COSMOS BANK, TAIWAN
Financial Statements
June 30, 2010 and 2009
(With Auditors’ Report Thereon)
Independent Auditors’ Report
The Board of Directors and Stockholders
Cosmos Bank, Taiwan:
We have audited the accompanying balance sheets of Cosmos Bank, Taiwan as of June 30, 2010 and 2009,
and the related statements of income, changes in stockholders’ equity, and cash flows for the six-month
periods then ended. These financial statements are the responsibility of the Bank’s management. Our
responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the Regulations Governing the Auditing of Financial
Statements of Financial Institutions by Certified Public Accountants and auditing standards generally
accepted in the Republic of China. Those standards and regulations require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
As stated in note 4(h) to the financial statements, the equity investments accounted for under the equity
method amounting to $27,635 thousand and $60,840 thousand as of June 30, 2010 and 2009, respectively,
and the related investment income of $7,665 thousand and $10,065 thousand, respectively, recognized for
the six-month periods then ended, were based on the investee companies’ unaudited financial statements.
As stated in note 4(k) to the financial statements, the Bank signed individual contracts with asset
management companies between 2004 and 2006 to sell non-performing loans. Based on the Law
Governing Mergers of Financial Institutions and Tai-Cai-Rong-(3)-Zi No. 0913000051 issued by the
Ministry of Finance on March 8, 2002, the losses on these sales were amortized using the straight-line
method over 5 years. However, it was not in accordance with generally accepted accounting principles in
the Republic of China. The unamortized balance was recorded as deferred losses on the sale of non-
performing loans. Had these losses not been deferred, the carrying value of the deferred losses as of June
30, 2010 and 2009, would have decreased by $5,818,473 thousand and $11,709,977 thousand, respectively,
and retained earnings would have decreased by $4,829,333 thousand and $8,782,483 thousand,
respectively. In addition, the loss after tax would have decreased by $2,298,580 thousand and $2,708,670
thousand for the six-month periods ended June 30, 2010 and 2009, respectively.
Note to Readers
The accompanying financial statements are intended only to present the financial position, results of operations and cash flows in
accordance with the accounting principles and practices generally accepted in Taiwan, the Republic of China and not those of any
other jurisdictions. The standards, procedures and practices to audit such financial statements are those generally accepted and
applied in Taiwan, the Republic of China.
The auditors’ report and the accompanying financial statements are the English translation of the Chinese version prepared and
used in the Republic of China. If there is any conflict between, or any difference in the interpretation of, the English and Chinese
language auditors’ report and financial statements, the Chinese version shall prevail.
In our opinion, except for the fact that financial statements of certain investees have not been audited as
mentioned in the third paragraph, and the effects of the deferred loss on the sale of the non-performing
loans mentioned in the fourth paragraph, the financial statements referred to above present fairly, in all
material respects, the financial position of Cosmos Bank, Taiwan as of June 30, 2010 and 2009, and the
results of its operations and its cash flows for the six-month periods ended June 30, 2010 and 2009, in
conformity with the Guidelines Governing the Preparation of Financial Reports by Public Banks, the
related financial accounting standards of the “Business Entity Accounting Act” and of the “Regulation on
Business Entity Accounting Handling”, and accounting principles generally accepted in the Republic of
China.
August 23, 2010
See accompanying notes to financial statements.
COSMOS BANK, TAIWAN
Balance Sheets
June 30, 2010 and 2009 (Expressed in thousands of New Taiwan dollars)
2010
2009
Percentage
Increase
(Decrease)
Assets Amount Amount %
Cash and cash equivalents (notes 4(a) and 5) $ 2,253,947 2,549,605 (12)
Due from the Central Bank and call loans to banks (notes 4(b)
and 5)
38,212,560
28,512,069
34
Financial assets at fair value through profit or loss, net (note 4(c)) 630,977 153,055 312
Receivables, net (notes 4(d) and 5) 5,671,439 7,310,119 (22)
Assets held for sale (note 4(e)) - 125,199 -
Discounts and loans, net (notes 4(f) and 5) 62,694,974 80,967,644 (23)
Available-for-sale financial assets, net (notes 4(g) and 6) 954,809 895,513 7
Equity investments under the equity method, net (notes 4(h) and 5) 27,635 60,840 (55)
Other financial assets, net (notes 4(i) and 6) 1,052,716 1,031,636 2
Fixed assets, net (note 4(j)) 6,279,570 6,434,969 (2)
Intangible assets (note 10(d)) 110,161 137,272 (20)
Other assets, net (notes 4(k) and 5) 14,623,015 21,100,465 (31)
Total assets $ 132,511,803 149,278,386 (11)
2010
2009
Percentage
Increase
(Decrease)
Liabilities and Stockholders’ Equity Amount Amount %
Due to the Central Bank and other banks (note 4(l)) $ 9,396,715 11,966,323 (21)
Financial liabilities at fair value through profit or loss (note 4(c)) 901 5,000 (82)
Securities sold under repurchase agreements (note 4(m)) 30,000 - -
Payables (note 4(n)) 1,381,261 4,104,281 (66)
Deposits and remittances (notes 4(o) and 5) 105,453,550 113,038,253 (7)
Bank debentures (note 4(p)) 515,000 515,000 -
Accrued pension liabilities (note 4(q)) 185,122 202,894 (9)
Other financial liabilities (note 4(p)) 1,630,475 2,177,948 (25)
Other liabilities 545,891 280,350 95
Total liabilities 119,138,915 132,290,049 (10)
Capital stock (note 4(s))
Common stock 16,234,639 22,347,209 (27)
Preferred stock - 5,433,151 -
Total capital stock 16,234,639 27,780,360 (42)
Capital surplus
Others (note 4(s)) 12,970,567 15,856,306 (18)
Total capital surplus 12,970,567 15,856,306 (18)
Retained earnings
Accumulated deficit (note 4(s))
(15,850,903)
(26,675,389)
41
Total accumulated deficit (15,850,903) (26,675,389) 41
Others
Unrealized gains on financial instruments 18,585 27,060 (31)
18,585 27,060 (31)
Total stockholders’ equity 13,372,888 16,988,337 (21)
Commitments and contingencies (note 7)
Total liabilities and stockholders’ equity $ 132,511,803 149,278,386 (11)
See accompanying notes to financial statements.
COSMOS BANK, TAIWAN
Income Statements
For the six-month periods ended June 30, 2010 and 2009 (Expressed in thousands of New Taiwan dollars, except earnings per share,
which are expressed in New Taiwan dollars)
2010
2009
Percentage
Increase
(Decrease)
Amount Amount %
Interest revenue $ 2,786,064 3,567,004 (22)
Less: interest expense (note 4(p)) (552,701) (1,256,984) 56
Net interest 2,233,363 2,310,020 (3)
Net revenues (losses) other than interest
Service fee income, net 659,473 538,816 22
Gains (losses) on financial assets and liabilities at fair
value through profit or loss (note 4(c))
(6,083)
1,897
(421)
Realized gains on the sale of available-for-sale financial
assets
3,858
238
1,521
Income from equity investments under the equity
method (note 4(h))
7,665
10,065
(24)
Foreign exchange gains (losses), net 28,355 (12,429) 328
Gain on reversal of asset impairment loss (loss on
asset impairment) (notes 4(e), (j), and (k))
3,506
(31,299)
111
Other noninterest losses, net (notes 4(i), (k), and (u)) (22,210) (19,386) (15)
Loss on the sale of nonperforming loans (note 4(k)) (2,769,373) (3,611,560) 23
Total net revenues (losses) other than interest (2,094,809) (3,123,658) 33
Total net revenues (losses) 138,554 (813,638) 117
Provision for loan losses (note 4(f)) (26,408) (2,563,233) 99
Operating expenses (note 5)
Personnel (893,414) (1,319,721) 32
Depreciation and amortization (178,333) (257,213) 31
Others (720,607) (851,687) 15
Total operating expenses (1,792,354) (2,428,621) 26
Loss before income tax (1,680,208) (5,805,492) 71
Income tax (expense) benefit (note 4(r)) (898,261) 649,193 (238)
Net loss $ (2,578,469) (5,156,299) 50
Before
Tax
After
Tax
Before
Tax
After
Tax
Loss per share (note 4(t)) $ (1.03) (1.59) (2.60) (2.31)
Loss per share – retroactive (note 4(t)) $ (5.69) (5.05)
See accompanying notes to financial statements.
COSMOS BANK, TAIWAN
Statements of Changes in Stockholders’ Equity
For the six-month periods ended June 30, 2010 and 2009 (in thousands of New Taiwan dollars)
Common
stock
Preferred
stock
Capital
surplus
Accumulated
deficit
Unrealized
valuation gains or
losses on financial
instruments Total
Balance at January 1, 2009 $ 22,347,209 5,433,151 15,844,318 (21,519,090) 16,489 22,122,077
Stock-based compensation - - 11,988 - - 11,988
Net loss for six-month period ended June 30, 2009 - - - (5,156,299) - (5,156,299)
Unrealized valuation gains on financial instruments - - - - 10,571 10,571
Balance at June 30, 2009 $ 22,347,209 5,433,151 15,856,306 (26,675,389) 27,060 16,988,337
Balance at January 1, 2010 $ 16,234,639 - 12,961,607 (13,272,434) 30,497 15,954,309
Stock-based compensation - - 8,960 - - 8,960
Net loss for six-month period ended June 30, 2010 - - - (2,578,469) - (2,578,469)
Unrealized valuation losses on financial instruments - - - - (11,912) (11,912)
Balance at June 30, 2010 $ 16,234,639 - 12,970,567 (15,850,903) 18,585 13,372,888
See accompanying notes to financial statements.
COSMOS BANK, TAIWAN
Statements of Cash Flows
For the six-month periods ended June 30, 2010 and 2009 (in thousands of New Taiwan dollars)
2010 2009
Cash flows from operating activities:
Net loss $ (2,578,469) (5,156,299)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation expenses 93,833 129,806
Amortization expenses 85,748 127,407
Provision for loan losses 1,030,526 3,238,197
Share-based compensation expense 17,188 11,988
Amortization of discount on convertible bank debentures 77,575 119,694
(Gain) loss on sale and disposal of properties, net (4) 324
Income from equity investments under the equity method (7,665) (10,065)
(Gain) loss on disposal of investment, net (3,788) 1,604
Gain on disposal of assets held for sale, net (6,603) -
(Gain) loss on non-financial asset impairment (3,506) 31,299
Amortization of loss on the sale of nonperforming loans 2,769,373 3,611,560
Net changes in operating assets and liabilities:
(Increase) decrease in financial assets at fair value through profit or
loss (482,244) 2,974
Increase in receivables (139,654) (1,378,888)
Increase in other financial assets (1,482) (31,547)
Increase in other assets (26,106) (31,688)
Decrease (increase) in deferred income tax assets, net 897,912 (649,566)
Decrease in financial liabilities at fair value through profit or loss (2,827) (8,027)
(Decrease) increase in payables (914,282) 741,824
Increase (decrease) in other liabilities 268,250 (20,818)
Increase (decrease) in provision for pension cost 2,946 (83,621)
Net cash provided by operating activities 1,076,721 646,158
Cash flows from investing activities:
Proceeds from the sale of available-for-sale financial assets 35,820 6,335
Increase in due from the Central Bank and call loans to banks (8,188,131) (1,442,548)
Decrease in discounts and loans 7,488,270 10,240,011
Acquisition of properties (1,923) (12,876)
Proceeds from the sale of properties 9 159
Proceeds from the sale of debt instruments with no active market 13,276 445,648
Increase in intangible assets (4,637) (87,404)
Decrease in refundable deposits 63,625 57,637
Proceeds from the sale of held-for-sale assets 55,034 -
Rebates from the sale of nonperforming loans 58,750 63,334
Cancellation of reacquisition (reacquisition) of sold nonperforming loans 887 (7)
(Increase) decrease in other assets (6,113) 48,526
Net cash (used in) provided by investing activities (485,133) 9,318,815
Cash flows from financing activities:
Decrease in due to the Central Bank and other banks (2,692,441) (1,250,033)
Increase (decrease) in deposits and remittances 2,199,944 (9,562,471)
Increase (decrease) in securities sold under repurchase agreements 30,000 (7,034)
Decrease in other financial liabilities (332,970) (53,064)
Net cash used in financing activities (795,467) (10,872,602)
Net decrease in cash and cash equivalents (203,879) (907,629)
Cash and cash equivalents at beginning of year 2,457,826 3,457,234
Cash and cash equivalents at end of half year $ 2,253,947 2,549,605
Supplementary cash flow information
Interest paid $ 436,631 1,556,132
Income tax paid $ 104 258
Supplemental disclosures of non-cash investing and financing activities:
Fixed assets transferred to rental assets $ 161,800 -
Fixed assets transferred to deferred expenses $ - 35,112
Other assets transferred to fixed assets $ 16,799 -
Unrealized (gain) loss on valuation of available-for-sale financial
instruments at fair value $ 11,912 (10,571)
(Continued)
COSMOS BANK, TAIWAN
Notes to Financial Statements
June 30, 2010 and 2009 (Expressed in New Taiwan dollars unless otherwise specified)
1 Organization and Operations
Cosmos Bank, Taiwan (the “Bank”) engages in banking activities permitted by the Banking Act of the
Republic of China (Banking Act).
As of June 30, 2010, the Bank had a main office, an offshore banking unit (OBU), and 48 domestic
branches.
In accordance with the resolution of the 32nd
meeting of the 6th session of the Bank’s Board of
Directors held on January 23, 2009, in an effort to improve operational effectiveness, the Bank applied
to close 12 branches, and on March 24, 2009, the Bank obtained the approval from the FSC under Jin
Guan Yin (2) No. 09800043360 and then closed the branches. As of June 30, 2010 and 2009, the
Bank had 1,640 and 1,725 employees, respectively.
The business of the Bank’s Trust Department includes planning, managing and operating trust business
regulated under the Banking Act and Trust Business Regulations of the Republic of China (ROC).
The shares of the Bank have been traded on the Taiwan Stock Exchange (TSE) since June 29, 1998.
Under the TSE’s operating rules and regulations, the Bank had to change the way its shares were
traded on September 5, 2007. However, the trading method was changed back to the original method
on May 6, 2009.
Under section 64 of the Banking Act of the Republic of China, “Directors and Supervisors shall report
to the central government authority when banks have accumulated losses over 1/3 of the capital. The
central government authority shall have the Bank recover the capital within three months, otherwise
the Bank shall be ordered to suspend its business or be taken over by the government.” To avoid the
situation as described under Section 64 of the Banking Act of the Republic of China, the Financial
Supervisory Commission (FSC) issued Directive Jin Guan Yin (1) No. 09700480350 and requested the
Bank to actively improve operating results and to propose practical plans to strengthen the Bank’s
capital structure. In the 33rd
meeting of the 6th session of the Bank’s Board of Directors held on
February 25, 2009, the Bank approved a plan to enhance capital; please refer to paragraph (a) below.
In addition, on July 23, 2009, the FSC issued Directive Jin Guan Yin Guo No. 09800325300 and stated
that the Bank had accumulated losses over 1/3 of the capital. According to Jin Guan Yin (2) No.
09800101560, the Bank should implement plans to strengthen its capital structure and recover the
capital before October 31, 2009.
2
COSMOS BANK, TAIWAN
Notes to Financial Statements
(Continued)
(a) The contents of the capital increase and reduction of common stock plan are as follows:
(1) In order to improve the Bank’s financial structure, General Electric International Inc. (GEII)
and GE Processing Services Pty Limited (GE Australia) have reached an agreement to resolve
the differences regarding their technical service agreement with the Bank. Under the new
agreement, the remaining payable will be partially settled by cash, and the remainder will be
through a private placement of common shares.
(2) Based on the issuance principles of the 2007 issuance of preferred shares, the preferred shares
will be converted into common shares at a 1:1 ratio.
(3) S.A.C. PEI Taiwan Holdings B.V. holds Subordinated Unsecured Mandatory Convertible
Bonds (MCB) issued by the Bank in 2007, a portion of which will be converted prior to the
maturity date into common shares.
(4) The Bank will complete a capital reduction to offset accumulated losses and the share
discount from the issuance of common shares from the abovementioned capital injection.
(b) The Bank will actively dispose of non-performing loans and reduce personnel costs and recurring
expenses in order to reduce the speed at which capital is used. Also, it will continue to engage in
product innovation, improve the risk management process, and implement internal control policies
in order to improve the operating efficiency of the Bank.
In the stockholders’ meeting held on June 19, 2009, the Bank approved the capital increase and
capital reduction plan under which the Bank would reduce the capital by $19,300,000 thousand
after issuance of common shares by a private placement of common shares, conversion of
$3,630,000 thousand of the MCB into common shares, and conversion of preferred shares into
common shares. The abovementioned technical service agreement regarding the settlement
through a private placement of common shares was approved by the meeting of the Bank’s Board
of Directors held on July 28, 2009, and the Board of Directors set the share pricing date as that
date and proposed the private placement of common shares be settled at $3.22 per share. The
proposed share price remained unchanged from the resolution of the extraordinary meeting of the
Board of Directors held on August 25, 2009, and was agreed by the authorized representative of
GEII and GE Australia.
