CONTENTS MESSAGE TO OUR SHAREHOLDERS FINANCIAL HIGHLIGHTS ORGANIZATION CHART PROFILE OF THE BANK BUSINESS PLANS FOR 2007 MARKET ANALYSIS

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1 CONTENTS MESSAGE TO OUR SHAREHOLDERS FINANCIAL HIGHLIGHTS ORGANIZATION CHART BOARD OF DIRECTORS & SUPERVISORS & EXECUTIVE OFFICERS PROFILE OF THE BANK BUSINESS PLANS FOR 2007 MARKET ANALYSIS RISK MANAGEMENT STATEMENT OF INTERNAL CONTROLS SUPERVISORS' REPORT INDEPENDENT AUDITORS' REPORT FINANCIAL STATEMENT DESIGNATED FOREIGN EXCHANGE BANKS SERVICE NETWORK

2 MESSAGE TO OUR SHAREHOLDERS Message to Our Shareholders Thanks to the lack of major unfavorable incidents, the stabilizing of oil-price rises, and appropriate monetary policy controls by the central banks of various countries, the global economy maintained a stable rate of growth in According to data released by Global Insight Inc. in December 2006 the global economy expanded at a rate of 3.8% last year, higher than the 3.4% achieved in The United States Federal Reserve moved to cool down the housing market and prevent inflation by holding constantly to a contractionary monetary policy; it completed its 17 th interest-rate hike in June, boosting the federal funds rate from 4.25% at the end of 2005 to 5.25%. Chairperson Teh-Nan Hsu The central banks of other countries followed by raising their own interest rates; Japan boosted its rediscount rate by 0.25% in July, for example, and the European Central Bank carried out five interest hikes to bring its rate to 3.5%. In addition, the strong economic growth that mainland China has experienced in recent years has become a major engine for global economic expansion; the huge trade surplus that it has accumulated has led the U.S. to exert continuous pressure for the revaluation of China's renminbi (RMB) currency, and the expectation that the value of the RMB will rise has brought a flood of hot money into Asia. This has meant a certain amount of pressure on the monetary policies of different Asian central banks. Taiwan's economy benefited from the continuous growth of the global economy; according to statistics from the Directorate-General of Budget, Accounting and Statistics, the domestic economy expanded by 4.62% in 2006, up from 4.03% the year before. A listing of major economic indicators shows that Taiwan's imports amounted to US$202.7 billion and exports reached US$224.0 billion in 2006, both record highs; the island's economic indicator light showed a yellow-blue signal for six months in a row beginning in June, turning blue in December to represent a weakening of economic performance. Except for July and August, the unemployment rate stayed below 4% for the entire year. The consumer price index (CPI) rose at an annual rate of 0.6%, the lowest level in three years; wholesale prices were affected by the high level of international crude oil, copper, zinc, nickel, and other basic metals, however, and rose 5.64%, the highest level in two years. The impact of this increase on the CPI will have to be watched. Due to the slackening in the CPI increase, real normal wages shook off the negative growth they had experienced since 2004 and entered positive-growth territory. 2

3 Consolidation in Taiwan's domestic financial market continued in 2006, with mergers bringing together the Taiwan Cooperative Bank (TCB) and The Farmers Bank of China, International Commercial Bank of China and Chiao Tung Bank, and Bank SinoPac and International Bank of Taipei. In the past financial consolidation has been among domestic institutions only, but in September the Standard Chartered Bank of England made an open purchase of the Hsinchu International Bank by paying a 40% premium for its shares. This opened the curtain for the acquisition of Taiwan banks by foreign investors. Under the impact of cash- and credit-card turmoil, the non-performing-loan (NPL) ratio among Taiwan's banks climbed month by month, rising from 2.24% at the end of 2005 to 2.53% in May Strenuous writing off of bad debt by the banks, however, brought the ratio back down to 2.13% at the end of December. Despite 10 successive interest-rate hikes by the Central Bank, intense competition in the market and weak demand for capital combined with other factors to cut the spread between deposit and loan interest rates for local banks to just 1.77% in the fourth quarter of 2006; this was a historic low, and it had a severe impact on bank profits. To bring to life "big and beautiful" financial institutions that are internationally competitive, in September 2006 the government come out with a "Financial Package Program" aimed at carrying on with the restructuring of the banking market via transparent management by government shareholding and the release of government shares, along with the reinforcement of accompanying financial supervisory measures. In an overall sense, the domestic financial market was affected by the cash- and credit-card consumerfinancial turmoil, the increased allocation of reserves against bad debt, the lessening interest-rate spreads, and other factors in 2006, and the banks' pre-tax profit showed a loss in 2006 for the first time since 2002, with red ink in the amount of NT$7.4 billion. The card crisis was gradually brought under control, however; and with the wealth-accumulation effect of the 19.5% rise in the stock market during the year plus the heating up of the real-estate market, private consumer confidence can be expected to strengthen and this will favor the expansion of banking businesses. Consolidation in the domestic financial market is expected to continue in 2007, but the re-enactment of the embezzlement of money from a major business conglomerate at the beginning of the year, and the consequent impact on bank debt, shows that room for improvement remains in the nation's financial oversight and points up the fact that banks should fully exercise their risk-control and corporate-governance capabilities to accommodate to the implementation of the Basel II agreement and assure the quality of their loan assets. Major Achievements in 2006 Inauguration of chain franchisee loans. Inauguration of stock-purchase loans for enterprise employees. Inauguration of loans to the proprietors of contract stores. Inauguration of the small-loan telemarketing business. Establishment of 16 mini foreign-exchange branches and four full foreign-exchange branches. 3

