PROSPECTUS

January 10, 2014

This Prospectus is being displayed in the website to make the Prospectus accessible to more investors. The PSE assumes no responsibility for the correctness of any of the statements made or opinions or reports expressed in the Prospectus. Furthermore, the PSE makes no representation as to the completeness of the Prospectus and disclaims any liability whatsoever for any loss arising from or in reliance in whole or in part on the contents of the Prospectus.

(a universal banking corporation organized under Philippine law)

PHILIPPINE NATIONAL BANK

PNB FINANCIAL CENTER PRES. DIOSDADO MACAPAGAL BLVD. PASAY CITY TELEPHONE NUMBER: (632) 891-6040 to 70 or (632) 526-3131 to 92

Prospectus Relating to the S12 billion Rights Offer Of 162,931,262 Common Shares with a Par Value of S40.00 per Share To be offered at the Offer Price of S71.00 per Rights Share To be listed and traded on The Philippine Stock Exchange, Inc. Ratio of 15:100 Common Shares Held as of Record Date

Joint International Lead Managers and International Underwriters

Sole Domestic Underwriter

THE PHILIPPINE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE AND SHOULD BE REPORTED IMMEDIATELY TO THE PHILIPPINE SECURITIES AND EXCHANGE COMMISSION. THE OFFER OF THE SECURITIES IS EXEMPT PURSUANT TO SECTION 10.1 OF THE SECURITIES REGULATION CODE OF THE PHILIPPINES (THE SRC) AND, ACCORDINGLY THE SECURITIES HAVE NOT BEEN REGISTERED WITH THE PHILIPPINE SECURITIES AND EXCHANGE COMMISSION UNDER THE SRC. ANY FUTURE OFFER OR SALE THEREOF IS SUBJECT TO REGISTRATION REQUIREMENTS UNDER THE SRC UNLESS SUCH OFFER OR SALE QUALIFIES AS AN EXEMPT TRANSACTION.

PHILIPPINE NATIONAL BANK PNB FINANCIAL CENTER PRES. DIOSDADO MACAPAGAL BLVD. PASAY CITY TELEPHONE NUMBER: (632) 891-6040 to 70 or (632) 526-3131 to 92 www.pnb.com.ph This Prospectus relates to the offering for subscription (the Offer) of 162,931,262 shares of common stock (the Rights Shares), with a par value of P40.00 per share (the Common Shares), of Philippine National Bank (the Bank), a banking corporation organized under the laws of the Republic of the Philippines, by way of a stock rights offering to existing eligible shareholders of record of the Common Shares (the Eligible Shareholders) at the proportion of fifteen (15) Rights Share for every one hundred (100) existing Common Shares held as of January 16, 2014 (the Record Date) at an offer price of P71.00 per Rights Share (the Offer Price). Any fractional share shall be disregarded in the computation of the Rights Shares that Eligible Shareholders will be entitled to. The Bank intends to source 32,586,252 of the Rights Shares from existing authorized but unissued capital stock, while the remaining Rights Shares will be sourced from an increase in authorized capital stock of the Bank, which the Bank will apply for with the Philippine Securities and Exchange Commission (the PSEC) immediately after the conclusion of the Offer. LT Group, Inc. (LTG), which currently indirectly owns 59.83% of the Banks shareholdings, has agreed to subscribe to 97,477,427 Rights Shares, while PNB Capital and Investment Corporation (PNB Capital) has agreed to procure Eligible Shareholders to subscribe to: (i) up to 32,867,583 of the Rights Shares; and (ii) any such portion of the 97,477,427 Rights Shares not subscribed to by LTG, which shall be sourced from the increase in authorized capital stock of the Bank. LTG has consented, and PNB Capital has agreed to procure the consent of the relevant Eligible Shareholders, to the delayed delivery of their subscribed Rights Shares pending the approval of the Banks application for an increase in its authorized capital stock. As soon as the Banks application for increase in authorized capital stock is approved by the PSEC, the Banks Rights Shares to be issued from such increase in authorized capital stock will be listed with The Philippine Stock Exchange, Inc. (the PSE). PNB Capital (the Sole Domestic Underwriter) with Credit Suisse (Singapore) Limited (Credit Suisse) and Deutsche Bank AG, Hong Kong Branch (Deutsche Bank, and together with Credit Suisse, the Joint International Lead Managers and International Underwriters) (together with the Sole Domestic Underwriter, the Joint Global Coordinators and Bookrunners) shall purchase or procure subscribers to purchase the unsubscribed portion of the Offer in order to ensure that the Rights Shares covered by the Offer will be fully subscribed. Any such Rights Shares that are unsubscribed in the Offer, after the second round, may be offered by the Sole Domestic Underwriter only to qualified buyers in the Philippines in reliance on Section 10(1) of the SRC, and outside the Philippines and the United States by the Joint International Lead Managers and the International Underwriters in offshore transactions outside of the Philippines and the United States pursuant to Regulation S under the United States Securities Act of 1933, as amended (the Securities Act). Holders of Common Shares who are eligible to participate in the Offer are: (i) holders located inside the Philippines and (ii) holders located in jurisdictions outside the Philippines and outside the United States where it is legal to participate in the Offer under the securities laws of such jurisdiction. The Joint Global Coordinators and Bookrunners will act as underwriters of the Offer. To the extent that any Rights Shares remain unsubscribed for by the Eligible Shareholders after the Offer, the Joint Global Coordinators and Bookrunners will take up all such remaining Rights Shares. The Sole Domestic Underwriter will place certain unsubscribed Rights Shares to other investors in the Philippines (the Domestic Offer) in accordance with the domestic underwriting agreement (the Domestic Underwriting Agreement). The Joint International Lead Managers and International Underwriters will take up the unsubscribed Rights Shares in accordance with the international underwriting agreement (the International Underwriting Agreement) entered into between the Joint International Lead Managers and International Underwriters and the Bank. Credit Suisse and Deutsche Bank were appointed to act as Joint International Lead Managers and International Underwriters to the Offer and to use their reasonable efforts to assist the Bank in soliciting interest from existing shareholders of the Bank in the purchase of the Rights Shares. The authorized capital stock of the Bank is P50,000,000,040 consisting of 1,250,000,001 Common Shares with a par value of P40.00 per share. As of September 30, 2013, the Banks total outstanding and issued shares of capital stock was 1,086,208,416. In meetings held on February 9, 2013 and May 28, 2013, respectively, the Board and shareholders of the Bank each approved an increase in the authorized capital stock of the Bank to i