Regarding the capital increase, the Bank applied to increase the common stock on August 26, 2009,
and obtained approval from the FSC under Jin Guan Yin Guo No. 09800425750 on September 22,
2009. According to the resolution of the meeting of the Board of Directors on September 28,
2009, the Bank set September 29, 2009, as the basis date of a private placement with General
Electric International Inc. (GEII) and October 6, 2009, as the basis date of Series A Preferred
Shares converted into common shares and a portion of the MCB converted into common shares.
The Bank obtained approval to change the amount of capital from the FSC under Jin Guan Yin
Guo No. 09800473800 on October 8, 2009.
3
COSMOS BANK, TAIWAN
Notes to Financial Statements
(Continued)
Regarding the capital reduction, the Bank submitted a capital reduction application to compensate
for its accumulated loss and offset the share discount resulting from the aforementioned issuance
of common shares, and obtained approval from the FSC under Jin Guan Cheng Fa No.
0980055038 on October 27, 2009. According to the resolution of the Board of Directors on
October 29, 2009, the Bank set October 30, 2009, as the capital reduction basis date and January
20, 2010, as the stock market quote date. The Bank completed the capital reduction registration
on November 10, 2009.
In order to strengthen the operating capital, improve the financial structure, and increase the capital
adequacy ratio, according to the resolution of the Board of Directors on May 7, 2010, and the
resolution of stockholders on June 18, 2010, the Bank will raise capital by a private placement of
common shares, and issue a maximum of 1,000,000 thousand shares, with a face value of 10
dollars per share; and the total face value of the private placement should not exceed $10,000,000
thousand. In accordance with the “Directions for Public Companies Conducting Private
Placements of Securities”, the private placement of common shares would be settled at 6 dollars
per share temporarily, and the Board of Directors was authorized to determine the actual settled
price afterwards depending on the particular sources of capital.
2 Summary of Significant Accounting Policies
The Bank’s financial statements have been prepared in conformity with the Guidelines Governing the
Preparation of Financial Reports by Public Banks, the Business Entity Accounting Act, the Regulation
on Business Entity Accounting Handling, and accounting principles generally accepted in the Republic
of China. In preparing financial statements in conformity with these guidelines and principles, the
Bank is required to make certain estimates and assumptions that could affect the amounts of allowance
for possible losses, reserve for losses on guarantees, property depreciation, impairment loss on assets,
valuation of financial instruments at fair value, pension, employee bonuses, directors’ and supervisors’
remuneration, share-based payments, allowance for income tax assets, income tax, and accrued
litigation loss. Actual results could differ from these estimates.
Since the operating cycle in the banking industry cannot be reasonably identified, accounts included in
the Bank’s financial statements are not classified as current or noncurrent. Nevertheless, these
accounts are properly categorized according to the nature of each account and sequenced by liquidity.
Please refer to Note 4(u) for the maturity analysis of assets and liabilities.
The Bank’s significant accounting policies are summarized as follows:
(a) Basis of Preparation
The accompanying financial statements include the accounts of the Head Office, the OBU, and all
the branches. All interoffice transactions and balances have been eliminated.
4
COSMOS BANK, TAIWAN
Notes to Financial Statements
(Continued)
(b) Cash and Cash Equivalents
The Bank considers cash on hand, due from banks, and checks for clearing to be cash and cash
equivalents.
(c) Financial Instruments at Fair Value Through Profit or Loss
Financial instruments classified as financial assets or financial liabilities at fair value through
profit or loss (“FVTPL”) include financial assets or financial liabilities held for trading and those
designated as at FVTPL on initial recognition. The Bank recognizes a financial asset or a
financial liability on its balance sheet when the Bank becomes a party to the contractual provisions
of the financial instrument. A financial asset is derecognized when the Bank has lost control of
its contractual rights over the financial asset. A financial liability is derecognized when the
obligation specified in the relevant contract is discharged, cancelled or expired.
Financial instruments at FVTPL are initially measured at fair value. At each balance sheet date
subsequent to the initial recognition, financial assets or financial liabilities at FVTPL are
remeasured at fair value, with changes in fair value recognized directly in profit or loss in the year
in which they arise. On derecognition of a financial asset or a financial liability, the difference
between its carrying amount and the sum of the consideration received and receivable or
consideration paid and payable is recognized in profit or loss. All regular way purchases or sales
of financial assets are recognized and derecognized on a trade-date basis.
Financial instruments used in derivative transactions that do not qualify for hedge accounting are
classified as financial assets or liabilities held for trading. If the fair value of a derivative is a
positive number, the derivative is carried as an asset, and if the fair value is a negative number, the
derivative is carried as a liability.
Fair values are determined as follows: (a) short-term bills - at reference prices published by
Reuters; (b) bonds - at year-end or period-end reference prices published by the GreTai Securities
Market (GTSM); (c) listed stocks and GTSM stocks - at closing prices as of the balance sheet date;
and (d) financial assets/liabilities without quoted prices in an active market - at values determined
using valuation techniques.
(d) Securities Purchased/Sold Under Resell/Repurchase Agreements
Securities purchased under resell agreements and securities sold under repurchase agreements are
generally treated as collateralized financing transactions. Interest earned on resell agreements or
interest incurred on repurchase agreements is recognized as interest income or interest expense
over the life of each agreement.
5
COSMOS BANK, TAIWAN
Notes to Financial Statements
(Continued)
(e) Assets Held for Sale
Assets held for sale are initially measured at the lower of the book value of the assets before they
were classified as held for sale or the net fair value. An impairment loss is recognized when the
net fair value is lower than the book value. The impairment loss is reversed if an increase in the
investment recoverable amount is due to an event that occurred after the impairment loss was
recognized, and the accumulated impairment loss is debited to net fair value; however, the adjusted
carrying amount of the investment may not exceed the carrying amount that would have been
determined had no impairment loss been recognized for the investment in prior years. Assets
classified as held for sale cannot be depreciated, depleted, or amortized.
(f) Accounts Receivable
For the Bank, consumer loans to credit card holders are reflected by the amounts reported by
merchants. Interest income is recognized on an accrual basis using the interest method.
A credit card loan or accrued interest that is over 90 days past due is reclassified to a non-accrual
account without accruing interest. Interest collected while accruing of interest has stopped is
included in earnings only to the extent of cash actually received.
The Bank engages in factoring and management of accounts receivable. The interest and
transaction fees from factoring and management of such accounts are treated as current income.
An allowance for credit losses is provided by reviewing the balance of factoring accounts
receivable at period-end.
(g) Loans
Loans are recorded at the amount of outstanding principal excluding unearned income. Interest
income is recognized on an accrual basis using the interest method.
When a loan becomes overdue, interest receivable is no longer accrued internally. Interest income
is recorded when payment is actually received.
(h) Overdue Loans
Under Ministry of Finance (MOF) guidelines, the Bank classifies loans and other credits
(including accrued interest) overdue for at least six months as overdue loans. However, the
following loans are excluded: (1) The borrowers paid by installment after negotiations; or (2) the
borrowers negotiated with the Bank through the R.O.C. Unsecured Consumer Financing Debt
Negotiation Mechanism and Consumer Debt Clearance regulations.
6
COSMOS BANK, TAIWAN
Notes to Financial Statements
(Continued)
Overdue loans (except other credits) are classified as discounts and loans, and other overdue
credits (such as guarantees, acceptances, and credit card charges) are classified as other financial
assets.
(i) Allowances for Possible Losses and Reserve for Losses on Guarantees
In accordance with the “Regulations Governing the Procedures for Banking Institutions to
Evaluate Assets and Deal with Non-performing/Non-accrual Loans”, the Bank evaluates credit
assets on and off the balance sheet, and evaluates the collectability of credit assets in consideration
of the overdue periods and their collateral values. Under the abovementioned regulations, the
Bank makes 100%, 50%, 10%, and 2% provisions for credits deemed uncollectible, highly
uncollectible, substandard, and special mention, respectively, as minimum provisions for possible
losses. Meanwhile, the Bank makes provisions for credit card receivables in accordance with the
“Regulations Governing Institutions Engaging in Credit Card Business.”
In addition, the Bank may adopt a special reserve as a specified provision to enhance the asset
quality when the credit assets encounter depreciation risk or other significant unfavorable factors.
The Bank would write off overdue loans and credits after deducting the estimated recovery amount,
and the write-offs are then approved by the Board of Directors.
(j) Available-for-sale Financial Assets
Available-for-sale financial assets are initially recognized at fair value plus transaction costs that
are directly attributable to the financial asset acquisition. When assets are subsequently measured
at fair value, the changes in fair value are excluded from earnings and reported as a separate
component of stockholders’ equity. The accumulated gains or losses are recognized as earnings
when the financial asset is de-recognized from the balance sheet. The Bank uses trade-date
accounting when recording transactions.
Cash dividends are recognized on the ex-dividend date, except for dividends distributed from the
pre-acquisition profit, which are treated as a reduction of investment cost. Stock dividends are
not recognized as investment income but are recorded as an increase in the number of shares.
The total number of shares subsequent to the increase is used for recalculation of cost per share.
The difference between the initial cost of a debt instrument and its maturity amount is amortized
using the effective interest method (or the straight-line method can be used if there will be no
significant difference), with the amortized interest recognized in profit or loss.
If an available-for-sale financial asset is determined to be impaired, a loss is recognized. If the
impairment loss on equity securities decreases, this loss is reversed to the extent of the decrease
and recorded as an adjustment to stockholders’ equity; and for available-for-sale debt instruments,
if the decrease can be objectively related to an event occurring after the impairment loss, it should
be reversed through profit or loss.
7
COSMOS BANK, TAIWAN
Notes to Financial Statements
(Continued)
(k) Equity Investments under the Equity Method
Investments in which the Bank holds 20% or more of the investees’ voting shares or exercises
significant influence over the investees’ operating and financial policy decisions are accounted for
by the equity method.
The difference between the investment cost and net equity of an investee is tested for impairment
at each balance sheet date. If there is evidence indicating that an impairment loss has occurred,
then the carrying amount of the investment is reduced to reflect its net realizable value. For long-
term equity investment in which the Bank has significant influence and a non-controlling interest,
the Bank would evaluate the asset impairment of the investment individually based on its carrying
amount.
For equity-method investments, stock dividends received are recognized only as increases in the
number of shares held, and not as income. Cost of equity investments sold is determined by the
weighted-average method.
(l) Other Financial Assets
Investments in equity instruments (including unlisted stocks) with no quoted market prices in an
active market and with fair values that cannot be reliably measured are recognized at cost on
acquisition. If there is objective evidence that a financial asset is impaired, an impairment loss is
recognized. However, impairment loss reversal is prohibited.
Debt instruments with no active market are those without quoted market prices in an active market
and with fair values that cannot be reliably measured. These instruments are carried at amortized
cost.
An impairment loss is recognized when there is objective evidence that the investment is impaired.
The impairment loss is reversed if an increase in the investment’s recoverable amount is due to an
event which occurred after the impairment loss was recognized; however, the adjusted carrying
amount of the investment may not exceed the carrying amount that would have been determined
had no impairment loss been recognized for the investment in prior years.
(m) Fixed Assets
Fixed assets are carried at cost less accumulated depreciation. Major betterments, additions and
renewals are capitalized, while repairs and maintenance are expensed as incurred.
8
COSMOS BANK, TAIWAN
Notes to Financial Statements
(Continued)
Depreciation is computed using the straight-line method over service lives initially estimated as
follows (plus one year to represent estimated salvage value):
(i) buildings: 20 to 60 years;
(ii) machinery and equipment: 2 to 5 years;
(iii) transportation and communications equipment: 2 to 15 years;
(iv) miscellaneous equipment: 2 to 10 years.
Properties that have reached their estimated useful lives but are still being used are depreciated
over their newly estimated service lives.
Upon sale or other disposal of properties, the related cost and accumulated depreciation are
removed from the accounts, and any gain or loss is credited or charged to net noninterest income.
(n) Intangible Assets
Computer software initially is measured at cost and is amortized over 5 years.
(o) Leased Assets and Depreciation
Fixed assets which were leased to others are stated as leased assets under other assets; rental
revenues are recognized as net revenues other than interest in the income statements. Leased assets
are carried at cost less accumulated depreciation. Depreciation is computed using the straight-
line method over the service lives initially estimated and is accounted for as a reduction of net
revenues other than interest in the income statements.
(p) Foreclosed Collateral
Foreclosed collateral taken over is booked at the acquisition cost stated by the court. Foreclosed
collateral is recorded at the lower of cost or net realizable value on the balance sheet date. If
collateral assumed is not disposed of within the statutory period, relevant regulations require that
the Bank should either apply for an extension of the disposal period or increase its provision for
possible losses.
(q) Deferred Loss on the Sale of Nonperforming Loans
In compliance with the Law Governing Mergers of Financial Institutions, loss on the sale of
nonperforming loans is amortized using the straight-line method over five years.
9
COSMOS BANK, TAIWAN
Notes to Financial Statements
(Continued)
(r) Asset Impairment
Under Statement of Financial Accounting Standards No. 35 - “Impairment of Assets”, the Bank
evaluates impairment on the balance sheet date if an asset (equity investment under the equity
method, fixed asset, asset held for sale, goodwill, foreclosed collateral, idle asset, or deferred
charge classified under other assets - other) is impaired.
If an asset is impaired, its recoverable amount is compared with its carrying amount. If the
recoverable amount is lower than the carrying amount, the carrying amount of the asset should be
reduced to its recoverable amount, and the reduction should be recognized as impairment loss.
After recognizing impairment of assets, the calculation of depreciation or amortization expense
should be based on the adjusted book value minus its residual value and amortized in a reasonable
and systematic manner over the remaining estimated useful period. The accumulated impairment
loss on an asset (except goodwill) recognized in prior years should be reversed if the recoverable
amount increases. In addition, the asset carrying amount should be increased to its recoverable
amount, but this increase should not exceed the carrying amount of the asset that would have been
determined net of depreciation or amortization had no impairment loss been recognized for the
asset in prior years.
(s) Bank Debentures
For convertible bonds issued, the Bank first determines the carrying amount of the liability
component by measuring the fair value of a similar liability (including any embedded non-equity
derivatives) that does not have an associated equity component, then determines the carrying
amount of the equity component, representing the equity conversion option, by deducting the fair
value of the liability component from the fair value of the convertible bonds as a whole. The
liability component (excluding the embedded non-equity derivatives) is measured at amortized
cost using the effective interest method, while the embedded non-equity derivatives are measured
at fair value. Upon conversion, the Bank uses the aggregate carrying amount of the liability and
equity components of the bonds at the time of conversion as the basis to record the common shares
issued.
Pursuant to a newly released SFAS, transaction costs of bonds issued on or after January 1, 2006,
are allocated in proportion to the liability and equity components of the bonds. Transaction costs
allocated to the equity component are accounted for as a deduction from equity, net of any income
tax benefit.
10
COSMOS BANK, TAIWAN
Notes to Financial Statements
(Continued)
(t) Pension Costs
The Bank has two types of pension plans: defined benefit and defined contribution.
Under the defined benefit pension plan, pension costs are recorded on the basis of actuarial
calculations. Unrecognized net transition obligation is amortized over 15 years, and prior service
cost and actuarial gains or losses are amortized over the employees’ remaining service years using
the straight-line method. Under the defined contribution pension plan, the Bank recognizes its
required monthly contributions to employees’ individual pension accounts as current expense
during the employees’ service periods.
(u) Share-based Payments
The value of compensatory stock options and stock appreciation rights is based on the expected
number of shares and the fair value on the grant date, and expense is recognized over the vesting
period using the straight-line method. At the same time, adjustment is made to capital surplus –
employee stock option for share-based payment, while adjustment is made to liabilities for non-
share-based payment.
If the grant date is later than the date that an employee who was given the share-based payment
awards started working, the fair value of the equity awards on the grant date is estimated, and is
recorded as a personnel expense for the period from the start-working date to the grant date.
After the grant date is confirmed, the amount recognized as an expense is adjusted to reflect the
fair value of the equity awards on the grant date.
(v) Employee Bonuses and Directors’ Remuneration
Employee bonuses and directors’ remuneration are accrued in accordance with Interpretation 96 Ji-
Mi No. 052 issued by the Accounting Research and Development Foundation in Taiwan and are
recorded under personnel costs. If the subsequent resolution by the shareholders’ meeting differs
from the amount disclosed in the financial statements, it is recognized as a change in estimates and
recorded under current-period profit/loss.
(w) Recognition of Interest Revenue and Service Fees
Interest revenue on loans is recorded on an accrual basis. Under MOF regulations, no interest
revenue is recognized on loans and other credits extended by the Bank that are classified as
overdue loans. The interest revenue on those loans is recognized upon collection.
The unpaid interest on rescheduled loans should be recorded as deferred revenue (included in other
liabilities), and the paid interest is recognized as interest revenue.
11
COSMOS BANK, TAIWAN
Notes to Financial Statements
(Continued)
Service fees are recorded when a major part of the earnings process is completed and revenue is
realized.
(x) Income Tax
Provision for income tax is based on intra-period and inter-period tax allocation. The tax effects
of deductible temporary differences, unused tax credits, operating loss carryforwards, and debit of
stockholders’ equity adjustments are recognized as deferred income tax assets, and those of taxable
temporary differences and credits to stockholders’ equity adjustments are recognized as deferred
income tax liabilities. A valuation allowance is provided for deferred income tax assets that are
not certain to be realized.