4 MESSAGE TO OUR SHAREHOLDERS On-line operation of the Foreign Currency Structured Products computer system in July Signing of cooperative agreement with New York Bank for application of remittances to Mainland China written in Chinese characters and Forfaiting. Inauguration of trading in Foreign Currency Interest Rate Option. Assumption of banking leadership in inaugurating proprietary dealing in bonds. Inauguration of formal personal trust products (child-rearing trust, retirement trust, and insurance fund trust contracts). Signing of general sales agency contracts for 16 offshore funds. Introduction of overseas fixed-income products, allowing customers to invest directly in foreign government bonds, corporate bonds, and other fixed-income instruments through the trust platform. Inauguration of telephone purchase of funds. Establishment of an Integrated Promotion and Evaluation Team for Financial-management Products charged with integrating the Bank's various financial-management products and posting times in order to reinforce development of the wealth-management business. Establishment of a Wealth Management System to assist VIP customers with the utilization of their assets and financial officers with information management. Implementation of a professional manager system for the Bank's securities brokerage business. The reorganization was carried out first at the Keelung Branch in July 2006, followed by Taichung and Tainan in October. In the B2B field, completion by the TCB's Internet bank of a dedicated corporate client system to upgrade service efficiency by providing safe and convenient corporate funds-flow services and online prearranged payments. In the B2C field, completion of development of an Internet e-banking value-added services mechanism providing for the online payment of utilities fees, application for consumer loans, online cash advancements, and other quality financial management services. Opening of cash card applications to holders of corporate passbook deposit accounts to expand the customer base for the Bank's IC bank cards and provide fee payment services for depositors who are not natural persons. Switch of the credit-card business from a branch-operations system to a centralized headquartersoperations system. Issuance of the B2B Lion Travel purchasing card, Kaohsiung County Government purchasing card, JCB IC Platinum Card, and Cardiac Children's Foundation of the R.O.C. Affinity Card. Establishment of debt negotiation platform for overdue credit card payments. Operating Performance Net interest: NT$21,287,921,000 Net revenues and gains other than interest : NT$11,048,109,000 Bad-debt expenses for loans: NT$5,974,960,000 Operating expenses: NT$15,970,732,000 4

5 Income before income tax: NT$10,390,338,000 Income before cumulative effect of changes in accounting principles: NT$9,135,146,000 Cumulative effect of changes in accounting principles: NT$40,062,000 Net Income: NT$9,175,208,000 Earnings per share: NT$2.45 Operating Strategies for 2007 Implementation of organizational re-engineering to enhance operating performance. Expansion of operating scale, strengthening of strategic alliances, reinforcement of competitive advantages, and development into a leading regional bank. Adoption of a loan strategy with equal emphasis on quantity and quality to assist with industrial development. Expansion of the consumer financing, wealth management, securities brokerage, insurance brokerage, and trust businesses in development toward becoming a comprehensive bank. Improvement of the Bank's financial structure and enhancement of financial efficiency so as to join the ranks of quality banks. President An-Hsiung Chen Establishment of a bank-wide risk-management mechanism to strengthen the Bank's operations. Active planning for the establishment of overseas business units so as to expand the Bank's international financial business territory; in addition, strengthening of the profits of overseas branches. Business Targets for 2007 Deposits: NT$1,821.1 billion (not including interbank deposits) Loans: NT$1,717.6 billion (NT$1,047.6 billion in corporate loans and NT$670 billion in personal loans) Guarantees: NT$56.6 billion Foreign Exchange: US$60.7 billion Investment: NT$197.7 billion Trust business: NT$90 billion in major trust businesses and NT$50 billion in custodial banking Wealth management: Commission fee income of NT$426 million Securities brokerage: NT$181.6 billion Credit cards: Cumulative transactions of NT$16.6 billion 5

6 FINANCIAL HIGHLIGHTS Financial Highlights Condensed Balance Sheets Unit:Thousands of New Taiwan Dollars CASH, CASH EQUIVALENTS AND DUE FROM THE CEN- TRAL BANK AND OTHER BANKS ,754, ,190, ,752,188 CASH,CASH EQUIVALENTS AND DUE FROM THE CENTRAL BANK AND CALL LOANS TO OTHER BANKS 427,274, ,225, SECURITIES PURCHASED, NET ,471, ,733, ,605,282 FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS SECURITIES PURCHASED UNDER RESELL AGREEMENTS 47,521,600 22,114, , AVAILABLE-FOR-SALE FINANCIAL ASSETS 61,907,516 55,670, BILLS, DISCOUNTS AND LOANS, NET - - 1,253,938,099 1,221,224,308 1,121,805,862 DISCOUNTS AND LOANS, NET 1,713,813,847 1,274,665, RECEIVABLES, NET 27,439,825 27,096,034 15,558,643 25,569,313 19,113,983 HELD-TO-MATURITY FINANCIAL ASSETS 3,163,176 3,281, EQUITY INVESTMENTS UNDER THE EQUITY METHOD 4,908,188 1,145, LONG-TERM INVESTMENTS ,015,586 7,199,815 5,032,929 PROPERTIES, NET 33,591,776 26,690,671 20,101,427 20,341,583 20,003,269 INTANGIBLE ASSETS - GOODWILL 3,170, OTHER FINANCIAL ASSETS, NET 41,071,681 31,358, OTHER ASSETS, NET 9,553,505 9,474,080 24,175,631 24,274, ,005,170 TOTAL ASSETS 2,373,415,224 1,965,942,674 2,029,014,901 1,991,534,192 1,868,318,683 DUE TO THE CENTRAL BANK AND OTHER BANKS 254,411, ,060, ,101, ,331, ,874,779 DEPOSITS AND REMITTANCES 1,823,373,039 1,533,042,886 1,582,927,974 1,548,537,846 1,462,132,564 FINANCIAL LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS SECURITIES SOLD UNDER REPURCHASE AGREEMENTS FUNDS BORROWED FROM THE CENTRAL BANK BANK DEBENTURES 3,403, , ,157,571 39,305, ,864,000 36,044,300 45,319,396 66,482,308 57,672,420 ACCRUED PENSION COSTS 1,293, , OTHER FINANCIAL LIABILITIES 4,942,175 3,434, OTHER LIABILITIES 53,238,451 40,468,046 70,998,459 65,790,234 77,624,996 TOTAL LIABILITIES 2,275,682,974 1,902,013,757 1,968,347,726 1,931,142,273 1,810,304,759 CAPITAL STOCK 45,000,000 25,398,304 25,398,304 22,085,482 22,085,482 RESERVE FOR CAPITALIZATION - 2,539, CAPITAL SURPLUS-PAID-IN CAPITAL IN EXCESS OF PAR VALUE 34,907,944 23,696,319 29,274,539 31,562,831 31,622,704 RETAINED EARNINGS 12,720,380 8,176,723 5,801,247 6,544,960 4,315,970 REVALUATION INCREMENTS ON PROPERTIES 4,024,155 4,025, UNREALIZED GAINS ON FINANCIAL INSTRUMENTS 902, CUMULATIVE TRANSLATION ADJUSTMENTS 177,176 92, , ,646-10,232 TOTAL STOCKHOLDERS' EQUITY 97,732,250 63,928,917 60,667,175 60,391,919 58,013,924 6