P70,000,000,040 divided into 1,750,000,001 Common Shares. The Bank will apply for approval of this increase in capital stock immediately after the conclusion of the Offer. See The Rights Offer. After the Offer, the Bank will have 1,249,139,678 issued and outstanding Common Shares. All of the Common Shares of the Bank issued and to be issued pursuant to the Offer have, or will have, identical rights and privileges. The Common Shares may be owned by any person or entity regardless of citizenship or nationality, subject to certain restrictions on foreign ownership, including limitations on the amount of capital stock outstanding and entitled to vote that may be held by non-Philippine nationals. See Summary of the OfferRestrictions on Ownership, Risk FactorsRisks relating to the Rights SharesThe Banks shares are subject to Philippine foreign ownership limitation beginning on page 35 of this Prospectus and Description of the Securities. Each holder of Common Shares will be entitled to such dividends as may be declared by the Banks board of directors (the Board or the Board of Directors), provided that the Bangko Sentral ng Pilipinas (the BSP) and the PSEC approve such declaration, and that any stock dividends declaration requires the approval of shareholders holding at least two-thirds of the Banks total outstanding capital stock. Dividends may be declared only from the Banks unrestricted retained earnings. Appraisal increment amounting to P7.7 billion and translation adjustment of P1.3 billion applied to deficit through a quasi-reorganization of the Bank in 2002 and 2000 are not available for dividend declaration. There are no specific requirements relating to the Banks dividend policy, except as disclosed in this Prospectus. The Bank has not declared any dividends during the past three years. See Dividend Policy. The Banks Common Shares are listed on the PSE under the symbol PNB. On September 30, 2013, the closing price of the Banks Common Shares on the PSE was P87.40 per Common Share. The Bank files annual and interim reports, as well as other information, with the PSE. The information filed by the Bank with the PSE does not form part of this Prospectus, is not incorporated by reference herein and should not be relied on when making an investment decision with respect to the Rights Shares. The Offer is conditioned on the listing of the Rights Shares on the PSE. The approval by the PSE of the Offer is based on the price set forth above. The Bank expects to raise gross proceeds of up to P12 billion. The net proceeds from the Offer, determined by deducting from the gross proceeds the total issue management, underwriting and selling fees, listing fees, taxes and other related fees and expenses, which are estimated to be approximately 2.1% of the proceeds of the Offer, will be used primarily for capital infusion into the Banks subsidiary Allied Saving Bank and for strengthening the capital ratio of the Bank as allowed under BSP regulations. See Use of Proceeds. No dealer, salesman, or any other person has been authorized to give any information or to make any representation not contained in this Prospectus. If given or made, any such information or representation must not be relied upon as having been authorized by the Bank or any of the Joint Global Coordinators and Bookrunners. The distribution of this Prospectus and the offer and sale of the Rights Shares may, in certain jurisdictions, be restricted by law. The Bank and the Joint Global Coordinators and Bookrunners require persons into whose possession this Prospectus comes to inform themselves of and observe all such restrictions. NOTHING IN THIS PROSPECTUS CONSTITUTES AN OFFER OF SECURITIES FOR SALE IN THE UNITED STATES OR ANY OTHER JURISDICTION WHERE IT IS UNLAWFUL TO DO SO. THE SECURITIES HAVE NOT BEEN, AND WILL NOT BE, REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE SECURITIES ACT), OR THE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR OTHER JURISDICTION AND THE SECURITIES MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES, EXCEPT PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND APPLICABLE STATE OR LOCAL SECURITIES LAWS. Unless the context clearly indicates otherwise, any reference to the Bank refers to Philippine National Bank on a consolidated basis. The information contained in this Prospectus relating to the Bank, its operations and those of its subsidiaries and associates has been supplied by the Bank, unless otherwise stated herein. To the best of its knowledge and belief, the Bank (which has taken all reasonable care to ensure that such is the case) confirms that, as of the date of this Prospectus, the information contained in this Prospectus relating solely to the Bank, its operations and those of its subsidiaries and associates is true and that there is no material misstatement or omission of fact which would make any statement in this Prospectus misleading in any material respect and that the Bank hereby accepts full and sole responsibility for the accuracy of the information contained in this Prospectus with respect to the same. Unless otherwise indicated, all information in this Prospectus is as of the ii

date of this Prospectus. Neither the delivery of this Prospectus nor any sale made pursuant to this Prospectus shall, under any circumstances, create any implication that the information contained herein is correct as of any date subsequent to the date hereof or that there has been no change in the affairs of the Bank since such date. The Joint Global Coordinators and Bookrunners assume no liability for information supplied by the Bank in relation to this Prospectus. In making an investment decision, investors must rely on their own examination of the Bank and the terms of the Offer, including the material risks involved. The Offer is being made on the basis of this Prospectus only. Market data and certain industry forecasts used throughout this Prospectus were obtained from internal surveys, market research, publicly available information and industry publications. Industry publications generally state that the information contained therein has been obtained from sources believed to be reliable, but that the accuracy and completeness of such information is not guaranteed. Similarly, internal surveys, industry forecasts and market research, while believed to be reliable, have not been independently verified, and neither the Bank nor the Joint Global Coordinators and Bookrunners make any representation as to the accuracy of such information. In this Prospectus, references to Pesos or P are to the lawful currency of the Philippines. The Bank maintains its accounts in Philippine Pesos. References to U.S. Dollars, US$ or $ are to the lawful currency of the United States of America. This Prospectus contains translations of certain amounts into U.S. Dollars at specified rates solely for the convenience of the reader. In addition, unless otherwise indicated, U.S. Dollar/ Philippine Peso exchange rates referred to in this Prospectus are Philippine Dealing System weighted average rates for the indicated period or on the applicable date, as relevant. No representation is made that the Peso, U.S. Dollar, or other currency amounts referred to herein could have been or could be converted into Pesos, U.S. Dollars, or any other currency, as the case may be, at this rate, at any particular rate or at all. This Prospectus includes forward-looking statements. The Bank has based these forward-looking statements largely on its current expectations and projections about future events and financial trends affecting its business. The words believes, may, will, estimates, continues, anticipates, intends, expects and similar words are intended to identify forward-looking statements. In light of these risks and uncertainties associated with forward-looking statements, investors should be aware that the forward- looking events and circumstances discussed in this Prospectus might not occur. The Banks actual results could differ substantially from those anticipated in the Banks forward-looking statements. An application for listing of the Rights Shares was approved on December 11, 2013 by the board of directors of the PSE, subject to the fulfillment of certain listing conditions. The PSE assumes no responsibility for the correctness of any statements made or opinions expressed in this Prospectus. The PSE makes no representation as to its completeness and expressly disclaims any liability whatsoever for any loss arising from reliance on the entire or any part of this Prospectus. Such approval for listing is permissive only and does not constitute a recommendation or endorsement of the Rights Shares by the PSE. On December 4, 2013, the PSEC approved the Banks Application for Confirmation of Exempt Transaction, thereby confirming that the Offer is exempt from the registration requirements of the SRC under Sections 10.1(e) and 10.1(l) of the SRC. In a letter dated November 18, 2013, the BSP took note of and expressed no objection to the proposed Offer of the Bank. THE OFFER OF THE SECURITIES IS EXEMPT PURSUANT TO SECTION 10 OF THE SECURITIES AND REGULATION CODE AND, ACCORDINGLY THE SECURITIES HAVE NOT BEEN REGISTERED WITH THE PHILIPPINE SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES REGULATION CODE AND ANY FUTURE OFFER OR SALE THEREOF IS SUBJECT TO REGISTRATION REQUIREMENTS UNDER THE SECURITIES REGULATION CODE UNLESS SUCH OFFER OR SALE QUALIFIES AS AN EXEMPT TRANSACTION. PHILIPPINE NATIONAL BANK By:

OMAR BYRON T. MIER President and Chief Executive Officer iii

TABLE OF CONTENTS
Page Page

GLOSSARY OF CERTAIN TERMS. . . . . . . . . . . . . . SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SUMMARY OF CONSOLIDATED FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . THE RIGHTS OFFER . . . . . . . . . . . . . . . . . . . . . . . . SUMMARY OF THE OFFER . . . . . . . . . . . . . . . . . . RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . PLAN OF DISTRIBUTION . . . . . . . . . . . . . . . . . . . . DIVIDEND POLICY . . . . . . . . . . . . . . . . . . . . . . . . . DETERMINATION OF OFFER PRICE . . . . . . . . . . . DILUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CAPITALIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . SELECTED STATISTICAL DATA . . . . . . . . . . . . . . MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . DISCUSSION OF HISTORICAL FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF ALLIED BANK . . . . . . . . . . . . . . . . . . . . . . . . BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 4 11 15 16 21 38 39 41 42 43 44 45

57

75 88

DESCRIPTION OF ALLIED BANK PRIOR TO THE MERGER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . THE PHILIPPINE BANKING INDUSTRY. . . . . . . . . BANKING REGULATION AND SUPERVISION . . . . ASSETS AND LIABILITIES . . . . . . . . . . . . . . . . . . . CORPORATE STRUCTURE . . . . . . . . . . . . . . . . . . . MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . RELATED PARTY TRANSACTIONS . . . . . . . . . . . . PRINCIPAL SHAREHOLDERS . . . . . . . . . . . . . . . . . RISK MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . MARKET PRICE OF THE BANKS STOCK AND RELATED STOCKHOLDER MATTERS . . . . . . . . THE PHILIPPINE STOCK MARKET . . . . . . . . . . . . PHILIPPINE FOREIGN EXCHANGE AND FOREIGN OWNERSHIP CONTROLS . . . . . . . . . . DESCRIPTION OF THE SECURITIES . . . . . . . . . . . PHILIPPINE TAXATION . . . . . . . . . . . . . . . . . . . . . . LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . INDEPENDENT AUDITORS . . . . . . . . . . . . . . . . . . . INDEX TO FINANCIAL STATEMENTS . . . . . . . . . .