Tax credits for personnel training and stock investments are recognized in the current period.
Income taxes (10%) on undistributed earnings generated annually since 1998 are recorded as
expenses in the year when the stockholders resolve to retain the earnings.
(y) Foreign-currency Transactions
The Bank records foreign-currency transactions in the respective currencies in which these are
denominated. Every month-end, foreign currency income and expenses are translated into New
Taiwan dollars at the month-end exchange rate. On the balance sheet date, monetary assets and
liabilities denominated in foreign currencies are reporting using the month-end exchange rates, and
exchange differences are recognized in the income statement.
Unrealized exchange differences on nonmonetary financial assets (investments in equity
instruments) are a component of the change in their entire fair value. For nonmonetary financial
assets and liabilities classified as financial instruments measured at fair value through profit or loss,
unrealized exchange differences are recognized in the income statement. For nonmonetary
financial instruments that are classified as available-for-sale, unrealized exchange differences are
recorded directly under stockholders’ equity until the asset is sold or becomes impaired.
Nonmonetary financial instruments that are classified as carried at cost are recognized at the
exchange rates on the transaction dates.
(z) Contingencies
A loss is recognized when it is probable that an asset has been impaired or a liability has been
incurred and the amount of loss can be reasonably estimated. A footnote disclosure is made of a
situation that might result in a possible loss but for which the amount of loss cannot be reasonably
estimated.
12
COSMOS BANK, TAIWAN
Notes to Financial Statements
(Continued)
(aa) Earnings per Share
Basic earnings per share are calculated using the net income after taxes minus dividends paid on
preferred shares divided by the weighted-average number of common shares outstanding during
the period. Newly issued shares through retained earnings or capital surplus, or issued through a
resolution of the 2008 shareholders’ meeting or before, should be recalculated. If the
measurement date is before the balance sheet date, then they should also be recalculated.
The employee stock options and the employee bonuses settled using shares that have yet to be
approved by the shareholders’ meeting are deemed to be potential common stock. If the potential
common stock possesses diluting effects, then diluted EPS must be disclosed in addition to basic
EPS. If diluting effects do not exist, then only basic EPS are required to be disclosed.
3 Accounting Changes: None
4 Summary of Major Accounts
(a) Cash and cash equivalents
June 30, 2010 June 30, 2009
Cash on hand $ 1,384,906 1,861,923
Due from banks 683,030 527,262
Checks for clearing 186,011 160,420
$ 2,253,947 2,549,605
(b) Due from the Central Bank and call loans to banks
June 30, 2010 June 30, 2009
Call loans to banks $ 9,369,831 8,891,313
Deposit in the Central Bank 24,700,000 15,400,000
Reserves for deposits - a/c B 2,745,603 2,915,378
Reserves for deposits - a/c A 1,215,081 1,101,695
Deposits 182,045 203,683
$ 38,212,560 28,512,069
As required by law, the reserves for deposits in the Central Bank are calculated by applying the
prescribed rates to the average monthly balances of various types of deposit accounts. The use of
reserves for deposits - a/c B is restricted by the Central Bank.
13
COSMOS BANK, TAIWAN
Notes to Financial Statements
(Continued)
(c) Financial instruments at fair value through profit or loss (FVTPL)
June 30, 2010 June 30, 2009
Held-for-trading financial assets
Commercial paper $ 499,535 -
Government bonds 131,442 147,945
Cross-currency swap contracts - 4,745
Forward exchange contracts - 255
Foreign-currency swap contracts - 110
$ 630,977 153,055
Held-for-trading financial liabilities
Forward exchange contracts $ 194 255
Foreign-currency swap contracts 707 -
Cross-currency swap contracts - 4,745
$ 901 5,000
The Bank engages in derivative transactions mainly to hedge its exchange rate and interest rate
exposures. The Bank’s financial hedging policy is to reduce or minimize its market price or cash
flow exposures.
Outstanding derivative contracts as of June 30, 2010 and 2009, were as follows:
June 30, 2010 June 30, 2009
Cross-currency swap contracts $ - 267,105
Foreign-currency swap contracts 48,417 65,636
Forward exchange contracts 21,052 90,383
Net (losses) and gains on financial assets held for trading for the six-month periods ended June 30,
2010 and 2009, were ($3,761) thousand and $6,295 thousand, respectively. The net losses on
financial liabilities at FVTPL for the six-month periods ended June 30, 2010 and 2009, were
$2,322 thousand and $4,398 thousand, respectively.
14
COSMOS BANK, TAIWAN
Notes to Financial Statements
(Continued)
(d) Receivables, net
June 30, 2010 June 30, 2009
Credit cards $ 3,739,519 4,096,138
Accounts receivable - no recourse 47,407 335,706
Accrued interest 277,015 403,013
Acceptances 60,697 55,060
Tax refund receivable 51,237 72,079
Accrued income 78,435 76,030
Rental deposits 1,410,700 1,010,700
Others 1,867,241 1,993,373
7,532,251 8,042,099
Less: allowance for possible losses (1,860,812) (731,980)
$ 5,671,439 7,310,119
As of June 30, 2010 and 2009, rental deposits receivable amounting to $1,410,700 thousand and
$1,010,700 thousand, respectively, resulted from the relocation to self-owned property, of which,
deposits from Prince Motors and Cosmos Construction Management Corporation amounted to
$910,700 thousand. As of June 30, 2010, after deducting the value of collateral of $166,700
thousand from deposits of Prince Motors and Cosmos Construction Management Corporation, the
Bank had recorded the shortage amount as a provision for possible losses amounting to $744,000
thousand, and the repayment agreement was under negotiation.
From May 2007 to February 2008, the Bank sold structured notes, which were issued by GVEC
Resource Inc. (GVEC), through a specific trust fund amounting to USD 48,920 thousand. PEM
Corporation, which GVEC group was subordinated to, was found to have committed fraud by the
U.S. Securities and Exchange Commission (SEC). In view of its social responsibility, the Bank’s
Board of Directors decided to buy back the structured notes and ask for compensation from PEM
Corporation on June 26, 2009, and the total sales minus prepaid interest amounting to $1,449,168
thousand (USD 44,896 thousand) was recognized as other receivables. The Bank made a
provision for $655,984 thousand after the evaluation of the amount of assets recoverable. Please
refer to note 4(n).
(e) Assets held for sale
June 30, 2010 June 30, 2009
Land held for sale $ - 213,988
Buildings held for sale - 60,717
- 274,705
Less: accumulated impairment loss - (149,506)
$ - 125,199
15
COSMOS BANK, TAIWAN
Notes to Financial Statements
(Continued)
On January 16, 2008, the Board of Directors of the Bank resolved to sell land and buildings which
were previously used for the Bank’s auto service division or warehouse. For the six-month
periods ended June 30, 2010 and 2009, the Bank evaluated the net fair value of those assets, and
recognized gain on reversal of asset impairment amounting to $3,506 thousand and impairment
loss amounting to $31,299 thousand, respectively.
For the six-month periods ended June 30, 2010 and 2009, part of the assets held for sale with
carrying amounts of $48,431 thousand and $0 thousand, respectively, were sold by the Bank, and
the Bank recognized the disposal gains amounting to $6,603 thousand and $0 thousand,
respectively, as net revenues other than interest in the income statements. In addition, part of the
assets held for sale with carrying amounts of $16,799 thousand and $0 thousand for the six-month
periods ended June 30, 2010 and 2009, respectively, were reclassified to self-use fixed assets,
which was approved by the Board of Directors and the FSC.
(f) Discounts and loans, net
June 30, 2010 June 30, 2009
Bills negotiated $ 7,271 -
Overdraft - 7,614
Loans
Short-term 34,838,576 36,256,609
Medium-term 17,928,510 28,312,937
Long-term 12,019,577 17,555,111
Overdue loans 986,773 2,808,024
65,780,707 84,940,295
Less: allowance for possible losses (3,085,733) (3,972,651)
$ 62,694,974 80,967,644
As of June 30, 2010 and 2009, the balances of loans for which accrual of interest revenues was
discontinued were $965,956 thousand and $2,742,909 thousand, respectively. The unrecognized
interest revenues on these loans were $66,883 thousand and $106,846 thousand for the six-month
periods ended June 30, 2010 and 2009, respectively.
As of June 30, 2010 and 2009, the Bank had written off certain loans after carrying out the
required legal procedures.
16
COSMOS BANK, TAIWAN
Notes to Financial Statements
(Continued)
The details and changes in allowance for possible losses on discounts and loans are summarized
below:
For the six-month period ended June 30, 2010
Specific General
Risk Risk Total
Opening balance at January 1, 2010 $ 2,233,317 747,972 2,981,289
Provision (reversal of provision) (427,272) 441,067 13,795
Recovery of written-off credits 932,157 - 932,157
Write-offs (841,513) - (841,513)
Effects of exchange rate changes 5 - 5
Other adjustment - - -
Ending balance at June 30, 2010 $ 1,896,694 1,189,039 3,085,733
For the six-month period ended June 30, 2009
Specific General
Risk Risk Total
Opening balance at January 1, 2009 $ 3,817,726 626,791 4,444,517
Provision 1,697,222 60,240 1,757,462
Recovery of written-off credits 628,262 - 628,262
Write-offs (2,857,589) - (2,857,589)
Effects of exchange rate changes (1) - (1)
Ending balance at June 30, 2009 $ 3,285,620 687,031 3,972,651
The details of the provision for loan losses for the six-month periods ended June 30, 2010 and
2009, were as follows:
For the six-month periods ended
June 30, 2010 June 30, 2009
Provision for possible losses on discounts and loans $ 13,795 1,757,462
Provision for possible losses on receivables 18,649 657,481
Provision (reversal of provision) for overdue accounts
receivable and other assets
(204)
148,290
Reversal of provision for losses on guarantee (5,832) -
$ 26,408 2,563,233
17
COSMOS BANK, TAIWAN
Notes to Financial Statements
(Continued)
(g) Available-for-sale financial assets, net
June 30, 2010 June 30, 2009
Government bonds $ 952,886 878,290
Visa Card shares 1,923 17,223
$ 954,809 895,513
For the six-month period ended June 30, 2010, the net profit recognized on disposal of Visa Card
shares amounted to $3,788 thousand.
(h) Equity investments under the equity method, net
June 30, 2010 June 30, 2009
Carrying
Value
% of
Owner-
ship
Carrying
Value
% of
Owner-
ship
Reliance Securities Investment Trust
Corporation, Ltd. (RSIT) $ - - 46,752 20.00
Cosmos Insurance Brokers Co., Ltd. 27,635 100.00 14,088 100.00
$ 27,635 60,840
For the six-month periods ended June 30, 2010 and 2009, net income on this investment was
$7,665 thousand and $10,065 thousand, respectively. Net income is calculated and recognized in
accordance with the unaudited financial statements of the investee companies during the same
period.
The Bank no longer possesses significant influence over RSIT, which was originally accounted for
under the equity method, as the Bank did not participate in RSIT’s capital increase plan, and its
holding in RSIT fell below 20%. Starting August 7, 2009, the book value of $46,752 thousand
was reclassified as financial assets carried at cost.
The total assets and capital of the Bank’s subsidiary, Cosmos Insurance Brokers Co., Ltd., were
not significant to the Bank, and the Bank did not prepare consolidated financial statements for the
six-month periods ended June 30, 2010 and 2009.
18
COSMOS BANK, TAIWAN
Notes to Financial Statements
(Continued)
(i) Other financial assets, net
June 30, 2010 June 30, 2009
Debt instruments with no active market, net $ 24,677 66,318
Financial assets carried at cost, net 769,582 722,830
Others 258,457 242,488
$ 1,052,716 1,031,636
(i) Debt instruments with no active market were as follows:
June 30, 2010 June 30, 2009
Special-purpose trust beneficiary certificates $ 24,677 66,318
For the six-month period ended June 30, 2009, the net loss recognized on leveraged spread
notes amounted to $1,795 thousand.
(ii) Financial assets carried at cost were as follows:
June 30, 2010 June 30, 2009
Carrying
Value
% of
Owner-
ship
Carrying
Value
% of
Owner-
ship
Unlisted common stock with no quoted market
price:
CDIB & Partners Investment Holding Ltd. $ 500,000 4.95 500,000 4.95
Taiwan Asset Management Corporation 100,000 0.57 100,000 0.57
Euroc II Venture Capital Corporation 33,263 7.50 33,263 7.50
Financial Information Service Co., Ltd. 49,120 1.23 49,120 1.23
Reliance Securities Investment Trust
Corporation, Ltd. (RSIT)
46,752
12.31
-
-
Euroc III Venture Capital Corp. 18,357 5.00 18,357 5.00
Taiwan International Future Co. Ltd. 10,250 0.51 10,250 0.51
Taiwan Depository & Clearing Corp. 6,345 0.08 6,345 0.08
Yang-Kuan Asset Management Corporation 3,445 5.74 3,445 5.74
Lien-An Service Co. 1,250 5.00 1,250 5.00
Taipei Forex Inc. 800 0.40 800 0.40
Cosmos Construction Management Corporation
(CCMC)
-
9.39
-
9.39
$ 769,582 722,830
Beginning August 7, 2009, RSIT was accounted for under the cost method. For more
details, please refer to note 4(h).
19
COSMOS BANK, TAIWAN
Notes to Financial Statements
(Continued)
(iii) Other financial assets were as follows:
June 30, 2010 June 30, 2009
Pledged certificates of deposit $ 258,351 241,844
Others 106 644
$ 258,457 242,488
As of June 30, 2010, the pledged certificates of deposit of the Bank were composed of the
collateral for spot exchange transactions and the collateral for collections of the National
Treasury tax, which amounted to $238,351 thousand and $20,000 thousand, respectively. As
of June 30, 2009, the collateral for spot exchange transactions was $241,844 thousand.
(j) Fixed assets, net
June 30, 2010
Cost
Accumulated
depreciation
Accumulated
impairment
Net
Land $ 3,995,972 - - 3,995,972
Buildings 2,646,446 507,951 - 2,138,495
Machinery and equipment 1,635,287 1,509,470 - 125,817
Transportation and communications equipment 256,881 247,132 - 9,749
Miscellaneous equipment 318,982 309,445 - 9,537
Total $ 8,853,568 2,573,998 - 6,279,570
June 30, 2009
Cost
Accumulated
depreciation
Accumulated
impairment
Net
Land $ 4,288,952 - 277,575 4,011,377
Buildings 2,774,061 482,408 89,597 2,202,056
Machinery and equipment 1,664,978 1,414,979 54,738 195,261
Transportation and communications equipment 264,261 244,513 7,851 11,897
Miscellaneous equipment 356,619 335,412 6,829 14,378
Total $ 9,348,871 2,477,312 436,590 6,434,969
The Bank defines each product line as a CGU to test assets, including fixed assets, deferred
charges, and intangible assets, for impairment. The recoverable amount of a CGU is its value in
use, and the key assumptions on the economic conditions that will occur over the remaining useful
life of the CGU, such as estimated future cash flows, are based on each CGU’s operations or
objective data on its business cycle. Under the assumption of sustainable operations, the Bank
estimated each CGU’s net cash flow for future years. As of June 30, 2010 and 2009, the
weighted-average cost of capital (WACC) rates for future cash flows were 2.34% and 3.24%,
respectively. On December 31, 2009, the Bank estimated the expected future cash inflow to be
20
COSMOS BANK, TAIWAN
Notes to Financial Statements
(Continued)
larger than the book value of the assets, so the Bank reversed the impairment losses on fixed assets
and deferred charges amounting to $436,590 thousand and $67,137 thousand, respectively.
(k) Other assets, net
June 30, 2010 June 30, 2009
Deferred loss on the sale of nonperforming loans $ 5,818,473 11,709,977
Others:
Prepayments 93,620 98,816
Prepayments of pension 13,789 5,212
Deferred charges 141,190 269,988
Less: accumulated impairment – deferred charges (note 4(j)) - (67,137)
Foreclosed collateral, net - 391,500
Deferred income tax assets, net (note 4(r)) 7,102,088 7,547,666
Refundable deposits 948,885 1,471,298
Less: accumulated impairment – refundable deposits - (373,200)
Leased assets 468,703 -
Less: accumulated depreciation – leased assets (28,146) -
Others 64,413 46,345
8,804,542 9,390,488
$ 14,623,015 21,100,465
(i) Deferred loss on the sale of nonperforming loans
Between 2004 and 2006, the Bank signed contracts to sell the following nonperforming loans:
1) In 2004, the Bank signed contracts with Chung-Cheng Asset Management Co. (CCAM)
and Cosmos Marketing Consulting Co. (CMC) to sell nonperforming loans of $4,700,691
thousand and $3,753,942 thousand, respectively. These transactions, with a selling
price of $495,402 thousand, resulted in a loss of $7,959,231 thousand. CCAM and
CMC both committed that if, within five years from the contract date, there are proceeds
from the sale of nonperforming loans, 45% of these proceeds net of the yield amount,
related tax and litigation expenses, and necessary administrative expenditures should be
returned to the Bank, which was dued on December 31,2009. For the six-month period
ended June 30, 2009, the Bank received proceeds of $10,182 thousand (treated as a
reduction of deferred loss on the sale of nonperforming loans).
