Cosmos Bank, Taiwan

2008 Annual Report Contents

Letter to Shareholders 2

Bank Overview 5 Introduction 6 Organizational Structure 8 Information on Directors 10

Fund Raising Status and Operational Highlights 14 Capital & Dividend 15 Financial Bonds 20 Preferred Shares 21 Issuance of Depository Receipt 22 Employee Stock Option Plan (ESOP) 22 Merging or Acquisition of Other Financial Institutions 22 Scope of Business 23 Profile of Employees 30 Corporate Responsibilities and Ethics 31 Labor/Management Relations 31 Major Contracts 33 Risk Management 33 Financial Report from Audit Committee in 2008 43

Financial Review 44 Independent Auditors' Report 45 Financial Statements 46 Note to Financial Statements 54

Contact Details of Head Offices & Branches 107

1 LETTER TO SHAREHOLDERS

2 LETTER TO SHAREHOLDERS

The financial tsunami in 2008 created by the U.S. second mortgage crisis continues to impact the global economy. The severity and impact are growing and many countries are facing the problem of declining wealth, rising unemployment, lowering of domestic demand and export. The global economy was impacted severely in the second half of 2008 and Quarter 4 growth shrank to only 1.1%. This has also affected the Taiwanese economy which is export oriented. Due to the various negative developments, the local economy only managed a growth of 0.12% p.a., a 5.58% drop as compared to 2007. 2008 Quarter 4 growth has contracted to -8.36%.

Since its successful recapitalization in the end of 2007, Cosmos Bank (the “Bank”) and majority shareholders SAC Private Capital Group (SAC P.C.G.) and GE Money have completed the first stage of the Bank's re-engineering in the middle of 2008. With a better overall financial structure, lower operating cost, full management team and strategy realignment, the Bank's external rating (issued by Taiwan Ratings on September 18, 2008) continues to be at twBBB/twA-3 with a “positive” long term credit rating outlook.

In the past year, the Bank has focused in improving information system infrastructure and customer service, strengthening service quality and re-branding. The Bank has also successfully invited individuals with international and domestic banking experience to join the management team. With this, the Bank hopes to enhance its domestic and international capabilities. The Bank completed a capital reduction in July 2008 to set off issuance discount arising from the 2007 recapitalization creating a stronger, more efficient capital structure. With a combined shareholding of 81%, GE Money and SAC P.C.G are fully committed to the long term sustainability of Cosmos and Taiwan.

To increase overall operational efficiency, the Bank has undertaken various process improvement initiatives in the past year to increase productivity for front and back offices, shorten work flow and improve timeliness. In underwriting procedures, the implementation of an on-line collateral valuation system and interfacing it with corporate credit management system resulted in greater efficiency. It also enabled better collateral analysis and control. In the area of collection, the Bank implemented a recovery evaluation model that facilitates collection effort by analyzing customer profile which improve collection effectiveness.

To strengthen and enlarge the credit card market share, the Bank has launched the Money Back Signature Card. The Card and its varied affiliated benefits attracted favorable response and has enhanced the Bank's reputation in the market. The collapse of Lehman Brothers and the impact to the overall wealth management industry created an overall contraction of the market. With comprehensive products and training, our Relationship Managers were able to increase 2008 Quarter 4 fee income by 36% as compared to the same period last year. The Bank will continue to strengthen the professionalism and productivity of its Relationship Managers and actively harvest the wealth management market.

3 LETTER TO SHAREHOLDERS

In financial operation and asset quality, the Bank has been actively managing its non-performing loans and wrote off large bad debt exposures. As a result, the Bank incurred a net operating loss of NT$10.2 billion. However, the Bank registered coverage ratio of 116.32% and a high capital adequacy ratio of 17.95% at end of 2008. With this as a strong foundation, the Bank will be able to enhance asset quality further. With better quality new credit origination, the NPL ratio at end of 2008 was 3.9%, a reduction of 33.9% as compared to the ratio of 5.9% at 2007 year end. Going forward, the Bank will take steps to further strengthen its capital structure to ensure long term sustainability.

2009 will be a challenging year. Whilst the global financial market trends continue to be mixed, the Bank will meet the challengers proactively, aiming to build a strong capital base and profitable platform. We are confident that the professionalism, passion and commitment of the management team will create further value for the shareholders while making the Bank a more efficient and diversified entity. The Bank revealed its new look in its branding exercise last year and will work hard to continue its goal of creating a local bank with world class capabilities.

Jeffrey M. Hendren Chairman & President

4 BANK OVERVIEW

5 BANK OVERVIEW

I. Introduction

1. Establishment Cosmos 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 corporate and individual customers. On December 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 leadership of our new management team, Cosmos Bank is well-poised 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 Restructure (1) On June 30th 2008, the Bank reinvested NT$1,002 thousand in Cosmos Insurance Brokers Co., Ltd. (previously known as “GE Capital Insurance Brokers Co., Ltd.”; hereinafter referred as “Cosmos Insurance Brokers”). The paid-in capital of Cosmos Insurance Brokers was NT$17,300 thousand and the investment cost amounted to its net worth of NT$1,002 thousand at time of reinvestment. Cosmos Insurance Brokers soon recovered from deficits after becoming a fully owned subsidiary of the Bank. As of end of 2008, its net worth reached NT$7,181 thousand, demonstrating a rapid growth of insurance business.

In order to provide comprehensive insurance plans for customers, Cosmos Insurance Brokers endeavors to introduce excellent products offered by insurance firms under a sound financial operation. It also provides a wide diversity of choices for various type of customers, including life insurance, health insurance, savings, investment and retirement planning which help customers to diversify and transfer risks in their respective stages of life as well as the pursuit of accumulated wealth at a robust pace.

(2) The Bank did not undertake any merger, acquisition or corporate restructuring during 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) Directors are appointed by S.A.C. and GE Money respectively to engage in decision-making of the Board of Directors. By introducing 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.

6 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.

(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.

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

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

(8) In 2008, the Bank introduced the MoneyBack Signature Credit Card, offering various privilege discounts and cash rebate.

(9) In 2009, the Bank introduced the “Care Credit Card,” offering affordable interests for card-holders with a good credit history.

(10) In order to focus on core businesses and to centralize branch resources, the Bank launched the Channel Adjustment Plan in 2009. As of the printing date of this annual report, branch mergers and closures approved by the Financial Supervisory Committee (“FSC”) of Executive Yuan are summarized as follows:

A. The Bank merged Core Pacific City Mini Branch with Tienmu Mini Branch and I-Lan Mini Branch with Peimen Mini Branch on February 28th 2009. Tienmu and Peimen Branch are the existing entities and were transformed into full-featured branches on March 23rd 2009.

B. 10 branches were closed on May 1st 2009, including Station Front, Fuyin, Fengchia, Hsinhsing, Tansui, Fuhsing, Taipei 101, Hsinsheng, Nankian and Taya.

C. Tsaotun Branch and Toufen Branch will be closed on June 27th 2009.

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

7 BANK OVERVIEW

II. Organization Structure

1. Major Departments

Function Department Major Business

Wealth Management Dept.,Branch/Channel Manage the overall wealth management, deposit and Wealth Dept.,Branch Administration Dept., trust businesses. The branches of wealth manage- Management Deposit Dept., Trust Dept. ment are its channels.

Responsible for product design for each product line General Business Dept., Sales Management Consumer and all management businesses within consumer Dept., Marketing Dept., Operation & F/A., Finance banking. Regional Consumer Banking Centers take Consumer Finance Centers charge of marketing.

Responsible for the collection activities of the Bank and all branches, card underwriting and follow-up Credit Consumer Underwriting Dept., Collection credit management as well as all management busi- Operation Dept., Discontinued Business Center nesses related to consumer banking products such as mortgages/credit loans/auto loans/sales finance.

Responsible for the development, underwriting and Corporate Channel Mgt., Credit Administration management of corporate banking and foreign SME & Dept., Corporate Operation Center., exchange businesses. Corporate Banking Center is in Corporate Loan International Banking, OBU, Large charge of exploring channels and customer connec- Corporate Loan Center tion.

Chungho Operation Center is responsible for customer service, telemarketing, deposit and wiring; General Affairs takes care of confidential matters as Chungho Operation Center, General Affairs well as documentation, company seal management, Operation Dept., Labor Safety & Health Dept. administration affairs, maintenance & refurbishment, property management and disbursement activities. Safety & Health manages general activities concern- ing safety and health of employees.

Responsible for accounting, financial planning and Financial Planning & Analysis, Accounting Finance analysis, internal control over financial reporting; also Dept., Treasury Dept. responsible for investment and funding activities.

Risk Management Risk Management Dept. Manage overall risk management in the Bank.

Application Development, Maintenance Manage R&D, maintenance and operation of all busi- IT and Administration., nesses related to IT in the Bank. Service Provision AP

Responsible for overall management of human Human Resources Human Resources Dept. resources.

Administration Board Secretariat Dept., Plan the overall strategy of the Bank, manage admin- Management Legal Dept. istration, legal and compliance.

Auditing Auditing Dept. Manage all matters related to auditing in the Bank.

8 Legal Board Kok Kiun Secretariat Wong (Acting) Wong Administration As at April 20, 2009 Audit Committee HR HR Joyce Chen Risk Committee IT tration Service Eric Pan Application Provision AP and adminis- maintenance development, Committee Compensation Risk Risk James Lin Management Committee Nominating FP&A Finance Treasury Pamela Wu Accounting BOD Affairs Center Health General Safety & Wen Shu Wen Operation Operation Chairman President & CEO President Jeffrey M. Hendren Jeffrey Jeffrey M. Hendren Jeffrey OBU Loan Large Credit SME & Center Banking Corporate Corporate Corporate Corporate Operation Wen Yir Lu Yir Wen Loan Center International Channel Mgt. Administration Credit Lee Hua Business Collection Consumer Operation Audit Discontinued Underwriting Jack Chou Chief Auditor F/A Sales Centers Finance General Business Consumer Marketing Tiger Chan Tiger 7 Consumer Operation & Management Finance & CMO Trust Branch Wealth Wealth Branch/ Deposit Channel Seraph Sun Management Management Administration 2. Organization Chart

9 BANK OVERVIEW

III. Information on Directors

Term Shareholding Present Spouse & Minor Date (Year) Date First When Elected Shareholding Shareholding Title Name Elected (Note Elected 1) Shares (%) Shares (%) Shares (%)

S.A.C. PEI Taiwan 1,650,000,000 543,315,107 (preferred 19.56 (preferred 19.56 0 0.00 Acting Holdings B.V. 03.04.2008 shares) shares) 3 yrs 03.04.2008 Chairman Representative： (Note 7) 0 0.00 0 0.00 0 0.00 Jeffrey M. Hendren

S.A.C. PEI Taiwan 1,650,000,000 543,315,107 (preferred 19.56 (preferred 19.56 0 0.00 Holdings B.V. shares) shares) Director 03.04.20083 yrs 03.04.2008 Representative： 0.00 0 0.00 0 0.00 Peter Berger 0

S.A.C. PEI Taiwan 1,650,000,000 543,315,107 (preferred 19.56 (preferred 19.56 0 0.00 Holdings B.V. shares) shares)

Director 03.04.20083 yrs 03.04.2008

Representative： 0 0.00 0 0.00 0 0.00 Frank Baker

S.A.C. PEI Taiwan 1,650,000,000 543,315,107 (preferred 19.56 (preferred 19.56 0 0.00 Holdings B.V. shares) shares) Director 03.04.20083 yrs 03.04.2008 Representative： 0 0.00 0 0.00 0 0.00 Wouter Kolff

Director David M. Fite 12.28.20073 yrs 12.05.2007 0 0.000 0.00 0 0.00

GE Capital Taiwan 700 0.00 230 0.00 0 0.00 Ltd. Director 05.30.20073 yrs 05.30.2007 Representative： 0 0.00 0 0.00 0 0.00 Des O'Shea(Note 6)

GE Capital Taiwan 700 0.00 230 0.00 0 0.00 Ltd. Director 05.30.20073 yrs 05.30.2007 Representative： 0 0.00 0 0.00 0 0.00 (N/A)(Note 6、9)

Independent Chang-ji Chang 05.30.20073 yrs 05.30.2007 0 0.000 0.00 0 0.00 Director

10 As at April 20, 2009 Other managers, direc- Shareholding in tors or super- Others' Names visors who Also serve Experience/Education have spouse concurrently as or family within 2-degree Shares (%) relationship

M.B.A. from Harvard Business School Acting Chairman, and tem- 0 0.00 porarily assumes the position Goldman, Sachs & Co.'s merger department as the President & CEO of N/A Managing Director at Ripplewood Holdings LLC/ RHJ the Bank, 0 0.00 Managing Director of S.A.C. International Private Capital Group

0 0.00 M.B.A. from Columbia University Graduate School of Business Managing Director of S.A.C. N/A Special Senior Advisor to the Board of RHJ International Private Capital Group 0 0.00 Managing Director of Ripplewood Holdings LLC

B.A. from University of Chicago M.B.A. from Harvard Business School 0 0.00 Goldman Sachs & Co. in the Mergers and Acquisitions Group Managing Director of S.A.C. J.P. Morgan Securities Inc. in the Capital Markets Group Private Capital Group N/A Managing Director of RHJ International / Representative of 0 0.00 RHJ International in Japan Managing Director of Ripplewood Holdings LLC

0 0.00 M.A. of Erasmus University Rotterdam Independent Director of the Board of Directors in Yes Bank Chairman of the Board N/A in India Vastned Retail 0 0.00 Board Director of Fetim/Benovem B.V. in Amsterdam

B.A. of Harvard College. M.A. of Business School, M.A. of Food research 0 0.00 Department Stanford University. － N/A Managing partner of Euclid Capital Partners Senior Corporate Officer and CFO of Shinsei Bank

0 0.00 University College Cork, Ireland BComm. Fellow of Institute of Chartered Accountants of Ireland CCO of GE Money-Global N/A Partnerships 0 0.00 Chief Commercial Officer of GE Money-Global Partnerships

0 0.00 －－ N/A 0 0.00

Ph D of Strategic Science (Economics) of Maryland University, USA, MA of Politics in National Chengchi University, Professor of Labor Studies in National Chengchi University 0 0.00 Assistant researcher of Academy Sinica (Institution of Professor of Labor Studies in N/A Economics), Vice Chairperson of Labor Council National Chengchi University (Administration Affairs), Consultant of CEPD and Taipei City Government, Member of Council of Labor Affairs, Investment Commission of MOEA and Mainland Affairs Council

11 BANK OVERVIEW

Term Shareholding Present Spouse & Minor Date (Year) Date First When Elected Shareholding Shareholding Title Name Elected (Note Elected 1) Shares (%) Shares (%) Shares (%)

Independent Peggy Wang 05.30.20073 yrs 05.30.2007 0 0.000 0.00 0 0.00 Director

Independent Wen-yu Wang 05.30.20073 yrs 05.30.2007 0 0.000 0.00 0 0.00 Director

Independent Ji-huang Lin 05.30.20073 yrs 05.30.2007 0 0.000 0.00 0 0.00 Director

Note：1. The tenure of the 6th Term Board of Directors commenced on May 30th 2007 and will terminate on May 29th 2010. 2. The capital reduction was approved by FSC of Executive Yuan, as per official letter No.0970029185 dated June 18th 2008. Capital reduction ratio: 67.0718117%. The shares held by the Bank's directors S.A.C. PEI Taiwan Holdings B.V. and GE Capital were reduced from 1,650,000,000 (preferred shares) to 543,315,107(preferred shares) and 700 to 230 respectively. 3. Supervisor Rong-zi Construction Co., Ltd. resigned on Jan. 9th 2008. 4. 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 Holdings B.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. 5. 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. 6. GE Capital re-delegated their corporate representatives on Apr. 9th 2008 to be Pearl Wang and Des O'Shea. 7. Director and Chairman Simon Williams resigned on January 15th 2009; on the same day Jeffrey M. Hendren was by-elected Acting Chairman, effective from February 1st 2009. 8. Director Steve Chou resigned on March 20th 2009. 9. Corporate representative delegated by GE Capital Pearl Wang resigned on April 10th 2009 by a written notice

12 As at April 20, 2009 Other managers, direc- Shareholding in tors or super- Others' Names visors who Also serve Experience/Education have spouse concurrently as or family within 2-degree Shares (%) relationship

MA of Dept. of Finance and Tax in National Chengchi University, CPA of Taiwan and the US, Director of Director of Accounting Dept. 0 0.00 N/A Accounting Dept. in JCIC, CPA of Ingram & Walils Corp. in JCIC USA, CPA of William C. Chalmers Corp. USA

Ph D of laws in University of Stanford, USA, MA of laws in Columbia University, BA of laws in National Chengchi University Professor of Department of Laws in National Taiwan Professor of Department of Laws in National Taiwan University, Visiting Professor of University of Hawaii, Hong 0 0.00 Universty; N/A Kong University, University of Singapore and University of Independent directors of Beijing Weltronics Componet Limited Director of TSEC, TAIFEX and Cooperative Bank Member of Fair Trade Commission (Executive Yuan) and legal consultant of Lee & Li

Ph D and MA of Finance in University of Oklahoma, USA, BA of Agricultural Economics Professor of Financial Management in National Chengchi University, Assistant Prof. of Financial Management in Professor of Financial 0 0.00 N/A National Sun Yet-Sen University, Chief Director of Financial Management in National Chengchi University Management Dept. in National Chengchi University, Assistant Prof. in South Australia University, Financial Analyst in the Bank of Land

13 FUND RAISING STATUS AND OPERATIONAL HIGHLIGHTS

14 FUND RAISING STATUS AND OPERATIONAL HIGHLIGHTS

I. Capital & Dividend

1. Sources of Capital Unit: 1,000 NT, 1,000 shares Unit of Issuance: NTD Authorized Shares Issued Shares Remarks Date of Issue Sources of Issue Price Shares Amount Shares Amount Other Capital

Founding Jan. 1992 $10 1,200,000 12,000,000 1,200,000 12,000,000 capital

Per Tai-Tsai-Jong Recapitalization Apr. 1997 $10 1,253,460 12,534,600 1,253,460 12,534,600 No.86120178 issued of earnings on April 30, 1997

Per Tai-Tsai-Jong Recapitalization July 1998 $10 1,337,481 13,374,810 1,337,481 13,374,810 No.87717793 issued of earnings on April 24, 1998

Per Tai-Tsai-Jong Recapitalization Apr. 2000 $10 1,400,928 14,009,277 1,400,928 14,009,277 No.89073362 issued of earnings on March 7, 2000

Merge with Per Tai-Tsai-Jong (2) Oct. 2002 $10 1,771,002 17,710,015 1,771,002 17,710,015 Cosmos Bills No.0918011575 issued Finance Corp. on Sep. 3, 2002

Per Jin-Kuan-Yin (2) Private place- No.09500113480 June 2006 $10 2,500,000 25,000,000 1,967,780 19,677,795 ment of shares issued on April 12, 2006

Per FSC official letter Capital Dec. 2007 － 2,500,000 25,000,000 1,377,446 13,774,456 No.0960029665 issued Reduction on July 13, 2007

Per FSC official letter Recapitalization No.09600503410 Dec. 2007 $10 20,000,000 200,000,000 8,436,650 84,366,500 of earnings issued on Dec. 10, 2007

Per FSC official letter Capital Sep. 2008 － 20,000,000 200,000,000 2,778,036 27,780,360 No.0970029185 issued Reduction on June 18, 2008

Unit: 1,000 shares Authorized Capital Share Type Remarks Issued Shares Un-issued Shares Total

Common Shares 2,234,721 17,221,964 19,456,685 Listed

Preferred Shares 543,315 0 543,315 Unlisted (because it's private placement)

15 FUND RAISING STATUS AND OPERATIONAL HIGHLIGHTS

2. Composition of Shareholders Unit: 1,000 shares, Headcount Base Date: April 20, 2009 Shareholder Foreign Government Financial Other Legal Domestic Status Institutions & Total Agencies Institutions Entities Individuals Number Individuals

Number of Shareholders 3 14 93 38,430 46 38,586

Shareholding(Shares) 3 719,089 115,852 255,423 1,687,669 2,778,036

Shareholding (%) 0.00% 25.89% 4.17% 9.19% 60.75% 100.00%

3. Distribution of Shareholding

(1) Distribution of Common Shares Unit: share, Headcount Base Date: April 20, 2009 Number of Shareholding (Shares) Holding Percentage Class of Shareholdings Shareholders

1 ~ 999 22,207 4,821,566 0.22%

1,000 ~ 5,000 10,870 27,096,718 1.21%

5,001 ~ 10,000 2,066 15,137,797 0.68%

10,001 ~ 15,000 963 11,649,336 0.52%

15,001 ~ 20,000 436 7,660,419 0.34%

20,001 ~ 30,000 684 16,388,083 0.73%

30,001 ~ 40,000 332 11,448,233 0.51%

40,001 ~ 50,000 238 10,994,242 0.49%

50,001 ~ 100,000 395 27,825,026 1.25%

100,001 ~ 200,000 200 27,749,783 1.24%

200,001 ~ 400,000 91 24,866,016 1.11%

400,001 ~ 600,000 27 13,380,511 0.60%

600,001 ~ 800,000 10 7,034,644 0.31%

800,001 ~ 1,000,000 9 8,044,692 0.36%

1,000,001 and more 57 2,020,623,828 90.43%

Total 38,585 2,234,720,894 100.00%

Note: Face value is NT$10.

16 (2) Allocation of Preferred Shares Unit: share, Headcount Base Date: April 20, 2009 Number of Shareholding Class of Shareholdings Holding Percentage Shareholders (Shares)

1,000,001 and above 1 543,315,107 100.00%

Total 1 543,315,107 100.00%

Note: Face value is NT$10.

4. List of Major Shareholders Unit: Share Base Date: April 20, 2009

Shares Number of Shareholding Holding Percentage Name of Major Shareholders

GE Capital Asia Investment Holdings B.V. 1,131,987,005 40.75%

S.A.C. PEI Taiwan Holdings B.V. 543,315,107 19.56%

China Development Industrial Bank 422,658,148 15.21%

Shing Kong Life Insurance Co., Ltd. 145,005,288 5.22%

Shing Kong Commercial Bank Co., Ltd. 88,106,202 3.17%

Taiwan Bank Life Insurance Co., Ltd. 27,268,268 0.98%

Sheng-Chang Co., Ltd, 18,321,243 0.66%

Allianz Life Insurance Co., Ltd. 16,360,960 0.59%

Sinon Life Insurance Co., Ltd. 16,360,960 0.59%

Rong-ji Investment Co., Ltd 14,455,570 0.52%

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

17 FUND RAISING STATUS AND OPERATIONAL HIGHLIGHTS

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

Current Year up until Year 2008 2007 Item March 31, 2009

Highest market price (NT$) 5.25 16.15 2.10 Market Price Lowest market price (NT$) 1.65 2.00 1.30 Per Share Average Market Price (NT$) 2.66 8.02 1.74

Before Distribution (NT$) 7.96 3.83 7.14 BVS After Distribution (NT$) (Note 1) 3.83 (Note 1)

Earnings Weighted average shares (Thousand Shares) 2,778,036 1,436,725 2,778,036 Per Share Earnings per share (NT$) (3.67) (6.58) (0.82)

Cash dividends －－－

Dividends Per Revenue －－－ Share dividends Share Capital gain －－－

Cumulative unappropriated dividends －－－

Price/Earning Ratio (Note 2) (Note 3) (Note 3) (Note 4) Return On Price/Dividends Ratio －－－ Investment Cash dividend yield rate －－－

Note 1：The net per share after distribution for March 2009 and 2008 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 2009 is not applicable as it is less than one year.

18 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 shareholders' 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 dividends. If the cumulative surplus of the previous year or current year after-tax surplus is insufficient for the appropriation 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 distribution 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.