112 140 145 153 165 167 180 182 187 191 192 197 198 200 203 204 F-1

iv

GLOSSARY OF CERTAIN TERMS In this Prospectus, unless the context otherwise requires, the following terms shall have the meanings set out below:

ABC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . AMLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Anti-Money Laundering Act . . . . . . . . . . .

Allied Banking Corporation Anti-Money Laundering Council the Anti-Money Laundering Act 2001 of the Philippines

ATM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . automated teller machine the Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . Philippine National Bank, and except where the context otherwise requires, all of its consolidated subsidiaries any of the days in a week, other than Saturday, Sunday and holidays, when banks are not required or authorized to close in Pasay City, Makati City and the City of Manila Philippine Bureau of Internal Revenue the board of directors of the Bank Bangko Sentral ng Pilipinas, the Philippine Central Bank the weighted average rate for the purchase of U.S. dollars for Pesos under the PDS appearing as of any given date in the Reference Exchange Rate Bulletin of the BSP Credit Suisse (Singapore) Limited Deutsche Bank AG, Hong Kong Branch a director of the Bank loans granted to directors, officers, stockholders, and related interests existing holders of record of Common Shares as of the Record Date who are: (i) located in the Philippines; and (ii) located in jurisdictions outside the Philippines and the United States where it is legal to participate in the Offer under the securities laws of such jurisdictions foreign currency deposit unit generally accepted accounting principles General Banking Law (Republic Act No. 8791)

Banking Day. . . . . . . . . . . . . . . . . . . . . . . . .

BIR. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Board or the Board of Directors . . . . . . . . BSP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . BSP Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Credit Suisse. . . . . . . . . . . . . . . . . . . . . . . . . Deutsche Bank . . . . . . . . . . . . . . . . . . . . . . . Director . . . . . . . . . . . . . . . . . . . . . . . . . . . . . DOSRI. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Eligible Shareholders . . . . . . . . . . . . . . . . .

FCDU . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . GAAP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . General Banking Law . . . . . . . . . . . . . . . . . Government (or National Government) . . . . . . . . . . . . . . . . . . . . . . IBCL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Joint Global Coordinators and Bookrunners. . . . . . . . . . . . . . . . . . . . . . . Joint International Lead Managers and International Underwriters . . . . . . . . . .

the government of the Republic of the Philippines interbank call loan

Credit Suisse, Deutsche Bank and the Sole Domestic Underwriter

Credit Suisse and Deutsche Bank 1

Jumbo Certificate . . . . . . . . . . . . . . . . . . . .

a new stock certificate covering all the shares lodged with the PDTC and issued in the name of the PCD Nominee local government unit LT Group, Inc., the primary holding company for the consumer interests of Dr. Lucio C. Tan, and the largest indirect shareholder of the Bank the metropolitan area comprising the cities of Kalookan, Las Pias, Makati, Malabon, Mandaluyong, Manila, Marikina, Muntinlupa, Navotas, Paraaque, Pasay, Pasig, Quezon, Valenzuela, Taguig and San Juan, which together comprise the National Capital Region and are commonly referred to as Metro Manila Monetary Board of the BSP Moodys Investor Services, Inc. New Central Bank Act (Republic Act No. 7653)

LGU . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . LTG . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Metro Manila . . . . . . . . . . . . . . . . . . . . . . . .

Monetary Board . . . . . . . . . . . . . . . . . . . . . . Moodys . . . . . . . . . . . . . . . . . . . . . . . . . . . . New Central Bank Act . . . . . . . . . . . . . . . .

NDFs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . non-deliverable forwards NPAs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . non-performing assets NPLs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . non-performing loans OFWs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . overseas Filipino workers PAS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Philippine Accounting Standards PCD Nominee . . . . . . . . . . . . . . . . . . . . . . . PCD Nominee Corporation, a corporation wholly-owned by the PDTC

PDIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Philippine Deposit Insurance Corporation PDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PDSWAR . . . . . . . . . . . . . . . . . . . . . . . . . . . PDTC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . the Philippine Dealing System Philippine Dealing System weighted average rate the Philippine Depository and Trust Corporation, the central securities depository of, among others, securities listed and traded on the PSE the lawful currency of the Philippines

Pesos and P . . . . . . . . . . . . . . . . . . . . . . . . .

PFRS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Philippine Financial Reporting Standards Philippine Corporation Code. . . . . . . . . . . Corporation Code of the Philippines, Batas Pambansa Blg. 68 Philippine GAAP. . . . . . . . . . . . . . . . . . . . . generally accepted accounting principles in the Philippines Philippine National . . . . . . . . . . . . . . . . . . . as defined under the Republic Act No. 7042, as amended, means a citizen of the Philippines, or a domestic partnership or association wholly-owned by citizens of the Philippines, or a corporation organized under the laws of the Philippines of which at least 60.0% of the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines, or a corporation organized abroad and registered to do business in the Philippines under the Philippine Corporation Code, of which 100.0% of the capital stock outstanding and entitled to vote is wholly-owned by Filipinos or a trustee of funds 2

for pension or other employee retirement or separation benefits, where the trustee is a Philippine National and at least 60.0% of the fund will accrue to the benefit of Philippine Nationals Philippines . . . . . . . . . . . . . . . . . . . . . . . . . . PSE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PSEC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . RA 7721 . . . . . . . . . . . . . . . . . . . . . . . . . . . . RA 9337 . . . . . . . . . . . . . . . . . . . . . . . . . . . . Republic of the Philippines The Philippine Stock Exchange, Inc. the Philippine Securities and Exchange Commission Republic Act No. 7721 Republic Act No. 9337, amending certain provisions of the Philippine National Internal Revenue Code of 1997 Philippine National Bank-Trust Banking Group Regulation S under the U.S. Securities Act real and other properties acquired Standard & Poors Rating Services Securities Clearing Corporation of the Philippines SyCip, Gorres, Velayo & Co., a member firm of Ernst & Young Global Limited Statements of Financial Accounting Standards shares of common stock of the Bank, each with a par value of P40 small-and-medium-enterprises PNB Capital and Investment Corporation the Special Purpose Vehicle Act of 2002 (Republic Act No. 9182) special purpose vehicle companies Securities Regulation Code of the Philippines (Republic Act No. 8799) and its implementing rules, as amended a group of companies and individual shareholders, representing one of the largest conglomerates in the Philippines with interests in banking and financial services, aviation, beverages, chemicals, distillery, education, food, real estate development and tourism, among others the Banks treasury operations unit investment trust funds the lawful currency of the United States of America generally accepted accounting principles in the United States the United States Securities Act of 1933, as amended value-added tax 3

Receiving Agent . . . . . . . . . . . . . . . . . . . . . Regulation S . . . . . . . . . . . . . . . . . . . . . . . . . ROPA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S&P . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SCCP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SGV & Co. . . . . . . . . . . . . . . . . . . . . . . . . . .

SFAS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SMEs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sole Domestic Underwriter . . . . . . . . . . . . SPV Act. . . . . . . . . . . . . . . . . . . . . . . . . . . . . SPVs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SRC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Tan Companies . . . . . . . . . . . . . . . . . . . . . .