7 Condensed Statements of Income Unit: Thousands of New Taiwan Dollars NET INTEREST 21,287,921 16,429, NET REVENUES AND GAINS OTHER THAN INTEREST 11,048,109 8,062, BAD-DEBT EXPENSES FOR LOANS 5,974,960 5,389, OPERATING EXPENSES 15,970,732 16,299, OPERATING REVENUE ,224,032 55,119,691 76,624,989 OPERATING COSTS AND EXPENSES ,432,869 51,933,012 75,893,810 OPERATING INCOME - - 1,791,163 3,186, ,179 NONOPERATING REVENUE - - 1,034,809 1,067,439 1,186,556 NONOPERATING EXPENSES - - 1,791,645 1,067, ,779 INCOME BEFORE INCOME TAX 10,390,338 2,803,865 1,034,327 3,186,671 1,567,956 INCOME BEFORE CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES 9,135,146 2,634, ,674 2,472,932 1,250,476 CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES 40, NET INCOME 9,175,208 2,634, ,674 2,472,932 1,250,476 Key Ratios (%) STABILITY RATIOS DEBT RATIO(TOTAL LIABILITIES/TOTAL ASSETS) 95.86% 96.73% 96.97% 96.93% 96.85% FIXED ASSETS/NET WORTH 34.37% 41.75% 33.13% 33.68% 34.48% LIQUIDITY RESERVE RATIO 18.08% 27.83% 31.82% 30.56% 24.84% PROFITABILITY RATIOS RETURN ON TOTAL ASSETS 0.42% 0.13% 0.04% 0.13% 0.07% RETURN ON EQUITY 11.30% 4.23% 1.34% 4.18% 2.17% NET INCOME RATIO 28.25% 10.76% 1.75% 4.49% 1.63% EARNINGS PER SHARE Credit Rating (Jan.29,2007) Taiwan Rating Standard & Poor's Long-term twaa BBB + Short-term twa-1 A-2 Outlook Stable Stable Worldwide ranking The Bankers-by tier 1 capital (2006/7) 253 The Bankers-by total assets (2006/7) 159 Domestic ranking Assets 2 Loans 1 Deposits 2 Branches 1 7

8 ORGANIZATION CHART E.V.P. Chen-Le Liu E.V.P. Tien Lin E.V.P. Ching-Chiang Fang E.V.P. Shu-Chang Chou E.V.P. Chung-Dea Hsieh General Auditor Chiu-Jung Tsai 8

9 Organization Chart General Auditor Auditing Division, Board of Directors Secretariat, Board of Directors Department of Business Management Department of Corporate Banking Department of Credit Management Department of Treasury Department of International Banking Department of Personal Banking Department of Wealth Management Department of Trusts Shareholders' Meeting Board of Directors Chairperson President Executive Vice Presidents Department of Securities Department of Electronic Banking Department of Credit Card Department of Loan Assets Management Secretariat General Affairs Division Regional Credit Management Center Regional NPL Management Center Domestic Branches and Sub-branches Overseas Branches Overseas Representative Offices Board of Supervisors Accounting Division Information Technology Division Credit Analysis and Research Division Overseas Subsidiary Bank Risk Management Division Human Resource Division Legal Affairs Division Security Management Division 9