19 FUND RAISING STATUS AND OPERATIONAL HIGHLIGHTS

II. Financial Bonds

st Type 1 term of 2006 Subordinate MCB (Private placement) Subordinate Financial Bonds

Official letter from FSC No. 09600547240 on Date & Approval No. Official letter from FSC No. 09500481860 on Nov. 17, 2006 Dec. 18, 2007 Issue Date Dec. 14, 2006 Dec. 28 , 2007 Face Value NT$ 1,000,000 (Note 1) NT$ 10,000,000 or its multiple Place of Issue Taiwan R.O.C. Taiwan R.O.C. Currency New Taiwan Dollars New Taiwan Dollars Issued Price At Par Value At Par Value Total amount is NT$7 billion, among which Total Amount Type A is NT$4.5 billion and Type B is NT$2.5 NT$19.8 billion billion Year 1, 2: coupon rate 6% Interest Rate Type A: 3.00% Type B: 3.20% Year 3, 4, 5: coupon rate 4% (1) Type A: 7 years 5 years Maturity Maturity date: Dec. 14, 2013 (2) Type B: 10 years Maturity Date: Dec. 28, 2012 Maturity date: Dec. 14, 2016 Lien Position Secondary Secondary Guarantee Institution N/A N/A Trustee N/A N/A Consignee N/A N/A Certified Lawyer N/A N/A Certified CPA N/A N/A Certified Financial Institution N/A Trust Dept. in An-Tai Bank Repayment Methods (Note 2) Converted to Common Shares of Cosmos Unredeemed Balance NT$515 million NT$ 19.8 billion Paid-in Capital in last Fiscal Year 17,710,015 thousand dollars 19,677,795 thousand dollars After-tax Net Worth in last Fiscal Year 20,397,283 thousand dollars 11,893,997 thousand dollars Performance Normal Based on the resolution of the Bondholders' No early repayment, redemption, re-purchase, Meeting for 1st term Subordinate Financial purchase or cancellation for part of or all of the Redemption or Early Redemption Bonds Type A and B in 2006 (on Dec. 27, financial bonds is allowed unless otherwise 2007, Note 2 and 3) agreed by bondholders and regulators in advance in written form. (1) Mandatory conversion: The bonds will (a) terminate upon maturity or (b) be converted proportionally when all or requested bondholders see it necessary in order to maintain CAR above 8%, or Tier 1 capital above 4%. Conversion & Exchange Conditions N/A However, no mandatory conversion of this debenture is required before Series A Preferred Shares are fully converted. (2) Free conversion: Applicable from the 31st day after the issue date but before the maturity date Limitation Article Subordinate debenture Subordinate debenture Enhance capital structure to fund medium Enhance capital structure to fund medium and Fund Utilization Plan and long-term business developments and long-term business developments and growth growth Balance of bonds as a percentage of 64.96% 170.80% after-tax net worth (%) Whether it is accounted for equity Yes, tier 2 capital Yes, tier 2 capital capital and type Name of credit rating agency, date None None and result of rating

20 Note 1: The lowest selling unit in practice is NT$10 million. Note2: 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 thousand, 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 thousand 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 2008 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 December 27th 2007 were reported to the local court on February 4th 2008 and approved by the Taipei District Court as set forth in Ruling Notice No.700 issued on November 26th 2008. Bondholders Zhu-nan Credit Cooperative Bank, Singfor Life Insurance Co., Ltd., San-zhi Agricultural Association in Taipei county are currently issuing an appeal to the court. Note 4: Subordinate MCB holder S.A.C. PEI Taiwan Holdings B.V. plans to covert part of its subordinate MCB (18.333% of total holding) to common shares of Cosmos at the price of NT$6.0738234 per share (price converted after capital reduction; original price of conversion: NT$2 per share)

III. Preferred Shares

Items Series A Preferred Shares (private placement)

Regulators' Approval Date and Number of Official letter from FSC No. 09600503410 on Dec. 10, 2007 Documents Issue Date Dec. 28, 2007 Face Value NT$10 Value upon Issuance NT$2 per share Number of Shares 1,650,000,000 shares (face value : NT$10) Total amount 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 the Distribution of Dividends and dividends will be distributed on the same base date as the resolution of the Bonus Board 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 are entitled to request the Bank to make payment in cash for the remaining prop- Distribution of Remaining erty with exact number distributed to the shareholders legally (hereinafter Property referred to as “Order of Distributing Remaining Property”.) 2. In case of settlement and that the Bank's remaining property is not sufficient enough to distribute to all bondholders and shareholders, holders of Series A Obligation Preferred 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' Meeting and their voting rights are equivalent to the number of common shares after Execution of Voting Rights conversion. Unless otherwise indicated in other rules or in the Issuance Policy of Series A Preferred Shares Article 7, the holders of Series A Preferred Shares have the same voting rights with holders of common shares. Unless otherwise provided in AOI, when the Bank issues any shares or securities related to equity, holders of Series A Preferred Shares have the priority to sub- Other scribe to securities related to their equity based on their proportion of outstanding equity (based on fully diluted equity) under statutory laws. Number of Redemption or N/A Outstanding Conversion Preferred The capital reduction was approved by Financial Supervisory Committee of Shares Unredeemed or Unconverted Executive Yuan as per official Letter No.0970029185 dated June 18th 2008. Balance Capital reduction ratio: 67.0718117%. Unconverted shares: 543,315,107 shares.

21 FUND RAISING STATUS AND OPERATIONAL HIGHLIGHTS

Items Series A Preferred Shares (private placement)

Holders of Series A Preferred Shares may exercise their conversion rights (hereinafter referred to as “conversion rights”) to convert the preferred shares with fully-paid common shares that are exempt from any fee at par (hereinafter Outstanding referred to as “conversion of shares”): (A) After issue date, the shareholders Preferred may exercise their rights at any time (B) When necessary, in order to maintain Shares Terms of Redemption or 8% CAR or 4% tier 1 capital (based on the BOD approved statement as present- Conversion ed by the CFO 30 days prior to the end of each quarter ), convert Series A Preferred Shares from the shareholders proportionally and (C) Exercise conversion rights on the 4th annual date after issue date. All Series A Preferred Shares should be converted before the conversion of Subordinate Unsecured CB. Market price per share － Converted or subscribed amount as of the printing N/A Other date of this annual report Equity Policy of Issuance and The same as the terms of bond conversion Conversion or Subscription The impact of issue terms to the equity of If preferred shares are converted into common shares, the amount of dilution preferred shareholders and current share- will depend on the converted common shares. holders, and the possible dilution of equity Impact of redeeming preferred shares to － the equity capital and RWA

Note: To align with the Bank's Capital Enhancement Plans, holder of the Bank's Series A Preferred Shares, S.A.C. PEI Taiwan Holdings B.V, plans to convert all of its Series A preferred shares to common shares of Cosmos.

IV. Issuance of Depository Receipt: None.

V. Employee Stock Option Plan (ESOP)

1. The Bank shall disclose any impact that ESOP has on the shareholders' rights along with the options that have not yet reached maturity as of the printing date of this annual report. Employee stock options by private placement shall be clearly marked: The Bank does not have any employee stock options that have not yet reached maturity for the time being.

2. As of the printing date of this annual report, managers and employees as the top 10 option holders and whose subscription amount is equivalent to NT$30 milliom or more, acquisition and subscription thereof: None.

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 institutions: None.

2. Merging or acquiring other financial institutions in the recent 5 years: None.

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

22 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 for investments, including deposit, trust, and bank insurance.

B. Consumer Banking In charge of personal loans, including cash card, credit card and consumer loans.

C. Corporate Banking In charge of corporate loans, including all types of short-term working capital, mid- and long-term financing, guarantees and acceptances.

D. Foreign Exchange In charge of export bill financing, import bill financing, foreign remittances and exchange, 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 Item Year 2008 Year 2007 Increase /Decrease

Net Interest 6,269,786 7,851,703 -20%

Net fee income 795,238 1,160,967 -32%

Net income on the sale and valuation of financial assets -200 96,883 -100% and liabilities at fair value through profit or loss

Realized P&L on the sale of ready-to-sell financial assets 49 -29,330 100%

Income from equity investments under the equity 7,024 5,268 33% method

Net Income of FX 68,568 79,212 -13%

Loss on asset impairment -405,538 -1,000,227 -59%

Non active financial asset 0 -796,170 -100%

Amortization of loss from the sale of NPL -7,506,343 -9,605,835 -22%

Other non-interest net loss 230,571 -126,224 283%

Total net income (loss) -540,845 -2,363,753 77%

23 FUND RAISING STATUS AND OPERATIONAL HIGHLIGHTS

(3) Summary of major businesses

A. Deposits Unit: NT $1,000

As at Dec. 31, 2008 As at Dec. 31, 2007 Increase (Decrease) Item amount % amount % amount %

Demand Deposit 29,533,706 21.75% 33,351,109 21.08% -3,817,403 -11.45%

Time Deposit 106,274,418 78.25% 124,849,123 78.92% -18,574,705 -14.88%

Total Deposits 135,808,124 100.00% 158,200,232 100.00% -22,392,108 -14.15%

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

B. Loans Unit: NT $1,000

As at Dec. 31, 2008 As at Dec. 31, 2007 Increase (Decrease) Item amount % amount % amount %

Consumer Loan 49,102,229 51.51% 57,355,124 49.36% -8,252,895 -14.39%

Corporate Loan 46,228,474 48.49% 58,851,180 50.64% -12,622,706 -21.45%

Total Loans 95,330,703 100.00% 116,206,304 100.00% -20,875,601 -17.96%

C. Wealth Management Unit: NT $1,000

Year 2008 Year 2007 Increase (Decrease) Item amount % amount % amount %

Fund transaction fee income 141,600 63.39% 582,586 99.34% -440,986 -75.69%

Insurance fee income 81,764 36.61% 3,859 0.66% 77,905 2,018.79%

Total 223,364 100.00% 586,445 100.00% -363,081 -61.91%

D. Credit Card Unit: NT $1,000; Cards

As at Dec. 31, 2008 As at Dec. 31, 2007 Increase (Decrease) Item Amount/Cards Amount/Cards Amount/Cards %

Issued Cards 641,923 716,447 -74,524 -10.40%

Valid Cards 281,380 287,949 -6,569 -2.28%

Balance of revolving loan 2,475,877 3,177,805 -701,928 -22.09%

24 E. Cash Card Unit: NT $1,000; Cards

As at Dec. 31, 2008 As at Dec. 31, 2007 Increase (Decrease) Item Amount/Cards Amount/Cards Amount/Cards Amount/Cards

Issued Card 1,068,391 1,116,237 -47,846 -4.29%

Activated Card 585,627 624,822 -39,195 -6.27%

Balance of Revolving Loan 37,573,110 44,593,647 -7,020,537 -15.74% (incl. overdue receivables)

F. Foreign Exchange Unit: US $1,000

Year 2008 Year 2007 Increase (Decrease) Item amount % amount % amount %

Import 73,098 2.98% 72,203 1.91% 895 1.24%

Export 80,313 3.27% 467,573 12.39% -387,260 -82.82%

Remittance 2,300,703 93.75% 3,234,678 85.70% 933,975 -28.87%

Total 2,454,114 100.00% 3,774,454 100.00% -1,320,340 -34.98%

2. Business Plan for 2009 The Bank successfully completed the capital injection on December 28th 2007. To set off the discounts at the recapitalization in 2007, the Bank reduced its capital by 67% in July 2008. Current major shareholders include global investors S.A.C. and GE Money. In 2008, the Bank has completed the first phase of its revitalization program, including improving its financial structures, reducing operating costs, building a management team and adjusting business strategy. Our operational guidelines and business plans are summarized as follows:

(1) Capital Adequacy from the Major Shareholders and Supports for Operation Management As the major shareholders of Cosmos, S.A.C. and GE Money are fully aware of capital requirements and will launch recapitalization in line with business demands when appropriate in order to ensure our capital adequacy ratio meets the statutory requirements.

(2) Facilitating Business Restructuring, Organization Downsizing and Reducing Operating Cost Proactively ▲▲▲ ▲ ▲▲ Reducing the current expenditures efficiently with organization downsizing and staff cutback; focusing on core businesses with niche and growth potential through the integration of internal resources.

Continuing to restructure our businesses and cost down to maximize the effectiveness of employing resources; centering on elevating staff performance in the hope of establishing an operation platform that recovers from deficit.

(3) Focusing on Core Businesses: Consumer Banking and Wealth Management as the main-stay of the Bank's Businesses

Centralizing consumer banking business and accounting process to reduce personnel and operating cost; mitigat- ing operational risks and increasing operation efficiency and quality with a comprehensive plan and educational training; consolidating allocation of consumer banking sales to seek better sales performance and business growth.

Setting differential pricing based on individual risk to strengthen asset quality; launching project marketing with the help of customer data warehouse in order to boost customer consumption and fee income.

25 FUND RAISING STATUS AND OPERATIONAL HIGHLIGHTS

▲▲▲▲▲Providing comprehensive trainings for selected financial service specialists and effective integration of resources in order to offer multi-faceted financial services for VIP customers and enhance productivity of financial service specialists.

(4) Implementing Risk Management Mechanism to Improve Debt Recovery Rate

Applying credit and behavioural scoring models to credit application reviews and account management; setting periodic follow-up system of asset quality for the management team to assess credit risk and take proper, prompt action.

Formulating recovery evaluation models and collection strategies based on customer attributes to increase the efficiency of debt recovery.

Strengthening effectiveness and execution of legal operations to improve debt recovery rate.

Improving collection procedures and enhancing follow-ups to our missing customers to achieve best collection results.

3. Market Analysis

(1) Macroeconomic Conditions Overview & Prospect As we look back in 2008, the global economy has been impacted by the sub-prime crisis and the ensuing financial tsunami. Being an export-oriented country, Taiwan faced a sharp decrease in its export orders as well as in trade volume of both export and import. Momentum of consumer consumption slumped due to the soaring unemployment rate and negative wealth effect. Capital expenditures became relatively conservative as a result of reduced investment profits in the market. According to the publication from Directorate General of Budget, Accounting and Statistics (DGBAS) in February 2009, the growth rate in 2008 and 2007 was 0.12% and 5.70% respectively, representing a significant decrease as compared to prior year. Negative growth continued during the third and fourth quarter of 2008, demonstrating the advent of economic recession. The outlook for the economy 2009 is still full of uncertainty. The local government has sought to revitalize the economy and regain market faith by distributing consumption vouchers and granting large interest rate cuts. In February 2009, DGBAS estimated that the economic growth rate of 2009 will be -2.97% and the Consumer Price Index (CPI) will decrease by 0.82%.

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

A. Sustain robust operation to survive global financial crisis The local financial industry is expected to be continuously affected by the macroeconomic recession, leading to soaring credit risks and a slowdown of revenue growth. Under the economic gloom, the Bank in possession of successful product positioning and sound capital structure will manage to overcome the global financial turmoil. Our major shareholders S.A.C. and GE Money have been keeping their firm promise on long-term management of the Bank. Under the leadership of our global management team, we are on the path to becoming the leading brand of consumer banking in Taiwan.

B. Take opportunity at re-branding in the consumer banking market to acquire competitive advantage There is an underlying chance for the consumer banking market to undergo a reshuffle. The Bank will adopt brand new marketing strategy for the George & Mary Cash Card by offering reasonable pricing and various discounts to satisfy customer demands.

26 C. Focus on developing SME financing in light of corporate finance Since wholesale loan has lower margin and has higher concentration risk, we made a shift in our target customers towards SMEs to diversify credit risks and increase revenue. We will provide banking services to high-quality SMEs in the future.

D. Promote wealth management business at a robust pace Interest rates offered in the financial market are relatively low while the demand for investment has been increasing in the past few years. It reflected the huge growth potential in wealth management market. In order to build up customer-oriented business, we will work in tandem with renowned global trust companies and insurance firms to offer comprehensive asset management services and provide professional training to our team so as to provide customized products with the aim of increasing 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

A. George & Mary Cash Card We introduced the George and Mary Cash Card in 1999. The number of issued cards was 1,070 thousand at end of December 2008. The loan balance was about NT$37.6 billion. In order to provide fast and user-friendly services for our customers, the Bank set up ALMs across Taiwan where there are masses of people.

B. SME Financing To induce more diverse business growth, we introduced the SME financing services in respective regional corporate banking centers in 2002. As end of December 2008, the balance of SME loans is around NT$26.5 billion.

C. Wealth Management The Bank received approval from regulators to offer wealth management services in November 2005. Since then, the number of customers and asset scale of wealth management has been on a stable growth. As of end of December 2008, the number of customers was about 50,000 and the asset scale was about NT$121.7 billion.

D. Promotion of virtual channels: Automated Services & E-banking To offer customers more convenient services, we have added several account-related services to our e-banking since 2005, including 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 around the clock. As end of December 2008, about 160,000 customers have applied for the Bank's teleservices and e-banking services.

(2) Expenditures on On-site Training and R&D for the Past Two Years The Bank's R&D investment primarily focuses on human resource development. The Bank held and supported diversified trainings internally and externally in order to improve employees' professional skills and broaden their knowledge. In addition, the Bank offered practical management programs to train manager associates. 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 pay- roll for professionals who are devoted to R&D and expenditures for IT software and hardware development) are listed below:

27 FUND RAISING STATUS AND OPERATIONAL HIGHLIGHTS

Unit: NT$ 1,000 Year 2008 2007 Growth Rate

Total Expenditure on Employee Training 11,522 12,782 -9.86%

Average Number of Employees 2,628 3,170 -17.10%

Average Training Expenditure Per Employee 4.38 4.03 8.68%

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

A. Results of employee training Unit: Person Year 2008 2007 Growth Rate

Internal Training 7,290 11,629 -37.31%

External Training 1,192 1,675 -28.84%

Total 8,482 13,304 -36.24%

B. Results of business developments Year 2007

▲ ▲▲▲▲ ▲▲▲ 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.

Offered “Assigned payment receipt's account number management system” business for processing Taiwan Clearing House's e-checks.

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

Year 2008

Launched the MoneyBack Signature Credit Card, offering a wide range of channel discounts and established our brand image in the local VISA Signature market.

Introduced the “Money+” MMR current savings account, providing deposit products that cater to our wealth management clients' needs for both investment and savings.

In alignment with the development of wealth management business, we launched several projects bundling fixed deposit with wealth management products to expand our client base.

Established the online collateral appraisal system in connection with the underwriting system of corporate banking. The computerized process, besides improving the underwriting efficiency, helps the Bank analyze and monitor its collateral.

(4) Future R&D Plans and Timeline

A. Enhance relationship with existing customers and their loyalty to the Bank; expand the loan balance to increase fee income.

28 B. Continue to integrate centralized operations and facilitate improvement of process flows to reduce the operating cost of branches and to increase the productivity and efficiency of Operation Centre and Customer Service Centre.

C. Devise automated saving accounts that cater for young generation with online accesses so as to increase the traf- fic of virtual channels and reduce operating cost.

5. Long-term Business Development Plans

In terms of long-term business development plans, we will take Consumer Banking, Wealth Management and Corporate Banking as the three major focuses of our development. The Bank aims at introducing more financial products that cater to our customers' demands and exploring new profit acquisition proactively with the prospect of becoming a “Local Bank with World Class Capabilities” by strengthening customer-oriented service and risk management.

(1) Consumer Banking ▲▲▲▲▲▲▲ ▲▲▲ ▲▲▲▲ With a comprehensive framework of prudent credit assessment policies, review measures and professional collection mechanism, we are able to effectively control risks, maintain service quality and pursue profitable growth.

With proactive analyses to understand customers' needs, we are able to provide tailored services to build up customer recognition and loyalty to the Bank so as to strengthen operation performance.

Integrate resources of credit card and cash card businesses and to boost consumer banking promotion by cross- selling.

Continue to improve and steamline the collection process to achieve better collection results and debt recovery rate.

(2) Wealth Management

Build a professional brand image for wealth management business and gradually explore a niche market target- ing at top-notch customers.

Broaden existing client base by devising tailored financial products and offering integrated financial management services for targeted customers.

Provide comprehensive training for financial service specialist, improve our ability on product design and productivity of our financial service specialists through strategic alliance.

(3) Corporate Banking

Develop multi-faceted financial services to deepen our relationship with major corporate clients; position the Bank as the one providing primary banking services to our customers.

Introduce standard operating procedures to provide faster services and to increase the Bank's competitiveness among corporate customer groups.

Continue to improve the credit assessment mechanism and formulate various underwriting guidelines and assessment standards based on each customer's size and industry; introduce risk-based pricing to mitigate potential credit risks.

29 FUND RAISING STATUS AND OPERATIONAL HIGHLIGHTS

VIII. Profile of Employees

1. Employee Composition Unit: Person Current Year Up until 2008 Year 2007 March 31, 2009

Staff 2,198 2,975 1,952 Number of Workers 57 40 84 Employees Total 2,255 3,015 2,036

Average Age 34.27 34.44 34.55

Average Years of Service 6.44 6.89 6.88

Doctorate 0.00% 0.00% 0.00%

Master Degree 5.27% 4.48% 5.45%

Education Degree/Diploma 85.34% 85.04% 86.64%

Senior High School 8.99% 9.85% 7.66%

Junior High School & Under 0.40% 0.63% 0.25%

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 accurate manner. They shall be loyal to the company, comply with corporate policies and shall not engage in unlawful transactions by taking advantage of their positions at the Bank. Meanwhile, the policy clearly sets out the Bank's merit/discipline 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 “Rules of Labor Safety and Health” and conduct on-site supervision in branches on an irregular basis to fully review any suggestion for improving workplace.

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

30 (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 12 years in a row.

3. With caring and compassion, the Bank endeavors to improve its service quality to protect customers and was awarded “Outstanding Bank” in 2006 under the “Evaluation of Consumer Protection by Banks,” a program administered by the FSC.

4. Regarding protection and caring for employees, besides an excellent employee welfare system, internal regulations governing human resources are in strict compliance with the Labor Standards Act and other relevant regulations. Self- inspections are conducted regularly to ensure operating results. In addition, communication between Head of Human Resources and the Union are held on a regular basis so that relevant issues may be handled in time by means of positive interaction with the Union. We set up inter-communication channels (communication mailbox/e-paper, etc.) for our employees from a care perspective. The Bank is open to every suggestion given by our staff and improvement. At the same time, employees are able to keep constant track of the Bank's development.

X. Labor/Management Relations

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

(1) Employee Welfare & Implementation Status 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 insurance (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 regulations. 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.

31 FUND RAISING STATUS AND OPERATIONAL HIGHLIGHTS

▲▲▲▲▲▲▲▲▲Favorable Retirement Program: The Bank will execute the two-phrases Favorable Retirement Program from January 1st, 2008 to December 31st, 2008.

A. Early Retirement Plan (ERP): (a) Phase I: From January 1st, 2008 to June 30th, 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 qualified 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.

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 representatives 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 2008 and prior to the printing date of the annual report:

A 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. 30 former employees claimed on their incentive pay and that the retirement pension should include their unused leaves (translated into reimbursement) and work bonus. 87 former employees claimed that their retirement pension should include their unused leaves (translated into reimbursement) and work bonus. Those three cases are currently being processed.

32 XI. Major Contracts

Counter Restrictive Nature Term Party Details Convenants

The annual technology service fee is $22 million USD and the total is $84 million USD. GE Holdings, GEII and GE Australia leverage their Jan. 1, resources worldwide to fully provide all kinds of 1. General Electric 2006~Jan. 1, IT and management systems for Cosmos' busi- None International Inc. 2010 ness, and support all types of integration pro- (hereinafter referred grams including data processing and system to as “GEII”) support. They also offer customorized IT pack- Service 2. GE Processing age, while at the same time providing complete Agreement Services Pty Limited training and technology transfer service. (hereinafter referred to as “GE Signed the Agreement on residual payables limit- Australia”) ed to a maximum of USD18,500 thousand between 2006 and 2008. Both parties agreed April 25, 2009 None that the SSA shall be retroactively terminated on January 1st 2009 upon completion of the Capital Enhancement Plan.

