This study uses the Data Envelopment Analysis Method. It evaluates the performance of 25 domestic banks in Taiwan based on data collected from 1995 to 2009. The Regression Analysis was used to analyze the relationship between loan quality and the effectiveness of the banks performance. The research found that 11.47% of domestic banks display technical inefficiency, and the main reason of this inefficiency comes from bank's internal management system. The value of TFPCH becomes less than 1, it indicates that approximately 5% of the study samples show a decline in productivity. The NPL ratio of credit quality variables in the productivity index has a negative statistical significance, it indicates non-performing loan ratios are down and that helps banks to improve credit quality and increased their productivity.