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Contents 2 Message to Shareholders 2 Major Achievements in 2016 4 Operating Performance in 2016 4 Operating Strategies for 2017 6 Business Targets for 2017 6 Credit Ratings 7 Bank Profile 7 Date of Establishment 7 History 9 Corporate Governance Report 9 Organization Chart 10 Bank’s Subsidiaries Chart 10 Major Corporate Functions 12 Directors, Supervisors and Executive Officers 13 Major Shareholder 13 Corporate Governance Execution Status and Deviations 15 Implementation of Corporate Social Responsibility 18 Operational Highlights 18 Annual Business Plans for 2017 20 Market Analysis 22 Human Resources 23 Financial Information 23 Condensed Consolidated Balance Sheets 24 Condensed Consolidated Statements of Comprehensive Income 24 Financial Analysis 25 Supervisors’ Report 26 Consolidated Financial Statements 104 Stand Alone Financial Statements 111 Risk Management 111 Credit Risk Management System 112 Operational Risk Management System 114 Market Risk Management System 116 Head Office and Branches 116 Head Office 117 Domestic Branches 128 Overseas Units 1. Message to Shareholders The global economy experienced a moderate growth in 2016. Factors influencing the banking industry in Taiwan included a slow growth in the overseas markets, a sluggish housing market, and a narrow interest rate spread which resulted in stagnant profits. Nevertheless, with support from our customers and efforts from our dedicated staff, we continued to be a leader in the amount of deposits and loans. Our net income in 2016 reached a record high of NT$12.524 billion with EPS of NT$1.48. Our non-performing loan (NPL) ratio was 0.37% and our coverage ratio increased to 321.27% in the same year. Looking forward to 2017, the global economy is expected to recover gradually. However, factors including rising interest rates and policies of the Trump administration in the U.S., combined with a continued rise of worldwide trade protectionism, the future development of Brexit, a rebalancing of the Chinese economy, volatility in global oil prices and geopolitical issues together create downside risks for the global recovery. Directorate-General of Budget, Accounting and Statistics (DGBAS), Executive Yuan forecasts an economic growth of 1.92% in 2017, which indicates a moderate economic growth. The government will proactively promote the New Southbound Policy and Innovative Industries Policy to facilitate the transformation and upgrade of our domestic economy. This will help domestic banks to boost momentum of the operational development and expand business opportunities for financial services. Following the principles of sound operations and equally balancing quality and quantity, we will strengthen our credit asset quality, enhance capital utilization efficiency, improve wealth management services, and expand the scale of our asset management. Moreover, on the trend of financial technology development, we will provide digital financial services. Along with optimizing transaction systems, reinforcing internal control and legal compliance, and nurturing professional talents, we aim to exploit our competitive advantages and achieve profit target successfully. Our major achievements in 2016 and operating strategies for 2017 are described briefly below: 1.1 Major Achievements in 2016 A. Capital Adequacy In 2016, we underwent a cash capital increase of NT$5.3 billion and issued subordinated debentures of NT$5 billion, which effectively improved our capital adequacy and strengthened our capital structure. At the end of 2016, our capital adequacy ratio, Tier 1 capital ratio, and common equity ratio were 12.91%, 9.60%, and 9.60%, respectively. 2 Chairman Tsan-Chang Liao Taiwan Cooperative Bank B. Deposits At the end of 2016, our deposit balance was NT$2,564.4 billion, ranking Second in Taiwan. The amount of demand deposit stood at NT$1,187.7 billion (excluding government deposits), placed us in the First Place throughout Taiwan. We effectively improved our deposit structure and lowered funding costs. C. Loans (1) At the end of 2016, our loan balance was NT$1,975.5 billion, ranking Second in Taiwan, in which the small-and-medium enterprises (SME) loans stood at NT$581 billion, ranking Second in Taiwan. Our loan to private enterprise loans (excluding government institutions and public enterprises) was NT$812.4 billion, ranking in the First Place throughout Taiwan. (2) In year 2016, we arranged/coordinated 75 syndication loans, for a total amount of NT$438 billion, and our participation amount reached NT$60.3 billion. According to Thomson Reuters Basis Point, our bookrunner market share ranked Third in Taiwan. (3) In November 2015, we launched a “Bagful of Happiness Loan,” Taiwan’s first-ever commercial reverse mortgage product, which received the Excellence Award in the Best Consumer Banking Category of the 8th Outstanding Banking & Finance Business Awards in November 2016. As of December 2016, the cumulative number of mortgages reached 516 with approved credit of NT$2.968 billion, ranking in the First Place throughout Taiwan. (4) We won the “Special Award for Balanced Regional Development - Loans to SME” and the “Facilitation of Regional Development Award” for outstanding financial institutions of SME credit guarantees. D. Overseas Business Our overseas pre-tax income (including OBU and overseas units) was NT$4.359 billion, accounting for 29.97% of total income. Our overseas units and services have expanded to Europe, the U.S., Australia, and throughout Asia. Our New York, USA branch was opened on January 6, 2016, and our Siem Reap sub-branch under Phnom Penh branch in Cambodia was opened on July 8, 2016. Add up the future (work in progress) branches in Changsha, China, in city center of Phnom Penh, Cambodia, and in Melbourne, Australia, we will have 20 overseas units. E. Wealth Management Business The net service fee income from trust, financial planning, insurance (including mortgage life insurance), and gold bankbook reached NT$4.034 billion, making up 64.36% of the total net fee income. We added new products to our lineup in 2016, including domestic and offshore funds, as well as foreign fixed-income securities, for a total of 162 funds. F. E-banking We received the “Best Business Development” as well as the “Best Innovation” in Online Transaction Services Award from the Financial Information Service Co., Ltd., and the “Excellence Award in Number of Checks Received on a Collection Basis” in the ACH promotion competition hosted by Taiwan Clearing House in 2016. G. Credit Card Business In 2016, we actively promoted our core products including the Lugang Mazu Card, Hi Lai Card, Worldwide Card, and Joint-iPass Card, resulting in overall transaction amount of NT$30.629 billion, equivalent to an annual growth of 13.12%; the transaction amount of the government’s online purchasing card reached NT$874 million in 2016, ranking in the First Place throughout Taiwan with a market share of 35.15%. Messsage to Shareholders 3 H. Corporate Social Responsibility In response to the government’s “Sport for All” policy, we have assisted in the training of national athletes for an extended period of time. We received the “Sports Activist Award” for eight consecutive years and were accredited with the “Exercise Enterprise Certification” from the Sports Administration, Ministry of Education. 1.2 Operating Performance in 2016 A. Net Interest：NT$31,402.40 million B. Total Net Revenue and Gain Other than Interest：NT$9,432.57 million C. Allowance for Bad-Debt Expenses：NT$3,802.66 million D. Operating Expenses：NT$22,486.08 million E. Income before Income Tax：NT$14,546.23 million F. Net Income：NT$12,523.60 million G. Basic Earnings Per Share：NT$1.48 1.3 Operating Strategies for 2017 A. Strengthen credit asset quality and enhance capital utilization efficiency (1) Promote the industrial sector and supply chain financing, activate the approved but unused line of credit, and focus on our corporate customers with a single mid- or long-term loan. Strive to acquire new business via integrated marketing. (2) Focus on the allocation of risk-weighted assets, utilize guarantee mechanism under credit guarantee funds and implement differential pricing