GE Capital Taiwan Acquired auto loans totaling $1,359,280 thou- Limited (hereinafter sand from GECT. Total cost of purchase was June 29, 2006 None referred to as $1,413,467 thousand. The premium was Auto Loan “GECT”) around 4%. Consignment Agreement Acquired auto loan totaling $1,023,770 thou- Mega International August 17, sand from Mega Commercial Bank. Total cost of None Commercial Bank 2006 purchase was amounted to $1,064,721 thousand. The premium was around 4%.

XII. Risk Management

1. Risk Management Organization Structure

Under the Bank's risk management structure, the Board of Directors (“the Board”) is ultimately responsible for the overall risk management. Under the Board is the Risk Committee, which is comprised of appointed directors to monitor risks on behalf of the Board. The Risk Management Committee under the Risk Committee is responsible for coordinating and implementing the overall risk management system. Risk Management Department is the administrative unit of the Risk Management Committee. Risk Management Department is in charge of formulating procedures for identifying, assessing, monitoring and controlling of various risks involving credit, operation and market. Legal Department is responsible for building legal risk management and setting up procedures for legal compliance. All departments reporting to the President will also execute and implement various risk management processes as part of their internal control and operational guidelines. Where required, they will also be requested to participate in risk management projects and initiatives. Audit Department is responsible for reviewing and examining each unit's actual implementation of internal audit systems.

33 FUND RAISING STATUS AND OPERATIONAL HIGHLIGHTS

2. Risk Management Policy

(1) In pursuit of sustainable operation for the Bank's risk management, we refer to the Best Practices of the New Basel Capital Accord to develop a comprehensive risk assessment structure and capital adequacy management system in order to ensure that the Bank meets the minimum statutory capital requirements and may withstand any impact on capital under various stress scenarios.

(2) The Bank's strategies for credit asset portfolio aims at profitability and risk diversification with a special focus on qualified retail portfolio. By segmenting customer risk into different tiers, the Bank is able to control the overall risk of asset portfolio within an acceptable range. The Bank also proactively transfers risks by means of Small and Medium Business Credit Guarantee Fund (SMEG) in order to ensure the Bank's obligatory claim over collaterals, mitigate the impact of delinquency while at the same time achieve risk capital saving. Besides, the Bank drives to improve the underwriting procedures, develop risk management tools, and improve risk management system to effectively monitor the overall asset quality and risk.

(3) 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 profitability. 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.

(4) 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 information report. Meanwhile, we have an improvement plan, including risk mitigation strategy or purchase proper insurance, by using risk index and evaluating risk cases periodically.

3. Risk Evaluation & Control Measures and Exposure Quantification

(1) Credit Risk Management Policy and Capital Requirement

A. Credit Risk Management Policy

Year 2008

Item Details

1. Credit Risk Strategy, (1) Management Strategy Goal, Policy, and The loan development strategy of the Bank focuses on cash card, credit card, and SME loan. Procedure We develop the niche market by accurately assessing the risk level of customers, solvency, and credit spreads. In addition to accurately selecting target customers, we also pursue a reasonable allocation between risk and profit. (2) Management Goal The main goals of our credit risk management are appropriately evaluating the risk of default, controlling credit quality, and diversifying loan risk in order to control the overall risk of loan portfolio based on the risk appetite approved by the Board of Directors. (3) Management Policy The purpose of formulating credit risk management policy is to set a standardized procedures of credit risk identification, evaluation and monitoring/controlling, reporting, and information disclosure, including the credit standard of target customers, underwriting procedures, loan approval procedure, procedure of reviewing exceptional cases, risk monitoring and management, credit review, NPL management and document/data management requirement.

34 Item Details

(4) Management Procedure All responsible units execute the following management procedure according to credit risk management policy: (a) Credit Review and Underwriting We accurately select the target customers and control the credit quality of asset portfolio by reviewing certifications based on credit standard of target customer. (b) Loan Approval The authorized directors in respective ranks may grant credit line to customers who pass underwriting assessments under the structure of credit limit management and regulations on credit authorization. The Bank manages the credit limit structure and credit authorization system by complying with the provisions of the Banking Act and other relevant statutory regulations. We have set credit ceilings on each sole counterparty, same related corporation/group, collateralized stock, industry and country. We periodically review the authorized limits delegated to respective directors based on their professional degree and the conditions of credit control over asset quality. (c) Interim and Follow-up Credit Management We keep track of the financial status of our corporate customers through the account management system and periodic credit review. We conduct regular risk assessment report on credit asset portfolio and set up an early alert mechanism. We track and monitor any change in asset quality through periodic Portfolio Quality Review (PQR) to ensure all the regulations are met. In addition, problematic loans are centralized and tracked through IT systems, application of analysis model and periodic review to improve debt recovery rate and accelerate NPL collection. (d) Risk Report and Information Disclosure Risk Management Department is in charge of assessing risk and reporting to Chief Risk Officer. Risk management report covering risk management index and risk capital requirements are produced quarterly and submitted to the senior management and the Board of Directors. (e) Development, operation and validation of risk information system. To assess customers' default risk effectively, we develop risk assessment models by using quantitative statistics as references for credit decisions. We have developed the credit scoring models based on respective types of products and clients, by which selection of new clients, risk-based pricing and management of credit line are implemented. We also adopt analysis of customer behavioral models to formulate collection strategies for delin- quent loan. To enhance the effectiveness and consistency of our underwriting standards, the Bank has built up a computerized credit assessment system to elevate its operating efficiency and computerization as well as a basis for further development and improvement on quantitative models. We have periodic validation mechanism for risk analysis model. The analyst, who is not the developer, will execute the validation of model effectiveness to evaluate if the model is proper and make necessary modification accordingly.

2. Credit Risk Management The Board of Directors is ultimately responsible for credit risk management. The Risk Committee Organization & Structure under the Board is comprised of board members to monitor risks based on their delegation of authority. The Risk Management Committee, set up by the Risk Committee in accordance with the Organization Charter approved by the Board, is in charge of coordinating the overall risk management system and reports regularly to the Risk Committee. The Risk Management Department is in charge of promoting policies on risk management, operating procedures and submitting periodic report to the Risk Management Committee and Chief Risk Officer. Units in charge of underwriting conduct assessments base on the crediting standards set for target customers. In addition, the Bank has formulated the “Guidelines Governing the Delegation of Authorities for Credit Granting” to delegate the authority to respective directors in charge of credit underwriting.

35 FUND RAISING STATUS AND OPERATIONAL HIGHLIGHTS

Item Details

Through a collegiate system, the Credit Committee deliberates on important loan applications or applications for large credit line to control the overall credit quality. The Bank also set up credit review mechanism to review disbursement procedures so as to ensure the underwriting system and policies are fully observed.

3. The Scope and To allow the Board of Directors a full understanding and control of the credit risk undertaken by Characteristics of Credit the Bank, the Risk Management Department provides the Risk Committee with periodic reports Risk Report and regarding assessment of credit risk index and review of risk management performance, includ- Measurement System ing risk portfolio of credit assets, NPL ratio and loss rate, and assessment of risk capital requirement in order to constantly track any change in credit asset quality.

4. Credit Risk Policies of The Bank's strategies for credit risk hedging or mitigation is evaluated depending on borrower Hedging and Risk and transaction risk. The Bank requests specific clients to provide appropriate collateral with Mitigation Sustainable good liquidity as well as proper amount or transfer guarantee from assurance institute (such as effective Strategy and SMEG) to secure our loan rights. The derivatives has not be introduced as a tool for credit risk Procedure of monitoring mitigation so far. hedging and risk deduc- We monitor the effectiveness of hedging. We provide periodic assessment on value fluctuation tion tools of collateral in addition to confirm the required legal documents when making agreements in order to decide if additional collaterals or adjustment on credit line is necessary.

5. The Method for We calculated the regulatory capital requirement of credit risk based on “The Calculation Regulatory Capital Approach of the Regulatory Equity Capital Requirement and RWA of the Bank -The Requirement Standardized Approach of Credit Risk”.

B. Risk Exposure after Risk Mitigation under Standardized Approach and Capital Requirement Unit: NT$ 1,000 As at March 31, 2009 Risk Exposure after Type of Risk Exposure Capital Requirement Risk Mitigation

Sovereigns 27,514,700 －

Non Central- Government Public Sector Entities －－

Banks ( Multilateral Development Banks included) 9,419,877 197,775

Corporates (Securities firms and Insurance companies included) 21,839,914 1,505,438

Claims included in the Retail Portfolios 69,563,315 3,962,971

Residential Property 6,045,738 222,933

Equity Securities Investment 552,870 176,918

Other Assets 25,337,011 1,864,531

Total 160,273,425 7,930,566

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

A. Risk Management Policy of Asset Securitization

Year 2008

Item Details

1. Management Strategy and Procedure of Asset Not Applicable (Note: The Bank currently is not handling Securitization cases for an Originating Bank of asset securitization or credit enhancement institute. We invest in few asset- based securities according to the “Securities Investment Management Regulations”).

2. Management Organization and Structure of Asset Not Applicable Securitization

3. The Scope and characteristics of Asset Securitization Not Applicable Risk Report and Measurement System

4. Asset Securitization Hedging or Risk Mitigation Policy. Sustainable effective Strategy and Procedure of moni- Not Applicable toring hedging and risk mitigation tools

5. Method for Regulatory Capital Requirement We calculated the regulatory capital requirement based on“The Calculation Approach of the Regulatory Equity Capital Requirement and RWA of the Bank─ The Standardized Approach for the transaction of Asset Securitization”.

B. Asset Securitization Status: None.

C. Risk Exposure and Capital Requirement of Asset Securitization Unit: NT$ 1,000 As at March 31, 2009 Non- Originating Bank Originating Bank

Risk Exposure Purchase Type of Risk or Non-Asset based Commercial Paper Capital Exposure Possession Capital Requireme- Asset nt before of Requirem- Traditional Type Portfolio Type based Securitizati ent Securitizat- Commerc- ion on Risk Retained Unretained Retained Unretained ial Paper Exposure Position Position Position Position

ABS 350,767 48,112 －－－－－－ (Credit Card)

CBO (Collateralized 108,755 4,350 －－－－－－ Bond Obligation)

Total 495,522 52,462 －－－－－－

37 FUND RAISING STATUS AND OPERATIONAL HIGHLIGHTS

D. Securitized Products

a. Consolidated Chart of Securitized Products Unit: NT$ 1,000 Accumulated Category Historical Accumulated Account P&L of Impairment Par Value (Note 1) Cost Valuation

Collateralized Bond 155131520 Obligations Debt Investment without Active $107,983 0 0 $107,983 (CBO) Market--Securitized Product—CBO

Asset-backed 155131510 Securities Debt Investment without Active $350,000 0 0 $350,000 (ABS) Market--Securitized Product—ABS

b. (a) Disclosure of information regarding securitized products whose historical cost is equivalent to NT$300 million or higher per transaction (excluding those held by the Bank as an originating institution for the purpose of credit enhancement) Unit: NT$ 1,000

Accum- Date Date Accum- Issuer ulated Attach Detail of Curr- of of Coupon Credit Method of Histori- ulated Par Title of Account and P&L of ment Asset ency Purc- Matur- Rate Rating Repayment cal Cost Impair Value Securities Location Valuati Point Pool hase ity ment on

Beneficial 155131510 NTD The 5.31. 11.30. 90-day Latest Quarterly 250,000 0 0 250,000 8% Credit Card Securities of Debt Hongkong 2005 2010 NTD CP Rating: Adjustment Receivables specific pur- Investment and Rate Dec. 9th of Index Rate Subordinate pose without Shanghai (Primary 2008 (Quotes by (Securitization Active Banking Market) Fitch Reuters); of Taishin Market-- Corporation +40bps A(twn) Interest: Bank Credit Securitized Limited, Act/365, Card Product— Taipei Branch payable quar- Receivables)－ ABS Address: terly. One-off Beneficial 14F., No.333, repayment Securities Sec. 1, upon maturi- Type B Keelung Rd., ty after 4 Taipei City years

Beneficial 155131510 NTD The 6.22. 11.30. 90-day Latest Quarterly 100,000 0 0 100,000 4% Credit Card Securities of Debt Hongkong 2005 2010 NTD CP Rating: Adjustment Receivables specific pur- Investment and Rate Dec. 9th of Index Rate Subordinate pose without Shanghai (Primary 2008 (Quotes by (Securitization Active Banking Market) Fitch Reuters); of Taishin Market-- Corporation +80bps BBB Interest: Bank Credit Securitized Limited, (twn) Act/365, Card Product— Taipei Branch payable quar- Receivables)－ ABS Address: terly. One-off Beneficial 14F., No.333, repayment Securities Sec. 1, upon maturi- Type C Keelung Rd., ty after 4 Taipei City years

(b) Disclosure of Information regarding positions held by the Bank as an originating institution of securitization for purpose of credit enhancement: None.

(c) Disclosure of Information regarding the Bank as an institution that purchases or settles impaired assets of securitized products: None.

38 c. Disclosure of Information regarding the Bank as an institution that guarantees securitized products or provides liquid facilities: None.

(3) Operational Risk Management Policy and Capital Requirement

A. Operational Risk Management Policy Year 2008

Item Details

1. Operational Risk Management The definition of the Bank's operational risks are internal operational risk, mistakes Strategy and Procedure made by staff and systematic errors, or risk of external events that incur indemnities to the Bank, including the legal risk. However, the strategic risk and reputation risk are excluded. To effectively control operational risks, the Bank has set up a sound internal control measures and standard operational procedures. We have set up review mechanism and IT system for risk management. The self-assessment, internal auditing review mechanisms on a regular or irregular basis, and risk analysis would ensure that the effective execution of review mechanism and system. We have also established the contingency plan and remote back-up systems based on supervisory regulations to control potential accidental losses and continuous operation. We have done comprehensive assessment in advance, continuous monitoring, and required amendment based on professional services. We also outsource some of our operations and review them based on supervisory and internal regulations to ensure the legitimacy and the rights and benefits of the Bank and customers . The Bank has trained employees on risk management to improve their skills and ensure they understand the regulatory requirements clearly.

2. Operational Risk Management Under the Bank's structure of operational risk management, the management team in Organization and Structure Head Office is responsible for formulating the operation guidelines for various businesses, implementing internal audit system and controlling operational risk. In addition, each unit is obliged to report any loss incurred by operational risk to ensure the executed control over such risks. The Legal Department is in charge of legal risk management and promotion of legal compliance. The Audit Department takes charge of independent auditing to ensure full compliance of business guidelines. The Bank has set up the Department of Operational Risk Management based on “Pillar II Supervisory Review Process.” The Department is responsible for setting up procedures for identifying, assessing, monitoring/controlling, reporting operational risks and approaches to relevant information disclosure. Operational risk reports are submitted to the Risk Management Committee, Risk Committee and Board of Directors on a regular basis.

3. The Scope and Characteristics of Each department is responsible for reporting losses incurred by operational risks upon Operational Risk Report and occurrence based on the type of operational risk and loss defined in “The New Basel Measurement System . Capital Accord.” The purpose is to understand and improve the existing operation procedures, IT systems and employee trainings. Through Risk Control Self-assessment Plan, the Bank will review the design of each operation procedure and set up primary risk index to enhance risk control and set up a proper early warning mechanism.

4. Operational Risk Hedging or Risk Based on supervisory regulation and internal analysis, the Bank seeks insurance cover- Mitigation Policy. Sustainable age (For example, comprehensive insurance, accident insurance, and fire insurance) to effective Strategy and Procedure offset our operational risks which might cause major loss. The Bank view insurance as of monitoring hedging and risk risk mitigation and strengthen the ability for identifying and assessing to ensure the mitigation tools affordable risk and adjust risk management strategy.

5. Method for Regulatory Capital We calculated the regulatory capital requirement based on “The Calculation Requirement Approach of the Regulatory Equity Capital Requirement and RWA of the Bank─ The Basic Index Approach for Operational Risk”.

39 FUND RAISING STATUS AND OPERATIONAL HIGHLIGHTS

B. Operational Risk-Based Capital Requirement Unit: NT$ 1,000 As at March 31, 2009 Year Net Profit Capital Requirement

2006 12,179,462

2007 9,252,668 -

2008 7,472,677

Total 28,904,807 1,445,240

(4) Market Risk Management Policy and Capital Requirement

A. Market Risk Management Policy Year 2008

Item Details

1. Market Risk Management The Bank's market risk positions include financial commodities on trading book and non- Strategy and Procedure trading book. The price fluctuation is affected by interest rate, stock price, foreign exchange rate, and commodity price. The Bank allocates its capital primarily to loan business. On a basis of high liquidity and safety, allocation of the remaining capital includes certificates of deposit issued by Central Bank of Taiwan, government bonds and other profitable liquid assets stipulated in “Directions for Auditing Liquidity of Financial Institutions.” We created the foreign exchange sight/forward positions in line with the needs for foreign currency loan and currency exchange without involving any speculative trade to avoid undertaking excessive market risk. The Treasury Department sets up market risk positions based on the annual budget and implements daily management, including dynamic adjustment of investment portfolio and authority delegated to respective dealers. The Risk Management Department submits the market risk report (incl. assessment and monitoring of market risk) to the Risk Management Committee, Risk Committee and Board of Directors on a regular basis.

2. Market Risk Management The Bank's Board of Directors is the ultimate unit responsible for market risk management. Organization and Structure Under the Board is the Risk Committee, which set up the Risk Management Committee in accordance with the authorization by the Board. The Risk Management Committee is in charge of coordinating and supervising the overall risk management system, and reports to the Risk Committee on a regular basis. The Risk Management Committee also takes charge of decision-making for risk management, including formulating policies and limits on risk management. The Risk Management Department is in charge of implementing risk assessment, supervision and report pursuant to the policies and limits on risk management. The Asset/Liability Management Committee periodically monitors interest rate, exchange rate, share price or changes in macroeconomic index to assess all potential impact on the Bank's assets and liabilities or propose action plans, aiming at sustaining a proper asset/liability structure and liquidity.

3. The Scope and Characteristics The market risk assessment includes the risk change in trading book and non-trading book. of Market Risk Report and The measurement index includes, nominal position, fair value, sensitivity index and risk Measurement System value. The trade book is assessed with the change of daily market price. The market price assessment is based on GAAP, i.e. the quotation in active market. We only assessed the value based on model quotation when the activated market quotation could not be accessed. The non-trading book positions are the book value of“assets held until maturity,”“debt investment without active market”,“financial assets measured by cost”or“equity investment by equity method”based on purposes of holding and related accounting guidelines. We conduct periodic risk assessments and reports pursuant to regulations governing such investments. The risk assessment and information disclosure of derivative transactions are based on “Criteria Governing Derivative Transactions, Cosmos Bank”.

40 Item Details

4. Market Risk Hedging or Risk Foreign exchange spot/forward positions generated by trade finance and currency Mitigation Policy. Sustainable exchange will be squared off in principle. Open positions are managed based on the autho- effective Strategy and rized limits stipulated in the operation guidelines to avoid overexposure to the market risks. Procedure of monitoring To avoid the risks associated with the Bank's assets and liabilities, we select the hedging hedging and risk mitigation tools based on the fair value or cash flow which could write-off the hedging items. The cat- tools egory include but not limit to derivatives. The operation procedure of GAAP, information disclosure and risk management of the Bank's hedging transaction on derivatives is based on “Criteria Governing Derivative Transactions, Cosmos Bank”. The Bank conducted hedging effectiveness test on a regular basis based on the supervisory regulation. We provide periodic report of hedging position and the change of fair value or cash flow of hedging items to the Board of Directors.

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

B. Market Risk-Based Capital Requirement Unit: NT$ 1,000 As at March 31, 2009 Type of Risk Capital Requirement

Interest Rate Risk 27,994

Equity Securities Risk 0

Foreign Exchange Risk 100,495

Commodity Risk 0

Total 128,489

(5) Liquidity Risk

A. Assets & Liabilities Maturity Analysis

(a) Maturity Analysis — NTD Unit: NT$ 1,000 As at March 31, 2009 Amount Outstanding By Time Till Maturity Total 181 days~ More than 1~30 days 31 ~90 days 91~180 days 1 year 1 year

Major capital inflow 136,066,615 33,542,830 5,687,586 8,407,437 41,361,738 47,067,024

Major capital outflow 179,382,182 16,442,086 25,501,755 44,356,006 46,831,913 46,250,422

Gap ( 43,315,567) 17,100,744 ( 19,814,169) ( 35,948,569) ( 5,470,175) 816,602

41 FUND RAISING STATUS AND OPERATIONAL HIGHLIGHTS

(b) Maturity Analysis—USD Unit: US$ 1,000 As at March 31, 2009 Amount Outstanding By Time Till Maturity Total 181 days~ More than 1~30 days 31 ~90 days 91~180 days 1 year 1 year

Assets 121,078 100,264 10,926 3,644 4,140 2,104

Liabilities 121,078 54,397 7,874 7,006 16,449 35,352

Gap 0 45,867 3,052 ( 3,362) ( 12,309) ( 33,248)

Cumulative Gap 0 45,867 48,919 45,557 33,248 0

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 2008 was 19.6%, which is higher than the required percentage of 7%.

42 XIII. Financial Report from Audit Committee in 2008

Date: April 27, 2009

Inspection Report from the Audit Committee

Among all the business report, financial reports and provisions for P&L in 2008 approved by the Board of Directors, the financial report was incorporated by KPMG along with the auditors' report containing a qualified opinion. I certify the conclusion of the Audit Committee, which states that all the aforementioned reports are complete and in compliance with Article 14-4 of the Securities and Exchange Act and Article 219 of the Company Act. Please review and approve.

Cosmos Bank, Taiwan

Independent Directors:

Wen-yu Wang,

Peggy Wang,

Ji-huang Lin,

Chang-ji Chang

(I herein state that my personal opinion is a qualified opinion as that of CPA, referring to the impact which the unamortized balance of NPL sales NT$ 15,384,878 thousand as of December 31st 2008 may have on the 2008 Financial Reports.)

43 44 FINANCIAL REVIEW

I. Independent Auditors' Report

The Board of Directors and Stockholders Cosmos Bank, Taiwan:

We have audited the accompanying balance sheet of Cosmos Bank, Taiwan as of December 31, 2008, and the related statements of income, changes in stockholders' equity, and cash flows for the year 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 audit. The financial statements of Cosmos Bank, Taiwan as of and for the year ended December 31, 2007, were audited by other auditors, who expressed a qualified opinion on March 25, 2008. A qualified opinion was expressed because losses arising from the sale of non-performing loans were deferred and amortized. Had these losses not been deferred, the carrying value of other assets as of December 31, 2007, would have decreased by $23,012,779 thousand, retained earnings would have decreased by $17,259,584 thousand, and the loss after tax would have decreased by $7,204,376 thousand for the year ended December 31, 2007.

We conducted our audit in accordance with the Regulations Governing the Auditing of Financial Statements of Financial Institutions by Certified Public Accountants and auditing standards generally accepted in the Republic of China. Those standards and regulation require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As stated in note 4(k) to the financial statements, the Bank signed individual contracts with asset management companies between 2002 and 2006 to sell non-performing 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 recorded as deferred losses on the sale of non-performing loans. Had these losses not been deferred, the carrying value of the deferred losses as of December 31, 2008, would have decreased by $15,384,878 thousand, and retained earnings would have decreased by $11,538,659 thousand. In addition, the loss after tax would have decreased by $5,629,758 thousand for the year ended December 31, 2008.

In our opinion, except for the effects of the deferred loss on the sale of the non-performing 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, 2008, and the results of its operations and its cash flows for the year ended December 31, 2008, in conformity with the Guidelines Governing the Preparation of Financial Reports by Public Banks, the related financial accounting standards of the Business Entity Accounting Act and of the Regulation on Business Entity Accounting Handling, and accounting principles generally accepted in the Republic of China.