Treasury . . . . . . . . . . . . . . . . . . . . . . . . . . . . UITF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . U.S.$ or U.S. dollar. . . . . . . . . . . . . . . . . . . U.S. GAAP . . . . . . . . . . . . . . . . . . . . . . . . . . U.S. Securities Act . . . . . . . . . . . . . . . . . . . VAT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

SUMMARY This summary highlights information contained elsewhere in this Prospectus. The following summary is qualified in its entirety by more detailed information and financial statements, including notes thereto, appearing elsewhere in this Prospectus. For a discussion of certain matters investors should consider in evaluating an investment in the Rights Shares, see Risk Factors. Investors are recommended to read this entire Prospectus carefully, including the Banks consolidated financial statements and related notes. Overview As of September 30, 2013, the Bank, subsequent to its merger with Allied Banking Corporation (ABC) effective February 9, 2013, was the fourth largest privately-owned Philippine commercial bank in terms of total assets, with total assets of P606.1 billion. As of September 30, 2013, the Bank had 656 branches and offices and 854 ATMs located throughout the Philippines. The Bank has the largest overseas network among Philippine banks with 81 branches, representative offices, remittance centers and subsidiaries in 16 locations in the United States, Canada, Europe, the Middle East and Asia. As of September 30, 2013, the Bank also maintained correspondent relationships with 1,120 banks and financial institutions worldwide. As a result of this large geographic coverage, the Bank is one of the leading providers of remittance services to Overseas Filipino Workers (OFWs). The Bank provides a full range of banking and other financial services to large corporate, middle-market, small to medium-sized enterprises (SMEs) and retail customers including OFWs, as well as to the Philippine Government, National Government agencies (NGAs), local government units (LGUs) and government owned and controlled corporations (GOCCs). While the Banks principal focus has historically been to serve the banking needs of Government-related entities and GOCCs, the Banks focus since 2000 after the privatization has been to further develop its banking services for large corporates, middle-market, SMEs, retail customers and OFWs. The Banks principal commercial banking activities include deposit-taking, lending, bills discounting, trade finance, foreign exchange dealings, fund transfers/remittance servicing, a full range of retail banking and trust services, and treasury operations. Through its subsidiaries, the Bank also engages in a number of diversified financial and related businesses such as remittance servicing in the United States, Canada, Hong Kong, Italy, France and the United Kingdom, investment banking, non-life insurance, stock brokerage, leasing and financing and freight forwarding services. As of December 31, 2012, the Banks consolidated Tier 1 capital adequacy ratio and total consolidated capital adequacy ratio under the Basel Committee on Banking Supervisions Revised International Convergence of Capital Management and Capital Standards (BASEL II) as reported to the BSP were 11.9% and 18.1%, respectively. As of September 30, 2013, consolidated Tier 1 capital adequacy ratio and total consolidated capital adequacy ratio as reported to the BSP were 17.0% and 20.3%, respectively. The Bank has been listed on The Philippine Stock Exchange (PSE) since June 1989. The market capitalization of the Bank on September 30, 2013 (based on the closing price of the shares of the Bank on the PSE on that date of P87.40 per Share) was P94.9 billion. For the nine months ended September 30, 2013, the Banks total assets were P606.1 billion and its net income was P6.0 billion, compared to total assets of P331.0 billion and P312.1 billion as of December 31, 2012 and 2011, respectively, and net income of P5.0 billion and P4.8 billion in the years ended December 31, 2012 and 2011, respectively. The Banks results as of and for the nine months ended September 30, 2013 include the results of ABC beginning on the merger effectivity date of February 9, 2013.

The following table sets out the Banks selected key financial ratios for the periods indicated.
For the nine months For the year ended December 31, ended September 30, 2010 2011 2012 2013

Selected financial ratios

Net interest margin(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost-income ratio(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Return on average assets(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Return on average equity(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . NPL ratio(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total equity to total assets(6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans to deposits(7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Liquidity ratio(8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3.4% 57.7% 1.4% 15.2% 4.5% 9.5% 42.0% 35.3%

3.0% 58.7% 1.6% 15.0% 3.1% 11.2% 48.6% 46.3%

2.6% 60.9% 1.6% 13.5% 2.4% 12.0% 55.3% 44.6%

2.7% 60.2% 1.7% 12.9% 1.1% 13.8% 53.5% 46.6%

Notes: (1) For the years ended December 31, 2010, 2011 and 2012: net interest income divided by average interestearning assets. For the nine months ended September 30, 2013: net interest income divided by 9 multiplied by 12 divided by average interest earning assets. Interest-earning assets which mainly consist of Due from BSP and other banks, Interbank loans and Securities Purchased Under Resale Agreements, Trading and investment securities, and receivable from customers, net of NPLs. (2) Total operating expenses (excluding provision for impairment, credit and other losses) divided by operating income. (3) For the years ended December 31, 2010, 2011 and 2012: Net income divided by average total assets for the period indicated. For the nine months ended September 30, 2013: Net income divided by 9 multiplied 12 then divided by the average assets for the period. (4) For the years ended December 31, 2010, 2011 and 2012: Net income divided by average total equity for the period indicated. For the nine months ended September 30, 2013: Net income divided by 9 multiplied by 12 then divided by the average equity. (5) Total non-performing loans (net) divided by total adjusted loan portfolio. As of December 31, 2010, 2011 and 2012, ratios were computed based on the balances on the audited financial statements. As of September 30, 2013, the ratio was computed based on figures reported to the BSP. (6) Total equity divided by total assets. (7) Receivables from customers divided by total deposits. (8) Total liquid assets divided by total assets. History The Bank was established in 1916 by the Philippine Government. At that time, in addition to engaging in the general commercial banking business, the Bank also served as the de facto central bank of the Philippines. The Bank acted as the sole depository of Philippine Government deposits, the clearing house for the Philippine banking system, the custodian of bank reserves and the issuer of Philippine bank notes and Government bonds, functions which the Bank performed until 1949, when the Central Bank of the Philippines, which has since been renamed the BSP was established. Historically, as a bank which was then solely owned by the Government, the Bank played an important role in implementing the Governments financial policies. This included being a major provider of banking services to the Government as well as its agencies, LGUs and GOCCs, serving as a depository bank for working balances, providing fund transfers, disbursements, credits and import/export financing, administering trust funds, and acting as a channel for the sale of Government securities. Following Proclamation No. 50, the Government embarked on the privatization of the Bank. In June 1989, the Government offered to the Philippine public 30.0% of the outstanding shares of the Bank for a total consideration of P1.1 billion. In April 1992, the Government disposed of a further 10.0% of the outstanding shares in the Bank to the Philippine public for a total consideration of P2.1 billion. In December 1995, the Government disposed of a further 7.2% of the outstanding shares of the Bank. On May 27, 1996, it was incorporated with the PSEC as a juridical entity. Its Articles of Incorporation and By-Laws were duly filed.

As a result of the Asian financial crisis, the Bank suffered a liquidity crisis for the five years ended December 31, 2002, which necessitated significant levels of financial assistance from the BSP and the Philippine National Government (through the PDIC). The Bank had to undergo a rehabilitation program pursuant to a MOA signed by the Republic of the Philippines, the PDIC and certain Tan Companies. The MOA, which was signed on May 3, 2002, stipulated the following financial conditions: conversion into equity of P7.8 billion of the P25.0 billion assistance extended by the BSP and the PDIC; settlement of the P10.0 billion obligation by way of dacion en pago through the assignment of government and government related receivables; and the conversion of P6.1 billion into a ten-year loan with interest equivalent to the 91-day T-Bill rate plus 1.0%. In June 2007, the Bank settled its P6.1 billion loan to PDIC, four years ahead of maturity date. In August 2007, the Bank successfully completed a Tier 1 Follow-On Equity Offering where it raised about P5.1 billion, net of issuance cost of P199.5 million, in Tier 1 Capital. Together with the sale of 89 million primary shares, 71.8 million secondary shares owned by the Government through PDIC and the Department of Finance (DOF) were sold to the public paving the way for a complete exit of the Government from the Bank. As of September 30, 2013, LTG held indirect ownership over 45.51% of the Banks shares through various subsidiaries. Shareholders associated with or who issue proxies/special powers of attorney in favor of Director Lucio C. Tan from time to time held a total of about 31.19% of the Banks shares, while the latter held direct ownership over 1.19% of the Banks shares. The remaining 22.11% of the Banks shares were owned by other stockholders. Notwithstanding its status as a private bank, the Bank remains one of the Authorized Government Depository banks having been granted by the BSP the authority to accept government deposits on a continuing basis since the Bank has successfully met the BSP requirements for this license. Merger with Allied Banking Corporation On February 9, 2013, the Bank concluded its planned merger with ABC as approved and confirmed by the Board of Directors of the Bank and of ABC on January 22 and January 23, 2013, respectively. The respective shareholders of the Bank and ABC, representing at least two-thirds of the outstanding capital stock of both banks, approved the amended terms of the Plan of Merger of the two banks on March 6, 2012. The original Plan of Merger was approved by the affirmative vote of ABC and the Banks respective shareholders on June 24, 2008, representing at least two-thirds of the outstanding capital stock of both banks. On March 26, 2012, the Parent Company submitted to the BSP and PDIC applications for consent to the merger. On April 12, 2012, the application for the merger was filed with the PSEC. On July 25, 2012, the Parent Company received notice that the PDIC had given its consent to the merger. Likewise, on August 2, 2012, the Monetary Board of the BSP issued a resolution giving its consent to the merger. Finally, on January 17, 2013, the PSEC granted its approval to the merger. In addition, with respect to ABCs overseas subsidiaries, the Parent Company has also filed notices in relation to the merger with various relevant foreign regulatory agencies; and as of January 17, 2013 had received all necessary approvals to effectuate the merger. As of September 30, 2013, the merged Bank has a combined distribution network of 656 branches and offices and 854 ATMs nationwide. Based on September 30, 2013 figures, the merged entity was the fourth largest private domestic bank in the Philippines in terms of local branches and the fourth largest in terms of consolidated total assets (P606.1 billion), net loans and receivables (P258.2 billion) and deposits (P454.0 billion). In addition, it has the widest international footprint among Philippine banks spanning Asia, Europe, the Middle East and North America. With a combined 133 years of banking experience, the new Philippine National Bank now operates under the motto Bigger, Stronger, and Better. The Bank reaffirms its commitment towards building fruitful and solid partnerships with its clientele to help them achieve their financial goals. Recent Developments Impact of 2013 Typhoons and the Earthquake in Bohol As a result of the typhoons Maring and Santi, the earthquake in Bohol and, in particular typhoon Yolandawhich caused significant damage in Central Visayas and certain parts of Southern Luzonthe Bank