10 Board of Directors & Supervisors & Executive Officers Board of Directors & Supervisors & Executive Officers Board of Directors Chairperson Teh-Nan Hsu Managing Directors An-Hsiung Chen Ching-Nain Tsai Chuan-Chung Liu Tse-Ching Huang Directors Kao-Chi Chen Yieng-Chen Han Der-Tzon Hsieh Kuo-Tay Chen Bor-Wen Lee Che-Hui Huang Chih-Hsing Chang Jen-Chyuan Lee Shing-Wu Chang Jung-Ching Su Chen-Fa Wang Sing-Lon Lin Chih-Ching Lian General Auditor Chiu-Jung Tsai Executive Officers President An-Hsiung Chen Executive Vice Presidents Chen-Le Liu Tien Lin Ching-Chiang Fang Shu-Chang Chou Chung-Dea Hsieh S.V.P. & G.M., Department of Business Management Wen-Jenq Wu S.V.P. & G.M., Department of Corporate Banking Thomas K.T. Ho S.V.P. & G.M., Department of Credit Management Wen-Long Lin S.V.P. & G.M., Department of Treasury Chen-Yuan Tu S.V.P. & G.M., Department of International Banking Hong-Chen Lin S.V.P. & G.M., Department of Personal Banking Dah-Wei Wu S.V.P. & G.M., Department of Wealth Management Mei-Tsu Chen S.V.P. & G.M., Department of Trusts Ying-Lin Huang S.V.P. & G.M., Department of Securities Wu-Hsiung Wang S.V.P. & G.M., Department of Electronic Banking Meng-Chin Lin S.V.P. & G.M., Department of Credit Card Shang-Sheng Tsai 10

11 Board of Supervisors Resident Supervisor Fu-Deng Hsieh Supervisors Robert K. Su Len-E Chen Long-Yen Chuang Ching-Yu Cheng Executive Officers S.V.P. & G.M., Department of Loan Assets Management Cheng-Hsiu Chen S.V.P. & G.M., Secretariat Kuan-Young Huang S.V.P. & G.M., General Affairs Division Ching-Hsin Lien S.V.P. & G.M., Accounting Division Chao-Hsin Lin S.V.P. & G.M., Information Technology Division Hsiang Hu G.M., Credit Analysis and Research Division Chang-Jung Lin S.V.P. & G.M., Risk Management Division Chin-Hung Ho S.V.P. & G.M., Human Resource Division Wu-Lieh Tsai S.V.P. & G.M., Legal Affairs Division Chih-Cheng Peng S.V.P. & G.M., Security Management Division Che-Tsung Chang 11

12 Profile of the Bank Profile of the Bank Date of establishment: Oct. 5, 1946 History The Bank was established through the reorganization of the Taiwan Industry Bank of the Japaneseoccupation era. Capitalization in the amount of 25 million Old Taiwan Dollars was provided by the Taiwan Provincial Government along with cooperative groups, farmers' associations, fishermen's associations, and irrigation associations. The operating scale of the Bank has been constantly expanded thanks to the efforts of its entire staff over the past 60 years, and at the end of 2006 its capitalization stood at NT$45 billion. The Bank achieved corporate status under the provisions of Article 52 of the Banking Law in May It was reorganized as the Taiwan Cooperative Bank Co., Ltd. on Jan. 1, 2001; went public in June 2003; was listed on the stock market on Nov. 17, 2004; changed its Chinese name on February 10, 2006, but its English name remains unchanged; and merged with The Farmers Bank of China on May 1 that year. As of Dec. 31, 2006 the Bank had a total of 301 domestic and overseas branches (including the Manila Branch, Los Angeles Branch, Seattle Branch, Beijing Representative Office, and Hong Kong Representative Office), giving us the most extensive branch network of all Taiwan banks and putting us in a position of market leadership in share of deposits and loans. According to the statistics published in the July 2006 issue of The Banker magazine, in the assets ranking of top 1,000 banks the TCB placed 159 th in the world and second in Taiwan, after only the Bank of Taiwan. The TCB, Bank of Taiwan, Land Bank of Taiwan, and Taiwan Business Bank have jointly established the United Taiwan Bank in Belgium, with the TCB taking a 70% share of its equity. In addition, the TCB established the wholly-owned Cooperative Bank Assets Management Co. on Oct. 18, 2005 and, on Mar. 22, 2006, boosted its capitalization to a total of NT$3.5 billion. On Nov. 25, 2005 the Bank established the wholly-owned Cooperative Bank Insurance Brokerage Co. with an investment of NT$10 million. Also, in line with the government's policy of clearing up cash- and credit-card debt and unsecured debt, the Bank also participated in the establishment of the Sunshine Asset Management Co. on Apr. 21, 2006 with an investment of NT$430,880 via Debt-for-Equity Swap. 12

13 Under the TCB Charter, the Bank is charged with carrying out the missions of operating a banking business, developing national economic construction, and providing financial adjustment for the farming and fishery industries. In addition to providing financing for cooperative enterprises, the farming and fishery industries, and small and medium enterprises, the TCB also offers deposit, loan, and foreign exchange services for business enterprises in general to facilitate funds utilization and promote overall economic development. This makes the TCB a consolidated international bank for farming, fishery, cooperative, and business financing. 13

14 Business Plans for 2007 Business Plans for 2007 Operational Management The demand deposit, corporate loan, and foreign exchange businesses will be vigorously expanded so as to heighten competitiveness. Low-interest deposits will be developed, government agency deposits and corporate salary transfer deposits will be solicited, and the collection of funds for capital increases by listed companies, the disbursement of cash dividends, and the custodial banking businesses will be pursued. Commission-fee income will be increased by providing customers with the finest in tailor-made insurance packages, and a professional sales training system will be brought in to boost the marketing abilities of Bank personnel. Training in all types of risk management will be continued so as to deepen the bank's internal risk management know-how and culture, carry through with risk management in all areas of business, and enhance operating performance and asset quality. An analysis operations function for the information service system will be established so as to upgrade the competitiveness of new lines of business. Deposit and remittance processes will be streamlined and new teller terminal computer operating systems will be installed to heighten the service quality of business units and the satisfaction of customers. Corporate Banking The handling of new businesses such as receivables for suppliers and prearranged payment financing will be strengthened and the structural ratio of loans to government agencies will be adjusted whenever appropriate. Post-merger redundancies in loan clients will be integrated to a suitable extent so as to enhance efficiency in the utilization of the Bank's resources. The right to act as lead bank for syndicated loans will be actively solicited and related derivatives businesses will be pursued with the goal of serving as manager bank. Horizontal communication and vertical liaison between business units, Regional Credit Managemnet Center, and Department of Credit Management will be strengthened and loan procedures and loan management will be reinforced to facilitate overall sales coordination. The Bank's post-merger market leadership position will be used to vigorously expand the foreign exchange and OBU businesses as a means of increasing income and boosting market share. The Regional NPL Management Center mechanism will be implemented thoroughly and the clearing up of non-performing loans will be accelerated through such means as the assumption of collateral, amicable settlement, and negotiation of time payments. 14