2) In 2005, the Bank signed contracts with P.I.C.K. Second Fund Co., Ltd. (P.I.C.K.), CMC,
and Hui-Cheng First Asset Management Co., Ltd. to sell nonperforming loans of
$820,961 thousand, $6,029,567 thousand, and $1,619,640 thousand, respectively.
These transactions, with a selling price of $644,643 thousand, resulted in a loss of
$7,825,525 thousand.
21
COSMOS BANK, TAIWAN
Notes to Financial Statements
(Continued)
3) In 2006, the Bank signed contracts with Yang-Kuan Asset Management Co., Ltd.
(YKAM), ORIX Taiwan Corporation (ORIX), and CMC to transfer and sell to these
three companies nonperforming loans of $103,239 thousand, $2,454,035 thousand, and
$19,465,842 thousand, respectively. For these transactions, the Bank should receive a
payment of $1,140,590 thousand in cash and some YKAM stock at face value. These
sales resulted in a loss of $20,882,526 thousand. CMC agreed that if there are proceeds
from the sale of nonperforming loans within five years from the contract date, 50% of
these proceeds, net of the yield amount, related tax and litigation expenses, and necessary
administrative expenditures, should be returned to the Bank. For the six-month periods
ended June 30, 2010 and 2009, the Bank received proceeds of $58,750 thousand and
$53,152 thousand (treated as a reduction of deferred loss on the sale of nonperforming
loans), respectively.
Under the Law Governing Mergers of Financial Institutions, the Bank deferred and
amortized all of the losses on the sale of the above nonperforming loans by the straight-
line method over five years. The unamortized amounts of $5,818,473 thousand and
$11,709,977 thousand as of June 30, 2010 and 2009, respectively, were presented under
deferred loss on the sale of nonperforming loans. The amortized amounts of $2,769,373
thousand and $3,611,560 thousand for the six-month periods ended June 30, 2010 and
2009, respectively, were classified as amortization of loss on the sale of nonperforming
loans.
(ii) Foreclosed collateral, net
June 30, 2010 June 30, 2009
Foreclosed collateral $ 87,311 504,117
Less: Accumulated impairment (87,311) (112,617)
$ - 391,500
An item of the Bank’s real estate collateral, whose acquisition cost and accumulated
impairment loss were $416,806 thousand and $25,306 thousand, respectively, was sold on
November 30, 2009.
(iii) Please refer to note 4(r) for the deferred income tax assets, net.
22
COSMOS BANK, TAIWAN
Notes to Financial Statements
(Continued)
(iv) Leased assets, net:
June 30, 2010 June 30, 2009
Leased assets – 1and $ 332,135 -
Leased assets – buildings 136,568 -
468,703 -
Less: Accumulated depreciation (28,146) -
$ 440,557 -
(l) Due to the Central Bank and other banks
June 30, 2010 June 30, 2009
Due to Banks $ - 96
Due to Chunghwa Post Co., Ltd. 9,395,805 11,955,285
Due to the Central Bank 910 1,645
Call loans from banks - 9,297
$ 9,396,715 11,966,323
(m) Securities sold under repurchase agreements
As of June 30, 2010, securities sold for $30,000 thousand under repurchase agreements would be
purchased for $30,003 thousand by July 2010.
As of June 30, 2010, available-for-sale financial assets amounting to $27,000 thousand (face value)
had been sold under repurchase agreements.
(n) Payables
June 30, 2010 June 30, 2009
Accrued expenses $ 296,881 1,054,174
Accrued interest 324,249 781,538
Payable on funds purchased 25,944 82,224
Checks for clearing 186,011 160,420
Collections payable 56,829 44,222
Acceptance 60,772 55,156
Others 430,575 1,926,547
$ 1,381,261 4,104,281
23
COSMOS BANK, TAIWAN
Notes to Financial Statements
(Continued)
In accordance with the resolution of the Bank’s Board of Directors on June 26, 2009, the Bank
bought back the structured notes amounting to $1,449,168 thousand (USD44,896 thousand) from
investors and recognized the amount as other payables. The notes were issued by GVEC and sold
by the Bank to investors through a specific trust fund. As of March 31, 2010, the Bank had
bought back all of the notes from investors. For more details, please refer to note 4(d).
(o) Deposits and remittances
June 30, 2010 June 30, 2009
Deposits:
Checking $ 862,440 1,108,676
Demand 9,937,549 7,948,031
Time 22,251,467 10,927,074
Savings 72,368,855 92,900,093
Negotiable certificates of deposit 25,600 142,900
Remittances 7,639 11,479
$ 105,453,550 113,038,253
(p) Bank debentures
June 30, 2010
Cosmos Bank Maturity Date Rate Par Value
Discount
Amount Book Value
First subordinated bank
debenture issued in 2006 B
2006.12.14~
2016.12.14
3.20%
annually $ 515,000 - 515,000
June 30, 2009
Cosmos Bank Maturity Date Rate Par Value
Discount
Amount Book Value
First subordinated bank
debenture issued in 2006 B
2006.12.14~
2016.12.14
3.20%
annually $ 515,000 - 515,000
(i) On November 9, 2006, the Board of Directors resolved to publicly issue a subordinated bank
debenture, with the amount not to exceed $7,000,000 thousand, to strengthen the Bank’s
capital structure for future growth. This public issuance was approved by the Financial
Supervisory Commission (FSC) on November 17, 2006 (FSC approval document: Jin-Kuan-
Yin-(2)-Zi No. 09500481860).
24
COSMOS BANK, TAIWAN
Notes to Financial Statements
(Continued)
On December 14, 2006, the Bank issued one 7-year ($4,500,000 thousand) and one 10-year
($2,500,000 thousand) subordinated bank debenture, with interest payable annually at 3%
and 3.2%, respectively, and the principal fully repayable on maturity.
Under an original subscription agreement that was signed on December 26, 2007, together
with an appendix to the agreement, China Development Industrial Bank Inc. and eight other
banks agreed to reduce by 58% the total creditors’ right to the first convertible bank
debenture issued in 2006, with a principal of $6,485,000 thousand. The residual amount
will be partially paid in cash and partially paid in the Bank’s common shares.
Chu Nan Credit-Cooperative Association, Singfor Life Insurance Co., Ltd., and Taipei
Sanjhih Hsiang Farmers’ Association subscribed for a subordinated bank debenture issued by
the Bank in 2006. The principal of this debenture was $515,000 thousand (classified as
bank debentures) as of June 30, 2010. However, these subscribers did not sign the
subscription agreement. The Bank filed a petition with the courts to waive certain
conditions of the debentures. On November 26, 2008, the case was accepted by the Taiwan
Taipei District Court, civil division, but the counterparties filed an appeal with the collegiate
bench of the Taipei District Court. A retrial for the effectiveness of the subscription
agreement was accepted by the collegiate bench of the Taipei District Court on October 28,
2009. On November 24, 2009, the Bank’s Board of Directors resolved to revise the terms
of the subordinated bank debentures, and the Bank stopped calculating and paying interest
from the second day (December 29, 2007) after the Bank settled the creditors’ right with its
common shares.
On July 21, 2010, the Taiwan High Court adjudged that the resolution of the meeting for
reducing the debenture was effective. Therefore, the Bank will pay back 42% of the
remaining bank debenture in cash, and an after-tax extraordinary gain resulting from the
abovementioned bank debenture relief is estimated to be $247,921 thousand. For more
details, please refer to note 9. In addition, Chu Nan Credit-Cooperative Association filed
another lawsuit to request the Bank pay the interest on the bank debenture, which amounted
to $3,200 thousand; the lawsuit is in process at the summary court of the Taipei District
Court.
(ii) On December 28, 2007, the Bank privately placed Subordinated Unsecured Mandatory
Convertible Bonds (the Bonds). GE Capital Asia Investments Holdings B.V. and S.A.C.
PEI Taiwan Holdings B.V. subscribed for these Bonds, and their holdings amounted to
$1,650,000 thousand and $18,150,000 thousand, respectively. The issuance period is five
years, and the interest rate is from 4.00% to 6.00%. The coupon interest for year 1 should
be fully paid on the issue date, and for year 2 should be fully paid on the first day of year 2.
The coupon interest rate of the first two years is 6%. For years 3 to 5, the coupon interest
(4%) is payable quarterly from the end of the three months after the first day of year 3. The
conversion price upon issuance is NT$2.00 per share, which can be modified anytime using a
certain formula. The Bonds can be converted without restrictions between the 31st day of
the issuance date and the maturity date.
25
COSMOS BANK, TAIWAN
Notes to Financial Statements
(Continued)
Advance repayment, redemption, purchase, cancellation or amendment of all or part of the
Bonds is prohibited under the contract unless the Bank receives a written consent from the
bondholders.
Under Statement of Financial Accounting Standards No. 36 - “Financial Instruments:
Disclosure and Presentation”, the Bank recognized (a) the conversion option as capital
surplus – others, which amounted to $15,819,198 thousand ($15,944,124 thousand less
$124,926 thousand in transaction cost after income tax) and (b) the accrued interest on the
Bonds, which amounted to $3,826,385 thousand ($3,855,876 thousand less $29,491 thousand
in transaction cost after income tax), classified as other financial liabilities. For the six-
month periods ended June 30, 2010 and 2009, the Bank recognized $77,575 thousand and
$119,694 thousand, respectively, in interest. As of June 30, 2010 and 2009, the balance of
accrued interest on the Bonds was $1,436,344 thousand and $1,937,349 thousand,
respectively.
Under mandatory terms, the Bonds should be converted into fully paid common shares of the
Bank (i) on the maturity date or (ii) whenever needed to maintain the Bank’s capital
adequacy ratio at 8% or higher or the Tier 1 capital ratio at 4% or higher, with the related
calculation to include the pro rata conversion of holdings on the date of the conversion.
In order to strengthen the Bank’s financial structure, the Board of Directors approved the
proposal to have S.A.C. PEI Taiwan Holdings B.V. convert the Bonds in the amount of
$3,630,000 thousand into common stock before the maturity date. The conversion ratio was
20%, and the Bank obtained approval from the FSC under Jin Guan Yin Guo No.
09800425750 on September 22, 2009. In accordance with the resolution of the Bank’s
Board of Directors on September 28, 2009, the conversion date was October 6, 2009, the
conversion price upon issuance was NT$6.0049020 per share, and the Bonds should be
converted into 604,506 thousand common shares, with $10 face value per share. The
abovementioned capital increment was approved by the FSC under Jin Guan Yin Guo No.
09800473800 on October 8, 2009.
(q) Pension plan
The Labor Pension Act (the “Act”), which took effect on July 1, 2005, provides for a new defined
contribution pension plan. Bank employees subject to the earlier promulgated Labor Standards
Law were allowed to choose between the pension mechanism under the Labor Standards Law or
the mechanism under the Act. For those employees who chose to be subject to the pension
mechanism under the Act, their service years before the enforcement of the Act will be retained.
However, those hired on or after July 1, 2005, automatically become subject to the Act.
Based on the Act, the rate of the Bank’s required monthly contributions to the employees’
individual pension accounts is 6% of monthly wages and salaries.
26
COSMOS BANK, TAIWAN
Notes to Financial Statements
(Continued)
For the Bank’s employees who chose to continue to be subject to the Labor Standards Law, benefit
payments are based on length of service and average monthly salary or wages upon retirement.
The Bank has two funds under its defined benefit plan: one for management and the other for
nonmanagement employees (“employees”). The Bank makes monthly contributions to the
employees’ pension fund, which is managed by the employees’ fund committee and deposited in
the committee’s name in the Central Trust of China (merged with Bank of Taiwan in July 2007,
with Bank of Taiwan as the surviving entity). The pension fund for management is administered
by the employees’ pension fund administrative committee and deposited under the committee’s
name to an account in the Bank.
On December 6, 2007, the Bank signed with the Bank’s labor union an Employee Benefit
Proposal – Early Retirement Plan (ERP), under which the Bank would carry out the following
enhanced pension plan in stages:
(i) Eligibility and limit on eligibility
1) First stage from January 1 to June 30, 2008 - The ERP will be open to all employees
whose sum of age and years of service is at least 50 years.
2) Second stage from July 1 to December 31, 2008 - The ERP will be open to all employees
other than the employees described in item (1) above if the sum of the age and the years
of service is less than 50 years. However, the qualified employees cannot exceed 20%
of the non-senior employees.
3) The third stage from February 1 to 28, 2009 - The ERP will be open to all employees
who enrolled earlier than December 31, 2007, and are still on the job at February 1, 2009,
and thereafter.
4) Taking into consideration the stability and development of the Bank’s future operations,
the pension expense of the next two years is accrued based on the original plan for the
employees that meet the conditions of the first stage but are required by the Bank to
remain for 2 more years.
(ii) Entitlement
The senior employees who apply for early retirement will be entitled to a lump-sum payment
equal to two months’ average salary for each service year. A service period that is equal to
or more than a half year is counted as one service year, and a service period that is less than a
half year is counted as a half year of service.
27
COSMOS BANK, TAIWAN
Notes to Financial Statements
(Continued)
The Board of Directors approved the ERP on December 11, 2007, and January 15, 2009.
For the six-month periods ended June 30, 2010 and 2009, pension expense recognized as a
result of the ERP amounted to $11,812 thousand and $232,251 thousand, respectively. In
accordance with the resolution of the Bank’s Board of Directors on January 23, 2009, the
Bank applied to close 12 branches, and the Bank accrued the severance payment amounting
to $41,000 thousand as pension expenses for the six-month periods ended June 30, 2009.
As of June 30, 2010 and 2009, ERP pension liability amounted to $185,122 thousand and
$202,894 thousand, respectively.
Pension expenses were $44,396 thousand and $314,560 thousand for the six-month periods
ended June 30, 2010 and 2009, respectively (among which $31,467 thousand and $34,680
thousand, respectively, belong to pension expenses for the defined contribution plan.)
Changes in the employees’ and management’s pension funds were as follows:
For the six-month periods ended
June 30, 2010 June 30, 2009
Employees’ pension fund
Beginning balance $ 506,800 499,667
Contribution 2,012 3,355
Interest income 1,695 4,179
Benefits paid - (3,816)
Ending balance $ 510,507 503,385
Management’s pension fund
Beginning balance $ 359,190 342,133
Contribution 6,286 7,967
Interest income 5,205 1,699
Ending balance $ 370,681 351,799
(r) Income tax
(i) According to the amendment of the Income Tax Act on May 27, 2009, the income tax rate
was changed from 25% to 20% beginning from the year 2010. The income tax rate was
further changed to 17% beginning from the year 2010 according to the amendment of the
Income Tax Act on June 15, 2010. Therefore, the statutory tax rates are 17% and 25% for
the years 2010 and 2009, respectively, and the Bank calculated the basic tax amount in
accordance with the Income Basic Tax Act.
28
COSMOS BANK, TAIWAN
Notes to Financial Statements
(Continued)
(ii) Income tax benefit was calculated as follows:
For the six-month periods ended
June 30, 2010 June 30, 2009
Income tax expense – current before tax credits $ 349 373
Net changes in deferred income tax expense (benefit):
Loss carryforwards (309,673) (1,760,393)
Amortization of goodwill 4,224 6,212
(Increase) decrease in allowance for possible losses on
loans and receivables
(28,937)
226,529
Pension costs 720 20,629
Effect on deferred income tax of income tax rate change 1,333,844 2,083,666
Valuation allowance (reversal) for deferred income tax
assets
(192,074)
(1,213,000)
Others 12,368 (8,942)
Deferred income tax expense (benefit) 820,472 (645,299)
Adjustment of prior year’s tax 77,440 (4,267)
Income tax expense (benefit) $ 898,261 (649,193)
(iii) The income tax computed at the statutory tax rate was reconciled with the provision for
income tax for the six-month periods ended June 30, 2010 and 2009, as follows:
For the six-month periods ended
June 30, 2010 June 30, 2009
Income tax benefit before income tax at statutory rate $ (285,635) (1,451,373)
Tax-exempt gain on domestic cash dividends (131) (2,146)
Interest expense on bank debenture (42,543) (113,131)
Tax-exempt losses from OBU 178 717
Tax-exempt losses on sale of land 1,355 -
Adjustment of prior year’s income tax 77,440 (4,267)
Effect on deferred income tax of income tax rate change 1,333,844 2,122,514
Valuation allowance (reversal) for deferred income tax
assets (192,074) (1,213,000)
Others 5,827 11,493
Income tax expense (benefit) $ 898,261 (649,193)
29
COSMOS BANK, TAIWAN
Notes to Financial Statements
(Continued)
(iv) Net deferred income tax assets and liabilities as of June 30, 2010 and 2009, were as follows:
June 30, 2010 June 30, 2009
Deferred income tax assets (liabilities)
Loss carryforwards $ 7,109,632 7,374,535
Allowance for possible losses on loans and
receivables
713,093
732,273
Pension costs 29,127 57,554
Impairment loss 6,864 119,785
Unrealized foreign exchange loss (gain) (2,028) 6,054
Loss on the transfer of foreclosed collateral to fixed
assets
9,006
10,879
Investment tax credits 11,342 9,023
Amortization and impairment of goodwill 12,907 25,223
Others 1,145 (660)
7,891,088 8,334,666
Less: Valuation allowance (789,000) (787,000)
Net deferred income tax assets $ 7,102,088 7,547,666
(v) The Bank’s unused investment tax credits mainly resulted from personnel training
expenditures from the past five years under the Statute for Upgrading Industries. The
useable amount of the unused investment tax credits is limited to 50% of the annual income
tax for each year, but is not limited in the expiry year. As of June 30, 2010, the Bank’s
unused investment tax credits and their related expiration years were as follows:
Occurrence year
Unused investment tax
credits
Expiry
year
2006 $ 3,313 (assessed) 2010
2007 2,673 (assessed) 2011
2008 3,461 (reported) 2012
2009 1,895 (reported) 2013
$ 11,342
30
COSMOS BANK, TAIWAN
Notes to Financial Statements
(Continued)
(vi) In accordance with the amendment to the Income Tax Act, taxable losses from the past ten
years as assessed by the authorities may be used to reduce net income in the current year.