expects to incur losses as a result of claims for property damage by clients of the Banks non-life insurance company, PNB Gen. While the amount of these losses, particularly with respect to losses arising as a result of typhoon Yolanda have not been fully assessed at this time, the Bank currently estimates that these losses will be between P700 million and P800 million. In addition, the Bank is still assessing the impact of typhoon Yolanda on the Banks owned and invested properties. Competitive Strengths The Bank considers the following to be its principal competitive strengths relative to the banking sector: Well-positioned franchise in the robust Philippine banking sector The Bank believes that it is well-positioned in the robust Philippine banking sector. The Philippines has one of the lowest banking penetrations in Asia, leaving significant headroom for growth. According to the Economist Intelligence Unit, loan growth is expected to be strong at 13.5% on average over the next five years driven by strong domestic consumption and favorable demographics. The banking sector has also stabilized over the years, with the average net NPL ratio generally declining to 3.1% as of December 31, 2011, from 15.0% in 2002 according to data from the BSP. Under the new methodology adopted by the BSP, the banking sectors average net NPL ratios were 0.3% and 0.5% as of December 31, 2012 and September 30, 2013, respectively. The Banks scale, reach, business mix, product offerings and brand recognition have made it among the leading financial institutions in the Philippines. According to the Banks published SEC Form 17-Q Report, as of September 30, 2013, the Bank is the Philippines fourth largest private commercial bank in terms of total assets, deposits, net loans and receivables. Extensive and strategically located distribution network The Bank believes it has one of the most extensive branch networks among its competitors in the Philippines. As of September 30, 2013, the Bank had 656 domestic branches and offices and 854 ATMs. The Banks branches and ATMs are strategically located to maximize market potential and cover areas where competitors are less present, making financial services accessible to untapped customers and investment opportunities. The Banks extensive distribution network allows for a strong deposit gathering capability and the ability to sell and distribute fee-generating product lines such as bancassurance, trust, fixed-income securities and credit cards. According to BSP data, the 653 domestic branches and offices of the Bank comprised approximately 14% of the total number of branches of all private commercial and universal banks in the Philippines as of June 30, 2013. The 854 ATMs of the Bank represented about 8.1% of the total number of Bancnet ATMs of commercial and universal banks. Industry-leading OFW remittance business The Banks OFW remittance business accounted for approximately 21% market share by remittance volume as of August 31, 2013, based on data from the BSP, making it one of the largest in the Philippines. The Banks large-scale remittance business is supported by the Banks extensive overseas network of 81 branches, representative offices and remittance centers across 16 countries in North America, Europe, the Middle East and Asia. As of September 30, 2013, the Bank also maintained correspondent relationships with 1,120 banks and financial institutions worldwide. Diversified customer base The Bank provides a full range of banking and other financial services to a diversified customer base including government entities, large corporate, middle-market, SMEs and retail customers, with the Bank having the distinction of being one of only five authorized Government depository banks in the Philippines. As of September 30, 2013, the Banks receivables from customers were well-diversified across the large corporate, Government, SMEs and retail segments. The Bank believes that with the merger, additional customers contributed by ABC will strengthen the Banks ability to withstand periods of volatile economic markets as compared to many of its peers.

Solid capitalization, improving asset quality and stable financial performance The Bank believes its capital position is strong, with a consolidated Tier 1 ratio of 17.0% and consolidated CAR of 20.3% as of September 30, 2013 as reported to the BSP. Meanwhile, ABC maintained a strong capital position prior to its merger with the Bank, with a consolidated CAR of 21.0% for the year ended December 31, 2012 as reported to the BSP, higher than the BSP minimum required CAR of 10.0%. The Banks strong capital position gives it the flexibility to expand its business, invest in new products and services, information technology and other infrastructure required for the execution of its growth strategy. Moreover, the Bank has been committed to prudent credit approval and risk management processes, which have resulted in improving asset quality. As of September 30, 2013, the Bank recorded a net NPL ratio of 1.1%, a net NPA ratio of 3.6% and an NPL coverage ratio of 94.0% as reported to the BSP. The Bank believes that its asset quality would remain at a healthy level subsequent to its recent merger with ABC with the latter similarly maintaining strong asset quality. Moreover, the Bank believes it will benefit from ABCs stable financial performance in recent years. ABC has continuously maintained its position among the 10 largest private Philippine universal banks in terms of total assets, loan portfolio, deposits and net worth, according to data from the BSP. Synergies from its strong shareholder group As a member of the Tan Companies, the Bank believes that it will continue to benefit from being part of one of the largest and most diversified conglomerates in the Philippines, with interests ranging from beverages, airlines, tobacco, property development, education and others. The Bank believes that it has been able to achieve significant synergies with the Tan Companies, such as partnering with ABC (prior to its merger with the Company) and Philippine Airlines to introduce one of the most popular mileage rewards credit cards in the Philippine market, providing collection facilities through its nationwide branches for sellers of Philip Morris Fortune Tobacco Corporation, Inc.s products and for other Tan Companies and facilitating guarantees for ticketing agents of Philippine Airlines. Credit ratings upgrade The Banks borrowing costs are affected directly by the Banks credit ratings. The Banks post-merger credit ratings by Moodys Investor Service as of September 2013 and Standard & Poors as of March 2013 are set forth below:
Moodys September 2013 Standard & Poors March 2013

Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stand-alone Credit Profile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-Term Counterparty Credit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Short-Term Counterparty Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Local Currency Deposit Rating . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign Currency Deposit Rating . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Banks Financial Strength Rating (BFSR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Baseline Credit Assessment (BCA) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjusted Baseline Credit Assessment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SubordinateDomestic Currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Stable

Stable B+ B

Ba2 Ba2 E+ b1 b1 B2

A securities rating is not a recommendation to buy, sell or hold securities. A securities rating may be subject to withdrawal or revision at any time. Each rating should be evaluated separately of any other rating. Business Strategies The Bank aims to fortify its position as one of the leading banks in the Philippines, delivering high profitability supported by a solid balance sheet. To achieve this corporate goal, the Bank will undertake the following strategic initiatives as discussed in its Strategic Planning Workshop last March 2013. Improve revenue mix As part of the strategy to improve its profitability and at the same time minimize dependence on any specific revenue source, the Bank will take steps to modify its revenue mix towards a more stable stream of income.