April 27, 2009

Notice to Readers

The accompanying financial statements are intended only to present the financial position, results of operations and cash flows in accordance with the accounting principles and practices generally accepted in Taiwan, the Republic of China and not those of any other jurisdictions. The standards, procedures and practices to audit such financial statements are those generally accepted and applied in Taiwan, the Republic of China.

The auditors' report and the accompanying financial statements are the English translation of the Chinese version prepared and used in the Republic of China. If there is any conflict between, or any difference in the interpretation of, the English and Chinese language auditors' report and financial statements, the Chinese version shall prevail.

45 FINANCIAL REVIEW

II. Financial Statements COSMOS BANK, TAIWAN Balance Sheets December 31, 2008 and 2007 (Expressed in thousands of New Taiwan dollars) Percentage Increase 2008 2007 (Decrease) Assets Amount Amount %

Cash and cash equivalents (notes 4(a) and 5) $ 3,457,234 3,009,940 15 Due from the Central Bank and call loans to banks (notes 4(b) and 5) 27,069,521 40,553,922 (33) Financial assets at fair value through profit or loss, net (note 4(c)) 156,029 195,503 (20) Receivables, net (notes 4(d) and 5) 6,771,268 6,504,729 4 Assets held for sale (note 4(e)) 156,498 212,941 (27) Discounts and loans, net (notes 4(f) and 5) 93,593,380 113,651,805 (18) Available-for-sale financial assets, net (notes 4(g) and 6) 891,086 648,440 37 Equity investments under the equity method, net (notes 4(h) and 5) 50,775 42,749 19 Other financial assets, net (notes 4(i) and 6) 1,447,533 1,887,056 (23) Fixed assets, net (note 4(j)) 6,587,495 6,847,196 (4) Intangible assets (notes 3 and 10(e)) 67,540 389,945 (83) Other assets, net: Deferred loss on the sale of nonperforming loans (note 4(k)) 15,384,878 23,012,779 (33) Others (notes 4(k) and 5) 8,902,439 8,270,088 8 24,287,317 31,282,867 (22)

Total assets $164,535,676 205,227,093 (20)

See accompanying notes to financial statements.

46 Percentage Increase 2008 2007 (Decrease) Liabilities and Stockholders' Equity Amount Amount %

Due to the Central Bank and other banks (note 4(l)) $ 13,216,356 32,157,167 (59) Financial liabilities at fair value through profit or loss (note 4(c)) 13,027 15,366 (15) Securities sold under repurchase agreements (note 4(m)) 7,034 40,920 (83) Payables (note 4(n)) 3,362,457 4,502,347 (25) Deposits and remittances (notes 4(o) and 5) 122,600,724 131,126,060 (7) Bank debentures (note 4(p)) 515,000 515,000 - Accrued pension liabilities (note 4(q)) 286,515 1,053,269 (73) Other financial liabilities (note 4(p)) 2,111,318 3,058,197 (31) Other liabilities 301,168 460,243 (35) Total liabilities 142,413,599 172,928,569 (18) Capital stock (note 4(s)) Common stock 22,347,209 67,866,500 (67) Preferred stock 5,433,151 16,500,000 (67) Total capital stock 27,780,360 84,366,500 (67) Capital surplus Others (note 4(s)) 15,844,318 15,831,910 - Total capital surplus 15,844,318 15,831,910 - Retained earnings Accumulated deficit (note 4(s)) (21,519,090) (67,902,864) 68 Total accumulated deficit (21,519,090) (67,902,864) 68 Others Unrealized losses on financial instruments 16,489 2,978 454 16,489 2,978 454 Total stockholders' equity 22,122,077 32,298,524 (32) Commitments and contingencies (note 7) Total liabilities and stockholders' equity $ 164,535,676 205,227,093 (20)

47 FINANCIAL REVIEW

COSMOS BANK, TAIWAN Income Statements For the years ended December 31, 2008 and 2007 (Expressed in thousands of New Taiwan dollars, except earnings per share, which are expressed in New Taiwan dollars) Percentage Increase 2008 2007 (Decrease) Amount Amount %

Interest revenue $ 9,920,451 12,066,082 (18) Less: interest expense (3,650,665) (4,214,379) 13 Net interest 6,269,786 7,851,703 (20) Net revenues (losses) other than interest Service fee income, net 795,238 1,160,967 (32) Gains on financial assets and liabilities at fair value through profit or loss (note 4(c)) (200) 96,883 (100) Realized gains (losses) on the sale of available-for-sale financial assets (note 4(u)) 49 (29,330) 100 Income from equity investments under the equity method (note 4(h)) 7,024 5,268 33 Foreign exchange gains (losses), net 68,568 79,212 (13) Loss on asset impairment (notes 4(i), (j), and (k)) (405,538) (1,000,227) 59 Other noninterest gains (losses), net (note 5) 230,571 (126,224) 283 Realized losses on the sale of debt instruments with no active market - (796,170) - Loss on the sale of nonperforming loans (7,506,343) (9,605,835) 22 Total net losses other than interest (6,810,631) (10,215,456) 33 Total net revenues (losses) (540,845) (2,363,753) 77 Provision for loan losses (note 4(d)) (6,065,720) (7,029,903) 14 Operating expenses (notes 5 and 10(e)) Personnel (note 10(e)) (2,747,572) (4,194,999) 35 Depreciation and amortization (note 10(e)) (566,583) (647,636) 13 Others (2,417,039) (3,507,930) 31 Total operating expenses (5,731,194) (8,350,565) 31

See accompanying notes to financial statements.

48 Percentage Increase 2008 2007 (Decrease) Amount Amount %

Loss before income tax (12,337,759) (17,744,221) 30 Income tax benefit (note 4(r)) 2,135,393 2,750,280 (22) Extraordinary gain - 5,539,725 - Net loss $(10,202,366) (9,454,216) (8)

2008 2007 Before After Before After Tax Tax Tax Tax

Net income from continuing operations (4.44) (3.67) (12.35) (10.44) Extraordinary gain or loss - - 5.14 3.86 Loss per share (note 4(t)) $(4.44) (3.67) (7.21) (6.58) Loss per share – retroactive $(21.89) (19.98)

49 FINANCIAL REVIEW

COSMOS BANK, TAIWAN Statements of Changes in Stockholders' Equity For the years ended December 31, 2008 and 2007 (in thousands of New Taiwan dollars)

Common Preferred Capita stock stock surplus

Balance at January 1, 2007 $ 19,677,795 - 942,524

Offset of 2006 accumulated deficit: Legal reserve - - - Special reserve - - - Capital surplus - - (929,812) Capital decrease, July 20, 2007 (5,903,339) - - Issuance of common stock for cash, NT$ 2 per share 33,000,000 - - Issuance of preferred stock for cash, NT$ 2 per share - 16,500,000 - Issuance of common stock from convertible bank debentures 21,092,044 - - Equity component of subordinated unsecured mandatory convertible bonds - - 15,819,198 Net loss for year ended December 31, 2007 - - - Unrealized valuation gains on financial instruments - - -

Balance at December 31, 2007 67,866,500 16,500,000 15,831,910

Capital decrease (45,519,291) (11,066,849) - Stock-based compensation - - 12,408 Net loss for year ended December 31, 2008 - - - Unrealized valuation gains on financial instruments - - -

Balance at December 31, 2008 $ 22,347,209 5,433,151 15,844,318

See accompanying notes to financial statements.

50 Retained Earnings (Accumulated Deficit)

Unrealized valuation Legal Special Accumulated losses on financial Total reserve reserve deficit instruments

777,389 1,813,493 (11,286,541) (30,663) 11,893,997

(777,389) - 777,389 - - - (1,813,493) 1,813,493 - - - - 929,812 - - - - 5,903,339 - -

- - (26,451,880) - 6,548,120

- - (13,225,940) - 3,274,060

- - (16,908,320) - 4,183,724

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

- - - 33,641 33,641

- - (67,902,864) 2,978 32,298,524

- - 56,586,140 ------12,408 - - (10,202,366) - (10,202,366)

- - - 13,511 13,511

- - (21,519,090) 16,489 22,122,077

51 FINANCIAL REVIEW

COSMOS BANK, TAIWAN Statements of Cash Flows For the years ended December 31, 2008 and 2007 (in thousands of New Taiwan dollars)

2008 2007

Cash flows from operating activities: Net loss $ (10,202,366) (9,454,216) Extraordinary gain - (5,539,725) Adjustments to reconcile net loss to net cash provided by (used in) operating activites: Depreciation and amortization 566,583 647,636 Provision for loan losses 6,065,720 7,029,903 Employee share option 12,408 - Amortization of loss on the sale of nonperforming loans 7,506,343 9,605,835 Amortization of discount on convertible bank debentures 277,870 64,908 Loss on sale of properties and foreclosed collateral, net 347 3,600 (Gain) loss on financial assets and liabilities at fair value through profit or loss, net 200 (96,883) Income from equity investments under the equity method (7,025) (5,268) (Gain) loss on sale of debt instruments with no active market (685) 796,170 Gain on disposal of financial assets carried at cost, net - (30,124) Loss on the sale of available for sale financial assets, net - 29,330 Loss on asset impairment 405,538 1,000,227 Recovery of loans and receivables written off in prior years 993,438 2,064,452 Gain of disposal of held assets, net (16,920) - Net changes in operating assets and liabilities: Decrease in financial assets at fair value through profit or loss 36,935 4,108,549 Decrease in receivables 202,476 736,110 (Increase) decrease in other financial assets (10,410) 2,660,755 Increase in other assets (12,409) (242,280) Increase in deferred income tax (2,098,888) (2,832,361) Decrease in payables (1,139,890) (1,458,291) Other liabilities (159,075) 111,257 (Decrease) increase in provision for pension cost (766,754) 1,047,228 Others 3,453 31,695 Net cash provided by operating activities 1,656,889 10,278,507 Cash flows from investing activities: Decrease (increase) in due from the Central Bank and call loans to banks 13,483,170 (6,268,127) Decrease in discounts and loans 13,530,952 8,538,919 Acquisition of properties (102,331) (38,197) Acquisition of long-term investment (1,003) - Proceeds from the sale of available-for-sale financial assets 530,372 1,249,953 Acquisition of available-for-sale financial assets (777,006) - Proceeds from the sale of debt instruments with no active market 412,238 6,060,148 Increase in intangible assets (27,600) (10,654) Decrease in refundable deposits 15,930 238,110

52 2008 2007

Rebates from the sale of nonperforming loans 113,266 66,630 Proceeds from the sale of financial assets carried at cost - 39,203 Proceeds from the sale of assets held for sale 69,186 27,457 Acquisition of foreclosed collateral - (417,112) Proceeds from the sale of foreclosed collateral - 116,688 Decrease (increase) in other assets 268,880 (50,760) Others (867) 5 Net cash provided by investing activities 27,515,187 9,552,263 Cash flows from financing activities: Issuance of common stock for cash - 6,600,000 Issuance of preferred stock for cash - 3,300,000 Issuance of subordinated unsecured mandatory convertible bank debentures – capital surplus - 15,944,124 Issuance of subordinated unsecured mandatory convertible bank debentures – other financial liabilities - 2,711,436 Increase (decrease) in due to the Central Bank and other banks (18,940,811) 12,479,898 Decrease in deposits and remittances (8,525,336) (59,978,544) Decrease in securities sold under repurchase agreements (33,886) (2,119,919) Increase (decrease) in other financial liabilities (1,224,749) 58,195 Decrease in other liabilities - (304,492) Decrease in bank debentures - (1,130,291) Net cash used in financing activities (28,724,782) (22,439,593) Net increase (decrease) in cash and cash equivalents 447,294 (2,608,823) Cash and cash equivalents at beginning of year 3,009,940 5,618,763 Cash and cash equivalents at end of year $ 3,457,234 3,009,940 Supplementary cash flow information Interest paid $ 3,994,369 4,327,661 Income tax paid $ 3,571 6,768

See accompanying notes to financial statements.

53 FINANCIAL REVIEW

III. Note to Finacial Statements Notes to Financial Statements December 31, 2008 and 2007 (Expressed in New Taiwan dollars unless otherwise specified)

1. Organization and Operations

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

As of December 31, 2008, the Bank had a main office, an offshore banking unit (OBU) and 62 domestic branches.

In accordance with the resolution of the 32nd meeting of the 6th session of the Bank's Board of Directors held on January 23, 2009, as an effort to improve operational effectiveness, the Bank applied to close 12 branches, and on March 24, 2009, the Bank obtained the approval from the FSC under Jin Guan Yin (2) No. 098000043360. As of December 31, 2008, the Bank had 2,255 employees.

The business of the Bank's Trust Department includes planning, managing and operating trust business regulated under the Banking Act and Trust Business Regulations of the Republic of China (ROC).

The shares of the Bank have been traded on the Taiwan Stock Exchange (TSE) since June 29, 1998. Under the TSE's operating rules and regulations, the Bank had to change the way of trading its shares on September 5, 2007.

As a result of the Bank's continuing losses and to avoid the situation as described under Section 64 of the Banking Act of the Republic of China, the Financial Supervisory Commission (FSC) issued Directive Jin Guan Yin (1) No. 09700480350 and requested the Bank to actively improve operating results and to propose practical plans to strengthen the Bank's capital structure. In the 33rd meeting of the 6th session of the Bank's Board of Directors, the Bank approved the following plan:

(a) The Bank expects to complete its capital increase and reduction of its common stock in July 2009 in order to comply with the requirements of Article 64 of the Banking Act. The expected contents of the plan are as follows:

(1) In order to improve the Bank's financial structure, GE Capital Asia Investments Holding B.V. and the Bank have reached an agreement to resolve the differences regarding the technical service agreement. Under the new agreement, the remaining payable will be partially settled by cash, and the remainder will be through a private financing of common shares.

(2) Based on the issuance principles of the 2007 issuance of preferred shares, the preferred shares will be converted into common shares at a 1:1 ratio.

(3) S.A.C. PEI Taiwan Holdings B.V. holds Subordinated Unsecured Mandatory Convertible Bonds (MCB) issued by the Bank in 2007, a portion of which will be converted prematurely into common shares.

(4) The Bank will complete a capital reduction to offset accumulated losses and the share discount from the issuance of common shares from the abovementioned capital injection.

(b) The Bank will actively dispose of non-performing loans and reduce personnel costs and recurring expenses in order to reduce the speed at which capital is used. Also, it will continue to engage in product innovation, improve the risk management process, and implement internal control policies in order to improve the operating efficiency of the Bank.

54 The Bank has been approved to conduct business in the following areas:

(1) Checking accounts, savings accounts, time deposits;

(2) Short-, medium-, and long-term loans;

(3) Note discounting;

(4) Investment in marketable securities;

(5) Domestic foreign exchange business;

(6) Banker's acceptances;

(7) Issuance of domestic standby letters of credit;

(8) Domestic endorsement guarantees business;

(9) Collection and payment agency;

(10) Agency for government and corporate bonds, treasury bills, and securities transactions;

(11) Agency transactions and proprietary trading of short-term bills;

(l2) Credit card-related products;

(13) Agency for sale of gold nuggets, gold coins and silver coins;

(14) Trust businesses as approved by the competent authority;

(15) Custody and warehouse services;

(16) Renting of safe-deposit boxes;

(17) Financial advisory services for corporate banking;

(18) Foreign exchange business in connection with exports and imports, fund remittance and repatriation, foreign currency deposits and loans; guarantee for secured repayment, and attestation on exports and imports;

(19) Certification of securities;

(20) Acting as bond issuer and providing representative services;

(21) Endorsement and issuance of corporate bonds;

(22) Issuance of financial debentures;

(23) Trust business regarding loans and related security interests;

(24) Proprietary trading of government bonds;

(25) All businesses related thereto as specified in the license or other agency services as approved by the competent authority;

(26) Trust and fiduciary services;

(27) Trust business regarding money;

(28) Issuance of cash value cards;

55 FINANCIAL REVIEW

(29) Sale of public welfare lottery tickets;

(30) Trust business regarding securities;

(31) Other businesses as approved by the competent authority;

(32) Fiduciary investments through trusts;

(33) Trust business regarding real estate.

(34) Land rights trust

(35) Wealth management

(36) Custodian services

2. Summary of Significant Accounting Policies

The financial statements are the English translation of the Chinese version prepared and used in the Republic of China. If there is any conflict between, or any difference in the interpretation of, the English and Chinese language financial statements, the Chinese version shall prevail.

The Bank's financial statements have been prepared in conformity with the Guidelines Governing the Preparation of Financial Reports by Public Banks, the Business Entity Accounting Act, the Regulation on Business Entity Accounting Handling, and accounting principles generally accepted in the Republic of China. In preparing financial statements in conformity with these guidelines and principles, the Bank is required to make certain estimates and assumptions that could affect the amounts of allowance for possible losses, reserve for losses on guarantees, property depreciation, impairment loss on assets, valuation of financial instruments at fair value, pension, income tax, and accrued litigation loss. Actual results could differ from these estimates.

Since the operating cycle in the banking industry cannot be reasonably identified, accounts included in the Bank's financial statements are not classified as current or noncurrent. Nevertheless, these accounts are properly categorized according to the nature of each account and sequenced by liquidity. Please refer to Note 4(u) for the maturity analysis of assets and liabilities.

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

(a) Basis of Preparation The accompanying financial statements include the accounts of the Head Office, the OBU, and all the branches. All interoffice transactions and balances have been eliminated.

(b) Financial Instruments at Fair Value Through Profit or Loss Financial instruments classified as financial assets or financial liabilities at fair value through profit or loss (“FVTPL”) include financial assets or financial liabilities held for trading and those designated as at FVTPL on initial recognition. The Bank recognizes a financial asset or a financial liability on its balance sheet when the Bank becomes a party to the contractual provisions of the financial instrument. A financial asset is derecognized when the Bank has lost control of its contractual rights over the financial asset. A financial liability is derecognized when the obligation specified in the relevant contract is discharged, cancelled or expired.

Financial instruments at FVTPL are initially measured at fair value. At each balance sheet date subsequent to the initial recognition, financial assets or financial liabilities at FVTPL are remeasured at fair value, with changes in fair value recognized directly in profit or loss in the year in which they arise. On derecognition of a financial asset or a financial liability, the difference between its carrying amount and the sum of the consideration received and receivable or consideration paid and payable is recognized in profit or loss. All regular way purchases or sales of financial assets

56 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 the GreTai Securities Market (GTSM); (c) listed stocks and GTSM stocks - at closing prices as of the balance sheet date; and (d) financial assets/liabilities without quoted prices in an active market - at values determined using valuation techniques.

(c) Securities Purchased/Sold Under Resell/Repurchase Agreements Securities purchased under resell agreements and securities sold under repurchase agreements are generally treated as collateralized financing transactions. Interest earned on resell agreements or interest incurred on repurchase agreements is recognized as interest income or interest expense over the life of each agreement.

(d) 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 been recognized for the investment in prior years.

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

(e) Accounts Receivable For the Bank, consumer loans to credit card holders are reflected by the amounts reported by merchants. Interest thereon is recognized on an accrual basis using the interest method.

A credit card loan or accrued interest that is over 90 days past due is reclassified to a non-accrual account without accruing interest. Interest collected while accruing of interest has stopped is included in earnings only to the extent of cash actually received.

The Bank engages in factoring and management of accounts receivable. The interest and transaction fees from factoring and management of such accounts are treated as current income. An allowance for credit losses is provided by reviewing the balance of factoring accounts receivable at period-end.

(f) Loans Loans are recorded at the amount of outstanding principal excluding unearned income. Interest income is recognized on an accrual basis using the interest method.

When a loan becomes overdue, interest receivable is no longer accrued internally. Interest income is recorded when payment is actually received.

(g) 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.

57 FINANCIAL REVIEW

(h) 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.

Debts and guarantees with specific risks are evaluated internally for their collateral, collectibility and customers' overall credits. Under MOF guidelines, the Bank makes 100%, 50%, 10% and 2% provisions for credits deemed uncollectible, highly uncollectible, substandard and special mention, respectively, as minimum provisions for possible losses.

Under MOF guidelines and in consideration of the collectibility 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.

(i) Available-for-sale Financial Assets Available-for-sale financial assets are initially recognized at fair value plus transaction costs that are directly attributable to the financial asset acquisition. When assets are subsequently measured at fair value, the changes in fair value are excluded from earnings and reported as a separate component of stockholders' equity. The accumulated gains or losses are recognized as earnings when the financial asset is de-recognized from the balance sheet. The Bank uses trade-date accounting when recording transactions.

Cash dividends are recognized on the ex-dividend date, except for dividends distributed from the pre-acquisition profit, which are treated as a reduction of investment cost. Stock dividends are not recognized as investment income but are recorded as an increase in the number of shares. The total number of shares subsequent to the increase is used for recalculation of cost per share. The difference between the initial cost of a debt instrument and its maturity amount is amortized using the effective interest method (or the straight-line method can be used if there will be no significant difference), with the amortized interest recognized in profit or loss.

If an available-for-sale financial asset is determined to be impaired, a loss is recognized. If the impairment loss on equity securities decreases, this loss is reversed to the extent of the decrease and recorded as an adjustment to stockholders' equity, and for debt securities, the loss is recognized as earnings.

(j) Equity Investments under the Equity Method Investments in which the Bank holds 20% or more of the investees' voting shares or exercises significant influence over the investees' operating and financial policy decisions are accounted for by the equity method.

The difference between the investment cost and net equity of an investee is amortized over 10 years. However, under the revised Statement of Financial Accounting Standards No. 5 - “Long-term Investments under Equity Method”, 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 an 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 - “Financial Instruments: Recognition and Measurement”. If the Bank losses 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.

58 (k) Other Financial Assets Investments in equity instruments (including unlisted stocks) with no quoted market prices in an active market and with fair values that cannot be reliably measured are recognized at cost on acquisition. If there is objective evidence that a financial asset is impaired, an impairment loss is recognized. However, impairment loss reversal is prohibited.

Debt instruments with no active market are those without quoted market prices in an active market and with fair values that cannot be reliably measured. These instruments are carried at amortized cost.

An impairment loss is recognized when there is objective evidence that the investment is impaired. The impairment loss is reversed if an increase in the investment's recoverable amount is due to an event which occurred after the impairment loss was recognized; however, the adjusted carrying amount of the investment may not exceed the carrying amount that would have been determined had no impairment loss been recognized for the investment in prior years.

(l) 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):

(i) buildings: 20 to 60 years;

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

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

(iv) miscellaneous equipment: 2 to 10 years.

Properties that have reached their estimated useful lives but are still being used are depreciated over their newly estimated service lives.

Upon sale or other disposal of properties, the related cost and accumulated depreciation are removed from the accounts, and any gain or loss is credited or charged to net nonoperating income.

(m) Intangible Assets Computer software initially is measured at cost and is amortized over 5 years. Goodwill previously was amortized over 10 years; however, effective from January 1, 2006, the Bank adopted Statement of Financial Accounting Standards No. 25 - “Business Combinations” whererby goodwill is no longer amortized and is assessed for impairment periodically.

(n) Foreclosed Collateral Foreclosed collateral is recorded at the lower of cost or net realizable value on the balance sheet date. If collateral assumed is not disposed of within the statutory period, relevant regulations require that the Bank should either apply for an extension of the disposal period or increase its provision for possible losses.

(o) 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.

59 FINANCIAL REVIEW

(p) Asset Impairment Under Statement of Financial Accounting Standards No. 35 - “Impairment of Assets”, the Bank evaluates impairment on the balance sheet date if an asset (equity investment under the equity method, fixed asset, asset held for sale, goodwill, foreclosed collateral, idle asset or deferred charge classified under other assets - other) is impaired. If an asset is impaired, its recoverable amount is compared with its carrying amount. If the recoverable amount is lower than the carrying amount, the carrying amount of the asset should be reduced to its recoverable amount, and the reduction should be recognized as impairment loss. After recognizing impairment of assets, the calculation of depreciation or amortization expense should be based on the adjusted book value minus its residual value and amortized in a reasonable and systematic manner over the remaining estimated useful period. The accumulated impairment loss on an asset (except goodwill) recognized in prior years should be reversed if the recoverable amount increases. In addition, the asset carrying amount should be increased to its recoverable amount, but this increase should not exceed the carrying amount of the asset that would have been determined net of depreciation or amortization had no impairment loss been recognized for the asset in prior years.