As of June 30, 2010, loss carryforwards were as follows:
Accrued Year
Total Credits
Granted
Total Tax
Credits Granted
Expiry
Year
2006 (assessed) $ 4,608,024 783,364 2016
2007 (assessed) 11,400,998 1,938,170 2017
2008 (reported) 13,803,205 2,346,545 2018
2009 (reported) 10,187,530 1,731,880 2019
2010 (estimated) 1,821,604 309,673 2020
$ 41,821,361 7,109,632
(vii) Imputed tax credits are summarized as follows:
June 30, 2010 June 30, 2009
Accumulated deficit for year 1998 and thereafter $ (15,850,903) (26,675,389)
Balance of stockholders’ imputed tax credits $ 989,971 982,097
(viii) Income tax returns through 2007 have been examined by the tax authorities. The Taipei
National Tax Administration will refund 65% of certain withholding taxes. The Bank
accepted the refund at this percentage.
(s) Stockholders’ equity
(i) Capital
In accordance with the resolution of the Board of Directors on February 25, 2009, and the
stockholders’ meeting held on June 19, 2009, the Bank had a private placement of common
shares with General Electric International Inc. to settle the Bank’s debts. On September 28,
2009, the Board of Directors set the share pricing date as September 29, 2009, and the private
placement amounted to $550,368 thousand, with 170,922 thousand shares issued at $3.22 per
share. The face value of each share is 10 dollars; therefore, the Bank’s capital increased
$1,709,217 thousand, and the private placement was approved by the FSC under Jin Guan
Yin Guo No. 09800425750.
In addition, in accordance with the resolution of the Board of Directors on February 25, 2009,
and the stockholders’ meeting held on June 19, 2009, the Series A Preferred Shares of the
Bank and a portion of the MCB would be converted into the Bank’s common shares, and the
Bank obtained approval from the FSC under Jin Guan Yin Guo No. 09800425750.
31
COSMOS BANK, TAIWAN
Notes to Financial Statements
(Continued)
According to the resolution of the Board of Directors on September 28, 2009, the Board of
Directors set the conversion date as October 6, 2009, and approved the Series A Preferred
Shares conversion application of S.A.C. PEI Taiwan Holdings B.V. which had been
delivered on October 5, 2009. The preferred shares were converted into 543,315 thousand
common shares with a face value which is 10 dollars per share. Besides, a portion of
$3,630,000 thousand of the MCB were converted into 604,506 thousand common share at
$6.004902 per share, and the face value of each common share is 10 dollars.
The abovementioned capital increase through the private placement of common shares, the
conversion of preferred shares into common shares, and the conversion of a portion of the
MCB into common shares were completed and approved by the FSC under Jin Guan Yin
Guo No. 09800473800 on October 8, 2009, and the Bank also completed the registration of
this capital increase with the Ministry of Economic Affairs on October 23, 2009.
In order to strengthen the financial structure, the shareholders’ meeting on June 19, 2009,
approved reducing capital by $19,300,000 thousand and reducing the number of shares by
1,930,000 thousand shares, constituting a capital reduction of approximately 54.3132%.
The capital reduction was approved by the FSC under Jin Guan Cheng Fa No. 0980055038
on October 27, 2009. In addition, the basis date of the capital reduction was October 30,
2009, the registration of the capital reduction was completed on November 10, 2009, and the
share exchange was completed on January 20, 2010.
In order to strengthen the operating capital, improve the financial structure, and increase the
capital adequacy ratio, according to the resolution of the Board of Directors on May 7, 2010,
and the resolution of stockholders on June 18, 2010, the Bank will raise capital by a private
placement of common shares and issue a maximum of 1,000,000 thousand shares, with a face
value of 10 dollars per share; and the total face value of the private placement should not
exceed $10,000,000 thousand. In accordance with the Directions for Public Companies
Conducting Private Placements of Securities, the private placement of common shares would
be settled at 6 dollars per share temporarily, and the Board of Directors was authorized to
determine the actual settled price afterwards depending on the particular sources of capital.
As of June 30, 2010 and 2009, the Bank had authorized capital stock amounting to
$200,000,000 thousand (of which $12,580,000 thousand was reserved for employee stock
options). The capital stock included common stock of $16,234,639 thousand and
$22,347,209 thousand, and preferred shares of $0 thousand and $5,433,151 thousand, totaling
$16,234,639 thousand and $27,780,360 thousand, as of June 30, 2010 and 2009, respectively.
The face value of each share is 10 dollars.
(ii) Capital surplus
Under related regulations, capital surplus may only be used to offset a deficit. However,
capital surplus (from issuance in excess of common stock par value, issuance of common
stock for combinations, and treasury stock transactions) and donations may be transferred to
32
COSMOS BANK, TAIWAN
Notes to Financial Statements
(Continued)
common stock on the basis of the percentage of shares held by the stockholders. Any
capital surplus transfer should be within a certain percentage prescribed by law.
Capital surplus was as follows:
June 30, 2010 June 30, 2009
Mandatory convertible bonds $ 12,919,012 15,819,198
Issuance of employee stock options 38,843 24,396
Expiration of options 12,712 12,712
$ 12,970,567 15,856,306
(iii) Appropriation of earnings and dividend policy
The Bank’s earnings appropriation policy is aligned with its goals to maintain the adequacy
of capital and provide for future financial needs. Under the Bank’s Articles of
Incorporation (the “Articles”), annual net income, less any losses of prior years, should be
appropriated 30% as legal reserve and appropriated as special reserve (booked as a deduction
item of stockholders’ equity). The remainder plus unappropriated earnings of prior years
should be appropriated 80% as dividends to stockholders, and the remaining 20% should be
appropriated as follows:
1) 80% as bonus to stockholders
2) 15% as bonus to employees
3) 5% as remuneration to directors
The cash dividends should be at least 10% of the total dividends to be paid/distributed.
However, if the cash dividend is less than NT$0.1 per share, the entire dividend should be
paid in stock.
Under a directive of the Securities and Futures Bureau, the Bank has to appropriate a special
reserve from current year’s earnings and the unappropriated earnings generated in prior years
that is equal to the debit balance of any stockholders’ equity account (except deficit). The
special reserve should be adjusted on the basis of the debit balance of the stockholders’
equity account as of year-end.
In making this appropriation, the Bank should consider its capital adequacy ratio, long-term
financial position, and stockholders’ cash needs, and the shareholders’ meeting may decide
not to appropriate any dividend and bonus in full or in part.
33
COSMOS BANK, TAIWAN
Notes to Financial Statements
(Continued)
Under the Law Governing Mergers of Financial Institutions, loss on the sale of
nonperforming loans is amortized using the straight-line method over five years, and a
special reserve equal to the loss should be appropriated.
The appropriation of the deficit for the years ended December 31, 2009 and 2008, resolved
by the Board of Directors and stockholders on June 18, 2010, and June 19, 2009, respectively,
was as follows:
2009 2008
Accumulated deficit, beginning of 2009 and 2008 $ (21,519,090) (67,902,864)
Capital decrease to offset accumulated deficit 19,300,000 56,586,140
Less: Discount on issuing common shares from
settlement of bebts
(1,158,849)
-
Discount on issuing common shares from
conversion of the MCB
(2,730,224)
-
Prior-year net loss (7,164,271) (10,202,366)
Accumulated deficit $ (13,272,434) (21,519,090)
Information on appropriation of earnings or deficit offsetting will be available on the Market
Observation Post System of the Taiwan Stock Exchange (http://emops.tse.com.tw) after the
related meetings.
Under the Company Act, legal reserve should be appropriated until the reserve equals the
Bank’s paid-in capital. This reserve may only be used to offset a deficit. When the
reserve reaches 50% of the aggregate par value of the Bank’s outstanding capital stock, up to
50% thereof may be declared as stock dividends. In addition, the Banking Act provides that,
before the legal reserve equals the Bank’s paid-in capital, annual cash dividends and bonuses
should not exceed 15% of paid-in capital.
The Bank recorded an after-tax loss in the first six months of 2010 and 2009, and therefore is
not required to accrue any employee bonuses or directors’ remuneration.
(iv) Employee stock option plans and the stock appreciation rights plan for executives
To attract and encourage professionals, enhance employees’ loyalty to the Bank, and create
maximum benefits to stockholders and the Bank, the Board of Directors approved on May 22,
2008, an employee stock option plan. As of June 12, 2008, the Bank had registered this plan
with the Financial Supervisory Commission. A full-time employee who first reported for
work before the plan issue date qualifies for the plan. A full-time employee of a Bank
subsidiary in which the Bank owns over 50% of voting shares directly or indirectly in or
outside Taiwan will also qualify for the plan.
34
COSMOS BANK, TAIWAN
Notes to Financial Statements
(Continued)
The options granted are valid for 10 years and are exercisable at certain percentages after the
second anniversary from the grant date. The options were granted at an exercise price equal
to the grant date closing price of the Bank’s common stock listed on the Taiwan Stock
Exchange. For any subsequent changes in common shares, the exercise price and the
number of options are adjusted accordingly. The Bank issued 838,700 thousand units of
employee share options, and a unit can convert into one common share of the Bank. As a
result, the Bank retained 838,700 thousand new shares of common stock for the plan.
The abovementioned plan expired on June 11, 2009, and the Bank’s Board of Directors
approved the “2010 regulation on the issuance and subscription of employee stock options”
in the meeting of the Board of Directors held on February 25, 2010. The total issuance
amount of the new employee stock options was 161,391 thousand units, which had
considered the effect of capital reduction. Meanwhile, the Bank’s Board of Directors
approved the stock appreciation rights plan for executives on December 22, 2009, and the
Bank could settle the stock appreciation rights by the Bank’s common shares or by cash.
The information on employee benefits from share-based payment transactions for the six-
month periods ended June 30, 2010 and 2009, is as follows:
For the six-month periods ended
June 30, 2010 June 30, 2009
Expenses resulting from equity-settled share-based
payment transactions
$ 17,188
11,988
Balance of liabilities resulting from share-based
payment transactions
8,848
-
Additional paid-in capital resulting from equity-settled
share-based payment transactions
8,960
11,988
The information on the Bank’s share-based payment transaction plans as of June 30, 2010, is
as follows:
Stock appreciation rights
plan of executives
Employee stock
option plan
Grant date 2009.12.22 2008.5.5~2008.9.9
Grant amount (thousand shares) 16,571 6,580
Vesting period 2009.12.22~2013.12.21 2008.5.5~2012.9.8
35
COSMOS BANK, TAIWAN
Notes to Financial Statements
(Continued)
The details of the Bank’s employee benefit plan are as follows:
June 30, 2010
Stock appreciation
rights plan of executives
Employee stock
option plan
Units
(thousand
shares)
Exercise
price
(dollars)
Units
(thousand
shares)
Exercise
price
(dollars)
Outstanding units as of January 1,
2010 (balance at period-end) 16,571 $ 7.33 6,580 12.36~20.21
June 30, 2009
Stock appreciation
rights plan of executives
Employee stock
option plan
Units
(thousand
shares)
Exercise
price
(dollars)
Units
(thousand
shares)
Exercise
price
(dollars)
Outstanding units as of January 1,
2009 (balance at period-end) - $ - 17,862 5.65~9.23
When estimating the fair value of the stock options granted using the Black-Scholes Option
Model, the Bank takes into account the following factors:
June 30, 2010
Stock
appreciation
rights plan of
executives
Employee stock
option plan
Exercise price (dollars) 7.33 12.36~20.21
Stock price on grant date (dollars) 7.33 12.36~20.21
Weighted-average expected contractual remaining life 5.48~6.48 3.92~5.20
Expected share price volatility (%) 47.63~49.87 41.60~42.95
Risk-free interest rate (%) 1.27~1.36 2.23~2.74
(v) Unrealized gain or loss on financial instruments
The movements as of June 30, 2010 and 2009, of unrealized gain or loss on available-for-sale
financial instruments were as follows:
36
COSMOS BANK, TAIWAN
Notes to Financial Statements
(Continued)
For the six-month periods ended
June 30, 2010 June 30, 2009
Balance, beginning of year $ 30,497 16,489
Recognized in stockholders’ equity (8,054) 10,809
Transferred to profit or loss (3,858) (238)
Balance, end of year $ 18,585 27,060
(t) Earnings per share
For the six-month periods ended
June 30, 2010 June 30, 2009
Before
income tax
After
income tax
Before
income tax
After
income tax
Basic earnings per share (New Taiwan
dollars):
Net loss $ (1,680,208) (2,578,469) (5,805,492) (5,156,299)
Weighted-average number of shares
outstanding (thousands) 1,623,464 1,623,464 2,234,721 2,234,721
Basic earnings per share (New Taiwan
dollars) $ (1.03) (1.59) (2.60) (2.31)
Retroactively adjusted weighted average
of outstanding shares (thousands) - - 1,020,972 1,020,972
Basic earnings per share – retroactive $ - - (5.69) (5.05)
There was a net loss as of June 30, 2010 and 2009; thus, the basic loss per share equaled the
diluted loss per share as of June 30, 2010 and 2009.
(u) Financial instruments
(i) Fair value of financial instruments
June 30, 2010 June 30, 2009
Carrying
Amount
Estimated
Fair Value
Carrying
Amount
Estimated
Fair Value
Assets
Financial assets at fair value through
profit or loss $ 630,977 630,977 153,055 153,055
Available-for-sale financial assets 954,809 954,809 895,513 895,513
Financial assets carried at cost 769,582 See ii (5) 722,830 See ii (5)
Debt instruments with no active
market 24,677 See ii (6) 66,318 See ii (6)
Liabilities
Financial liabilities at fair value
through profit or loss 901 901 5,000 5,000
37
COSMOS BANK, TAIWAN
Notes to Financial Statements
(Continued)
(ii) Methods and assumptions applied to estimate the fair value of financial instruments are
summarized as follows:
1) For financial instruments measured at fair value through profit or loss and available-for-
sale financial assets, fair value is best determined on the basis of quoted market prices.
However, in many instances where there are no quoted market prices for the Bank’s
various financial instruments, fair values are based on estimates using other financial data
and appropriate valuation methodologies.
2) The carrying amounts of short-term financial instruments approximate their fair values
because of the short maturities of these instruments, such as cash and cash equivalents, due
from the Central Bank and call loans to banks, securities purchased under resell
agreements, net receivables (except tax refund receivable), refundable deposits, due to the
Central Bank and other banks, payables (except tax payable), remittances, securities sold
under repurchase agreements, and guarantee deposits received.
3) If there are no active market prices for derivative financial instruments, fair values of
forward contracts will be calculated using the discounted cash flow method, while values
of options are provided by counter-parties.
The Bank estimates the fair value of each forward contract on the basis of the exchange
rates quoted by Reuters on each settlement date. The fair value of a cross-currency swap
contract is calculated using the prices quoted by Bloomberg.
4) Discounts and loans, cash deposits, and MCB are interest-earning assets and interest-
bearing liabilities. Thus, their carrying amounts represent fair value. The fair value of
overdue loans is based on their carrying amount, net of allowance for possible losses.
5) If equity investments carried at cost consist of unlisted stocks, these investments have no
quoted market prices in an active market and their fair value cannot be reliably measured.
Thus, the Bank does not disclose their fair value.
6) If there are trade prices or prices quoted by major market players, the latest trade prices or
quoted prices are used as the basis for determining the fair value of debt instruments with
no active market, and this kind of instrument would be classified as other financial assets.
7) Other financial liabilities include an appropriate loan fund. They are items that can be
transferred to other banks at any time depending on the business situation. Thus, the
carrying amounts of these liabilities represent their fair values.
38
COSMOS BANK, TAIWAN
Notes to Financial Statements
(Continued)
(iii) As of June 30, 2010 and 2009, the fair values of financial assets and liabilities determined
using quoted market prices or estimated using a valuation method were as follows:
June 30, 2010 June 30, 2009
Quoted
Market
Prices
Estimated
Market
Prices
Quoted
Market
Prices
Estimated
Market
Prices
Financial assets
Financial assets at fair value through
profit or loss $ 630,977 - 147,945 5,110
Available-for-sale financial assets 954,809 - 895,513 -
Financial liabilities
Financial liabilities at fair value
through profit or loss - 901 - 5,000
From the above, the gain and loss recognized by the Bank on the valuation of financial
instruments at estimated market prices for the six-month periods ended June 30, 2010 and
2009, were a loss of $4,000 thousand and a gain of $5,054 thousand, respectively.