Along this line, the Bank will continue to determine the proper allocation of the use of funds between loans and investments to ensure a more stable level of accrued interest income and higher yields from loans versus the volatile movements in trading gains/losses from investment securities held for trading. Likewise, the Bank intends to further leverage on its strong franchise and increase fee-based income by intensifying its cross-selling efforts to its existing customers, including its OFWs customers. The Bank will also review its fee structure and align bank fees and service charges with market rates to remain competitive. With its bancassurance license from the BSP, the Bank plans to intensify its efforts in the marketing of bancassurance products. Shift loan portfolio mix in favor of SMEs and consumer segments The Banks lending strategy will entail a shift in marketing focus from large institutional accounts to SMEs and individuals. This shift in lending strategy by increasing the number of smaller accounts is intended to help the Bank in achieving higher lending margins as smaller accounts are less sensitive to changes in interest rates. The Bank intends to leverage on its extensive customer base of OFWs to expand its consumer lending business. The Banks consumer finance business will be transferred to the Banks subsidiary, Allied Savings Bank (to be renamed PNB Savings Bank) which will play a pivotal role in strengthening the banks foothold on the retail and consumer segment. Strengthen leadership in the global Filipino Market The Bank intends to further increase its share in the global Filipino market by going beyond merely providing them with remittance services to offering them a more diverse menu of financial services. The Bank will continue to enhance its products aimed at delivering optimum services, particularly by introducing electronic-remittance channels. In addition to its large global distribution network, the Bank will keep on partnering with companies that are considered leaders in their home markets to reinforce its overseas presence. The sustained focus on service quality, continued product innovation and marketing initiatives are expected to result in increased remittance volume and/or increased foreign currency business. Rationalize cost of funds The Bank will leverage on the strength of its nationwide branch network to generate low-cost deposits from its existing and growing customer base. In support of the expansion in total assets, the Bank will also keep an acceptable level of high-cost deposits to complement the low-cost deposit base. Maximize synergies from the merger with ABC The merger brings together a combined complementary client base ranging from large corporations, local government units, government-owned and controlled corporations, OFWs, the Chinese-Filipino community to the provincial market. The merged bank will also be able to leverage and harness on the wide network of its major shareholder, LTG, the primary holding company belonging to one of the largest conglomerates in the Philippines. Together, PNB and Allied Bank will have a better platform to offer a wide range of personal and corporate banking services and products, and become a leading player in its chosen markets. The merger is expected to create substantial revenue and cost synergies. Revenues should be enhanced as a result of new customers, increased business from existing customers, low funding cost from improved risk profile and greater opportunities for cross-selling bancassurance, trust, credit card and other products to a larger customer base via a wider distribution network. In addition, the merger will result in cost efficiency improvements through branch re-engineering, economies of scale, systems integration, realignment of front offices and optimization of back office processing and support functions. Accelerate ROPA disposition Through its Special Asset Management Group (SAMG), the Bank will aggressively dispose of foreclosed assets as well as maximize recoveries from asset sales and income potential of acquired assets. Under the Banks three-year business plan, SAMG will focus its efforts on the following: (i) pursue implementation of development plans for selected ROPAS e.g., portfolio sale, joint-venture with developers, sale of small and medium ROPAs; (ii) collection of CARP accounts; (iii) strong marketing initiatives; (iv) efficient account management of SCR accounts; and (v) more effective and efficient lease management practices.

Risks of Investing Before making an investment decision, investors should carefully consider the risks associated with an investment in the Common Shares. These risks include: Risks relating to the Bank and its overall business; Risks relating to the Philippine banking industry; Risks relating to the Philippines; Risks relating to the Projections; and Risks relating to the Common Shares. Please refer to the section entitled Risk Factors, which, while not intended to be an exhaustive enumeration of all risks, must be considered in connection with a purchase of Rights Shares. Bank Information The registered office of the Bank is located at PNB Financial Center Pres. Diosdado Macapagal Blvd., Pasay City, Philippines. The Banks telephone number is (632) 891-6040 to 70 or (632) 526-3131 to 92 and its corporate website is www.pnb.com.ph. The information on the Banks website is not incorporated by reference into, and does not constitute part of this Prospectus. Investor Relations Office The Investor Relations Office (IRO) of the Bank is tasked to (a) promote investors awareness and name recognition through participation in domestic and international conferences sponsored by fund managers (b) improve investors perception of the Bank by keeping them abreast of the developments in the Bank through constant communications and maintaining cordial relations with them and (c) effectively address concerns/issues that could materially affect the Banks good image, operations and viability. Senior Vice President Emeline C. Centeno, head of the Corporate Planning and Research Division (Corplan) also serves as the Banks designated investor relations manager. The IRO is also responsible for ensuring that the Banks shareholders have accurate, timely and uniform access to official announcements, disclosures and market-sensitive information relating to the Bank in line with the prescribed standard of disclosure by regulatory agencies. The IRO is responsible for responding to queries from investors and shareholders in a consistent and impartial manner. In addition, the IRO oversees the investor briefings and the Investor Relations portion of the Companys website. The IRO also coordinates with the Marketing Services Division in holding press conferences right after the Banks shareholder meetings and preparing the Banks annual reports. The Companys Investor Relations Office, which is part of Corplan, is located at 9/F PNB Financial Center D. Macapagal Blvd. Pasay City.

10

SUMMARY OF CONSOLIDATED FINANCIAL INFORMATION The following tables present summary consolidated financial information of the Bank and should be read in conjunction with the consolidated financial statements and the related notes included elsewhere in this Prospectus and the sections entitled Managements Discussion and Analysis of Financial Condition and Results of Operations, Selected Statistical Data, Assets and Liabilities, and Business in this Prospectus. The summary financial information presented below as of and for the years ended December 31, 2010, 2011, and 2012 was prepared in accordance with PFRS and was derived from the audited consolidated financial statements of the Bank as of January 1, 2011 and December 31, 2011 and 2012 and for the years ended December 31, 2010, 2011 and 2012. The balances as of December 31, 2010 below are equivalent to the balances as of January 1, 2011 as reflected in the audited consolidated financial statements. The summary financial information as of September 30, 2013 and for the nine months ended September 30, 2012 and 2013 was derived from the unaudited interim condensed consolidated financial statements of the Bank and was prepared in accordance with Philippine Accounting Standard 34, Interim Financial Reporting. The post-merger interim condensed consolidated financial statements of the Bank have not been audited and may be subject to further adjustments. The Bank adopted PFRS 10, Consolidated Financial Statements and the amendments to PAS 19, Employee Benefits on January 1, 2013, the effective date of these new and amended standards. These standards require retrospective application. The annual audited consolidated financial statements as of January 1, 2011 and December 31, 2011 and 2012 and for the years ended December 31, 2010, 2011 and 2012, included elsewhere in this Prospectus have not been revised to reflect the changes. The changes as a result of the adoption of the new accounting standards have been reflected in the unaudited interim condensed consolidated financial statements as of September 30, 2013 and for the nine months ended September 30, 2012 and 2013. Refer to Note 2 of the unaudited interim condensed consolidated financial statements included elsewhere in this Prospectus for the impact of the new accounting standards. The pro forma consolidated financial information as of and for the year ended December 31, 2012 was derived from the unaudited pro forma condensed consolidated financial information of the Bank included elsewhere in this Prospectus and prepared in accordance with Paragraph 8 of the Rule 68 of the PSECs Implementing Rules and Regulations of the Securities Regulation Code, as amended. The summary financial information set out below does not purport to project the results of operations or financial condition of the Bank for any future period or date. The pro forma adjustments are based upon available information and certain assumptions that the Bank believes are reasonable under the circumstances. The summary unaudited pro forma condensed consolidated financial information does not purport to represent what the results of operations of the Bank would have been had the merger with Allied Bank in fact occurred as at January 1, 2012, or December 31, 2012, as the case may be, nor does it purport to project the results of the Bank for any future period or date. Summary Consolidated Statement of Income Data
For the year For the nine months ended December 31, ended September 30, 2010 2011 2012 2012 2013 (audited) (unaudited) (Q millions)