15 Personal Banking The high-quality home loan business will be developed, cross-industry cooperation will be strengthened, marketing channels will be expanded, and customer sources will be enlarged so as to increase the TCB's share of the home loan market. A personal-banking databank will be established, the client structure will be analyzed, and new marketoriented package products and niche small loans will be developed in order to increase the Bank's share of the personal banking market. An automated grading system will be used to develop the high-quality small personal loan and creditcard businesses. The existing e-commerce platform will be integrated and supply-chain B2B and B2C e-commerce developed, and electronic channels will be used to promote the collection business, in order to increase commission-fee income and boost demand deposits. New EOI (EDI over Internet) products will be developed to satisfy the needs of customers for the transfer and allocation of funds throughout the world. The Bank's branch-network advantage will be used to promote the government purchasing card, business card, platinum card, and other high-income businesses. Financial Planning A financial marketing platform will be set up to facilitate integrated marketing, satisfy the needs of customers, and upgrade the Bank's service functions. More investment channels will be added and investment objects increased so as to enhance operating performance. Investment position control will be strengthened, the efficiency of funds utilization improved, and the scale of trading expanded to heighten income on investment. The financial planning business will be instituted so as to upgrade competitiveness. The budget management and implementation function will be reinforced so as to enhance operating performance. Wealth Management The innovation and diversification of wealth management products will be speeded up, market trends will be grasped and business projects planned accordingly, and integrated marketing to enterprise groups will be developed to boost the Bank's commission-fee income. Financial consultants will be trained and a professional investment research team set up in order to expand the scale of customer asset management. Multiple media channels will be used to publicize the Bank's wealth management brand, and customer relationship management and maintenance will be strengthened, so as to upgrade customer loyalty and establish the Bank's wealth management image. 15

16 Business Plans for 2007/ Market Analysis Existing trust services including domestic and foreign mutual funds, structured products, and real estate trust will continue to be developed, and the promotion of new trust businesses such as individual management pecuniary trust and securities trust will be strengthened. The Bank will use the advantage of its existing branch network to develop customer sources for the trust business, and will carry out investment-type financial planning through convenient buying of securities, so as to break away from the traditional securities business methods and boost competitiveness, expand the scale of the Bank's securities brokerage business, increase market share, and improve operating performance. Administrative Management The Bank will be built into a learning organization so as to enhance the know-how of employees, accelerate post-merger personnel interchange and corporate culture harmonization, and improve operating performance. The disposition of collateral acquired through the assumption of community-level financial institutions will be accelerated so as to enliven the use of funds and increase the Bank's income. 16

17 Market Analysis Area of Service The TCB has established a comprehensive bank and branch network serving all parts of Taiwan with a full spectrum of corporate banking, personal banking, wealth management, and specialized financial services. Following merger with The Farmers Bank of China, at the end of 2006 the TCB had a total of 296 domestic units more than any other bank in Taiwan. The area with the largest number of branches is Taipei City with 67 or 22.63% of the total, followed by Taipei County with 37 or 12.5% and Taichung City with 29 or 9.79%. The Bank also has six overseas branches and representative offices, in Belgium, Manila, Seattle, Los Angeles, Hong Kong, and Beijing. Sixty-one of the branches act on behalf of the National Treasury, 58 are designated foreign exchange units, and 188 offer simple foreign exchange services. Future Supply and Demand in the Market, and Growth Potential Numerous financial holding companies have been established under the government's policy of financial reform, and cross-industry operations and the tide of consolidation have brought intense competition to the market. With the constant growth in the wealth of Taiwan's people in recent years, plus the steady enlargement of the scale and internationalization of corporate development, the traditional deposit and loan businesses can no longer satisfy the diverse financial needs of bank customers. The TCB has responded to the changes in consumption by constantly introducing new types of business and changing the traditional marketing model away from the past product orientation and toward a customer orientation, and by adopting the product package concept to carry out joint marketing and bring greater growth in the different areas of TCB business. Competitive Niches An outstanding reputation and largest operating scale in Taiwan The TCB was established in 1946 via a reorganization of the Taiwan Industry Bank, and it now has the largest scale of operations of any bank in Taiwan with a position of leadership in the areas of total assets, loans, and deposits. A comprehensive branch network and a leading channel advantage The Bank has a closely-knit network of marketing channels that strengthens its competitiveness in the retail market. A large customer base that presents financial management opportunities The Bank's customer base exceeds 5 million persons, and this base can be used to promote loans, wealth management, electronic banking, payment systems, and other retail banking services. Four flagship wealth management centers and 104 financial management areas had been established by the end of 17