(iv) For the six-month periods ended June 30, 2010 and 2009, the interest revenues for financial
assets and liabilities at fair value were $2,779,173 thousand and $3,557,261 thousand,
respectively. The incurred interest expenses were $550,135 thousand and $1,251,544
thousand, respectively.
(v) For the six-month periods ended June 30, 2010 and 2009, the adjustments of stockholders’
equity decreased and increased directly from the available-for-sale financial assets amounted
to $8,054 thousand and $10,809 thousand, respectively.
(vi) Financial risk information
1) Market risk
The Bank is engaged in investment in interest rate instruments including time certificates
of deposit, bonds, notes, and similar financial instruments. As a result, it is exposed to
interest rate risk. Since the fair value of these financial instruments is sensitive to the
market interest rates, the following is the sensitivity variation for a 0.01% increase in
market interest rates.
39
COSMOS BANK, TAIWAN
Notes to Financial Statements
(Continued)
(In Thousands of New Taiwan Dollars) June 30, 2010
Currency
Principal
Amount
Average
Duration (Years)
The Effect on the
Fair Value per
Variation of 0.01%
New Taiwan Dollars $ 1,573,477 1.65379 NT$ 266
(In Thousands of New Taiwan Dollars)
June 30, 2009
Currency
Principal
Amount
Average
Duration (Years)
The Effect on the
Fair Value per
Variation of 0.01%
New Taiwan Dollars $ 1,041,918 3.15556 NT$ 345
The Bank monitors profit or loss on investment positions by marking to market to
consider investment strategies and investment positioning.
The Bank evaluated the market risk of financial instruments using daily value at risk
(VaR). VaR is the potential loss in market value of financial instruments held by the
Bank within a certain confidence interval for a specified period. As of June 30, 2010
and 2009, the Bank had price risk from holding bonds and commercial paper.
VaR of securities held by the Bank is shown in the table below. The Bank made an
assumption that, if there is a 99% level of confidence, there is only a 1% chance that the
Bank will incur a loss on its financial instruments within a day. In addition, based on
VaR assumptions, there are only 2 out of 200 days when the Bank could face losses on
its financial instruments. The average, highest and lowest amounts of the interest rate
and price risks that were calculated at the daily VaR for the six-month periods ended
June 30, 2010 and 2009, were as follows (thousands):
For the six-month periods ended
June 30, 2010 June 30, 2009
Type of Market Risk Average Highest Lowest Average Highest Lowest
Fair value interest rate
risk $ 6,723 7,559 5,876 7,356 7,704 6,934
The Bank engages in trade financing and foreign currency exchange; thus, it is exposed
to exchange risks on differences between spot and forward rates. The Bank’s policy is
to have a square position on its forward contracts. If the contract transactions do not
square off, all Bank employees are authorized to handle the contracts in accordance with
the Cosmos Bank Handling International Financing Transaction Rules. In addition, the
exchange rate risks and interest rate risks on foreign security investments or other
40
COSMOS BANK, TAIWAN
Notes to Financial Statements
(Continued)
international financing business are hedged by cross-currency swap contracts, and the
gains and losses on these contracts are measured at rates quoted by Reuters. These
gains and losses are assessed and reported to Bank management regularly in order to
adjust the hedge strategy.
2) Credit risk
The Bank is exposed to potential loss due to contract defaults by counter-parties or
financial instrument issuers.
The Bank evaluates the creditworthiness of credit applications case by case, taking into
account the applicant’s credit history, credit rating and financial condition. As of June 30,
2010 and 2009, about 46% and 47%, respectively, of total loans had been granted, and
about 40% and 16%, respectively, had been secured. Collateral, mostly in the form of
cash, real estate, marketable securities and other assets, may be required depending on
the evaluation result. However, there is no collateral for issuing credit cards. Thus, the
Bank evaluates the creditworthiness of credit card holders regularly and modifies the
credit facilities if necessary. If the counter-parties or others concerned (e.g., guarantors)
break a contract, the Bank will execute its right on the collateral and decrease its credit
risk.
In addition, the Bank discloses its maximum credit exposure without taking collateral fair
value into consideration.
The maximum credit exposure of financial assets is the carrying amounts of financial
assets on the balance sheet date.
The amounts of financial contracts with off-balance-sheet credit risks as of June 30, 2010
and 2009, were as follows:
June 30, 2010 June 30, 2009
Credit card and cash card commitments $ 83,272,393 110,990,857
Guarantees and letters of credit issued 392,968 704,062
Irrevocable loan commitments 156,000 446,280
Concentration of credit risk exists when counter-parties to financial transactions are
individuals or groups engaged in similar activities or activities in the same region, which
would cause their ability to meet contractual obligations to be similarly affected by
changes in economic or other conditions. It is also affected by the nature of the
borrowers’ operations. The concentration of the Bank’s credit risk was as follows:
41
COSMOS BANK, TAIWAN
Notes to Financial Statements
(Continued)
June 30, 2010 June 30, 2009
Group
Private enterprise $ 26,782,324 35,259,126
Natural person 38,990,072 49,670,300
Non-profit enterprise 8,311 10,869
$ 65,780,707 84,940,295
Industries
Wholesale, retail and catering $ 9,846,640 11,193,219
Manufacturing 8,265,437 9,705,854
Finance, insurance and real estate 4,369,401 6,262,701
$ 22,481,478 27,161,774
3) Liquidity risk
As of June 30, 2010 and 2009, the liquidity reserve ratios were 29.06% and 20.32%,
respectively. The Bank has sufficient equity capital and working capital to execute all
contract obligations and has no liquidity risk.
The management policy of the Bank is to match the contractual maturity profile to the
interest rates for its assets and liabilities. Because of uncertainties regarding the
transaction conditions, however, the maturities did not fully match the interest rates,
resulting in gaps that may potentially give rise to gain or loss.
The Bank applied appropriate ways to group assets and liabilities. The maturity
analysis of assets and liabilities was as follows:
June 30, 2010
Due after Due after Due after Due after
One Month Three Months Six Months One Year
Due in Up to Three Up to Up to Up to Due after
One Month Months Six Months One Year Seven Years Seven Years Total
Assets
Cash and cash equivalents $ 2,253,947 - - - - - 2,253,947
Due from the Central Bank
and call loans to banks 13,974,711 5,485,377 16,413,162 1,842,353 496,957 - 38,212,560
Financial assets at fair value
through profit or loss 630,977 - - - - - 630,977
Available-for-sale financial
assets 18,163 8,597 - - 928,049 - 954,809
Debt instruments with no
active market - - - 24,677 - - 24,677
Equity investments under the
equity method - - - - - 27,635 27,635
Financial assets carried at
cost - - - - - 769,582 769,582
Receivables 1,473,519 567,591 714,942 1,376,109 3,395,849 4,241 7,532,251
Discounts and loans 6,824,247 8,002,382 13,019,034 18,128,848 15,729,226 4,076,970 65,780,707
Other financial assets - others 123,091 103,587 32,536 415 11 30,292 289,932
Foreclosed collateral - - 1,869 - 85,442 - 87,311
Refundable deposits 3,044 830 2,701 86,557 855,753 - 948,885
$ 25,301,699 14,168,364 30,184,244 21,458,959 21,491,287 4,908,720 117,513,273
42
COSMOS BANK, TAIWAN
Notes to Financial Statements
(Continued)
June 30, 2010
Due after Due after Due after Due after
One Month Three Months Six Months One Year
Due in Up to Three Up to Up to Up to Due after
One Month Months Six Months One Year Seven Years Seven Years Total
Liabilities
Due to the Central Bank and
other banks $ 682,671 803,117 5,212,556 2,698,371 - - 9,396,715
Financial liabilities at fair
value through profit or
loss 901 - - - - - 901
Securities sold under
repurchase agreements 30,000 - - - - - 30,000
Payables 493,665 167,827 152,984 209,118 357,667 - 1,381,261
Deposits and remittances 12,621,498 20,226,448 22,899,238 31,377,607 18,328,759 - 105,453,550
Bank debentures - 515,000 - - - - 515,000
Other financial liabilities 6,311 161,811 167,227 497,066 798,060 - 1,630,475
$ 13,835,046 21,874,203 28,432,005 34,782,162 19,484,486 - 118,407,902
June 30, 2009
Due after Due after Due after Due after
One Month Three Months Six Months One Year
Due in Up to Three Up to Up to Up to Due after
One Month Months Six Months One Year Seven Years Seven Years Total
Assets
Cash and cash equivalents $ 2,411,982 104,805 - 32,818 - - 2,549,605
Due from the Central Bank
and call loans to banks 25,929,717 727,715 660,955 795,939 397,743 - 28,512,069
Financial assets at fair value
through profit or loss 153,055 - - - - - 153,055
Available-for-sale financial
assets 39,743 - - 3,627 852,143 - 895,513
Debt instruments with no
active market - - - - 66,318 - 66,318
Equity investments under the
equity method - - - - - 60,840 60,840
Financial assets carried at
cost - - - - - 722,830 722,830
Receivables 3,319,764 575,443 823,352 1,697,476 1,618,352 7,712 8,042,099
Discounts and loans 6,017,593 4,331,657 5,179,000 36,362,775 27,390,016 5,659,254 84,940,295
Other financial assets - others 242,275 265 265 137 168 47,172 290,282
Foreclosed collateral - - 418,675 - 85,442 - 504,117
Refundable deposits 407,750 270 7,542 145,485 910,251 - 1,471,298
$ 38,521,879 5,740,155 7,089,789 39,038,257 31,320,433 6,497,808 128,208,321
Liabilities
Due to the Central Bank and
other banks $ 692,798 803,117 5,929,686 4,540,722 - - 11,966,323
Financial liabilities at fair
value through profit or
loss 5,000 - - - - - 5,000
Payables 2,424,089 353,143 852,907 281,520 183,682 8,940 4,104,281
Deposits and remittances 14,686,242 27,759,741 25,319,393 30,289,075 14,983,802 - 113,038,253
Bank debentures - - - - - 515,000 515,000
Other financial liabilities 22,558 770 18,508 25,866 2,110,246 - 2,177,948
$ 17,830,687 28,916,771 32,120,494 35,137,183 17,277,730 523,940 131,806,805
43
COSMOS BANK, TAIWAN
Notes to Financial Statements
(Continued)
4) Fair value interest rate risk and cash flow interest rate risk
When market interest rates change, the cash flows on floating-interest-rate assets will
also fluctuate, and the Bank may suffer risks due to any adverse interest rate changes.
Thus, the Bank used cross-currency swap contracts to reduce risks from adverse changes
in market interest rates.
(vi) Risk control and hedge policy
The Bank documents its risk management policies, including overall operating strategies and
risk control philosophy. Each business unit, when engaged in its various operations, it must
abide by the risk management policies and hedging policies as approved by the Board of
Directors in order to implement risk management, strengthen businesses, and limit risks that
may arise from operation to an acceptable level. Risk management polices and other policies
are adjusted in accordance with the Bank’s overall organization, operating plan, management
targets, and strategy. The Board of Directors reviews the policies regularly and reviews
whether the Bank’s policies are executed properly to control the Bank’s risks.
5 Related-party Transactions
(a) Related parties
Related Party Relationship with the Bank
S.A.C. PEI Taiwan Holdings B.V. Main stockholder
S.A.C. PEI Asia Investments Holdings II S.à r.l.
(“Lux. Co. II”)
Parent company of S.A.C. PEI Taiwan
Holdings B.V.
S.A.C. PEI Asia Investments Holdings I S.à r.l.
(“Lux. Co. I”)
Parent company of Lux. Co. II
S.A.C. Private Equity Investors, L.P.
(“S.A.C. PEI”)
Parent company of Lux. Co. I
S.A.C. Private Equity GP, L.P. (“S.A.C. PEI GP”) Partnership with S.A.C. PEI
GE Capital Asia Investments Holdings B.V
(“GE Asia Holdings”)
Main stockholder
General Electric Capital Corporation (GECC) Affiliate of GE Asia Holdings
GE Capital Taiwan Holdings Inc. (“GE Holdings”) Affiliate of GE Asia Holdings
General Electric International Inc. (GEII) Affiliate of GE Asia Holdings
GE Processing Services Pty Limited
(“GE Australia”)
Affiliate of GE Asia Holdings
GE Capital Thailand Affiliate of GE Asia Holdings
GE Money Taiwan Ltd. Affiliate of GE Asia Holdings
Reliance Securities Investment Trust Corporation,
Ltd. (RSIT)
Equity-method investee (The Bank no longer
has significant influence from August 7,
2009.)
44
COSMOS BANK, TAIWAN
Notes to Financial Statements
(Continued)
Related Party Relationship with the Bank
Cosmos Insurance Brokers Co., Ltd. 100%-owned investee
Others The Bank’s chairman, president, managers
and their relatives with a kinship of up to
the second degree of consanguinity with the
chairman and president
Note: The Bank disclosed related-party transactions as of June 30, 2010, and the transactions with
non-related parties as of June 30, 2010, were not included in the balance sheet as of June 30,
2010.
(b) Significant transactions between the Bank and related parties
(i) Loans, deposits
For the six-month period
ended June 30, 2010
June 30, 2010
Interest Rate
Revenue
(Expense)
Amount % (%) Amount
Loans $ 17,366 0.03 1.04~18.25 98
Deposits $ 177,166 0.17 0~5.69 (1,466)
For the six-month period
ended June 30, 2009
June 30, 2009
Interest Rate
Revenue
(Expense)
Amount % (%) Amount
Loans $ 15,779 0.02 1.04~18.25 181
Deposits $ 141,420 0.13 0~6.045 (2,093)
45
COSMOS BANK, TAIWAN
Notes to Financial Statements
(Continued)
(i) Loans
For the six-month period ended June 30, 2010
(In Thousands of New Taiwan Dollars)
Loan Classification
Type Account Volume
(Number of Names) Highest Balance
Ending
Balance
Normal
Loans
Nonperforming
Loans Collateral
Differences in
Transaction Terms
from Those for
Unrelated Parties
Consumer loans for employees 7 $ 3,075 1,941 1,941 - Real estate; some loans had no
collateral
None
Self-use housing mortgage loan 9 16,345 15,425 15,425 - Real estate None
For the six-month period ended June 30, 2009
Loan Classification
Type Account Volume
(Number of Names) Highest Balance
Ending
Balance
Normal
Loans
Nonperforming
Loans Collateral
Differences in
Transaction Terms
from Those for
Unrelated Parties
Consumer loans for employees 9 $ 7,301 2,931 2,931 - Real estate; some loans had no
collateral
None
Self-used housing mortgage loan 10 17,392 12,848 12,848 - Real estate None
In accordance with sections 32 and 33 of the Banking Act of the Republic of China, no unsecured credit shall be extended by the Bank to any interested party, and for any secured credit
extended by the Bank to any interested party, the terms of such extended credit shall not be more favorable than those terms offered to other same-category customers. However, the
foregoing rule on unsecured credit shall not apply to consumer loans and loans extended to the government.
46
COSMOS BANK, TAIWAN
Notes to Financial Statements
(Continued)
(ii) Support service agreements
1) GE Asia Holdings subscribed for the Bank’s common shares and GECC bought call
options from China Development Industrial Bank Inc. under certain subscription
agreements. The Bank also has support service agreements (SSAs) with GEII and GE
Australia signed on June 5, 2006. Under the SSAs, GE Holdings and GE Australia
will provide the Bank with management systems, data processing service, system
support, and IT (information technology) services as part of intensive training and
technology transfer services. The SSAs also provide for the integration of Global Best
Practices with Bank operations to redesign or enhance systems for business
development and management operations, such as strategic planning and analysis,
product design, marketing, client relationship management, employee-performance
management, human resources, process upgrade, risk management, overdue loan
processing, Six Sigma enhancement, etc. They also support information processing
for all systems, system development and maintenance, daily operations, and strategic
support.
Unless constrained by uncontrollable environmental factors, GE Holdings and the Bank
promise to fully cooperate with each other to use global human resources and obtain
best practices and key information and technology that can help the Bank enhance
earnings generation. The Bank will pay GE Holdings (1) technology provision service
fees of US$84,000 thousand, payable at US$11,000 thousand in the year ending
December 31, 2006; US$22,000 thousand annually from 2007 to 2009; and US$7,000
thousand for the period ending June 30, 2010; and (2) consulting expenses of up to
US$3,339 thousand for assigning directors, chief manager, CEO, CFO, CRO, managers
of the Claims Department, etc., and costs of supporting personnel based on the
assignment period.
As an effort by GE to assist the Bank to improve its financial structure and to resolve
the differences regarding the service contracts with GEII and GE Australia, the Bank
and GE agreed to calculate the remaining payables in 2006 to 2008 in accordance with
the terms and methods specified under the agreements. In accordance with the
agreement approved by the Board of Directors on April 15, 2009, the remaining payable
amount should be calculated based on the estimate of 2 professional valuation firms,
and not exceeding USD18,500 thousand.