Interest Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net Interest Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net Service Fees and Commission Income . . . . . . . . . . . . . . . . . . Other Income(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for Impairment, Credit and Other Losses . . . . . . . . . . Operating Expenses (excluding Provision for Impairment, Credit and Other Losses)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for Income Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net Income attributable to: Equity Holders of the Parent Company . . . . . . . . . . . . . . . . . . . . . Non-controlling Interest in a Subsidiary . . . . . . . . . . . . . . . . . . . . Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

12,331 (4,772) 7,559 2,124 7,693 (2,400)

12,472 (5,269) 7,203 2,137 8,051 (1,552)

11,361 8,629 (4,385) (3,201) 6,976 5,428 1,876 1,396 8,741 6,356 (934) (1,326)

13,533 (3,817) 9,716 1,850 8,601 (734)

(10,020) (10,204) (10,706) (7,581) (12,150) (924) (879) (925) (670) (1,293) 4,032 3,566 466 4,032 4,756 4,669 87 4,756 5,028 4,652 376 5,028 3,603 3,596 7 3,603 5,990 5,932 58 5,990

11

Notes: (1) Other income consists of Trading and investment securitiesnet, Foreign exchange gains (losses)net, Net gain on sale or exchange of assets and Miscellaneous. (2) Operating expenses (excluding provision for impairment, credit and other losses) consist of Compensation and fringe benefits, Taxes and licenses, Occupancy and equipment-related costs, Depreciation and amortization and Miscellaneous. Summary Consolidated Statements of Financial Position
As of December 31, 2010 2011 2012 (audited) (P millions) As of September 30, 2013 (unaudited)

Cash and Other Cash Items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,457 5,404 5,599 Due from Bangko Sentral ng Pilipinas. . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,286 38,153 37,175 Due from Other Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,142 6,424 4,043 Interbank Loans Receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,692 17,098 11,499 Securities Held Under Agreements to Resell . . . . . . . . . . . . . . . . . . . . . . 6,800 18,300 18,300 Financial Assets at Fair Value Through Profit or Loss . . . . . . . . . . . . . . 15,981 6,876 4,023 Available-for-Sale Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,531 52,324 66,997 Loans and Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110,316 126,249 144,708 Held-to-Maturity Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38,228 Property and Equipment(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,632 16,564 16,504 Investment in an Associate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,832 2,902 2,905 Investment Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,913 16,100 14,478 Deferred Tax Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,829 1,776 1,781 Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,481 3,897 2,995 Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 297,120 312,067 331,007 Deposit Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 226,436 237,534 240,854 Financial Liabilities at Fair Value Through Profit or Loss. . . . . . . . . . . 6,575 6,650 6,480 Bills and Acceptances Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,004 8,459 13,077 Accrued Taxes, Interest and Other Expenses . . . . . . . . . . . . . . . . . . . . . . 4,325 3,981 4,063 Subordinated Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,487 6,453 9,939 Income Tax Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,922 14,016 16,847 Non-Controlling Interest in a Subsidiary. . . . . . . . . . . . . . . . . . . . . . . . . . 560 531 905 Equity Attributable to Equity Holders of the Parent Company . . . . . . . 27,811 34,443 38,842 Total Liabilities and Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 297,120 312,067 331,007

8,835 129,183 15,769 12,090 25,000 11,568 80,024 258,200 22,973 18,717 1,150 16,018 6,575 606,102 453,978 7,364 14,466 5,533 9,950 95 30,830 3,073 80,813 606,102

Note: (1) Property and equipment consists of furniture, fixtures and equipment and leasehold improvements measured at cost and land and buildings measured at appraised value.

12

Summary Financial Ratios and Earning Per Share

As of and for the nine As of and for the years ended months ended December 31, September 30, 2010 2011 2012 2013

Return on Average Assets(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Return on Average Equity(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net Interest Margin(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Efficiency Ratio(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Receivable from Customers to Deposit Liabilities(5). . . . . . . . . . . . . . . . . . . Tier 1 Capital Adequacy Ratio(6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Capital Adequacy Ratio(7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Capital Funds to Total Assets(8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . NPL Ratio(9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allowance for Credit Losses (Loans) to Total Receivable from Customers(10) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allowance for Credit Losses (Loans) to Total Non-Performing Loans(11) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Basic/Diluted Earnings per share(12) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Notes:

1.4% 15.2% 3.4% 57.7% 42.0% 12.8% 19.4% 9.5% 4.5% 5.4%

1.6% 15.0% 3.0% 58.7% 48.6% 14.5% 21.7% 11.2% 3.1% 4.7%

1.6% 13.5% 2.6% 60.9% 55.3% 11.9% 18.1% 12.0% 2.4% 4.1%

1.7% 12.9% 2.7% 60.2% 53.5% 17.0% 20.3% 13.8% 1.1% 2.3% 94.0% P5.71

67.2% 78.4% 83.4% P5.38 P7.05 P7.02

Average balances, as referred to below, are determined as the sum of the beginning and ending balances of the respective statement of financial position accounts as of the end of the year divided by two. (1) For the years ended December 31, 2010, 2011 and 2012: Net income divided by average total assets for the period indicated. For the nine months ended September 30, 2013: Net income divided by 9 multiplied by 12 then divided by the average assets for the period. (2) For the years ended December 31, 2010, 2011 and 2012: Net income divided by average total equity for the period indicated. For the nine months ended September 30, 2013: Net income divided by 9 multiplied by 12 then divided by the average equity. (3) For the years ended December 31, 2010, 2011 and 2012: Net interest income divided by average interestearning assets. For the nine months ended September 30, 2013: Net interest income divided by 9 multiplied by 12 divided by average interest earning assets. Interest-earning assets which mainly consist of Due from BSP and other banks, Interbank loans and Securities purchased under resale agreements, Trading and investment securities, and Receivable from customers, net of NPLs. (4) Total operating expenses (excluding provision for impairment, credit and other losses) divided by total operating income for the period indicated. (5) Receivable from customers divided by total deposit liabilities. (6) Tier 1 capital divided by total risk-weighted assets, as reported to the BSP. (7) Total capital divided by total risk-weighted assets, as reported to the BSP. (8) Total equity divided by total assets. (9) NPLs (net of NPLs fully covered by allowance for credit losses) divided by total loans (receivable from customers, interbank loans and securities under agreements to re-sell). As of December 31, 2010, 2011 and 2012, ratios were computed based on the balance on the audited financial statements. As of September 30, 2013, the ratio was computed based on figures reported to the BSP. (10) Total allowance for credit losses divided by total receivable from customers. (11) Total allowance for credit losses divided by total NPLs. As of December 31, 2010, 2011 and 2012, ratios were computed based on the audited financial statements. As of September 30, 2013, the ratio was computed based on figures reported to the BSP. (12) Net income attributable to equity holders of the Parent Company divided by weighted average number of common shares.

13

Pro Forma Condensed Consolidated Statement of Income Data

For the year ended December 31, 2012 (Q millions)

Interest Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net Interest Income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net Service Fees and Commission Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other Income(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for Impairment, Credit and Other Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating Expenses (excluding Provision for Impairment, Credit and Other Losses)(2) . . . . . . . . Provision for Income Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net Income attributable to: Equity Holders of the Parent Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-controlling Interest in a Subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

20,593 (6,695) 13,898 2,435 13,601 (2,717) (18,734) (1,438) 7,045 6,646 399 7,045

Notes: (1) Other income consists of Trading and investment securitiesnet, Foreign exchange gains (losses)net, Net gain on sale or exchange of assets and Miscellaneous. (2) Operating expenses (excluding provision for impairment, credit and other losses) consist of Compensation and fringe benefits, Taxes and licenses, Occupancy and equipment-related costs, Depreciation and amortization and Miscellaneous. Pro Forma Condensed Consolidated Statements of Financial Position
As of December 31, 2012 (Q millions)

Cash and Other Cash Items. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due from Bangko Sentral ng Pilipinas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due from Other Banks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interbank Loans Receivable and Securities Held Under Agreements to Resell . . . . . . . . . . . . . . . Financial Assets at Fair Value Through Profit or Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Available-for-Sale Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans and Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property and Equipment(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred Tax Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deposit Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial Liabilities at Fair Value Through Profit or Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bills and Acceptances Payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued Taxes, Interest and Other Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subordinated Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred Tax Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-Controlling Interest in a Subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity Attributable to Equity Holders of the Parent Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Liabilities and Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

8,653 81,657 16,271 34,109 10,525 85,668 236,876 23,050 19,494 1,833 16,018 4,891 539,045 381,771 10,358 16,557 5,743 14,438 916 25,169 3,668 80,425 539,045

Note: (1) Property and equipment consists of furniture, fixtures and equipment and leasehold improvements measured at cost and land and buildings measured at appraised value.