18 Market Analysis 2006, and financial consultants had been stationed in the branches so as to broaden the customer base and realize the synergies of cross-marketing. Abundant experience in the loan business and solid long-term relations with customers The Bank's share of the loan market is the largest in Taiwan. It fills the needs of its customers for medium- and long-term loans, and in this way establishes solid relations with them. Favorable and Unfavorable Factors in Development Prospects, and Countermeasures Favorable Factors Following merger with The Farmers Bank of China, the TCB has become tops in Taiwan in terms of loan scale and business units, and this has a multiplier effect on realization of the bank's diversified operations and on heightening synergies. The domestic real estate market is continuing to recover along with the steady growth of Taiwan's economy, and this has a positive effect on the protection of the Bank's assets and on its profitability. The government is continuing to promote the incentive program for the strengthening of loans to small and medium enterprises; and since the Bank is tops in Taiwan in the amount of loans outstanding to SMEs, and it won third place overall in the SME loan competition (running, in its first year, from July 2005 through June 2006), the incentive program has a beneficial effect on the Bank's addition of new branches and promotion of new types of business. The Bank holds firmly to a pragmatic spirit and a professional attitude in its continuous cultivation of the syndicated loan market, and this has won it the approbation of customers and other banks alike. This business has grown year by year, and in 2006 it put the Bank in 4 th place among lead banks for syndicated loans in Taiwan. The Bank's NPL ratio fell to 2.16% at the end of 2006 and coverage was up to 55.66%. The ongoing improvement in the Bank's asset quality will help it achieve even more solid development in the future. Unfavorable Factors Although domestic banks are striving to develop new products, because a situation of excessive competition still exists it will remain easy for the marketing of different financial products to slip into a state of price competition. While the Bank has comparative advantage in the traditional deposits and loans business, it is nevertheless difficult to expand its business niche and increase its income. The popularity of the direct-financing market is bringing greater diversity to corporate financing models and this is unfavorable to the Bank's loan promotion. 18

19 Under the attractive effect of mainland China and global corporate deployment, some companies are gradually shrinking the scale of their finances and their businesses in Taiwan; this reduces the demand for financing on the island, and is unfavorable to the further expansion of the Bank's business. Financial products are constantly being upgraded, forcing banks to devote large amounts of R&D money and manpower to this effort. This increases the Bank's operating costs. Countermeasures The Bank will continue to carry out organizational re-engineering and readjustment of its division of labor, will working to develop overseas markets by, among other efforts, applying for the establishment of more overseas branches and for the upgrading of representative offices to branch status, will actively plan for strategic alliances, and will develop electronic financial services. In response to the trend toward financial integration in the Asia-Pacific region, the Bank will actively plan for the establishment of overseas bases and will seek out strategic-alliance partners that can complement the Bank's areas of business and business locations, and can provide added value, so as to reinforce the TCB's ability to offer a full spectrum of financial services. To carry out a diversified operating strategy, the Bank will continue cultivating the consumer and corporate banking markets while, at the same time, devoting full effort to the development of the wealth-management business and implementing differentiated and customized marketing for different wealth-management customer groups. To enhance manpower quality and reinforce competitiveness, the Bank will continue recruiting outstanding personnel, adjusting its human resources policy, and carrying out personnel training so as to strengthen the competitiveness and profit capabilities of its employees. Faced with the challenges posed by increasing consolidation in the international financial market and by the rapid changes that are taking place in economic and financial conditions, the Bank will set up comprehensive risk management policies and rules so as to be able to control risk nimbly and dynamically whenever required by changes in the operating environment. 19

20 Risk Management Risk Management Structure of risk management Board of Directors chairperson President Risk Management Committee Executive Vice President Risk Management Division Departments/Divisions in charge of various services Operation Risk and Planning Management Section Credit Risk Section Market Risk Section Business Units Risk Management Organization and Policy Organizational Structure of Risk Management The Board of Directors is the Bank's highest policymaking body for risk management, responsible for establishing bank-wide risk-management policies and frameworks, and for setting up a bank-wide risk-management culture. It bears the ultimate responsibility for overall risk management. The Bank has established a Risk Management Committee charged with supervising and reviewing the implementation of bank-wide risk management, the assessment of capital adequacy, and the assumption of risk. The Bank's Risk Management Division was established on May 1, 2006, and includes an Operation Risk and Planning Management Section, Credit Risk Section, and Market Risk Section. Its main responsibilities are implementation of the resolutions taken by the Committee, as well as planning and implementation in regard to risk management issues. 20

21 The units in charge of different areas of business carry out routine risk assessment and control in accordance with business management rules and risk policy. The Risk Management Division submits regular reports on various areas of risk management to the Risk Management Committee and the Board of Directors. Risk Management Policy The Bank controls its capital adequacy in accordance with the capital adequacy management regulations established by the competent authority, and carries out the allocation of assets and establishes risk management for its different areas of business in consideration of overall exposure, self-owned capital, and debt characteristics. Capital management is carried out in accordance with the Bank's business plans, capital adequacy ratio targets, and risk appetite. Resources are allocated effectively through the distribution of capital, and risk control and business development are balanced in order to optimize shareholder value. An independent and effective risk management mechanism has been established to set up and adjust risk management operating procedures for different areas in response to changes in the operating environment, the Bank's business, and operating activities, thus effectively identifying, weighing, monitoring, and controlling all kinds of risk. Methods of Weighing and Controlling Risk Credit Risk Strategies and Procedures The Bank's credit risk strategies are established in accordance with overall risk management targets, with the use of an effective risk management mechanism to identify, measure, monitor, and control different items of risk and with pre-loan review, post-loan follow-up management, and judgment carried out in accordance with information provided by the Joint Credit Information Center and Taiwan Clearing House. Risk management is further carried out in consideration of growth trends in the banking industry and the needs of regional development and in accordance with five basic principles: safety, liquidity, fairness, profitability, and growth. The Bank has formulated a Loan and Investment Policy and Credit Risk Management Criteria in order to management credit risk effectively, and has established, and strictly carries out, rules regarding the concentration of different kinds of risk and trading with related parties. Risk Management Organizational System and Framework The Board of Directors is the Bank's highest policymaking body for risk management, and bears ultimate responsibility for the Bank's credit risk. The Risk Management Committee handles the credit risk management mechanism in accordance with credit risk decisions taken by the Board of 21