In accordance with the agreement signed between GEII, GE Australia and the Bank, the
remaining amount payable is limited to USD18,500 thousand; therefore, the Bank
reversed the service fee accrued in 2008 amounting to USD22,000 (NT$759,066)
thousand, and the remaining portion amounting to USD3,500 (NT$141,523) thousand
was recorded under other non-interest income. The remaining amount payable of
USD18,500 thousand was repaid using cash amounting to USD1,700 thousand and a
private placement of common shares amounting to USD16,800 (NT$550,368) thousand.
47
COSMOS BANK, TAIWAN
Notes to Financial Statements
(Continued)
The Bank signed a personnel secondment service agreement with GEII, and quarterly
paid GEII the personnel secondment fees for two high-level employees seconded for the
period from January 1, 2009, to December 31, 2010. The two parties would draw up
and agree on a budget for the personnel secondment fees, and then the fees could not be
increased arbitrarily. The Bank may terminate the agreement at any time by giving a
one-month prior written notice to GEII. For the six-month periods ended June 30,
2010 and 2009, the secondment fees amounted to $14,559 thousand and $23,076
thousand, respectively, and were recorded under other administrative and management
expenses. As of June 30, 2010, the payables from personnel secondment fees
amounted to $8,084 thousand; and as of June 30, 2009, the payables from technical
service fees and personnel secondment fees amounted to $658,088 thousand, recorded
under expenses payable, and the Bank paid the amount by cash and stock in the second
half year of 2009.
In the abovementioned agreement, both parties agree that once the capital strengthening
plan is completed, the agreement will be retroactively terminated on January 1, 2009.
The agreement was approved by the annual shareholders’ meeting on June 19, 2009. On
July 10, 2009, the Bank signed an addendum to the abovementioned agreement with
GEII and GE Australia; in the addendum, both parties agreed that the share pricing date
regarding the private placement of common shares would be no later than July 31, 2009,
or another date that both parties agree to, while that in the original abovementioned
agreement was no later than July 9, 2009.
In accordance with the resolution of the 16th meeting of the 6th session of the Bank’s
Board of Directors held on July 28, 2009, the share pricing date was July 28, 2009. The
private placement of common shares was settled at $3.22 per share. The price
mentioned above was unchanged after reconsideration in the extraordinary meeting of
the Bank’s Board of Directors held on August 25, 2009. Moreover, this price was also
accepted by the directors who represented GEII and GE Australia. The Bank has
already completed implementation of the private capital strengthening plan. For more
details, please see note 4(s)(i).
2) The Bank obtained from GE Capital Thailand the right to use NAOS for $15,115
(USD400) thousand based on a support services agreement. For the six-month periods
ended June 30, 2010 and 2009, the Bank amortized the right in the amount of $1,512
thousand, classified as depreciation and amortization.
3) Due to the uniqueness of the technology service contract, Vision Plus software, and
NAOS, the Bank cannot acquire comparable prices from an unrelated party. However,
other related-party transactions which were comparable to those with unrelated parties
did not appear significantly extraordinary.
48
COSMOS BANK, TAIWAN
Notes to Financial Statements
(Continued)
(iii) To improve its car loan operations, the Bank signed a car loan acquisition contract with GE
Money to buy car loans amounting to $1,359,280 thousand for $1,413,467 thousand. The
premium rate is about 4%, estimated at the net value calculated using the cash flow model.
In addition, on August 17, 2006, the Bank signed a contract for the purchase from Mega
International Commercial Bank of a car loan for $1,023,770 thousand, the amount due to
GECC for GECC’s providing services to Mega Bank for a price of $1,064,721 thousand,
with a premium rate of about 4%. The transaction price was calculated using the future
cash flow model.
(iv) Fee income
The Bank, Cosmos Insurance Broker Co., Ltd., and other insurance companies signed
contracts for three-party cooperative promoting and marketing to sell insurance products
through the channels of the Bank. The Bank’s channel fee income from the
abovementioned transactions was $81,459 thousand and $78,551 thousand for the six-month
periods ended June 30, 2010 and 2009, respectively.
6 Pledged Assets
(a) Government bonds with carrying value of $52,100 thousand (recorded as available-for-sale
financial assets, net, amounting to $49,300 thousand, and refundable deposits amounting to $2,800
thousand) as of June 30, 2010, and government bonds with carrying value of $354,600 thousand
(recorded as available-for-sale financial assets, net, amounting to $339,700 thousand, and
refundable deposits amounting to $14,900 thousand) as of June 30, 2009, had been placed with the
court as guarantee deposits in line with the Bank’s request for court approval to seize and sell the
properties of the Bank’s debtors to satisfy the debtors’ obligations to the Bank.
(b) As of June 30, 2010 and 2009, the Bank had provided government bonds (recorded as available-
for-sale financial assets, net) with carrying value of $220,000 thousand as the reserve and deposits
for guarantee of the Bank’s operating business.
(c) As of June 30, 2010 and 2009, certificates of foreign exchange time deposit of $238,351 thousand
and $241,844 thousand (recorded as other financial assets, net), respectively, had been provided as
collateral for spot exchange transactions.
(d) The Bank provided a Central Bank certificate of deposit amounting to $20,000 thousand as the
collateral for collections of treasury tax.
49
COSMOS BANK, TAIWAN
Notes to Financial Statements
(Continued)
7 Commitments and Contingencies
In addition to the disclosures in Note 4(u), the commitments as of June 30, 2010, were as follows:
(a) The Bank leases from unrelated parties the premises occupied by its branches under operating
lease agreements expiring on various dates until April 30, 2015. Refundable deposits on these
leases amounted to $885,715 thousand as of June 30, 2010. The leases also require the payment
of rentals monthly, semiannually or annually, or a refundable rental deposit which generates no
interest.
Future minimum annual rentals on these leases as of June 30, 2010, were as follows:
Period Amount
2010.07.01~2010.12.31 $ 107,655
2011.01.01~2011.12.31 141,771
2012.01.01~2012.12.31 55,713
2013.01.01~2013.12.31 18,995
2014.01.01~2014.12.31 4,920
$ 329,054
(b) Significant outstanding purchase contracts
Item
Contract
amount
Prepayment
Payable
Banking information and operating systems $ 60,525 12,890 47,635
Premises improvements, water and electricity,
and air conditioning 26,455 - 26,455
$ 86,980 12,890 74,090
(c) The Bank’s ex-chairman, Sheng-Fa Hsui, and ex-vice chairman, Xian-Rong Hsui, were prosecuted
for involvement in illegal events. With the exception of the insider trading portion, which is still
being tried, the defendants have been ruled by the Taipei District Court to be in violation of the
Banking Act and sentenced. The Bank is now being managed by a new management team, which
uses high standards to administer the Bank, and would not be influenced by this legal case.
50
COSMOS BANK, TAIWAN
Notes to Financial Statements
(Continued)
(d) The Bank sold structured notes, which were issued by GVEC Resources Inc. (GVEC), through a
specific trust fund, amounting to USD48,920 thousand. PEM Corporation, a member of the
GVEC group, was found to have committed fraud by the U.S. Securities and Exchange
Commission (SEC). Due to the fraud, the Bank’s Board of the Directors’ meeting held on June 26,
2009, approved buying back the structured notes from the investors and asked for compensation
from PEM Corporation. The Bank recognized the estimated compensation as other receivables
amounting to $1,449,168 thousand (USD44,896 thousand) and made a provision amounting
$655,984 thousand, based on evaluation of the amount of assets recoverable. Please see notes 4(d)
and 4(n).
(e) The Bank’s ex-employees disagreed with the calculation method of pension payment and asked
the Bank to pay higher pensions. The lawsuits were lodged with the courts, and these lawsuits
requested $86,167 thousand. As of August 23, 2010, the lawsuits were in the process of
judgment by the courts.
8 Major Casualty Losses: None
9 Significant Subsequent Events
On December 26, 2007, China Development Industrial Bank Inc. and eight other banks signed an
original subscription agreement together with an appendix with the Bank to reduce the bondholders’
right. In accordance with the revised terms of the subordinated bank debentures, which were
approved by the bondholders’ meeting held on December 27, 2007, the Bank was able to reduce the
amount of the unpaid bank debentures by 58%. However, Chu Nan Credit-Cooperative Association,
Singfor Life Insurance Co., Ltd., and Taipei Sanjhih Hsiang Farmers’ Association, which hold
$515,000 thousand in principal of the bank debentures, did not sign the subscription agreement and
filed a lawsuit. According to the judgment by the Taiwan High Court on July 21, 2010, the resolution
of the meeting for reducing the debenture was effective, and an after-tax extraordinary gain resulting
from the abovementioned bank debenture relief is estimated to be $247,921 thousand. Please refer to
note 4(p).
51
COSMOS BANK, TAIWAN
Notes to Financial Statements
(Continued)
10 Others
(a) Trust business under the Trust Law
(i) Trust-related items, as shown in the following balance sheets and trust property list
Balance Sheets of Trust Accounts
June 30, 2010 and 2009
Trust Assets 2010 2009
Cash in bank $ 186,519 74,603
Short-term investments
Bonds 2,475,985 6,541,217
Common stock 159,361 533,361
Mutual funds 27,826,968 19,675,241
Exchange traded
fund (ETF) 9,006 -
Accounts receivable
Notes receivable 8,521 -
Offset against
business tax
payable - 25
Accounts receivable 6,355 -
Other receivable
Related party 7,649 -
Others 11,917 -
Real property 16,200 16,200
Intangible assets
Superficies 984,534 1,189,000
Prepaid account
Prepaid expenses 1,599,793 2,330,291
Prepaid taxes 187 125
Business tax credits 80 -
Other prepaid 5,116,000 -
Other assets
Deferred expenses 572,222 550,782
Refundable depostits 360 360
Trust assets $ 38,981,657 30,911,205
(in thousands of New Taiwan dollars)
Trust Liabilities 2010 2009
Account payables
Accrued expenses $ 11,840 254
VAT tax payables 27,295 54
Other payables 383 -
Advance receipts
Advance revenues - 2,128,123
Advance real estate
receipts 7,432,876 -
Advance rental
revenues 8,373 -
Other advance
receipts 274 -
Receipts under custody - 825,000
Suspense credits 294 -
Other liabilities 1,000 500
Trust capital
Money 30,471,321 26,399,819
Securities - 350,000
Real property 16,200 16,200
Superficies 984,534 1,189,000
Net income (loss) 309,709 (133,564)
Accumulated earning
(deficit) (282,442) 135,819
Trust liabilities $ 38,981,657 30,911,205
52
COSMOS BANK, TAIWAN
Notes to Financial Statements
(Continued)
Trust Property List
June 30, 2010 and 2009
(in thousands of New Taiwan dollars)
Investment Items 2010 2009
Cash in bank $ 186,519 74,603
Short-term
Bonds 2,475,985 6,541,217
Common stock 159,361 533,361
Mutual funds 27,826,968 19,675,241
ETF 9,006 -
Real property
Others 16,200 16,200
Intangible assets
Superficies 984,534 1,189,000
$ 31,658,573 28,029,622
Statements of Income on Trust Accounts
For the six-month periods ended June 30, 2010 and 2009
(in thousands of New Taiwan dollars)
2010 2009
Revenues
Interest revenues $ 461,258 323,702
Gain from trading properties 139,827 -
Rental revenues 21,710 9,000
Other revenues 1,219 952
Revenues from beneficiary certificates 624,014 333,654
Expenses
Sales expense – electricity 464 -
Levies - 4
Management fees 304,886 143,143
Service fees - 5
Loss from trading properties - 314,689
Interest 8,955 9,377
Expense from beneficiary certificates 314,305 467,218
Net income (loss) before tax 309,709 (133,564)
Income tax expenses - -
Net income (loss) $ 309,709 (133,564)
Note: The above statements of income are for the business of the trust division, and the
amounts are not included in the profit and loss of the Bank.
53
COSMOS BANK, TAIWAN
Notes to Financial Statements
(Continued)
(ii) Nature of trust business operations under the Trust Law: Please refer to note 1.
(b) Average amount of, and average interest rate on, interest-earning assets and interest-bearing
liabilities:
Average balance was calculated as the daily average balances of interest-earning assets and
interest-bearing liabilities.
For the six-month period ended
June 30, 2010
Average Average
Balance Rate (%)
Interest-earning assets
Cash and cash equivalents – due from banks $ 577,811 0.02
Due from the Central Bank and call loans to banks 34,326,587 0.58
Financial assets at fair value through profit or loss
(excluding stocks and funds) 178,045 4.90
Receivables of credit cards 3,346,359 10.19
Discounts and loans (excluding overdue loans) 67,906,598 7.28
Available-for-sale financial assets (excluding stocks and
funds) 955,407 2.07
Debt instruments with no active market 29,004 0.70
Other financial assets – other (excluding stocks) 258,232 0.26
Interest-bearing liabilities
Due to the Central Bank and other banks 11,392,295 1.03
Securities sold under repurchase agreements 166 0.35
Demand deposits 9,041,334 0.07
Savings – demand deposits 24,390,512 0.33
Time deposits 18,615,705 0.96
Savings – time deposits 51,276,031 1.07
Bank debentures 515,000 3.20
Other financial liabilities (Note) 1,664,777 9.40
54
COSMOS BANK, TAIWAN
Notes to Financial Statements
(Continued)
For the six-month period ended
June 30, 2009
Average Average
Balance Rate (%)
Interest-earning assets
Cash and cash equivalents – due from banks $ 639,811 0.11
Due from the Central Bank and call loans to banks 27,716,505 0.61
Financial assets at fair value through profit or loss
(excluding stocks and funds) 150,430 5.77
Receivables of credit cards 3,731,934 11.20
Discounts and loans (excluding overdue loans) 87,792,110 7.38
Available-for-sale financial assets (excluding stocks and
funds) 869,061 2.26
Debt instruments with no active market 385,286 2.05
Other financial assets – other (excluding stocks) 214,147 0.59
Interest-bearing liabilities
Due to the Central Bank and other banks 12,800,551 1.27
Securities sold under repurchase agreements 2,198 0.54
Demand deposits 7,298,023 0.07
Savings – demand deposits 22,680,292 0.39
Time deposits 18,728,655 2.03
Savings – time deposits 68,513,143 2.35
Bank debentures 515,000 3.20
Other financial liabilities (Note) 1,994,925 12.10
Note: The face value of the Subordinated Unsecured Mandatory Convertible Bonds (MCB)
issued by the Bank amounted to $19,800,000 thousand, of which, approximately
$15,800,000 thousand was recorded under stockholders’ equity, which resulted in a high
average interest rate on the financial liabilities. The actual coupon rate is 4% for the six-
month period ended June 30, 2010. After S.A.C. PEI Taiwan Holdings B.V. converted
18.33% of the MCB on October 6, 2009, the face value of outstanding MCB amounted to
$16,170,000 thousand, of which approximately $12,920,000 thousand was recorded under
stockholders’ equity.
55
COSMOS BANK, TAIWAN
Notes to Financial Statements
(Continued)
(c) Asset quality, concentration of credit extensions, interest rate sensitivity, profitability, and maturity analysis of asset and liabilities
(i) Asset quality
Period June 30, 2010 June 30, 2009
Items
Nonperforming
Loans
(Note 1)
Loans
Ratio of
Nonperforming
Loans (Note 2)
Allowance for
Possible Losses
Coverage Ratio
(Note 3)
Nonperforming
Loans
(Note 1)
Loans
Ratio of
Nonperforming
Loans (Note 2)
Allowance for
Possible Losses
Coverage Ratio
(Note 3)
Corporate
Banking
Secured $ 753,912 18,976,275 3.97% 305,283 40.49% $ 992,011 23,919,442 4.15% 336,334 33.90%
Unsecured 751,704 10,511,208 7.15% 1,431,915 190.49% 748,875 16,133,581 4.64% 1,464,499 195.56%
Consumer
Banking
Housing mortgage (Note 4) 97,380 4,900,821 1.99% 6,984 7.17% 140,763 5,690,930 2.47% 5,314 3.78%
Cash card 544,913 27,991,911 1.95% 1,227,697 225.30% 1,302,049 33,880,069 3.84% 1,914,100 147.01%
Small-scale credit loans (Note 5) 31,155 1,502,494 2.07% 107,577 345.29% 169,396 1,865,561 9.08% 212,900 125.68%
Other (Note 6) Secured 41,951 1,704,716 2.46% 3,766 8.98% 100,286 3,234,363 3.10% 22,608 22.54%
Unsecured 28,569 193,282 14.78% 2,511 8.79% 39,097 216,349 18.07% 16,896 43.22%
Total loans 2,249,584 65,780,707 3.42% 3,085,733 137.17% 3,492,477 84,940,295 4.11% 3,972,651 113.75%
Nonperforming
Receivables
(Note 1)
Receivables
Ratio of
Nonperforming
Receivables
(Note 2)
Allowance for
Possible Losses
Coverage Ratio
(Note 3)
Nonperforming
Receivables
(Note 1)
Receivables
Ratio of
Nonperforming
Receivables
(Note 2)
Allowance for
Possible Losses
Coverage Ratio
(Note 3)
Credit cards 30,115 3,770,967 0.80% 68,696 228.11% 51,634 4,143,444 1.25% 62,650 121.33%
Factored accounts receivable without recourse (Note 7) 331 47,460 0.70% 87 26.22% 3,452 336,548 1.03% 1,528 44.27%
Amounts of executed contracts on negotiated debts not
reported as nonperforming loans (Note 8) 1,505,407 1,665,453
Amounts of executed contracts on negotiated debts not
reported as nonperforming receivables (Note 8) 6,539 7,979
Amounts of executed debt settlement program and
rehabilitation program not reported as nonperforming
loans (Note 9) 112,591 800,257
Amounts of executed debt settlement program and
rehabilitation program not reported as nonperforming
receivables (Note 9) 2,531 -
Note 1: Nonperforming loans are reported to the authorities and disclosed to the public, as required by the “Regulations Governing the Procedures for Banking Institutions to Evaluate Assets and Deal with Nonperforming/ Non-accrued Loans.”