(q) Bank Debentures For convertible bonds issued, the Bank first determines the carrying amount of the liability component by measuring the fair value of a similar liability (including any embedded non-equity derivatives) that does not have an associated equity component, then determines the carrying amount of the equity component, representing the equity conversion option, by deducting the fair value of the liability component from the fair value of the convertible bonds as a whole. The liability component (excluding the embedded non-equity derivatives) is measured at amortized cost using the effective interest method, while the embedded non-equity derivatives are measured at fair value. Upon conversion, the Bank uses the aggregate carrying amount of the liability and equity components of the bonds at the time of conversion as the basis to record the common shares issued. Pursuant to a newly released SFAS, transaction costs of bonds issued on or after January 1, 2006, are allocated in proportion to the liability and equity components of the bonds. Transaction costs allocated to the equity component are accounted for as a deduction from equity, net of any income tax benefit.

(r) Pension Costs The Bank has two types of pension plans: defined benefit and defined contribution.

Under the defined benefit pension plan, pension costs are recorded on the basis of actuarial calculations. Unrecognized net transition obligation is amortized over 15 years, and prior service cost and actuarial gains or losses are amortized over the employees' remaining service years using the straight-line method. Under the defined contribution pension plan, the Bank recognizes its required monthly contributions to employees' individual pension accounts as current expense during the employees' service periods.

(s) Employee Stock Options The issuance of compensatory stock options is treated under SFAS No. 39 - “Share-based Payment”. Their value is based on the expected amount of shares and the fair value on the grant day, and expense is recognized over the vesting period using the straight-line method. At the same time, adjustment is made to capital surplus – employee stock option.

(t) Employee Bonuses and Directors' and Supervisors' Remuneration Starting on January 1, 2008, employee bonuses and directors' and supervisors' remuneration are accrued in accordance with Interpretation 96 Ji-Mi No. 052 issued by the Accounting Research and Development Foundation in Taiwan and is recorded under personnel costs. If the subsequent resolution by the shareholders' meeting differs from the amount disclosed in the financial statements, it is then recognized as a change in estimates and recorded under current-period profit/loss.

60 (u) 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.

(v) Income Tax Provision for income tax is based on intra-period and inter-period tax allocation. The tax effects of deductible temporary differences, unused tax credits, operating loss carryforwards, and debit of stockholders' equity adjustments are recognized as deferred income tax assets, and those of taxable temporary differences and credits to stockholders' equity adjustments are recognized as deferred income tax liabilities. A valuation allowance is provided for deferred income tax assets that are not certain to be realized.

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

Income 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.

(w) Foreign-currency Transactions The Bank records foreign-currency transactions in the respective currencies in which these are denominated. Every month-end, foreign currency income and expenses are translated into New Taiwan dollars at the month-end exchange rate. On the balance sheet date, monetary assets and liabilities denominated in foreign currencies are reporting using the month-end exchange rates, and exchange differences are recognized in the income statement.

Unrealized exchange differences on nonmonetary financial assets (investments in equity instruments) are a component of the change in their entire fair value. For nonmonetary financial assets and liabilities classified as financial instruments measured at fair value through profit or loss, unrealized exchange differences are recognized in the income statement. For nonmonetary financial instruments that are classified as available-for-sale, unrealized exchange differences are recorded directly under stockholders' equity until the asset is sold or becomes impaired. Nonmonetary financial instruments that are classified as carried at cost are recognized at the exchange rates on the transaction dates.

(x) Contingencies A loss is recognized when it is probable that an asset has been impaired or a liability has been incurred and the amount of loss can be reasonably estimated. A footnote disclosure is made of a situation that might result in a possible loss but for which the amount of loss cannot be reasonably estimated.

(y) Earnings (Losses) per Share Basic earnings (losses) per share are calculated using the net income after taxes minus dividends paid on preferred shares. Newly issued shares through retained earnings or capital surplus, or issued through a resolution of the 2008 shareholders' meeting or before, should be recalculated. If the measurement date is before the balance sheet date, then they should also be recalculated.

61 FINANCIAL REVIEW

The employee stock options and the employee bonuses settled using shares that have yet to be approved by the shareholders' meeting are deemed to be potential common stock. If the potential common stock possesses diluting effects, then diluted EPS must be disclosed in addition to basic EPS. If diluting effects do not exist, then only basic EPS are required to be disclosed.

3. Accounting Changes

Effective January 1, 2008, the Bank adopted the newly released SFAS No. 39 - “Share-based Payment” in the accounting for employee stock options. As a result of the change in accounting standards, the net loss in the 2008 increased by $9,305 thousand while the basic loss per share after tax increased by 0.003 dollars.

The Bank adopted Interpretation 96 Ji-Mi No. 052 “Accounting for Employee Bonuses and Directors' and Supervisors' Remuneration” issued by the Accounting Research and Development Foundation in Taiwan. Employee bonuses and directors' and supervisors' remuneration should be accounted for as an expense and not a distribution of earnings. This change in accounting standards has no significant effect on the Bank.

The Bank adopted SFAS No. 37 “Intangible Assets” on January 1, 2007. In accordance with SFAS No. 37, the Bank reevaluated the useful lives and amortization methods of intangible assets already recognized as of the adoption date. No adjustments were required based on the evaluation.

4. Summary of Major Accounts

(a) Cash and cash equivalents

December 31, December 31, 2008 2007

Cash on hand $ 2,122,234 2,219,443 Due from banks 679,600 471,833 Checks for clearing 655,400 318,664 $ 3,457,234 3,009,940

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

December 31, December 31, 2008 2007

Call loans to banks $ 7,051,739 25,409,465 Deposit in the Central Bank 15,000,000 100,000 Reserves for deposits - a/c B 3,167,133 3,348,543 Reserves for deposits - a/c A 1,450,468 11,495,900 Deposits 400,181 200,014 $ 27,069,521 40,553,922

As required by law, the reserves for deposits in the Central Bank are calculated by applying the prescribed rates to the average monthly balances of various types of deposit accounts. The use of reserves for deposits - a/c B is restrict- ed by the Central Bank.

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

December 31, December 31, 2008 2007

Held-for-trading financial assets Government bonds $ 149,815 149,550 Cross-currency swap contracts 6,214 13,436 Foreign-currency swap contracts - 1,418 Bill investments - 31,099 $ 156,029 195,503 Held-for-trading financial liabilities Forward exchange contracts $1,569 - Foreign-currency swap contracts 5,244 1,930 Cross-currency swap contracts 6,214 13,436 $ 13,027 15,366

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, 2008 and 2007, were as follows:

December 31, December 31, 2008 2007

Cross-currency swap contracts $ 267,278 885,605 Foreign-currency swap contracts 98,580 223,437 Forward exchange contracts 29,926 -

Net gains on financial assets held for trading for the years ended December 31, 2008 and 2007, were $18,218 thousand and $121,201 thousand, respectively. The net loss on financial liabilities at FVTPL in 2008 and 2007 was $18,418 thousand and $24,318 thousand, respectively.

(d)Receivables, net

December 31, December 31, 2008 2007

Credit cards $ 4,049,637 4,285,252 Accounts receivable - no recourse 569,171 1,151,527 Accrued interest 520,888 610,931 Acceptances 46,738 78,695 Tax refund receivable 61,841 38,302 Accrued income 57,499 22,474 Accrued deposits 1,000,700 - Others 524,578 376,729 6,831,052 6,563,910 Less: allowance for possible losses (59,784) (59,181) $ 6,771,268 6,504,729

63 FINANCIAL REVIEW

As of December 31, 2008, deposits receivable amounting to $1,000,700 thousand resulted from the relocation to Bank-owned property, of which, deposits from Prince Motors and Cosmos Construction Management Corporation amounting to $910,700 thousand have been extended, and they are expected to sign a repayment agreement before June 30, 2009. Please refer to Note 9(c).

(e) Assets held for sale

December 31, December 31, 2008 2007

Land held for sale $ 213,988 264,631 Buildings held for sale 60,717 62,340 274,705 326,971 Less: accumulated impairment loss (118,207) (114,030) $ 156,498 212,941

The land and buildings were previously used for the Bank's auto service division or warehouses, and a search is under way for a buyer. This sale plan was approved by the Board of Directors on January 16, 2008.

(f) Discounts and loans, net

December 31, December 31, 2008 2007

Bills negotiated $ 23,937 34,791 Discounts 975 - Overdraft 5,584 693 Loans Short-term 42,904,699 50,539,442 Medium-term 33,301,513 43,185,180 Long-term 19,117,932 22,480,989 Overdue loans 2,683,257 3,719,243 98,037,897 119,960,338 Less: allowance for possible losses (4,444,517) (6,308,533) $ 93,593,380 113,651,805

As of December 31, 2008 and 2007, the balances of loans for which accrual of interest revenues was discontinued were $2,605,209 thousand and $3,606,957 thousand, respectively. The unrecognized interest revenues on these loans were $369,793 thousand and $431,114 thousand as of December 31, 2008 and 2007, respectively.

As of December 31, 2008 and 2007, the Bank had written off certain loans after carrying out the required legal procedures.

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

December 31, 2008 Specific Risk General Risk Total

Opening balance at January 1, 2008 $ 5,542,767 765,766 6,308,533 Provisions 5,754,031 (138,975) 5,615,056 Recovery of written-off credits 912,417 - 912,417 Write-offs (8,351,815) - (8,351,815) Effects of exchange rate changes (39,674) - (39,674) Ending balance at December 31, 2008 $ 3,817,726 626,791 4,444,517

December 31, 2007 Specific Risk General Risk Total

Opening balance at January 1, 2007 $ 8,858,417 587,153 9,445,570 Provisions 6,229,135 178,613 6,407,748 Recovery of written-off credits 1,994,534 - 1,994,534 Write-offs (11,530,048) - (11,530,048) Effects of exchange rate changes (9,271) - (9,271) Ending balance at December 31, 2007 $ 5,542,767 765,766 6,308,533

The details of the provision for loan losses in 2008 and 2007 were as follows:

December 31, December 31, 2008 2007

Provisions for possible losses on discounts and loans $ 5,615,056 6,407,748 Provision/reversal for possible losses on receivables 3,443 (185,068) Overdue accounts receivable and other assets 447,221 806,549 Reserves for guarantees - 674 $ 6,065,720 7,029,903

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

December 31, December 31, 2008 2007

Government bonds $ 871,923 648,440 Master Card shares 5,201 - Visa Card shares 13,962 - $ 891,086 648,440

65 FINANCIAL REVIEW

(h) Equity investments under the equity method, net

December 31, 2008 December 31, 2007 % of % of Carrying Value Ownership Carrying Value Ownership

Reliance Securities Investment Trust Corporation, Ltd. (RSIT) $ 43,594 20.00 42,749 20.00 Cosmos Insurance Brokers Co., Ltd. 7,181 100.00 - - $ 50,775 42,749

In 2008 and 2007, net income on this investment was $7,024 thousand and $5,268 thousand, respectively. Net income is recognized in accordance with the financial statements of the investee companies during the same period.

(i) Other financial assets, net

December 31, December 31, 2008 2007

Debt instruments with no active market, net $ 513,762 925,315 Financial assets carried at cost, net 722,830 761,210 Others 210,941 200,531 $ 1,447,533 1,887,056

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

December 31, December 31, 2008 2007

Special-purpose trust beneficiary certificates $ 481,197 893,435 Leveraged spread notes 32,565 31,880 $ 513,762 925,315

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

December 31, 2008 December 31, 2007 % of % of Carrying Value Ownership Carrying Value Ownership

Unlisted common stock with no quoted market price: CDIB & Partners Investment Holding Ltd. $ 500,000 4.95 500,000 4.95 Taiwan Asset Management Corporation 100,000 0.57 100,000 0.57 Euroc II Venture Capital Corporation 33,263 7.50 60,000 7.50 Financial Information Service Co., Ltd. 49,120 1.23 49,120 1.23 Euroc III Venture Capital Corp. 18,357 5.00 30,000 5.00 Taiwan International Future Co. Ltd. 10,250 0.51 10,250 0.51 Taiwan Depository & Clearing Corp. 6,345 0.08 6,345 0.08 Yang-Kuan Asset Management Corporation 3,445 5.74 3,445 5.74 Lien-An Service Co. 1,250 5.00 1,250 5.00 Taipei Forex Inc. 800 0.40 800 0.40 Cosmos Construction Management Corporation (CCMC) - 9.39 - 9.39 $ 722,830 761,210

66 In 2008, the impairment loss recognized on financial assets carried at cost amounted to $38,380 thousand.

(iii) Other financial assets were as follow:

December 31, December 31, 2008 2007

Pledged certificates of deposit $208,595 199,385 Others 2,346 1,146 $210,941 200,531

(j) Fixed assets, net

December 31, 2008 Accumulated Accumulated Cost depreciation impairment Net

Land $ 4,288,952 - 277,575 4,011,377 Buildings 2,774,061 455,613 89,597 2,228,851 Machinery and equipment 1,663,334 1,345,889 54,738 262,707 Transportation and communications equipment 264,851 234,794 7,851 22,206 Miscellaneous equipment 369,631 339,960 6,829 22,842 Prepayment for equipment 39,512 - - 39,512 Total $ 9,400,341 2,376,256 436,590 6,587,495

December 31, 2007 Accumulated Accumulated Cost depreciation impairment Net

Land $ 4,288,952 - 277,575 4,011,377 Buildings 2,774,061 401,048 89,597 2,283,416 Machinery and equipment 1,643,276 1,162,714 54,738 425,824 Transportation and communications equipment 268,888 211,440 7,851 49,597 Miscellaneous equipment 381,935 333,384 6,829 41,722 Construction in progress 12,295 - - 12,295 Prepayment for equipment 22,965 - - 22,965 Total $ 9,392,372 2,108,586 436,590 6,847,196

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.

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 future years. As of December 31, 2008 and 2007, the weighted- average cost of capital (WACC) rates for future cash flows were 3.48% and 4.07%, respectively.

67 FINANCIAL REVIEW

(k) Other assets, net

December 31, December 31, 2008 2007

Deferred loss on the sale of nonperforming loans $ 15,384,878 23,012,779 Others: Prepayments 72,340 141,125 Deferred charges 367,664 516,636 Less: accumulated impairment – deferred charges (67,137) (110,268) Foreclosed collateral, net 391,500 413,880 Deferred income tax assets, net 6,898,100 4,799,212 Refundable deposits 1,541,370 2,558,000 Less: accumulated impairment – refundable deposits (388,700) (375,000) Others 87,302 326,503 8,902,439 8,270,088 $ 24,287,317 31,282,867

(i) Deferred loss on the sale of nonperforming loans

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

1) 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 from the sale of nonperforming loans, 30% of these proceeds net of the yield amount, related tax and litigation expenses, and necessary administrative expenditures should be returned to the Bank. As of December 31, 2007, the Bank had received proceeds of $6,519 thousand (treated as a reduction of deferred loss on the sale of nonperforming loans).

2) In 2003, the Bank signed contracts with Taiwan Heng-Fong First Asset Management Co. (THFFAMC) to sell nonperforming loans of $3,630,562 thousand for $305,880 thousand. This sale resulted in a loss of $3,324,682 thousand.

3) In 2004, the Bank signed contracts with Chung-Cheng Asset Management Co. (CCAM) and Cosmos Marketing Consulting Co. (CMC) to sell nonperforming loans of $4,700,691 thousand and $3,753,942 thousand, respectively. These transactions, with a selling price of $495,402 thousand, resulted in a loss of $7,959,231 thousand. CCAM and CMC both committed that if, within five years from the contract date, there are proceeds from the sale of nonperforming loans, 45% of these proceeds net of the yield amount, related tax and litigation expenses, and necessary administrative expenditures should be returned to the Bank. As of December 31, 2008 and 2007, the Bank had received proceeds of $17,328 thousand and $32,276 thousand (treated as a reduction of deferred loss on the sale of nonperforming loans), respectively.

4) 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.

5) 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

68 thousand, $2,454,035 thousand, and $19,465,842 thousand, respectively. For these transactions, the Bank should receive a payment of $1,140,590 thousand in cash and some YKAM stock at face value. These sales resulted in a loss of $20,882,526 thousand.

CMC agreed that if there are proceeds from the sale of nonperforming loans within five years from the contract date, 50% of these proceeds net of the yield amount, related tax and litigation expenses, and necessary administrative expenditures should be returned to the Bank. As of December 31, 2008 and 2007, the Bank had received proceeds of $103,362 thousand and $27,835 thousand (treated as a reduction of deferred loss on the sale of nonperforming loans), respectively.

Under the Law Governing Mergers of Financial Institutions, the Bank deferred and amortized all of the losses on the sale of the above nonperforming loans by the straight-line method over 60 months. The unamortized amounts of $15,384,878 thousand and $23,012,779 thousand as of December 31, 2008 and 2007, respectively, were presented under deferred loss on the sale of nonperforming loans. The amortized amounts of $7,506,343 thousand and $9,605,835 thousand as of December 31, 2008 and 2007, respectively, were classified as amortization of loss on the sale of nonperforming loans.

(ii) Foreclosed collateral, net

December 31, December 31, 2008 2007

Foreclosed collateral $ 504,117 504,117 Accumulated impairment (112,617) (90,237) $ 391,500 413,880

The Bank tested for impairment of the foreclosed collateral at its fair value less selling costs and recognized impairment losses of $22,380 thousand and $47,649 thousand as of December 31, 2008 and 2007, respectively.

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

(l) Due to the Central Bank and other banks

December 31, December 31, 2008 2007

Due to banks $-5,038,011 Due to Chunghwa Post Co., Ltd. 13,214,885 27,094,010 Due to the Central Bank 1,471 17,962 Call loans from banks - 7,184 $ 13,216,356 32,157,167

(m) Securities sold under repurchase agreements As of December 31, 2008 and 2007, securities sold for $7,034 thousand and $40,920 thousand, respectively, under repurchase agreements would be purchased for $7,052 thousand and $40,945 thousand by January 2009 and January 2008, respectively.

As of December 31, 2008 and 2007, available-for-sale financial assets which amounted to $6,900 thousand (face value) and $37,500 thousand (face value), respectively, had been sold under repurchase agreements.

69 FINANCIAL REVIEW

(n) Payables

December 31, December 31, 2008 2007

Accrued expenses $ 1,211,193 1,769,195 Accrued interest 736,981 1,080,685 Payable on funds purchased 34,703 301,903 Checks for clearing 655,400 318,664 Collections payable 158,416 207,587 Acceptance 46,890 78,866 Others 518,874 745,447 $ 3,362,457 4,502,347

(o) Deposits and remittances

December 31, December 31, 2008 2007

Deposits: Checking $ 889,463 1,081,947 Demand 8,152,464 8,216,188 Time 26,017,892 38,650,112 Savings 87,363,920 82,853,775 Negotiable certificates of deposit 169,500 304,200 Remittances 7,485 19,838 $ 122,600,724 131,126,060

(p) Bank debentures

December 31, 2008 Discount Cosmos Bank Maturity Date Rate Par Value Amount Book Value

First subordinated bank debenture issued in 2006 B 2006.12.14~2016.12.14 3.20% annually $ 515,000 - 515,000

December 31, 2007 Discount Cosmos Bank Maturity Date Rate Par Value Amount Book Value

First subordinated bank debenture issued in 2006 B 2006.12.14~2016.12.14 3.20% annually $ 515,000 - 515,000

70 (i) 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. For years 3 to 5, the coupon interest (4%) is payable quarterly from the end of the three months after the first day of year 3. The conversion price upon issuance is NT$2.00 per share, which can be modified anytime using a certain formula. Advance repayment, redemption, purchase, cancellation or amendment of all or part of the Bonds is prohibited under the contract unless the Bank receives a written consent from the bondholders.

Under Statement of Financial Accounting Standards No. 36 - “Financial Instruments: Disclosure and Presentation”, the Bank recognized (a) the conversion option as capital surplus – others, which amounted to $15,819,198 thousand ($15,944,124 thousand less $124,926 thousand in transaction cost after income tax) and (b) the accrued interest of bank debentures which amounted to $3,826,386 thousand ($3,855,877 thousand less $29,491 thousand in transaction cost after income tax), classified as other financial liabilities. In the 2008, the Bank recognized $280,150 thousand in interest.

Under mandatory terms, the Bonds should be converted into fully paid common shares of the Bank (i) on the maturity date or (ii) whenever needed to maintain the Bank's capital adequacy ratio at 8% or higher or the Tier 1 capital ratio at 4% or higher, with the related calculation to include the pro rata conversion of holdings on the date of the conversion. Nevertheless, no Bonds should be mandatorily converted unless the Series A Preferred Shares have been converted in full. As of December 31, 2008, no Bonds had been converted into common shares.

(ii) 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 private issuance was approved by the Financial Supervisory Commission (FSC) on January 6, 2006 (FSC approval document: 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 anytime 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.

On November 9, 2006, 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 thousand) subordinated bank debenture, with interest payable annually at 3% and 3.2%, respectively, and the principal fully repayable on maturity.

Under an original subscription agreement that was signed on December 26, 2007, together with an appendix to the agreement, China Development Industrial Bank Inc. and nine other banks agreed to reduce 58% of the total creditors' 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 syndicate got back cash of $1,130,291 thousand and converted these bank debentures into 2,109,204 thousand common shares, amounting to $4,218,409 thousand. The Bank recorded $4,183,724 thousand as

71 FINANCIAL REVIEW

part of stockholders' equity after the deduction of the transaction cost net of income tax of $34,685 thousand.

Chu Nan Credit-Cooperative Association, Singfor Life Insurance Co., Ltd., and Taipei Sanjhih Hsiang Farmers' Association subscribed for a subordinated bank debenture issued by the Bank in 2006. The principal of this debenture was $515,000 thousand (classified as bank debentures) as of December 31, 2008. However, these subscribers did not sign the subscription agreement. The Bank has filed a petition with the courts to waive certain conditions of the bonds. The case has been accepted by the Taiwan Taipei District Civil Court, but the coun- terparties are filing an appeal with a higher court.

(q) Pension plan The Labor Pension Act (the “Act”), which took effect on July 1, 2005, provides for a new defined contribution pension plan. Bank employees subject to the earlier promulgated Labor Standards Law were allowed to choose between the pension mechanism under the Labor Standards Law or the mechanism under the Act. For those employees who chose to be subject to the pension mechanism under this Act, their service years before the enforce- ment 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 $356,431 thousand and $1,267,214 thousand as of December 31, 2008 and 2007, respectively (among which $83,746 thousand and $162,458 thousand, respectively, belong to pension expenses for the defined contribution plan).

For the Bank's employees who chose to continue to be subject to the Labor Standards Law, benefit payments are based on length of service and average monthly salary or wages of the years 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 managed by the employees' fund committee and deposited in the committee's name in the Central Trust of China (merged with Bank of Taiwan in July 2007, with Bank of Taiwan as the surviving entity). The pension fund for management is administered by the employees' pension fund administrative committee and deposited under the committee's name to an account in the Bank.

On December 6, 2007, the Bank signed with the Bank's labor union an Employee Benefit Proposal – Early Retirement Plan (ERP), under which the Bank would carry out the following enhanced pension plan in two stages from January 1 to December 31, 2008:

(i) Eligibility and limit on eligibility

1) First stage from January 1 to June 30, 2008 - The ERP will be open to all employees whose sum of age and years of service is at least 50 years.

2) Second stage from July 1 to December 31, 2008 - The ERP will be open to all employees other than the employees described in item (1) above if the sum of the age and the years of service is less than 50 years. However, the qualified employees cannot exceed 20% of the non-senior employees.