22 Risk Management Directors, reviews credit risk regulations, carries out interdepartmental coordination regarding credit risk management, and continuously monitors the performance of implementation. The headquarters office and branches have set up Credit Management Committees to review loan cases, and to approve or reject loan applications in accordance with the appropriate level of loan authorization. A Loan Assets Management Committee has been set up to review the disposition and writing off of non-performing loans and loans for collection, and the writing off of losses from the disposition of assumed collateral, so as to strengthen the management of NPLs and loans for collection. In addition, a Credit Review Section has been established within the Department of Loan Assets Management to carry out review and follow-up management and supervision for loans that have been extended and for important loan cases. Scope and Features of the Risk Reporting and Measurement System The Bank submits a regular Credit Risk Information Report (including information on risk positions, asset quality, utilization of quotas, and extraordinary incidents) to high-level management and the Board of Directors to serve as a reference in decision-making. Hedging Policy, and Monitoring Strategies and Procedures for Ongoing Hedging Effectiveness The Bank sets quotas for the same enterprise, the same business group, industries, countries, and collateral categories; constantly monitors and reviews the concentration of credit risk; and adjusts quotas on a regular and irregular basis. Market Risk Strategies and Procedures The Bank makes its market risk policies based on market risk management targets and investment authorization and stop-loss rules are established according to counterparty and trading practices, and managerial reports are evaluated on a regular basis so as to effectively control different types of market risk. Organization and Framework of the Risk Management System The Bank has a Risk Management Committee that handles the market risk management mechanism in accordance with market risk management decisions approved by the Board of Directors, reviews market risk limits and sector limits, and carries out reviews of changes in business strategies and market conditions on a scheduled basis or whenever necessary. A Risk Management Division has been established to carry out the work of overall bank-wide market risk management, playing a centralized middle office. Different trading units follow the Bank's market risk management rules in carrying out position management, and monitor limits. Scope and Features of the Risk Reporting and Measurement System The Bank's market risk management procedures include risk identification, assessment, 22

23 measurement, monitoring, and reporting. Business units and the Risk Management Division analyze market risk position data within the scope of their authorization. Assessment and measurement methods include the statistical basis measurement method, sensitivity analysis, and scenario approach. Monitoring is used to determine whether trading units and overall and individual trading procedures of financial products, including position changes, profit/loss changes, trading models, and trading instruments, conform to the rules and whether they are carried out within limits and scope of authority. The different departments submit trading reports to their superior units on a real-time, daily, or other regular basis, and assure their accuracy and effectiveness. The Risk Management Division submits regular reports and suggestions to the Risk Management Committee and the Board of Directors on the implementation of market risk management bank-wide, including market risk positions, risk levels, profit/loss, utilization of quotas, and conformity with market risk management rules. Hedging Policy, and Monitoring of Strategies and Procedures for Ongoing Hedging Effectiveness The Bank's current hedging activity is used mainly to hedge against foreign exchange and interest rate risk in foreign-currency funds and securities investment, derivative swaps as main hedging instruments. To assess profit/loss from hedging, all derivative products traded in hedging transactions are evaluated at least twice a month as to their market value, and combined with an evaluation of profit/loss on hedged products and reported to risk management officials. This is reported to the president monthly, along with the Integrated Business Risk Control Table, to the Risk Management Committee and Board of Directors on a quarterly basis. Operational Risk Strategies and Procedures To establish and implement a healthy operational risk management mechanism, operational risk management criteria and loss reporting and management guidelines are set up in accordance with bank-wide risk management policy. The rate of occurrence and severity of potential risks in normal bank-wide daily business activities and management procedures are assessed and appropriate countermeasures involving insurance, outsourcing, sustainable business operations training, prevention of nominal account approval, money-laundering prevention reporting, and regulatory conformity systems are adopted to maintain operational security, strengthen the operating system, and reduce losses from risk. Organization and Framework of the Risk Management System The Risk Management Division is responsible for designing and introducing a management system for operational risk identification, measurement, monitoring, and reporting. Headquarters units set operating management rules and supervise the different units in the necessary work of risk management. The Auditing Office of the Board of Directors carries out auditing work in a spirit of independence and impartiality, accomplishing an inspection of operating risk matters at least once a 23