Nonperforming credit card receivables are reported to the authorities and disclosed to the public, as required by the Banking Bureau’s letter dated July 6, 2005 (Ref. No. 0944000378).
Note 2: Ratio of nonperforming loans: Nonperforming loans ÷ Outstanding loan balance.
Ratio of nonperforming credit card receivables: Nonperforming credit card receivables ÷ Outstanding credit card receivables balance.
Note 3: Coverage ratio of loans: Allowance for possible losses for loans ÷ Nonperforming loans.
Coverage ratio of credit card receivables: Allowance for possible losses for credit card receivables ÷ Nonperforming credit card receivables.
Note 4: The mortgage loan is for house purchase or renovation and is fully secured by housing that is purchased (owned) by the borrower, the spouse or the minor children of the borrowers.
Note 5: Based on the Banking Bureau’s letter dated December 19, 2005 (Ref. No. 09440010950), small-scale credit loans are unsecured, involve small amounts, and exclude credit cards and cash cards.
Note 6: Other consumer banking loans refer to secured or unsecured loans that exclude housing mortgages, cash cards, credit cards and small-scale credit loans.
Note 7: As required by the Banking Bureau in its letter dated July 19, 2005 (Ref. No. 0945000494), factored accounts receivable without recourse are reported as nonperforming receivables within three months after the factors or insurance companies refuse to
indemnify Banks for any liabilities on these accounts.
Note 8: The amounts of executed contracts on negotiated debts that are not reported as nonperforming loans or receivables are reported in accordance with the Banking Bureau’s letter dated April 25, 2006 (Ref. No. 09510001270).
Note 9: The amounts of the executed debt settlement program and rehabilitation program not reported as nonperforming loans or receivables are reported in accordance with the Banking Bureau’s letter dated September 15, 2008 (Ref. No. 09700218940).
56
COSMOS BANK, TAIWAN
Notes to Financial Statements
(Continued)
(ii) Concentration of credit extensions
June 30, 2010
(in thousands of New Taiwan dollars, %)
Rank Business Groups’ Standard
Industrial Classification and Symbol
Total Amount of Credit
Endorsement or Other
Transactions
Percentage of
the Bank’s
Equity (%)
1 A Group-014841 Retail Sale of
Automobiles in Specialized Stores $ 2,977,719 22.27
2 B Group-013010 Motor Vehicles
Manufacturing 1,812,179 13.55
3 C Group-016499 Other Financial
Intermediation 1,398,086 10.45
4 D Group-016899 Other Real Estate 993,958 7.43
5 E Group-016499 Other Financial
Intermediation 989,184 7.40
6 F Group-016499 Other Financial
Intermediation 699,759 5.23
7 G Group-015911 Films Manufacturing 460,817 3.45
8 H Group-012411 Iron and Steel
Smelting 444,558 3.32
9 I Group-013510 Electricity Providers 405,371 3.03
10 J Group-016499 Other Financial
Intermediation 255,512 1.91
57
COSMOS BANK, TAIWAN
Notes to Financial Statements
(Continued)
June 30, 2009
(in thousands of New Taiwan dollars, %)
Rank Business Groups’ Standard
Industrial Classification and Symbol
Total Amount of Credit
Endorsement or Other
Transactions
Percentage
of the Bank’s
Equity (%)
1 K Group-014910 Railway
Transportation $ 4,132,230 24.32
2 A Group-014841 Retail Sale of
Automobiles in Specialized Stores 3,557,851 20.94
3 B Group-013010 Motor Vehicles
Manufacturing 2,304,679 13.57
4 C Group-016499 Other Financial
Intermediation 1,884,848 11.09
5 E Group-016499 Other Financial
Intermediation 1,266,254 7.45
6 D Group-016899 Other Real Estate 1,224,707 7.21
7 F Group-016499 Other Financial
Intermediation 844,759 4.97
8 J Group-014546 Wholesale of Tobacco
Products and Alcoholic Beverages 695,605 4.09
9 G Group-015911 Films Manufacturing 513,636 3.02
10 I Group-013510 Electricity Providers 460,975 2.71
Note 1: Ranked by the total amount of credit, endorsement, or other transactions; list
excludes government-owned or state-run enterprises. If the creditor is a group
enterprise, the Bank would express the amount of credit by aggregating the total
credit of this group enterprise, indicated with the symbol of the enterprise and
industrial classification. The Bank would further identify the industry in which the
group enterprise has the most exposure. The industrial classification refers to the
Industrial Classification Standard of the Directorate General of Budget, Accounting
and Statistics (DGBAS).
Note 2: Group enterprise refers to a group of corporate entities as defined by Article 6 of the
“Supplementary Provisions to the Taiwan Stock Exchange Corporation’s Rules for
Review of Securities Listings.”
Note 3: The total amount of credit, endorsement, or other transactions is the sum of various
loans (including import and export negotiations, discounts, overdrafts, unsecured and
secured short-term loans, margin loans receivable, unsecured and secured medium-
term loans, unsecured and secured long-term loans, and overdue loans), exchange
bills negotiated, factored accounts receivable without recourse, acceptances, and
guarantees.
58
COSMOS BANK, TAIWAN
Notes to Financial Statements
(Continued)
(iii) Interest rate sensitivity information
1)
Interest Rate Sensitivity
June 30, 2010
(in thousands of New Taiwan dollars, %)
Items 1 to 90 Days 91 to 180 Days 181 Days to
One Year Over One Year Total
Interest-rate-sensitive assets $ 78,887,986 16,844,670 2,001,232 3,878,381 101,612,269
Interest-rate-sensitive
liabilities
63,111,030
37,436,861
8,025,727
3,232,232
111,805,850
Interest rate sensitivity gap 15,776,956 (20,592,191) (6,024,495) 646,149 (10,193,581)
Net worth 14,315,053
Ratio of interest-rate-sensitive assets to liabilities (%) 90.88
Ratio of interest rate sensitivity gap to net worth (%) (71.21)
Interest Rate Sensitivity
June 30, 2009
(in thousands of New Taiwan dollars, %)
Items 1 to 90 Days 91 to 180 Days 181 Days to
One Year Over One Year Total
Interest-rate-sensitive assets $ 100,636,586 1,226,825 2,453,585 4,923,074 109,240,070
Interest-rate-sensitive
liabilities
56,561,103
46,989,776
15,123,630
4,709,785
123,384,294
Interest rate sensitivity gap 44,075,483 (45,762,951) (12,670,045) 213,289 (14,144,224)
Net worth 18,507,133
Ratio of interest-rate-sensitive assets to liabilities (%) 88.54
Ratio of interest rate sensitivity gap to net worth (%) (76.43)
Note 1: The above amounts included only New Taiwan dollar amounts held by the head office and branches
of the Bank (i.e., excluding foreign currency).
Note 2: Interest-rate-sensitive assets and liabilities are interest-earning assets and interest-bearing liabilities
with revenues or costs affected by interest rate changes.
Note 3: Interest rate sensitivity gap = Interest-rate-sensitive assets - Interest-rate-sensitive liabilities.
Note 4: Ratio of interest-rate-sensitive assets to liabilities = Interest-rate-sensitive assets/Interest-rate-
sensitive liabilities (in New Taiwan dollars).
59
COSMOS BANK, TAIWAN
Notes to Financial Statements
(Continued)
2)
Interest Rate Sensitivity
June 30, 21010
(in thousands of U.S. dollars, %)
Items 1 to 90 Days 91 to 180 Days 181 Days to
One Year Over One Year Total
Interest-rate-sensitive assets $ 110,898 6,662 - - 117,560
Interest-rate-sensitive liabilities 15,899 82,873 7,910 - 106,682
Interest rate sensitivity gap 94,999 (76,211) (7,910) - 10,878
Net worth (33)
Ratio of interest-rate-sensitive assets to liabilities (%) 110.20
Ratio of interest rate sensitivity gap to net worth (%) (32,963.64)
Interest Rate Sensitivity
June 30, 2009
(in thousands of U.S. dollars, %)
Items 1 to 90 Days 91 to 180 Days 181 Days to
One Year Over One Year Total
Interest rate-sensitive assets $ 100,684 8,249 - - 108,933
Interest rate-sensitive liabilities 16,679 53,920 6,652 - 77,251
Interest rate-sensitive gap 84,005 (45,671) (6,652) - 31,682
Net worth (20,046)
Ratio of interest rate-sensitive assets to liabilities (%) 141.01
Ratio of interest rate sensitivity gap to net worth (%) (158.05)
Note 1: The above amounts included only U.S. dollar amounts held by the head office, domestic branches,
OBU and overseas branches of the Bank, and excluded contingent assets and contingent liabilities.
Note 2: Interest-rate-sensitive assets and liabilities are interest-earning assets and interest-bearing liabilities
with revenues or costs affected by interest rate changes.
Note 3: Interest rate sensitivity gap = Interest-rate-sensitive assets - Interest-rate-sensitive liabilities.
Note 4: Ratio of interest-rate-sensitive assets to liabilities = Interest-rate-sensitive assets/Interest-rate-
sensitive liabilities (in U.S. dollars).
60
COSMOS BANK, TAIWAN
Notes to Financial Statements
(Continued)
(iv) Profitability
(Unit: %)
Items
For the six-
month period
ended June 30,
2010
For the six-
month period
ended June 30,
2009
Return on total assets Before income tax (2.50) (7.40)
After income tax (3.83) (6.57)
Return on equity Before income tax (22.92) (59.38)
After income tax (35.17) (52.74)
Net income ratio (1,860.98) (Note 6)
Note 1: Return on total assets = Income before (after) income tax/Average total assets.
Note 2: Return on equity = Income before (after) income tax/Average equity.
Note 3: Net income ratio = Income after income tax/Total net revenues.
Note 4: Income before (after) income tax was the income for the six-month periods ended
June 30, 2010 and 2009.
Note 5: The above profitability ratios are expressed annually.
Note 6: Not calculated as total net revenue is negative.
(v) Maturity analysis of assets and liabilities
1)
Maturity Analysis of Assets and Liabilities
June 30, 2010
(in thousands of New Taiwan dollars)
Total
Remaining Period to Maturity
1-30 Days 31-90 Days 91-180 Days 181 Days-
1 Year Over 1 Year
Main capital inflow on
maturity $ 120,348,615 24,203,516 13,290,008 29,820,165 21,458,959 31,575,967
Main capital outflow
on maturity 150,693,975 16,858,056 27,891,574 34,030,463 37,097,265 34,816,617
Gap (30,345,360) 7,345,460 (14,601,566) (4,210,298) (15,638,306) (3,240,650)
61
COSMOS BANK, TAIWAN
Notes to Financial Statements
(Continued)
Maturity Analysis of Assets and Liabilities
June 30, 2009
(in thousands of New Taiwan dollars)
Total
Remaining Period to Maturity
1-30 Days 31-90 Days 91-180 Days 181 Days-
1 Year Over 1 Year
Main capital inflow on
maturity $ 128,738,231 32,797,196 5,580,692 6,790,422 39,472,791 44,097,130
Main capital outflow
on maturity 166,349,957 17,621,133 35,212,484 38,154,808 38,541,678 36,819,854
Gap (37,611,726) 15,176,063 (29,631,792) (31,364,386) 931,113 7,277,276
Note: The above amounts include only New Taiwan dollar amounts held by the head office and domestic
branches of the Bank (i.e., excluding foreign currency).
2)
Maturity Analysis of Assets and Liabilities
June 30, 2010
(in thousands of U.S. dollars)
Total
Remaining Period to Maturity
1-30 Days 31-90 Days 91-180 Days 181 Days-
1 Year Over 1 Year
Main capital inflow on
maturity $ 149,929 110,776 26,683 10,970 - 1,500
Main capital outflow
on maturity 149,929 85,364 8,515 7,853 7,927 40,270
Gap - 25,412 18,168 3,117 (7,927) (38,770)
Maturity Analysis of Assets and Liabilities
June 30, 2009
(in thousands of U.S. dollars)
Total
Remaining Period to Maturity
1-30 Days 31-90 Days 91-180 Days 181 Days-
1 Year Over 1 Year
Main capital inflow on
maturity $ 145,933 120,321 8,828 8,284 6,520 1,980
Main capital outflow
on maturity 145,933 102,986 8,211 8,517 12,199 14,020
Gap - 17,335 617 (233) (5,679) (12,040)
62
COSMOS BANK, TAIWAN
Notes to Financial Statements
(Continued)
Note 1: The above amounts include only U.S. dollar amounts held by the head office, domestic branches and
OBU of the Bank.
Note 2: If overseas assets are above 10% of total assets of the Bank, it is necessary to provide supplementary
disclosure information.
(vi) Capital adequacy ratio
(Unit: in thousands of New Taiwan dollars)
Year
Items
June 30,
2010
June 30,
2009
Eligible
Capital
Tier 1 capital $ 7,246,791 8,910,184
Tier 2 capital 6,316,091 8,385,313
Tier 3 capital - -
Eligible capital 13,562,882 17,295,497
Risk-
weighted
Assets
Credit risk
Standardized approach 69,229,460 91,369,888
Internal rating-based approach - -
Securitization 12,400 33,631
Operational risk
Basic indicator approach 14,257,214 18,065,504
Standardized approach/Alternative
standardized approach - -
Advanced measurement approach - -
Market risk Standardized approach 1,610,644 1,494,777
Internal model approach - -
Risk-weighted assets 85,109,718 110,963,800
Capital adequacy ratio 15.94% 15.59%
Ratio of tier 1 capital to risk-weighted assets 8.52% 8.03%
Ratio of tier 2 capital to risk-weighted assets 7.42% 7.56%
Ratio of tier 3 capital to risk-weighted assets - -
Ratio of common stock to total assets 12.25% 14.97%
Leverage 6.06% 6.83%
Note 1: Eligible capital and risk-weighted assets are calculated under the “Regulations Governing the
Capital Adequacy Ratio of Banks” and the “Explanation of Methods for Calculating the
Eligible Capital and Risk-Weighted Assets of Banks.”
Note 2: Formulas used were as follows:
1) Eligible capital = Tier 1 capital + Tier 2 capital + Tier 3 capital.
2) Risk-weighted assets = Risk-weighted assets for credit risk + Capital requirements for
operational risk and market risk x 12.5.
3) Capital adequacy ratio = Eligible capital ÷ Risk-weighted assets.
4) Ratio of Tier 1 capital to risk-weighted assets = Tier 1 capital ÷ Risk-weighted assets.
63
COSMOS BANK, TAIWAN
Notes to Financial Statements
5) Ratio of Tier 2 capital to risk-weighted assets = Tier 2 capital ÷ Risk-weighted assets.
6) Ratio of Tier 3 capital to risk-weighted assets = Tier 3 capital ÷ Risk-weighted assets.
7) Ratio of common stock to total assets = Common stock ÷ Total assets.
8) Leverage=Tier 1 capital ÷ Adjusted average assets [Average Assets – Deduction from
Tier 1 capital (“Goodwill,” “Deferred loss on sale of nonperforming loans” and the
amount that should be deducted from Tier 1 capital according to the “Explanation of
Methods for Calculating the Eligible Capital and Risk-Weighted Assets of Banks”)].
Note 3: Under the regulation on capital adequacy ratios, the Bank had to use the standardized
approach to calculate its credit risks and had to reduce its Tier 1 capital when its operating
reserve and allowance for possible losses became insufficient. The Bank calculated its
capital adequacy ratios by referring to “The Expected Loss Interpretation of the Banking
Bureau,” previous loss experience, property risk, and risk-related developments and also
reported them to the supervisors from the Banking Bureau.
(d) Personnel, depreciation and amortization expenses
For the six-
month period
ended June 30,
2010
For the six-
month period
ended June 30,
2009
Personnel expenses
Salaries $ 718,768 789,429
Insurance 45,292 57,408
Pension 44,396 314,560
Others 84,958 158,324
Depreciation expenses 93,833 129,806
Amortization expenses 85,748 127,407
For the six-month periods ended June 30, 2010 and 2009, the depreciation on leased assets amounted
to $1,248 thousand and $0 thousand, respectively, recorded as reductions of rental revenue under net
revenues other than interest in the income statements.
11 Segment Financial Information
(a) Industry information: The Bank solely operates a commercial banking business.
(b) Geographic information: The Bank's foreign operating units or identifiable assets did not reach
10% of the Bank's revenues or total assets.
(c) Export sales: Not applicable
(d) Major customers: Not applicable