3) Taking into consideration the stability and development of the Bank's future operations, the pension expense of the next two years is accrued based on the original plan for the employees that meet the conditions of the first stage but are required by the Bank to remain for 2 more years.

72 (ii) Entitlement The senior employees who apply for early retirement will be entitled to a lump-sum payment equal to two months' average salary for each service year. A service period that is equal to or more than a half year is counted as one service year, and a service period that is less than a half year is counted as a half year of service.

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. As the applicable employees, salaries and the calculation basis for the 2008 benefit retirement plan are certain, and the cost is not paid through the employment pension plan, it is not included in the 2008 pension actuarials. In 2008, pension expense recognized as a result of the defined benefit retirement plan amounted to $286,514 thousand. As of December 31, 2008, pension liability amounted to $286,515 thousand.

December 31, December 31, 2008 2007

Benefit obligation: Non-vested benefit obligation $ 341,130 717,554 Vested benefit obligations 95,988 473,067 Accumulated benefit obligation 437,118 1,190,621 Additional benefits based on future salaries 217,482 407,657 Projected benefit obligation 654,600 1,598,278 Fair value of plan assets (699,645) (764,213) Funded status (45,045) 834,065 Unamortized prior service cost 4,265 6,096 Unrecognized net gain 44,116 218,890 Unrecognized transition obligation (3,855) (5,782) Accrued pension liability $ (519) 1,053,269

The vested benefits amounted to $109,872 thousand and $486,569 thousand as of December 31, 2008 and 2007, respectively.

The net pension costs in 2008 and 2007 consisted of the following items:

2008 2007

Service cost $ 19,197 49,640 Interest cost 29,535 28,621 Expected return on plan assets (21,353) (24,533) Amortization (1,026) 4,270 Amortization of unamortized prior service cost (40,182) 1,046,758 (13,829) 1,104,756 Add: ERP pension cost 286,514 - Net periodic pension cost $ 272,685 1,104,756

Actuarial assumptions were as follows:

2008 2007

Discount rate 2.25% 2.75% Expected rate of increase in salaries 3.00% 3.00% Expected rate of return on plan assets 2.50% 2.75%

73 FINANCIAL REVIEW

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

December 31, December 31, 2008 2007

Employees' pension fund Beginning balance $ 548,848 514,635 Net income or loss adjustment for prior year (3,641) - Contribution 8,558 37,632 From Miaoli Credit Cooperative Association - 137 Interest income 9,147 8,552 Benefits paid (63,245) (12,108) Ending balance $499,667 548,848 Management's pension fund Beginning balance $319,851 300,616 Contribution 21,163 19,896 Interest income 11,701 8,589 Benefits paid (10,582) (9,250) Ending balance $ 342,133 319,851

(r) Income tax

(i) income tax benefit was calculated as follows:

December 31, December 31, 2008 2007

Income tax expense – current before tax credits $ 1,957 6,768 Net changes in deferred income tax: Loss carryforwards (3,726,938) (3,658,747) Amortization and impairment of goodwill (64,632) 5,080 Tax credits (4,097) (3,196) Allowance for possible losses on loans and receivables 509,815 1,150,649 Employee stock options (3,102) - Impairment loss (3,425) (36,238) Loss on the transfer of foreclosed collateral to fixed assets 353 354 Provision for loss 9,795 (9,934) Pension costs 191,818 (279,422) Unrealized foreign exchange gain (loss) 902 6,003 Unrealized valuation gain (loss) on financial instruments (1,377) (6,953) Transaction costs of issuing capital - 79,186 Valuation allowance for deferred income tax assets 992,000 - (2,098,888) (2,753,218) Adjustment of prior year's tax (38,462) (3,830) $ (2,135,393) (2,750,280)

74 (ii) The Bank's income is subject to an income tax rate of 25%, and the Bank adopted the Income Basic Tax Act. A reconciliation of income tax expense – current before tax credits and income tax expense (benefit) before income tax is shown below:

December 31, December 31, 2008 2007

Income tax benefit before income tax at statutory rate (25%) $ (3,084,440) (4,436,055) Unrealized loss on financial asset 1,507 15,241 Tax-free cash dividend (14,081) (11,198) Interest expenses on bank debenture (216,073) (107) Tax-free earnings from OBU (6,718) 168,443 Tax-free gain on sale of land (4,030) 2,128 Adjustment of prior year's tax 201,644 (3,830) Valuation allowance for deferred income tax assets 992,000 1,008,000 Others (5,202) 507,098 $ (2,135,393) (2,750,280)

(iii) Net deferred income tax assets were as follows:

December 31, December 31, 2008 2007

Deferred income tax assets (liabilities) Loss carryforwards $ 7,773,545 4,046,607 Allowance for possible losses on loans and receivables 878,619 1,388,434 Pension costs 89,114 280,932 Impairment loss 97,175 93,750 Employee stock options 3,102 - Unrealized foreign exchange gain (7,554) (6,652) Loss on the transfer of foreclosed collateral to fixed assets 13,775 14,128 Provision for loss 468 10,263 Tax credits 10,608 6,511 Unrealized gain on financial instruments 1,507 130 Amortization and impairment of goodwill 37,741 (26,891) 8,898,100 5,807,212 Less: Valuation allowance (2,000,000) (1,008,000) Net deferred income tax assets $ 6,898,100 4,799,212

(iv) In accordance with the amendment to the Income Tax Act, taxable losses from the past 10 years as assessed by the authorities may be used to reduce net income in the current year.

As of December 31, 2008, loss carryforwards were as follows:

Total Tax Credits Remaining Expiry Accrued Year Granted Tax Credit Year

2006 (assessed) $ 1,191,023 1,191,023 2016 2007 (assessed) 2,863,712 2,863,712 2017 2008 (estimated) 3,718,810 3,718,810 2018 $ 7,773,545 7,773,545

75 FINANCIAL REVIEW

(v) Imputed tax credits are summarized as follows:

December 31, December 31, 2008 2007

Balance of stockholders' imputed tax credits $ 967,790 998,187

(vi) Income tax returns through 2005 have been examined by the tax authorities. The Taipei National Tax Administration will refund 65% of certain withholding taxes. The Bank accepted the refund at this percentage.

(vii) The income tax returns through the previous year of Cosmos Bills Finance Corporation, which merged with the Bank in 2002, have 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.)

(s) Stockholders' equity

(i) Capital In a special meeting on October 29, 2007, the Bank's stockholders approved the following items: (1) increase in 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 private 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, converted into 2,194,500 thousand common shares, with a par value of NT$10.00 and a subscription 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 item (3) above, be converted into common shares. This conversion was in agreement with a decision reached at a conference with the creditors.

As mentioned in Note 4(p) 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) 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. The Board of Directors resolved that the basis 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.

Regarding the 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 of this private placement are as follows:

76 1) Each holder is entitled to receive appropriations from earnings, the same right enjoyed by common stockholders.

2) Each outstanding Series A Preferred Share may be converted into one fully paid 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 capital 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, 2008, no preferred shares had been converted into common shares.

3) Holders of Series A Preferred Shares become entitled to the same number of votes accorded common stockholders on the conversion of their preferred shares and may thus exercise their right to vote during stockholders' meetings on all matters presented to the stockholders of the Bank for their action or consideration, including the right to elect or be elected as directors or supervisors.

4) Except as otherwise stated in the Articles of Incorporation, if the Bank issues any shares or equity securities, preferred share holders have the 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 or 30% of capital. The capital 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 basis 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 basis 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 December 6, 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 to 20, 2007. The Financial Supervisory Commission (FSC) approved the Bank's capital reduction on December 3, 2007.

In order to strengthen financial structure and offset the discount from capital injection, the meeting of the Board of Directors on April 21, 2008, and the shareholders' meeting on May 23, 2008, approved reducing capital by $56,586,140 thousand, and cancelled 5,658,614 thousand shares (which includes 4,551,929 thousand common shares and 1,106,685 thousand preferred shares), which constitutes a capital reduction of approximately 67.0718%. The capital reduction was approved by the Financial Supervisory Commission, Executive Yuan, on June 18, 2008. In addition, the basis date of capital reduction was June 25, 2008, and the registration of capital reduction was completed on July 16, 2008, and the share exchange was completed on September 3, 2008.

As of December 31, 2008 and 2007, the Bank had authorized capital stock amounting to $200,000,000 thousand (of which $12,580,000 thousand was reserved for employee stock options and convertible bonds). The capital stock included common stock of $22,347,209 thousand and preferred shares of $5,433,151 thousand, totaling $27,780,360 thousand, as of December 31, 2008, and common stock of $67,866,500 thousand and preferred shares of $16,500,000 thousand, totaling $84,366,500 thousand, as of December 31, 2007. The face value of each share is 10 dollars.

77 FINANCIAL REVIEW

(ii) Capital surplus Under related regulations, capital surplus may only be used to offset a deficit. However, capital surplus (from issuance in excess of common stock par value, issuance of common stock for combinations, and treasury stock transactions) and donations may be transferred to common stock on the basis of the percentage of shares held by the stockholders. Any capital surplus transfer should be within a certain percentage prescribed by law.

Capital surplus was as follows:

December 31, December 31, 2008 2007

Mandatory convertible bonds $ 15,819,198 15,819,198 Issuance of employee stock options 12,408 - Expiration of options 12,712 12,712 $ 15,844,318 15,831,910

(iii) Appropriation of earnings and dividend policy

The Bank's earnings appropriation policy is aligned with its goals to maintain the adequacy of capital and provide for future financial needs. Under the Bank's Articles of Incorporation (the “Articles”), annual net income, less any losses of prior years, should be appropriated 30% as legal reserve and appropriated as special reserve (booked as a deduction item of stockholders' equity), and the remainder plus unappropriated earnings of prior years should be appropriated 80% as dividend to stockholders, and the remaining 20% should be appropriated as follows:

1) 80% as bonus to stockholders

2) 15% as bonus to employees

3) 5% as remuneration to directors and supervisors

The cash dividends should be at least 10% of the total dividends to be paid/distributed. However, if the cash dividend is less than NT$0.1 per share, the entire dividend should be paid in stock.

Under a directive of the Securities and Futures Bureau, the Bank has to appropriate a special reserve from current year's earnings and the unappropriated earnings generated in prior years that is equal to the debit balance of any stockholders' equity account (except deficit). The special reserve should be adjusted on the basis of the debit balance of the stockholders' equity account as of year-end.

In making this appropriation, the Bank should consider its capital adequacy ratio, long-term financial position, and stockholders' cash needs, and the shareholders' meeting may decide not to appropriate any dividend and bonus in full or in part.

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.

78 The appropriation of the deficit resolved by the Board of Directors and stockholders on April 21 and May 23, 2008, respectively, was as follows:

Accumulated deficit, beginning of 2007 $ (7,765,847) Capital decrease to offset accumulated deficit 5,903,339 Less: discount on new issue (56,586,140) prior-year net loss (9,454,216) Accumulated deficit $ (67,902,864)

Information on appropriation of earnings or deficit offsetting can be accessed through the website of the Taiwan Stock Exchange (http://emops.tse.com.tw).

The appropriation of the deficit resolved by the Board of Directors and stockholders on April 27 and May 30, 2007, respectively, was as follows:

Unappropriated earnings, beginning of 2006 $- Net loss after tax in 2006 (11,286,541) Accumulated deficit (11,286,541) Offset of deficit Legal reserve 777,389 Special reserve 1,813,493 Capital surplus - paid-in capital in excess of par value 927,567 Capital surplus from treasury stock 2,245 Accumulated deficit $ (7,765,847)

Under the Company Act, legal reserve should be appropriated until the reserve equals the Bank's paid-in capital. This reserve may only be used to offset a deficit. When the reserve reaches 50% of the aggregate par value of the Bank's outstanding capital stock, up to 50% thereof may be declared as stock dividends. In addition, the Banking Act provides that, before the legal reserve equals the Bank's paid-in capital, annual cash dividends and bonuses should not exceed 15% of paid-in capital.

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.

The Bank recorded an after-tax loss in 2008 and therefore is not required to accrue any employee bonuses or directors' and supervisors' remuneration. The Bank's employee bonuses and directors' and supervisors' remuneration are still awaiting approval from the Board of Directors. Once the related meetings have been held, the information will be available through channels such as the Market Observation Post System. The Bank recorded an operating loss in 2007 and therefore is not required to accrue any employee bonuses or directors' and supervisors' remuneration.

(iv) 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 on December 28, 2007, 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 of a Bank subsidiary in which the Bank owns over 50% of voting shares directly or indirectly in or outside Taiwan will also qualify for the plan.

79 FINANCIAL REVIEW

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 stock listed on the Taiwan Stock Exchange. For any subsequent changes of common stock shares, the exercise price and the number of options are adjusted accordingly. As of June 12, 2008, the Bank has registered this plan with the Financial Supervisory Commission. The Bank issued 838,700 thousand units of employee stock options, and an unit can convert into one common stock of the Bank. As a result, the Bank has retained 838,700 thousand new shares of common stock for the plan.

Employee stock option plan

Grant date 97.5.5~97.9.9 Grant amount (thousand shares) 17,862 Vesting period 97.5.5~101.9.8

When estimating the fair value of the stock options granted, the Bank takes into account the following factors:

December 31, 2008 Employee stock option plan

Exercise price (dollars) 5.65~9.23 Stock price on grant date (dollars) 5.65~9.23 Weighted-average expected contractual remaining life 6.00~7.00 Expected share price volatility (%) 41.60~42.95 Risk-free interest rate (%) 2.23~2.74

The details of the Bank's employee benefit plan are as follows:

Year ended December 31, 2008 Employee stock option plan

Units Exercise price

Outstanding units as of January 1, 2008 $- Units granted (thousand shares) 17,862 5.65~9.23 Units exercised - Units outstanding - Balance at period-end $ 17,862

The abovementioned planned had yet to be executed as of December 31, 2008.

Year ended December 31, 2008

Expenses resulting from equity-settled share-based payment transactions $ 12,408 Additional paid-in capital resulting from equity-settled share-based payment transactions 12,408

The Chairman and President/CEO of the Bank resigned in February and March 2009, respectively. As a result, the Bank reversed the accrued service cost in 2008. Please refer to Note 5(b).

80 (v) Unrealized gain or loss on financial instruments The movements as of December 31, 2008 and 2007, of unrealized gain or loss on available-for-sale financial instruments were as follows:

2008 2007

Balance, beginning of year $ 2,978 (30,663) Recognized in stockholders' equity 13,560 4,311 Transferred to profit or loss (49) 29,330 Balance, end of year $ 16,489 2,978

(t) Loss per share

2008 2007 Before After Before After income tax income tax income tax income tax

Basic earnings per share: Before tax loss from continuing operations $ (12,337,759) (10,202,366) (17,744,221) (14,993,941) Extraordinary gain - - 7,386,300 5,539,725 Net loss $ (12,337,759) (10,202,366) (10,357,921) (9,454,216) Weighted-average number of shares outstanding (thousands) 2,778,036 2,778,036 1,436,725 1,436,725 Basic earnings per share (New Taiwan dollars): Continuing operations $ (4.44) (3.67) (12.35) (10.44) Cumulative effect of changes in accounting principles - - 5.14 3.86 Net loss $ (4.44) (3.67) (7.21) (6.58) Retroactively adjusted weighted-average number of shares outstanding (thousands) 473,088 473,088 Diluted earnings per share $ (21.89) (19.98)

There was a net loss as of December 31, 2008 and 2007; thus, the basic loss per share equaled the diluted loss per share as of December 31, 2008 and 2007.

(u) Financial instruments (i) Fair value of financial instruments

December 31, 2008 December 31, 2007 Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value

Assets Financial assets at fair value through profit or loss $ 156,029 156,029 195,503 195,503 Available-for-sale financial assets 891,086 891,086 648,440 648,440 Financial assets carried at cost 722,830 - 761,210 - Debt instruments with no active market 513,762 - 925,315 - Liabilities Financial liabilities at fair value through profit or loss 13,027 13,027 15,366 15,366

81 FINANCIAL REVIEW

(ii) Methods and assumptions applied to estimate the fair value of financial instruments are summarized as follows:

1) For financial instruments measured at fair value through profit or loss and available-for-sale financial assets, fair value is best determined on the basis of quoted market prices. However, in many instances where there are no quoted market prices for the Bank's various financial instruments, fair values are based on estimates using other financial data and appropriate valuation methodologies.

2) The carrying amounts of short-term financial instruments approximate their fair values because of the short maturities of these instruments. 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.

3) If there are no active market prices for derivative financial instruments, fair values of forward contracts will be calculated using the discounted cash flow method, while values of options are provided by counter-parties.

The Bank estimates the fair value of each forward contract on the basis of the exchange rates quoted by Reuters on each settlement date. The fair value of a cross-currency swap contract is calculated using the prices quoted by Bloomberg.

4) Discounts and loans, cash deposits and MCB are interest-earning assets and interest-bearing liabilities. Thus, their carrying amounts represent fair value. The fair value of overdue loans is based on their carrying amount, net of allowance for possible losses.

5) If equity investments under the equity method and financial assets carried at cost consist of unlisted stocks, these investments have no quoted market prices in an active market and their fair value cannot be reliably measured. Thus, the Bank does not disclose their fair value.

6) If there are trade prices or prices quoted by major market players, the latest trade prices or quoted prices are used as the basis for valuating the fair value of debt instruments with no active market, and this kind of instrument would be classified as other financial assets.

7) Other financial liabilities include an appropriate loan fund. They are items that can be transferred to other banks at any time depending on the business situation. Thus, the carrying amounts of these liabilities represent their fair values.

(iii) As of December 31, 2008 and 2007, fair values of financial assets and liabilities determined at quoted market prices or market prices estimated using a valuation method were as follows:

December 31, 2008 December 31, 2007 Quoted Market Estimated Quoted Market Estimated Market Prices Market Prices Prices Prices

Financial assets Financial assets at fair value through profit or loss $ 149,815 6,214 180,649 14,854 Available-for-sale financial assets 891,086 - 648,440 - Financial liabilities Financial liabilities at fair value through profit or loss - 13,027 - 15,366

82 From the above, the gain and loss recognized by the Bank on the valuation of financial instruments at estimated market prices as of December 31, 2008 and 2007, were a loss of $6,301 thousand and a gain of $3,887 thousand, respectively.

(iv) As of December 31, 2008 and 2007, the interest revenues excluded from financial assets and liabilities at fair value through profit or loss were $9,885,020 thousand and $11,955,734 thousand, respectively. The interest expenses for financial assets and liabilities at fair value through profit or loss were $3,624,026 thousand and $4,104,163 thousand, respectively. As of December 31, 2008 and 2007, the adjustments of stockholders' equity credited directly from the available-for-sale financial assets amounted to $13,560 thousand and $4,311 thousand, respectively. In 2008 and 2007, there were adjustments to stockholders' equity that were recorded in the periods' profit of $49 thousand and loss of $29,330 thousand, respectively.

(v) Financial risk information

1) 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 sensitivity analysis for a 0.01% increase in market interest rates.

December 31, 2008

The Effect on the Fair Principal Average Value per Currency Amount Duration (Years) Variation of 0.01%

New Taiwan Dollars $ 1,456,797 2.64800 NT$ 398 U.S. Dollars 1,030 0.13970 US$ 0.013

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 below. The Bank made an assumption that, if there is a 99% level of confidence, there is only a 1% chance that the Bank will incur a loss on its financial instruments within a day. In addition, based on VaR assumptions, there are only 2 out of 200 days when the Bank could face losses on its financial instruments. The average, highest and lowest amounts of the interest rate and price risks that were calculated at the daily VaR for the years ended December 31, 2008 and 2007, were as follows (thousands):

December 31, 2008 December 31, 2007 Type of Market Risk Average Highest Lowest Average Highest Lowest

Fair value interest rate risk $ 4,218 7,284 1,908 5,604 10,390 1,767 Price risk of listed stock - - - 15,355 28,522 -

83 FINANCIAL REVIEW

The Bank engages in trade financing and foreign currency exchange; thus, it is exposed to exchange risks on differences between spot and forward rates. The Bank's policy is to have a square position on its forward contracts. If the contract transactions do not square off, all Bank employees are authorized to handle the contracts in accordance with the Cosmos Bank Handling International Financing Transaction Rules. In addition, the exchange rate risks 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.

2) Credit risk The Bank is exposed to potential loss due to contract defaults by counter-parties or financial instrument issuers.

The Bank evaluates the creditworthiness of credit applications case by case, taking into account the applicant's credit history, credit rating and financial condition. Collateral, mostly in the form of cash, inventories, marketable securities and other assets, may be required depending on the evaluation result. As of December 31, 2008 and 2007, about 47% and 44%, respectively, of total loans had been granted, and about 13% and 11%, respectively, had been secured. However, there is no collateral for issuing credit cards. Thus, the Bank evaluates the creditworthiness of credit card holders regularly and modifies the credit facilities if necessary. If the counter-parties or others concerned (e.g., guarantors) break a contract, the Bank will execute its right on the collateral and decrease its credit risk.

In addition, the Bank discloses its maximum credit exposure without taking collateral fair value into consideration.

The maximum credit exposure of financial assets is the carrying amounts of financial assets on the balance sheet date; please refer to the balance sheet and the related notes.

The amounts of financial contracts with off-balance-sheet credit risks as of December 31, 2008 and 2007, were as follows:

December 31, December 31, 2008 2007

Credit card and cash card commitments $ 125,261,011 133,145,726 Guarantees and letters of credit issued 837,524 1,024,617 Irrevocable loan commitments 411,619 673,746

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:

December 31, December 31, 2008 2007

Group $ 40,902,040 50,563,700 Private enterprise 57,113,718 69,375,667 Natural person 22,139 15,180 Non-profit enterprise $ 98,037,897 119,954,547

Industries $13,161,593 15,212,723 Wholesale, retail and catering 11,903,896 14,261,127 Manufacturing 6,588,967 9,383,074 Finance, insurance and real estate $ 31,654,456 38,856,924

84 3) Liquidity risk As of December 31, 2008 and 2007, the liquidity reserve ratios were 17.11% and 9.69%, respectively. The Bank has sufficient equity capital and working capital to execute all contract obligations and has no liquidity risk.

The management policy of the Bank is to match the contractual maturity profile to the interest rates for its assets and liabilities. Because of uncertainties regarding the transaction conditions, however, the maturities did not fully match the interest rates, resulting in gaps that may potentially give rise to gain or loss.