24 Risk Management / Taiwan Cooperative Bank Statement of Internal Controls year and providing suggestions for improvement whenever necessary. The Bank has also set up an Information Operations Review, Coordination, and Security Management Committee to be in charge of coordinating and formulating the Bank's information security policy, planning, and resource allocation. It has also established a Labor Safety and Health Committee, Sexual Harassment Appeal Review Committee, and Evaluation and Promotion Committee to review and coordinate the Bank's labor safety and health policy, sexual harassment complaints, and employee promotion evaluation as well as rewards and punishments. Scope and Features of the Risk Reporting and Measurement System To effectively identify, measure, monitor, and report on all potential operational risks in everyday business activities and management procedures, the Bank has established a centralized a database for the management of bank-wide operational risk incidents, including causes of the occurrence of operational risk incidents, amount of loss incurred, process of disposition, and recording and followup of impact. Beginning in 2007, bank-wide operational risk information and management analysis reports are submitted to the Risk Management Committee and the Board of Directors on the regular basis. Hedging Policy, and Monitoring of Strategies and Procedures for Ongoing Hedging Effectiveness To control and monitor operational risk actively, the Bank has established rules for the implementation of risk management in the everyday operations of different areas of business so as to prevent the occurrence of risk, and carries out constant follow-up of the management of operational risk by the different units and the reporting of loss-causing incidents through the losses reporting mechanism as well as self-monitoring by the units and the auditing work of the headquarters office. Countermeasures are adopted in accordance with the frequency of occurrence and the amount of loss, as follows: For incidents with both high frequency of occurrence and high amount of loss: Withdrawal from the business concerned. For incidents with a low frequency of occurrence and high amount of loss: Transfer of risk through insurance or outsourcing, or offsetting of the risk of loss. For incidents with a high frequency of occurrence and low amount of loss: Effective control through the reinforcement of the operational procedures management mechanism. For incidents with both low frequency of occurrence and low amount of loss: Potential loss must be within the amount that the Bank is able to bear. To assure the sustainability of business operations, the Bank has set up an information security protection mechanism and emergency response plan, so that when a serious incident causes an interruption of operations the Bank will have the capability of continuing to operate and to minimize the scope of the incident. 24

25 Taiwan Cooperative Bank Statement of Internal Controls On behalf of the Taiwan Cooperative Bank we declare that during the period of Jan. 1, 2006 through Dec. 31, 2006 the Taiwan Cooperative Bank did conform to the provisions of the Implementation Rules for Banks' Internal Control and Auditing Systems by establishing an internal controls system, carrying out risk management, and having audits carried out by an impartial and independent auditing unit, with reports submitted on a regular basis to the Boards of Directors and Supervisors. In its operation of the securities business, the Bank assessed the effectiveness of the establishment and implementation of its internal controls system in accordance with the items for judgment of the effectiveness of internal controls systems as contained in the Regulations Governing the Establishment of Internal Controls Systems by Service Enterprises in Securities and Futures Markets promulgated by the Securities and Futures Bureau of the Financial Supervisory Commission. Careful assessment shows that the Bank's units did effectively carry out internal controls and regulatory compliance during this year, and did strengthen internal controls in regard to the financial management business. This Statement will become a major part of the Bank's annual report and its public announcements, and will be made public. Any fraudulent statements, undisclosed items, or other illegality will incur legal responsibility under Articles 20, 32, 171, and 174 of the Securities and Exchange Act. Submitted to the Financial Supervisory Commission, Executive Yuan Attestor Chairperson: President: General Auditor:, Compliance Officer: Jan. 26,

26 Statement Internal Control of Securities Business/ Supervisors' Report Statement Internal Control of Securities Business According to a self-audit carried out by the Taiwan Cooperative Bank, the internal controls system of the Bank did conform to the following conditions during the period of Jan. 1, 2006 through Dec. 31, 2006: 1. The Taiwan Cooperative Bank fully realizes that the establishment, implementation, and maintenance of an internal control system is the responsibility of the Bank's Board of Directors and management team, and has in fact established such a system. The purpose of the system is to provide reasonable assurance that the objectives of effective and efficient business operations (including profitability, performance, and protection of asset quality), the reliability of financial reporting, and compliance with related laws and regulations are being achieved. 2. Internal control systems have inherent limitations, however well they are designed, and an effective international control system can only provide reasonable assurance of the achievement of the three objectives mentioned above. Moreover, the effectiveness of an internal control system may change along with environmental or situational changes. However, the Bank's internal controls system contains a selfmonitoring mechanism, and corrective action is taken as soon as a deficiency is identified. 3. Based on the judgment items in the criteria for evaluation of internal control systems as contained in the Guidelines for the Establishment of Internal Controls Systems by Securities and Futures Enterprises, the TCB has carried out an evaluation to ascertain the effectiveness of the design and implementation of its internal controls system. The criteria adopted for the evaluation of internal controls systems under the Guidelines include five factors: (1) the control environment, (2) risk evaluation, (3) control operations, (4) information and communication, and (5) supervision. Each of these component elements contains a number of items. For detailed information on these items, please refer to the provisions of the Guidelines. 4. The TCB has adopted the internal controls judgment criteria mentioned above to evaluate the effectiveness of the establishment and implementation of its internal controls system. 5. Based on the results of the evaluation mentioned above, we believe that the establishment and implementation of the internal controls system (including the supervision and management of subsidiaries) during the period mentioned above, including the extent of achievement of the known operational effectiveness and efficiency objectives, the reliability of financial reporting, and compliance with related laws and regulations, were effective and able to assure the reasonable achievement of the objectives described above. 6. This Statement will become a major part of the TCB's Annual Report and Public Statement, and will be released to the public. Any discrepancy or omission in the content of the public statement would be a violation of Articles 20, 32, 171, and 174 of the Securities and Exchange Act and would incur legal responsibility. 7. The content of this Statement was approved by the 17 directors present at the TCB Board of Directors Meeting on Jan. 26, 2007, with no objection. Taiwan Cooperative Bank Chairperson: Feb. 15, 2007 President: 26

27 Supervisors' Report We have examined, in accordance with Article 219 of the Company Law, the financial statements and consolidated financial statements, proposed distribution of profit, and business reports as certified by Li- Chi Chen and Ryh-Yan Chang of Deloitte & Touche, and have found no discrepancies. Resident Supervisor Fu-Deng Hsieh Taiwan Cooperative Bank Resident Supervisor: Supervisor: Supervisor: Supervisor: Supervisor: Mar. 28,