The Bank applied appropriate ways to group assets and liabilities. The maturity analysis of assets and liabilities was as follows:

December 31, 2008 Due after Due after Due after Due after One Month Three Months Six Months One Year Due in Up to Three Up to Up to Up to Due after One Month Months Six Months One Year Seven Years Seven Years Total

Assets Cash and cash equivalents $ 3,457,234 - - - - - 3,457,234 Due from the Central Bank and call loans to banks 22,369,521 1,600,000 3,100,000 - - - 27,069,521 Financial assets at fair value through profit or loss 156,029 - - - - - 156,029 Available-for-sale financial assets 18,476 - - - 872,610 - 891,086 Debt instruments with no active market - - - - 513,762 - 513,762 Equity investments under the equity method - - - - - 50,775 50,775 Financial assets carried at cost - - - - - 722,830 722,830 Receivables 1,796,884 598,981 833,888 2,501,881 1,091,924 7,494 6,831,052 Discounts and loans 6,922,427 5,440,533 7,028,838 39,990,666 31,839,220 6,819,213 98,037,897 Other financial assets - others 104,538 104,655 246 127 747 46,152 256,465 Foreclosed collateral - - 418,675 - 85,442 - 504,117 Refundable deposits 418,511 15,278 8,028 29,760 1,069,793 - 1,541,370 $ 35,243,620 7,759,447 11,389,675 42,522,434 35,470,498 7,646,464 140,032,138 Liabilities Due to the Central Bank and other banks $ 888,047 2,586,262 3,889,090 5,852,957 - - 13,216,356 Financial liabilities at fair value through profit or loss 13,027 - - - - - 13,027 Securities sold under repurchase agreements 7,034 - - - - - 7,034 Payables 1,649,150 359,780 236,562 914,523 201,675 767 3,362,457 Deposits and remittances 11,886,169 16,831,641 21,491,961 52,517,215 19,873,738 - 122,600,724 Bank debentures - - - - - 515,000 515,000 Other financial liabilities 30,378 955 28,648 45,189 2,006,148 - 2,111,318 $ 14,473,805 19,778,638 25,646,261 59,329,884 22,081,561 515,767 141,825,916

85 FINANCIAL REVIEW

December 31, 2007 Due after Due after Due after Due after One Month Three Months Six Months One Year Due in Up to Three Up to Up to Up to Due after One Month Months Six Months One Year Seven Years Seven Years Total

Assets Cash and cash equivalents $ 3,009,940 - - - - - 3,009,940 Due from the Central Bank and call loans to banks 40,553,922 - - - - - 40,553,922 Financial assets at fair value through profit or loss 195,503 - - - - - 195,503 Available-for-sale financial assets 451,409 - - 99,441 97,590 - 648,440 Debt instruments with no active market - - - 271,320 653,995 - 925,315 Receivables 1,713,911 747,727 1,065,095 1,951,147 1,081,674 4,356 6,563,910 Discounts and loans 9,764,314 7,208,842 9,574,284 46,529,025 38,666,680 8,217,193 119,960,338 Other financial assets - others 825 575 199,960 423 503 100,877 303,163 Equity investments under the equity method - - - - - 42,749 42,749 Financial assets carried of cost - - - - - 761,210 761,210 Foreclosed collateral - - 418,675 - 85,442 - 504,117 Refundable deposits 46,000 400 101,665 406,118 387,117 1,616,700 2,558,000 $ 55,735,824 7,957,544 11,359,679 49,257,474 40,973,001 10,743,085 176,026,607 Liabilities Due to the Central Bank and other banks $ 914,733 3,123,510 19,840,533 8,278,391 - - 32,157,167 Payables 2,725,619 990,884 341,179 289,191 155,484 - 4,502,347 Financial liabilities at fair value through profit or loss 15,366 - - - - - 15,366 Deposits and remittances 15,210,493 23,391,725 38,934,556 31,166,760 22,422,526 - 131,126,060 Securities sold under repurchase agreements 40,920 - - - - - 40,920 Bank debentures - - - - - 515,000 515,000 Other financial liabilities 32,115 492 30,555 1,200,921 1,794,114 - 3,058,197 $ 18,939,246 27,506,611 59,146,823 40,935,253 24,372,124 515,000 171,415,057

4) Fair value interest rate risk and cash flow interest rate risk When market interest rates change, the cash flows on floating-interest rate assets will also fluctuate, and the Bank may suffer risks due to any adverse interest rate changes. Thus, the Bank used cross-currency swap contracts to reduce risks from adverse changes in market interest rates.

86 (vi) Risk control and hedge policy The Bank documents its risk management policies, including overall operating strategies and risk control philosophy. When each business unit is engaged in various operations, it must abide by the risk management policies and hedging policies as approved by the Board of Directors in order to implement risk management, strengthen businesses, and limit risks that may arise from operation to an acceptable level. Risk management polices are adjusted in accordance with the Bank's overall organization, operating plan, management targets, and strategy. The Board of Directors reviews the policies regularly and reviews whether the Bank's policies are executed properly to control the Bank's risks.

The Bank's Board of Directors authorized establishing an independent risk management committee under its risk committee. The risk management committee reports to the risk committee on a regular basis in order to strengthen risk management mechanisms and adjust to new regulations.

The mission of the risk management committee is to:

1) Review the Bank's risk management policies, including the responsibilities and definition of the risk management structure and report to the Board of Directors.

2) Review the asset allocation, risk limits, capital needs and adequacy, and report to the Board of Directors.

3) Review information provided by the Risk management related departments, including but not limited to major risk incidents, various risk indicators, effectiveness of risk management policies, and the risk monitoring of positions exposed to risk.

4) Carry out other risk management-related tasks as requested by the Board of Directors.

5) Review and evaluate the adequacy of the committee's structure and make suggestions to the Board of Directors.

6) The chairman of the committee should report to the Board of Directors and present the recommendations of the committee.

5. Related-party Transactions

(a) Related parties

Related Party Relationship with the Bank

S.A.C. PEI Taiwan Holdings B.V. Main stockholder since December 28, 2007 S.A.C. PEI Asia Investments Holdings II S.ar.al. Parent company of S.A.C. PEI Taiwan Holdings B.V. (“Lux. Co. II”) S.A.C. PEI Asia Investments Holdings I Parent company of Lux. Co. II S.ar.al. (“Lux. Co. I”) S.A.C. Private Equity Investors, L.P. (“SAC Parent company of Lux. Co. I PEI”) S.A.C. Private Equity GP, L.P. (“SAC PEI GP”) Partnership with SAC PEI Lehman Brothers Commercial Corporation Asia Equity-method investor of Lux. Co. II Limited GE Capital Asia Investments Holdings B.V Main stockholder (“GE Asia Holdings”) General Electric Capital Corporation (GECC) Affiliate of GE Asia Holdings GE Capital Taiwan Holdings Inc. (“ GE Affiliate of GE Asia Holdings Holdings”) General Electric International Inc. (GEII) Affiliate of GE Asia Holdings

(continued)

87 FINANCIAL REVIEW

Related Party Relationship with the Bank

GE Processing Services Pty Limited (“GE Affiliate of GE Asia Holdings Australia”) GE Capital Thailand Affiliate of GE Asia Holdings GE Money Taiwan Ltd. Affiliate of GE Asia Holdings Reliance Securities Investment Trust Equity-method investee Corporation, Ltd. (RSIT) Cosmos insurance Brokers Co., Ltd. 100%-owned investee Cosmos Construction Management Same chairman as the Bank's until March 14, 2007 Corporation (CCMC) (Note) Prince Motors Corporation (PMC) (Note) Corporate director until September 6, 2007 Chung Hsien Investment Co., Ltd. (Note) Corporate director until May 30, 2007 Taizi Investment Co., Ltd. (Note) Corporate director until May 30, 2007; corporate supervisor from May 31 to September 6, 2007 Yung Mei Automobile Co., Ltd. (Note) The chairman was a second-degree relative of the Bank's chairman; however, the Bank had a new chairman on September 6, 2007 Formosan Chemical Ind. Corp. (Note) The chairman was a second-degree relative of the Bank's chairman until September 6, 2007 Shin Kong Chao Fend Co., Ltd. (Note) The chairman was a second-degree relative of the Bank's chairman; however, the Bank had a new chairman on September 6, 2007 Formosan Glass Corporation (Note) The chairman was a second-degree relative of the Bank's chairman; however, the Bank had a new chairman on September 6, 2007 Shin Kong Life Insurance Co., Ltd. (SLIC) (Note) The chairman was a second-degree relative of the Bank's chairman; however, the Bank had a new chairman on September 6, 2007 Shin Kong Financial Holding Co., Ltd. (“SK The chairman was a second-degree relative of the Bank's chairman; Holdings”) (Note) however, the Bank had a new chairman on September 6, 2007 Zheng, Shun Shun (Note) A second-degree relative of the Bank's chairman; however, the Bank had a new chairman on September 6, 2007 Lin, Ching Jong The Bank's manager until February 15, 2008 Others The Bank's chairman, president, directors, supervisors, managers and their relatives with a kinship of up to the second degree of consanguinity with the chairman and president

Note:Some entities ceased to be related parties as of December 31, 2008, and the transactions with these entities in 2008 that had no impact on real accounts were not included in the balance sheet as of December 31, 2008.

88 (b) Significant transactions between the Bank and related parties

(i) Loans, deposits, and guarantees and acceptances

2008 Revenue December 31, 2008 (Expense) Interest Rate Amount % (%) Amount

Loans $ 20,861 0.02 2.375~18.25 1,210 Deposits $ 151,125 0.12 0~7.365 (4,481)

2007 Revenue December 31, 2007 (Expense) Interest Rate Amount % (%) Amount

Loans $ 53,826 0.04 2.25~18.25 93,731 Deposits $ 114,000 0.09 0~7.205 (46,147) Guarantees and acceptances $- - 0.50~0.75 954

1) Loans

2008

Loan Differences Highest Classification in Balance Transaction for Year Terms from Account Volume Ended Nonper- Those for (Number of December Ending Normal forming Unrelated Type Names) 31, 2008 Balance Loans Loans Collateral Parties

Consumer loans Real estate; some for employees 7 $ 27,322 2,399 2,399 - loans had no None collateral Self-used housing mortgage loan 10 36,998 18,462 18,462 - Real estate None

89 FINANCIAL REVIEW

2007

Consumer loans Real estate; some for employees 18 $ 25,979 21,066 21,066 - loans had no None collateral Self-used housing mortgage loan 15 38,421 32,760 32,760 - Real estate None Other loans PMC 1,569,000 - - - Real estate None Other loans Yung Mei Automobile Co., Ltd. 1,540,000 - - - Real estate None Other loans Formosan Chemical Ind. Corp. 955,600 - - - Real estate None Other loans Taizi Investment Co., Ltd. 500,000 - - - Real estate None Other loans Shin Kong Chao Fend Co., Ltd. 450,000 - - - Real estate None Other loans Formosan Glass Corporation 448,000 - - - Real estate None Other loans Chung Hsien Publicly listed Investment Co., stocks, real None Ltd. 94,000 - - - estate Other loans CCMC 56,000 - - - Real estate None Other loans Lin, Ching Jong 5,074 - - - Real estate None

NOTE: As it is no longer a related party as of the balance sheet date, the balance is not disclosed.

90 2) Guarantees

2007

Highest Balance in the Year Ended Balance of the December 31, Ending Reserve for Interest Name 2008 Balance Guarantees Rate Collateral

- Yung Mei Automobile Co., Ltd. $ 200,000 - 0.75% Real estate (note)

- Publicly listed Chung Hsien Investment Co., Ltd. 94,000 (note) - 0.50% stocks, real estate

- PMC - 0.75% Real estate 50,000 (note)

Note: As it is no longer a related party as of the balance sheet date, the balance is not disclosed.

(ii) Refundable deposits – rental

December 31, 2007 2007 Expense Amount (%) Amount

Refundable deposits - rental $- (note) - 28,654 PMC - (note) - 21,984 Others $- - 50,638

NOTE: As it is no longer a related party as of the balance sheet date, the balance is not disclosed.

The Bank signed a lease contract with PMC for renting an office building. The rentals are paid monthly or semiannually, or no rentals are paid, but the Bank gave refundable deposits to PMC which generate no interest. The expiry of this contract is on April 30, 2015. As of December 31, 2008 and 2007, the Bank had paid refundable deposits of $814,220 thousand and $1,617,920 thousand, respectively (classified as refundable deposits) to PMC. To cover the Bank's deposits to PMC, PMC provided real estate as a guarantee and allowed the Bank to be the second in line with the right of recourse on the property.

In addition, the Bank also signed several lease contracts with related parties for renting office buildings, and the rentals are paid monthly, semiannually, or no rentals are paid, but the Bank gave deposits to the lessors. These contracts will expire in succession in January 2014.

(iii) Equity investment

In June 2008, the Bank paid $1,144 thousand to purchase shares in Cosmos Insurance Brokers. In July 2008, it was adjusted to $1,002 thousand after auditing. As of December 31, 2008, all payments had been made.

(iv) Purchase or sale of notes and bonds

2007 RP Notes and Bonds Related Party Sold to Related Parties Interest Rate Range Interest Expense

SLIC $15,100,000 1.645%~1.72% 3,283

91 FINANCIAL REVIEW

(v) The Bank had paid SLIC insurance expenses of $3,538 thousand as of December 31, 2007.

(vi) The Bank had paid CCMC property appraisal fees of $3,563 thousand as of December 31, 2007.

(vii) GE Asia Holdings subscribed for the Bank's common shares and GECC bought call options from China Development Industrial Bank Inc. under certain subscription agreements. The Bank also has support service agreements (SSAs) with GEII and GE Australia signed on June 5, 2006. Under the SSAs, GE Holdings and GE Australia will provide the Bank with management systems, data processing service, system support, and IT (information technology) services as part of intensive training and technology transfer services. The SSAs also provide for the integration of Global Best Practices with Bank operations to redesign or enhance systems for business development and management operations, such as strategic planning and analysis, product design, marketing, client relationship management, employee-performance management, human resources, process upgrade, risk management, overdue loan processing, 6 sigma enhancement, etc. They also support information processing for all systems, system development and maintenance, daily operations, and strategic support.

Unless constrained by uncontrollable environment factors, GE Holdings and the Bank promise to fully cooperate with each other to use global human resources and obtain best practices and key information and technology that can help the Bank enhance earnings generation. The Bank will pay GE Holdings (1) technology provision service fees of US$84,000 thousand, payable at US$11,000 thousand in the year ending December 31, 2006; US$22,000 thousand annually from 2007 to 2009; and US$7,000 thousand for the period ending June 30, 2010; and (2) consulting expenses of up to US$3,339 thousand for assigning directors, chief manager, CEO, CFO, CRO, managers of the Claims Department, etc., and costs of supporting personnel based on the assign- ment period.

As an effort by GE to assist the Bank to improve its financial structure and to resolve the differences with the authorities regarding the service contracts with GEII and GE Australia, the Bank and GE agreed to calculate the remaining payables in 2006 to 2008 in accordance with the terms and methods specified under the agreement. In accordance with the agreement as presented to the Board of Directors on April 15, 2009, the remaining payable amount should be calculated based on the estimate of 2 professional valuation firms, and not exceeding USD18,500 thousand.

In accordance with agreement signed between GEII, GE Australia and the Bank, the remaining amount payable is limited to USD18,500 thousand; therefore, the Bank reversed the service fee accrued in 2008 amounting to USD22,000 (NT$759,066) thousand, and the remaining portion amounting to USD3,500 (NT$141,523) thousand was recorded under other non-interest income. The remaining amount payable of USD18,500 thousand will be repaid using cash amounting to USD1,700 thousand and a private placement of common shares amounting to USD16,800 thousand. As of December 31, 2008 and 2007, the payables from technical service fees and personnel secondment amounted to $745,148 thousand and $821,019 thousand, respectively, recorded under expenses payable. In 2008, the secondment expenses amounted to $137,238 thousand, and in 2007, the technical service fees and secondment fees amounted to $913,834 thousand, which are recorded under other administrative and management expenses. In addition, the Bank acquired the Vision Plus system from GE Australia in order to integrate the Bank's consumer banking business, which resulted in prepayment of USD1,000 thousand. As a result of the abovementioned agreement, the Bank agreed to waive its claims on the prepayment, and therefore the prepayment was reversed and recorded under non-interest income/loss.

In the abovementioned agreement, both parties agree that once the capital strengthening plan and settlement are completed, the agreement will be retroactively terminated on January 1, 2009. In order to speed up the settlement process, the Board of Directors will authorize the acting President to negotiate the final agreement following the review of the draft. The final version will be presented to the shareholders' meeting for approval.

92 (viii) The Bank obtained from GE Capital Thailand the right to use NAOS for $15,115 (USD400) thousand based on a support services agreement. In each of the years 2008 and 2007, the Bank amortized the right in the amount of $3,023 thousand, classified as depreciation and amortization.

(ix) 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 for the purchase from Mega International Commercial Bank of a car loan for $1,023,770 thousand, the amount due to GECC for GECC's providing services to Mega Bank for a price of $1,064,721 thousand, with a premium rate of about 4%. The transaction price was calculated using the future cash flow model. As of December 31, 2007, based on an estimate of future cash flows, the recognized impairment loss on this car loan was $14,390 thousand.

On December 28, 2007, the Board of Directors approved a consulting contract with two directors. Based on the resolution of the Board of Directors on June 23, 2008, the Bank cancelled and reversed consulting fees accrued in the first quarter of 2008 amounting to $11,757 thousand. On November 21, 2008, the Board of Directors resolved to amend the employment contract of the President of the Bank and the Board of Directors approved the resignation of the Chairman and President/CEO on January 15 and March 20, 2009, respectively; therefore, service cost amounting to $95,587 thousand was reversed.

Under the Banking Act, except for consumer loans and government loans, credit extended by the Bank to any related party should be 100% secured, and the terms of credit extended to related parties should be similar to those for third parties.

Due to the uniqueness of the technology service contract, Vision Plus software, and NAOS, the Bank cannot acquire comparable prices from an unrelated party. However, other related-party transactions which were comparable to those with unrelated parties did not appear significantly extraordinary.

(c) Key management personnel compensation The compensation paid to directors, supervisors, CEO's, vice presidents and other senior management in 2008 and 2007 was as follows:

2008 2007

Salaries $ 163,451 133,233 Bonuses and special allowances 6,298 8,513 Professional expenses 1,603 2,780 $ 171,352 144,526

6. Pledged Assets

(a) Government bonds with carrying value of $368,000 thousand (recorded as available-for-sale financial assets, net, amounting to $350,500 thousand, and refundable deposits amounting to $17,500 thousand) as of December 31, 2008, and 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, had been placed with the court as guarantee deposits in line with the Bank's request for court approval to seize and sell the properties of the Bank's debtors to satisfy the debtors' obligations to the Bank.

(b) As of December 31, 2008 and 2007, the Bank had provided government bonds (recorded as available-for-sale financial assets, net) with carrying value of $220,000 thousand as the reserve and deposits for guarantee of the Bank's operating business.

93 FINANCIAL REVIEW

(c) As of December 31, 2008 and 2007, negotiable certificates of deposit (NCDs) of $208,595 thousand and $199,385 thousand (recorded as other financial assets, net), respectively, had been provided as collateral for spot exchange transactions.

7. Commitments and Contingencies

In addition to the disclosures in Note 4(u), the commitments as of December 31, 2008, were as follows:

(a) The Bank leases from unrelated parties the premises occupied by its branches under operating lease agreements expiring on various dates until October 31, 2013. Refundable deposits on these leases amounted to $549,306 thousand as of December 31, 2008. The leases also require the payment of rentals monthly, semiannually or annually, or a refundable rental deposit which generates no interest.

Future minimum annual rentals on these leases as of December 31, 2008, were as follows:

Period Amount

2009.01.01~2009.12.31 $ 296,369 2010.01.01~2010.12.31 208,613 2011.01.01~2011.12.31 107,177 2012.01.01~2012.12.31 32,257 After 2013 27,128 $ 671,544

(b) Significant outstanding purchase contracts

Item Contract amount Prepayment Payable

Banking information and operating systems $ 102,067 47,428 54,639 Premises improvements, water and electricity, and air conditioning 9,193 1,934 7,259 $ 111,260 49,362 61,898

(c) The Bank's ex-chairman, Sheng-Fa Hsui, and ex-vice chairman, Xian-Rong Hsui, were prosecuted for involvement in illegal events. With the exception of the insider trading portion, which is still being tried, the defendants have been ruled by the Taipei District Court to be in violation of the Banking Act and sentenced. The Bank is now being managed by a new management team, which uses high standards to administer the Bank, and would not be influenced by this legal case.

The Bank claimed that a certain client defrauded the Bank and thus sued the client. But the court ruled that the client was 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.

8. Major Casualty Losses: None

9. Significant Subsequent Events

(a) On January 15, 2009, the Board of Directors approved the resignation of the Bank's president as a director and the president, effective February 1, 2009.

94 (b) On March 20, 2009, the Board of Directors approved the resignation of the Bank's CEO as the CEO and a director of the Bank and as a director and president of Cosmos Insurance Brokers Co., Ltd.

(c) On April 15, 2009, the Board of Directors of the Bank approved the loan extension agreement with Prince Motors Corporation, retroactive to March 31, 2009.

(d) On April 25, 2009, the Bank signed an agreement with GEII and GE Australia to resolve the differences arising from the technical service contract. Please refer to Note 5.

(e) As requested by the FSC, the Board of Directors approved the capital strengthening plan on February 25, 2009, in order to meet the requirements of Article 64 of the Banking Act.

(f) On January 23, 2009, the Board of Directors approved applying for the closing of 12 branches to improve operating results. The application was approved by the FSC under Jin Guan Yin (2) No. 09800043360 on March 24, 2009.

(g) The Bank sold structured products amounting to $1,500,000 thousand underwritten by GVEC through a specified money trust. According to news reports in April 2009, GVEC is related to the PEM Group, which is alleged to be involved in fraudulent activities. The Bank is currently investigating the reports and the possible impact on the Bank.

10. Others

(a) Trust business under the Trust Law

(i) Trust-related items, as shown in the following balance sheets and trust property list

Balance Sheets of Trust Accounts December 31, 2008 and 2007

Trust Assets 2008 2007 Trust Liabilities 2008 2007

Cash in bank $ 75,564 87,118 Account payables $11 3,028 Short-term investments Output tax 97 - Bonds 8,413,840 20,623,831 Advanced revenues 2,128,285 1,738,926 Mutual funds 17,448,181 18,707,727 Receipts under custody 330,000 - Common stock 544,956 591,949 Securities under Account receivables custody payable 14,074 - Note receivables - 3,410 Trust capital Prepaid account Money 26,057,000 39,789,491 Prepaid expenses 1,833,829 1,105,129 Securities 350,000 357,784 Prepaid taxes 121 102 Real property 16,439 16,200 Real property 16,200 16,200 Superficies 1,189,000 1,189,000 Intangible assets Net income 480 1,470,434 Superficies 1,189,000 1,189,000 Accumulated deficit 1,161 (1,689,615) Securities under custody 14,074 - Other assets Deferred expenses 550,782 550,782 Trust assets $ 30,086,547 42,875,248 Trust liabilities $ 30,086,547 42,875,248

95 FINANCIAL REVIEW

Trust Property List December 31, 2008 and 2007

Investment Items 2008 2007

Cash in bank $ 75,564 87,118 Short-term Bonds 8,413,840 20,623,831 Mutual funds 17,448,181 18,707,727 Common stock 544,956 591,949 Real property Others 16,200 16,200 Intangible assets Superficies 1,189,000 1,189,000 Securities under custody 14,074 - $ 27,701,815 41,215,825

Statements of Income on Trust Accounts Year Ended December 31, 2008 and 2007

2008 2007

Revenues Interest $ 201 1,730,919 Other revenues 316 394 Revenues from beneficiary certificates 517 1,731,313

Expenses Management fees 36 125,977 Levies 1 79 Service fees - 34 Property loss - 134,789 Expenses from beneficiary certificates 37 260,879 Net income before tax 480 1,470,434 Income tax expenses - - Net income $ 480 1,470,434

Note: The above statements of income belong to the business of the trust division (the year 2008 does not include the profit and loss of certain money trusts) and the amounts are not included in the profit and loss of the Bank.

(ii) Nature of trust business operations under the Trust Law: Please refer to note 10(a)(i).

(b) Average amount of and average interest rate on interest-earning assets and interest-bearing liabilities: Average balance was calculated as the daily average balances of interest-earning assets and interest-bearing liabilities.

96 December 31, 2008 Average Average Balance Rate (%)

Interest-earning assets Cash and cash equivalents – due from banks $ 1,007,906 0.53 Due from the Central Bank and call loans to banks 29,242,145 2.01 Financial assets at fair value through profit or loss (excluding stocks and funds) 155,682 5.65 Receivables of credit cards 4,149,270 11.46 Discounts and loans (excluding overdue loans) 103,876,158 8.28 Available-for-sale financial assets – bonds 530,840 2.36 Other financial assets – other (excluding stocks and funds) 205,071 2.91 Debt instruments with no active market 768,623 3.11

Interest-bearing liabilities Due to the Central Bank and other banks $ 21,113,926 2.54 Securities sold under repurchase agreements 10,478 1.81 Demand deposits 7,498,152 0.40 Savings - demand deposits 22,724,263 0.83 Time deposits 39,535,735 2.98 Time savings deposits 52,821,231 2.63 Bank debentures 515,000 3.20 Other financial liabilities 2,999,862 9.33

December 31, 2007 Average Average Balance Rate (%)

Interest-earning assets Cash and cash equivalents - due from banks $ 962,992 1.31 Due from the Central Bank and call loans to banks 16,705,286 1.85 Financial assets at fair value through profit or loss 1,566,472 2.26 Receivables of credit cards 4,823,408 11.86 Discounts and loans 129,445,180 8.08 Available-for-sale financial assets - bonds 1,195,146 1.87 Other financial assets - others 226,277 3.48 Debt instruments with no active market 4,231,386 4.82

Interest-bearing liabilities Due to the Central Bank and other banks 22,950,756 2.39 Securities sold under repurchase agreements 974,864 1.54 Demand deposits 8,650,156 0.53 Savings - demand deposits 30,937,497 0.82 Time deposits 28,376,846 2.45 Time savings deposits 90,220,010 2.19 Bank debentures 13,140,717 3.99 Other financial liability 253,810 1.06

The face value of the Subordinated Unsecured Mandatory Convertible Bonds issued by the Bank amounted to $19,800,000 thousand, of which, $15,800,000 thousand was recorded under stockholders' equity, which resulted in a high average interest rate on the financial liabilities. The actual coupon rate is 6%.

97 FINANCIAL REVIEW

(c) Asset quality, concentration of credit extensions, interest rate sensitivity, profitability and maturity analysis of asset and liabilities

(i) Asset quality

Period December 31, 2008 Ratio of Nonperfor- Allowance Coverage Nonperfor- ming Loans Loans for Possible Ratio Items ming Loans (Note 1) Losses (Note 3) (Note 2)

Corporate Secured $ 1,069,952 27,978,635 3.82% 419,019 39.16% Banking Unsecured 757,949 19,253,651 3.94% 1,501,806 198.15% Housing mortgage (Note 4) 130,783 6,399,368 2.04% 8,825 6.75% Cash card 1,510,634 37,573,110 4.02% 2,140,947 141.73% Corporate Small scale credit loans (Note 5) 297,810 2,645,975 11.26% 349,768 117.45% Banking Secured 47,241 3,981,411 1.19% 20,682 43.78% Other (Note 6) Unsecured 6,734 205,747 3.27% 3,470 51.53% Loan 3,821,103 98,037,897 3.90% 4,444,517 116.32%

Nonperfor- Ratio of Allowance Coverage ming Nonperforming Receivables for Possible Ratio Receivables Receivables Losses (Note 3) (Note 1) (Note 2)

Credit cards 49,044 4,093,549 1.20% 56,369 114.94% Factored accounts receivable without recourse (Note 7) 6,552 572,909 1.14% 2,946 44.97% Amounts of executed contracts on negotiated debts not reported as nonperforming 5,562,430 loans (Note 8) Amounts of executed contracts on negotiated debts not reported as nonperforming 443,380 receivables (Note 8)

98 Period December 31, 2007 Ratio of Nonperfor- Allowance Coverage Nonperfor- ming Loans Loans for Possible Ratio Items ming Loans (Note 1) Losses (Note 3) (Note 2)

Corporate Secured 2,402,255 32,097,805 7.48% 457,639 19.05% Banking Unsecured 1,927,966 24,829,906 7.76% 2,337,656 121.25% Housing mortgage (Note 4) 158,764 6,954,216 2.28% 17,147 10.80% Cash card 1,698,588 44,593,647 3.81% 2,581,025 151.95% Corporate Small scale credit loans (Note 5) 698,343 5,024,269 13.90% 754,085 107.98% Banking Secured 99,893 5,899,982 1.69% 41,440 41.48% Other (Note 6) Unsecured 93,610 560,513 16.70% 119,541 127.70% Loan 7,079,419 119,960,338 5.90% 6,308,533 89.11%

Nonperfor- Ratio of Allowance Coverage ming Nonperforming Receivables for Possible Ratio Receivables Receivables Losses (Note 3) (Note 1) (Note 2)

Credit cards 103,565 4,387,885 2.36% 106,208 102.55% Factored accounts receivable without recourse (Note 7) 629 1,152,155 0.05% 1,613 256.44% Amounts of executed contracts on negotiated debts not reported as nonperforming 9,124,374 loans (Note 8) Amounts of executed contracts on negotiated debts not reported as nonperforming 541,527 receivables (Note 8)

Note 1: Nonperforming loans are reported to the authorities and disclosed to the public, as required by the “Regulations Governing the Procedures for Banking Institutions to Evaluate Assets and Deal with Nonperforming/ Non-accrued Loans.” Nonperforming credit card receivables are reported to the authorities and disclosed to the public, as required by the Banking Bureau's letter dated July 6, 2005 (Ref. No. 0944000378). Note 2: Ratio of nonperforming loans: Nonperforming loans ÷ Outstanding loan balance. Ratio of nonperforming credit card receivables: Nonperforming credit card receivables ÷ Outstanding credit card receivables balance. Note 3: Coverage ratio of loans: Allowance for possible losses for loans ÷ Nonperforming loans. Coverage ratio of credit card receivables: Allowance for possible losses for credit card receivables ÷ Nonperforming credit card receivables. Note 4: The mortgage loan is for house purchase or renovation and is fully secured by housing that is purchased (owned) by the borrower, the spouse or the minor children of the borrowers. Note 5: Based on the Banking Bureau's letter dated December 19, 2005 (Ref. No. 09440010950), small-scale credit loans are unsecured, involve small amounts, and exclude credit cards and cash cards. Note 6: Other consumer banking loans refer to secured or unsecured loans that exclude housing mortgages, cash cards, credit cards and small-scale credit loans. Note 7: As required by the Banking Bureau in its letter dated July 19, 2005 (Ref. No. 0945000494), factored accounts receivable without recourse are reported as nonperforming receivables within three months after the factors or insurance companies refuse to indem- nify banks for any liabilities on these accounts. Note 8: The amounts of executed contracts on negotiated debts that are not reported as nonperforming loans or receivables are reported in accordance with the Banking Bureau's letter dated April 25, 2006 (Ref. No. 09510001270).

99 FINANCIAL REVIEW

(ii) Concentration of credit extensions

December 31, 2008 (in Thousands of New Taiwan dollars) Total Amount of Credit Percentage of Rank Enterprise/Group Name Endorsement or Other E. Sun Bank's Transactions Equity (%)

1 Continental Engineering Corp. $ 4,202,158 19.00

2 Gin Lai International Group 3,645,120 16.48

3 Prince Motors Group 2,304,679 10.42

4 First Investment Group 1,884,865 8.52

5 Chie Ho Construction Group 1,423,754 6.44

6 Core Pacific Group 1,374,275 6.21

7 Lucky Cement Group 914,759 4.14

8 China Man-Made Fiber Group 735,694 3.33

9 Nice Group 545,735 2.47

10 Taiwan Cement Group 488,777 2.21

December 31, 2007 (in Thousands of New Taiwan dollars) Total Amount of Credit Percentage of Rank Enterprise/Group Name Endorsement or Other E. Sun Bank's Transactions Equity (%)

1 Continental Engineering Corp. $ 4,896,053 15.16

2 Gin Lai International Group 4,141,420 12.82

3 Prince Motors Group 2,401,000 7.43

4 First Investment Group 2,064,750 6.39

5 Chie Ho Construction Group 1,788,821 5.54

6 Core Pacific Group 1,428,192 4.42

7 China Man-Made Fiber Group 1,406,663 4.36

8 APP Group 1,350,433 4.18

9 Lucky Cement Group 1,151,000 3.56

10 Taiwan Cement Group 1,117,376 3.46

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 (iii) Interest rate sensitivity information

1) Interest Rate Sensitivity December 31, 2008 (In Thousands of New Taiwan Dollars) 91 to 180 181 Days to Over One Items 1 to 90 Days Total Days One Year Year

Interest rate-sensitive assets $ 105,814,044 4,789,798 2,248,343 8,010,351 120,862,536

Interest rate-sensitive liabilities 42,467,070 41,676,366 45,322,659 4,574,613 134,040,708

Interest rate-sensitive gap 63,346,974 (36,886,568) (43,074,316) 3,435,738 (13,178,172)

Net worth 19,525,503

Ratio of interest rate-sensitive assets to liabilities (%) 90.17

Ratio of interest rate sensitivity gap to net worth (%) (67.49)

Interest Rate Sensitivity December 31, 2007 (In Thousands of New Taiwan Dollars) 91 to 180 181 Days to Over One Items 1 to 90 Days Total Days One Year Year

Interest rate-sensitive assets $ 126,322,175 3,815,982 4,358,775 12,432,573 146,929,505

Interest rate-sensitive liabilities 73,818,565 66,628,641 16,535,088 5,242,040 162,224,334

Interest rate-sensitive gap 52,503,610 (62,812,659) (12,176,313) 7,190,533 (15,294,829)

Net worth 32,665,550

Ratio of interest rate-sensitive assets to liabilities (%) 90.57

Ratio of interest rate sensitivity gap to net worth (%) (46.82)

Note 1: The above amounts included only New Taiwan dollar amounts held by the head office and branches of the Bank (i.e., excluding foreign currency).

Note 2: Interest rate-sensitive assets and liabilities are interest-earning assets and interest-bearing liabilities with revenues or costs affected by interest rate changes.

Note 3: Interest rate sensitivity gap = Interest rate-sensitive assets － Interest rate-sensitive liabilities.

Note 4: Ratio of interest rate-sensitive assets to liabilities = Interest rate-sensitive assets/Interest rate-sensitive liabilities (in New Taiwan dollars).

101 FINANCIAL REVIEW

Interest Rate Sensitivity December 31, 2008 (In Thousands of U.S. Dollars) 91 to 180 181 Days to Over One Items 1 to 90 Days Total Days One Year Year

Interest rate-sensitive assets $ 113,152 8,374 - - 121,526

Interest rate-sensitive liabilities 28,128 48,222 12,476 - 88,826

Interest rate-sensitive gap 85,024 (39,848) (12,476) - 32,700

Net worth 818

Ratio of interest rate-sensitive assets to liabilities (%) 136.81

Ratio of interest rate sensitivity gap to net worth (%) 3,997.56

Interest Rate Sensitivity December 31, 2007 (In Thousands of U.S. Dollars) 91 to 180 181 Days to Over One Items 1 to 90 Days Total Days One Year Year

Interest rate-sensitive assets $ 44,880 10,682 19,400 - 74,962

Interest rate-sensitive liabilities 30,651 57,599 21,675 - 109,925

Interest rate-sensitive gap 14,229 (46,917) (2,275) - (34,963)

Net worth (11,065)

Ratio of interest rate-sensitive assets to liabilities (%) 68.19

Ratio of interest rate sensitivity gap to net worth (%) -

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)

102 (iv) Profitability (Unit: %) Year Ended December Year Ended December Items 31, 2008 31, 2007

Before income tax (6.67) (4.60) Return on total assets After income tax (5.52) (4.20)

Before income tax (45.34) (46.88) Return on equity After income tax (37.49) (42.79)

Net income ratio (Note 6) (Note 6)

Note 1: Return on total assets = Income before (after) income tax/Average total assets Note 2: Return on equity = Income before (after) income tax/Average equity Note 3: Net income ratio = Income after income tax/Total net revenues Note 4: Income before (after) income tax was the income in the years ended December 31, 2008 and 2007. Note 5: The above profitability ratios are expressed annually. Note 6: Not calculated as total net revenue is negative.

(v) Maturity analysis of assets and liabilities

1) Maturity Analysis of Assets and Liabilities (New Taiwan Dollars) December 31, 2008 (In Thousands of New Taiwan Dollars) Remaining Period to Maturity 181 Days- Total 1-30 Days 31-90 Days 91-180 Days Over 1 Year 1 Year

Main capital inflow on maturity $141,865,475 30,885,240 7,493,938 11,028,449 42,678,811 49,779,037

Main capital outflow on maturity 181,450,863 17,057,875 27,050,736 32,993,382 62,332,060 42,016,810

Gap (39,585,388) 13,827,365 (19,556,798) (21,964,933) (19,653,249) 7,762,277

Maturity Analysis of Assets and Liabilities (New Taiwan Dollars) December 31, 2007 (In Thousands of New Taiwan Dollars) Remaining Period to Maturity 181 Days- Total 1-30 Days 31-90 Days 91-180 Days Over 1 Year 1 Year

Main capital inflow on maturity $180,325,222 53,987,972 7,413,526 11,523,390 48,827,186 58,573,148

Main capital outflow on maturity 220,944,345 18,491,809 27,175,249 59,295,818 55,291,931 60,689,538

Gap (40,619,123) 35,496,163 (19,761,723) (47,772,428) (6,464,745) (2,116,390)

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).

103 FINANCIAL REVIEW

Maturity Analysis of Assets and Liabilities (U.S. Dollars) December 31, 2008 (In Thousands of U.S. Dollars) Remaining Period to Maturity 181 Days- Total 1-30 Days 31-90 Days 91-180 Days Over 1 Year 1 Year

Main capital inflow on maturity $ 132,513 100,525 14,820 9,809 - 7,359

Main capital outflow on maturity 132,513 66,077 10,194 4,694 12,526 39,022

Gap - 34,448 4,626 5,115 (12,526) (31,663)

Maturity Analysis of Assets and Liabilities (U.S. Dollars) December 31, 2007 (In Thousands of U.S. Dollars) Remaining Period to Maturity 181 Days- Total 1-30 Days 31-90 Days 91-180 Days Over 1 Year 1 Year

Main capital inflow on maturity $ 122,074 59,579 12,890 21,600 9,741 18,264

Main capital outflow on maturity 122,074 71,099 14,419 21,369 21,969 (6,782)

Gap - (11,520) (1,529) 231 (12,228) 25,046

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 overseas assets are above 10% of total assets of the head office, it is necessary to provide supplementary disclosure information.

104 (vi) Capital adequacy ratio (Unit: In Thousands of New Taiwan Dollars, %) December 31, December 31, Year Items 2008 2007

Tier 1 capital (Note 3) $ 11,662,965 20,609,871

Eligible Tier 2 capital 10,431,493 12,904,456 Capital Tier 3 capital - -

Eligible capital 22,094,458 33,514,327

Standardized approach 102,786,791 135,685,317

Credit risk Internal rating-based approach - -

Securitization 667,840 1,692,579

Basic indicator approach 18,065,504 23,579,888 Operational Risk-weighted Standardized approach/Alternative standardized approach - - Assets risk Advanced measurement approach - -

Standardized approach 1,557,409 820,752 Market risk Internal model approach - -

Risk-weighted assets 123,077,544 161,778,536

Capital adequacy ratio 17.95% 20.72%

Ratio of tier 1 capital to risk-weighted assets 9.48% 12.74%

Ratio of tier 2 capital to risk-weighted assets 8.47% 7.98%

Ratio of tier 3 capital to risk-weighted assets - -

Ratio of common stock to total assets 13.58% 33.07%

Note 1: Eligible capital and risk-weighted assets are calculated under the “Regulations Governing the Capital Adequacy Ratio of Banks” and the “Explanation of Methods for Calculating the Eligible Capital and Risk-Weighted Assets of Banks.”

Note 2: Formulas used were as follows: 1) Eligible capital = Tier 1 capital + Tier 2 capital + Tier 3 capital 2) Risk-weighted assets = Risk-weighted assets for credit risk + Capital requirements for operational risk and market risk x 12.5 3) Capital adequacy ratio = Eligible capital ÷ Risk-weighted assets 4) Ratio of tier 1 capital to risk-weighted assets = Tier 1 capital ÷ Risk-weighted assets 5) Ratio of Tier 2 capital to risk-weighted assets = Tier 2 capital ÷ Risk-weighted assets 6) Ratio of Tier 3 capital to risk-weighted assets = Tier 3 capital ÷ Risk-weighted assets 7) Ratio of common stock to total assets = Common stock ÷ Total assets

Note 3: Under the regulation on capital adequacy ratios, the Bank had to use the standardized approach to calculate its credit risks and had to reduce its Tier 1 capital when its operating reserve and allowance for possible losses became insufficient. The Bank calculated its capital adequacy ratios by referring to “The Expected Loss Interpretation of the Banking Bureau,” previous loss experience, property risk, and risk-related developments and also reported them to the supervisors from the Banking Bureau.

105 FINANCIAL REVIEW

(d) Account reclassification Certain accounts in the financial statements for the year ended December 31, 2007, were reclassified to conform to 2008 financial statements disclosure format.

(e) Personnel, depreciation and amortization expenses

December 31, December 31, 2008 2007

Personnel expenses Salaries $ 1,936,193 2,584,435 Insurance 140,724 197,504 Pension 356,431 1,267,214 Others 314,224 145,846 Depreciation expenses 352,476 409,848 Amortization expenses 214,107 237,788

11. Segment Financial Information

(a) Industry information: The Bank operates solely in the commercial banking business.

(b) Geographic information: The Bank's foreign operating units or identifiable assets did not reach 10% of the Bank's revenues or total assets.

(d) Major customers: Not applicable

106 CONTACT DETAILS OF HEAD OFFICE AND BRANCHES

As at May 1, 2009 Office/Branch Phone Number Address

Head Office (Tunnan) 886-2-2701-1777 39 Tunhwa S.Rd., Sec. 2, Taipei, Taiwan

Head Office (Chungho) 886-2-8023-9088 Fl. 2, 188 Chingping Rd., Chungho City, Taipei County, Taiwan

Banking Business Dept. 886-2-2701-1777 39 Tunhwa S.Rd., Sec. 2, Taipei, Taiwan

Chunghsiao Branch 886-2-2778-1277 270 Chunghsiao E. Rd., Sec. 4, Taipei, Taiwan

Chiencheng Branch 886-2-2555-7777 70 Chengteh Rd., Sec. 1, Taipei, Taiwan

Chengtung Branch 886-2-2778-8777 224 Nanking E. Rd., Sec. 3, Taipei, Taiwan

East Taipei Branch 886-2-2570-5777 160 Nanking E. Rd., Sec. 4, Taipei, Taiwan

Sungchiang Branch 886-2-2517-3777 137 Sungchiang Rd., Taipei, Taiwan

Sungshan Branch 886-2-2761-6688 132 Sungshan Rd., Taipei, Taiwan

Tienmu Branch 886-2-8866-1117 246 Chungshan N. Rd., Sec. 6, Taipei, Taiwan

Taan Branch 886-2-3322-3677 8 Sinsheng S. Rd., Sec. 2, Taipei, Taiwan

Pateh Branch 886-2-3765-1111 88 Pateh Rd., Sec. 4, Taipei, Taiwan

Sanchung Branch 886-2-2981-2233 192 Chungyang Rd., Sec. 3, Sanchung City, Taipei County, Taiwan

Panchiao Branch 886-2-2259-7767 15 Minsheng Rd., Sec. 3, Panchiao City, Taipei County, Taiwan

Hsinchuang Branch 886-2-2277-6377 331 Suyuan Rd., Hsinchuang City, Taipei County, Taiwan

Luchou Branch 886-2-2289-8877 401 Chihsien Rd., Luchou City, Taipei County, Taiwan

Tucheng Branch 886-2-2260-5588 123 Chincheng Rd., Sec. 3, Tucheng City, Taipei County, Taiwan

Chungho Branch 886-2-8668-5566 200 Chingping Rd., Chungho City, Taipei County, Taiwan

Hsintien Branch 886-2-2918-1199 202 Peihsin Rd., Sec. 3, Hsintien City, Taipei County, Taiwan

Keelung Branch 886-2-2433-6566 193 Maijin Rd., Keelung City, Taiwan

Lotung Branch 886-3-953-3377 50 Kungcheng Rd., Lotung Township, I-Lan County, Taiwan

Hualien Branch 886-3-835-2299 560 Chungcheng Rd., Hualien City, Hualien County, Taiwan

Taitung Mini Branch 886-89-329-797 341 Chunghwa Rd., Sec. 1, Taitung City, Taitung County, Taiwan

Taoyuan Branch 886-3-339-7779 80 Nanhwa St., Taoyuan City, Taoyuan County, Taiwan

Chungli Branch 886-3-427-2777 13-1 Chungyang E. Rd., Chungli City, Taoyuan County, Taiwan

Hsinchu Branch 886-3-525-5577 645 Sida Rd., Hsinchu City, Taiwan

Nanta Branch 886-3-526-3155 339 Nanta Rd., Hsinchu City, Taiwan

107 CONTACT DETAILS OF HEAD OFFICE AND BRANCHES

As at May 1, 2009 Office/Branch Phone Number Address

Chuke Branch 886-3-577-5131 238 Kuangfu Rd., Sec. 1, Hsinchu City, Taiwan

Fengcheng Branch 886-3-526-1101 59 Chungcheng Rd., Hsinchu City, Taiwan

Miaoli Branch 886-37-265-725 81 Chungcheng Rd., Miaoli City, Miaoli County, Taiwan

Toufen Branch 886-37-669-377 1192 Chunghua Rd., Toufen Township, Miaoli County, Taiwan

Taichung Branch 886-4-2328-3331 160-1 Taichung Kang Rd., Sec. 1, Taichung City, Taiwan

Chikuang Branch 886-4-2222-0077 63 Chungcheng Rd., Taichung City, Taiwan

Tali Mini Branch 886-4-2486-6363 331 Chunghsing Rd., Sec. 2, Tali City, Taichung County, , Taiwan

Fengyuan Branch 886-4-2515-2777 329 Chungshan Rd., Fengyuan City, Taichung County, Taiwan

Yuanlin Branch 886-4-833-9777 266 Jeuguang Rd., Yuanlin Township, Changhwa County, Taiwan

Changhwa Branch 886-4-728-7777 199-3 Hsiaoyang Rd., Changhwa City, Changhwa County, Taiwan

Tsaotun Branch 886-49-230-5000 636 Chungcheng Rd., Tsaotun Township, Nantou County, Taiwan

Touliu Branch 886-5-533-1566 80 Shiping Rd., Touliu City, Yunlin County, Taiwan

Chiayi Branch 886-5-228-0777 302 Chungshan Rd., Chiayi City, Taiwan

Tainan Branch 886-6-226-8777 351 Hsimen Rd., Sec. 2, Tainan City, Taiwan

Chienkang Branch 886-6-225-6131 167 Chungyi Rd., Sec. 2, Tainan City, Taiwan

Tungmen Branch 886-6-225-6141 26 Fuchien Rd., Sec. 1, Tainan City, Taiwan

Peimen Branch 886-6-236-4401 133 Kaiyuan Rd., Tainan City, Taiwan

Linsen Mini Branch 886-6-237-6391 184 Linsen Rd., Sec. 2, Tainan City, Taiwan

Haitung Branch 886-6-250-2183 129 Haitien Rd., Sec. 1, Tainan City, Taiwan

Kueijen Mini Branch 886-6-330-8777 23 Chungcheng S. Rd., Sec. 1, Kueijen Hsiang, Tainan County, Taiwan

Yungkang Branch 886-6-272-7757 21 Yungda Rd., Sec. 2, Yungkang City, Tainan County, Taiwan

Kaohsiung Branch 886-7-336-7977 80 Szuwei 3rd Rd., Kaohsiung, Taiwan

North Kaohsiung Branch 886-7-346-3677 878 Minchu 1st Rd., Kaohsiung, Taiwan

Chungcheng Branch 886-7-241-1777 151 Chungcheng 4th Rd., Kaohsiung, Taiwan

Fengshan Branch 886-7-741-9777 165-3 Poai Rd., Fengshan City, Kaohsiung County, Taiwan

Pingtung Branch 886-8-738-5678 451 Kuangtun Rd., Pingtung City, Pingtung County, Taiwan

Note: Tsaotun Branch and Toufen Branch will be closed on June 27th 2009.

108 Address: 39 Tunhwa S. Rd., Sec. 2, Taipei, Taiwan Phone Number: 886-2-2701-1777