14

THE RIGHTS OFFER The Bank is offering for subscription 162,931,262 Rights Shares by way of a stock rights offering to Eligible Shareholders at the proportion of fifteen (15) Rights Share for every one hundred (100) existing Common Shares held as of the Record Date at the Offer Price of P71.00 per Rights Share. Fractions of the Rights Shares will not be allotted to existing shareholders and fractional entitlements will be rounded down to the nearest whole number of Rights Shares. Such fractions will be aggregated and sold for the benefit of the Bank. The Rights Shares may be subscribed by Eligible Shareholders of record of the Bank as of the Record Date. Below are the key dates of the Offer: Price Setting Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ex-Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Record Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Offer Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Listing Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . January 10, 2014 January 13, 2014 January 16, 2014 January 27, 2014 to February 3, 2014 February 11, 2014

The dates listed above may be changed at the discretion of the Bank and the Joint Global Coordinators and Bookrunners, subject to the approval of the PSE. The Joint Global Coordinators and Bookrunners shall purchase, or procure subscribers to purchase, the unsubscribed portion of the Offer, after the second round, in order to ensure that the Rights Shares covered by the Offer will be fully subscribed. See Plan of Distribution.

15

SUMMARY OF THE OFFER Issuer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rights Shares . . . . . . . . . . . . . . . . . . . . . . . . Philippine National Bank, a universal banking corporation organized under the laws of the Republic of the Philippines. 162,931,262 Common Shares of the Bank with a par value of P40.00 per share. The Rights Shares shall rank equally in all respects with the existing Common Shares, including the right to receive all dividends or distributions made, paid or declared after a valid subscription agreement is perfected between the Bank and a buyer as evidenced by the written acceptance by the Bank of the application to subscribe (the Application to Subscribe or the Application) of the buyer and other conditions, including listing of the Rights Shares on the PSE. The Bank is offering common shares for subscription to Eligible Shareholders. Any Rights Shares that remain unsubscribed for by the Eligible Shareholders after the second round of the Offer will be taken up by the Sole Domestic Underwriter to be offered to qualified buyers as defined under the SRC and by the Joint International Lead Managers and International Underwriters. For more information, see the section titled Plan of Distribution of the Prospectus. Offer Price . . . . . . . . . . . . . . . . . . . . . . . . . . The Rights Shares are being offered at a price of P71.00 per share. The Offer Price is computed based on the 10-day volume-weighted average price (VWAP) of the Banks Common Shares on the PSE, subject to a discount of 17.9%. The Offer Period shall commence at 9:00 am on January 27, 2014 and end at 12:00 pm on February 3, 2014. The Bank and the Joint Global Coordinators and Bookrunners reserve the right to extend or terminate the Offer Period with the approval of the PSE. Each Application must be for a minimum of one (1) Rights Share. The Rights Shares are being offered to eligible existing holders of record of Common Shares as of the Record Date. Holders of Common Shares who are eligible to participate in the Offer are: (i) holders located inside the Philippines and (ii) holders located in jurisdictions outside the Philippines and the United States where it is legal to participate in the Offer under the securities laws of such jurisdiction. The Common Shares of the Bank may be held by any person or entity, regardless of nationality, subject to the right of the Bank to reject an Application or reduce the number of Rights Shares applied for subscription or purchase if the same will cause the Bank to be in breach of the Philippine ownership requirement under relevant Philippine laws. Rights Entitlement. . . . . . . . . . . . . . . . . . . . Each eligible holder of Common Shares is entitled to subscribe to fifteen (15) Rights Share for every one hundred (100) Common Shares held as of the Record Date (the Entitlement Shares). Fractions of the Rights Shares will not be allotted to existing shareholders and fractional entitlements will be rounded down to the nearest whole number of the Rights Shares. Such fractions will be aggregated and sold for the benefit of the Bank. Subscription to the Rights Shares in certain jurisdictions may be restricted by law. Foreign investors interested in subscribing or

The Offer. . . . . . . . . . . . . . . . . . . . . . . . . . . .

Offer Period . . . . . . . . . . . . . . . . . . . . . . . . .

Minimum Subscription. . . . . . . . . . . . . . . . Eligible Shareholders . . . . . . . . . . . . . . . . .

16

purchasing the Rights Shares should inform themselves of the applicable legal requirements under the laws and regulations of the countries of their nationality, residence or domicile, and as to any relevant tax or foreign exchange control laws and regulations affecting them personally. Foreign investors, both corporate and individual, warrant that their purchase of the Rights Shares will not violate the laws of their jurisdiction and that they are allowed to acquire, purchase and hold the Rights Shares. Additional Subscription . . . . . . . . . . . . . . . If an applicant fully subscribes to his Entitlement Shares and subject to the availability of unsubscribed Rights Shares arising from the failure of the other eligible stockholders to fully exercise their Rights Shares entitlement, the applicant may simultaneously apply for an additional subscription of the unsubscribed Rights Shares (the Additional Rights Shares). The Additional Rights Shares are payable in full upon submission of the Application. If the aggregate number of Additional Rights Shares available for subscription equals or exceeds the aggregate number of Additional Rights Shares so subscribed for, an applicant will be allocated the number of Additional Rights Shares indicated in his Application. If the aggregate number of Additional Rights Shares available for subscription is less than the aggregate number of Additional Rights Shares so subscribed for, the available Additional Rights Shares will be allocated to applicants who have applied to subscribe for such Additional Rights Shares. Such allocation will be made at the discretion of the Bank primarily based on each applicants relative shareholding in the Bank as of the Record Date, provided that no applicant for Additional Rights Shares shall be allocated more Additional Rights Shares than the number for which such applicant has applied. There can be no guarantee made as to the number of Additional Rights Shares an applicant may be allocated. A subscription for Additional Rights Shares is irrevocable on the part of the applicant and may not be cancelled or modified by such applicant. The Philippine Constitution and related statutes set forth restrictions on foreign ownership of companies engaged in certain activities. The Bank is subject to Philippine legislation restricting the aggregate foreign ownership to 40.0% of the outstanding Shares. Accordingly, the Bank cannot allow the issuance or the transfer of its Shares which may result in the Bank ceasing to be at least 60.0% owned by Philippine nationals. As of September 30, 2013, approximately 70.25% of the Shares were held by Philippine nationals. After completion of the Offer, foreign equity shall not exceed 40.0% of the Banks share capital. For more information, see the sections titled Description of the Securities and Risk Factors of the Prospectus. Procedure for Application . . . . . . . . . . . . . All Applications shall be evidenced by the Application to Subscribe, duly executed by an authorized signatory of the applicant and the corresponding payment for the Rights Shares covered by the Application and all other required documents. The duly executed Application and required documents should be submitted during the Offer Period to Philippine National Bank-Trust Banking Group. Eligible Shareholders of certificated shares that are located outside the Philippines and the United States may submit an Application to Philippine National Bank-Trust Banking Group (the Receiving Agent) by email or fax before the end of the Offer Period.

Restrictions on Ownership. . . . . . . . . . . . .

17

If the applicant is an eligible individual shareholder, the applicant must submit a properly completed Application to Subscribe. If the applicant is a corporation, partnership, or trust account, the Application to Subscribe must be accompanied by a duly notarized corporate secretarys certificate setting forth the resolution of the applicants board of directors or equivalent body authorizing the purchase of the Rights Shares indicated in the Application, identifying the designated signatories authorized for the purpose, including his or her specimen signature, and certifying to the percentage of the applicants capital or capital stock held by Philippine nationals. If the applicant is a non-Filipino (individual shareholder or corporation, partnership or trust account), the Application to Subscribe must be accompanied by a certification letter (in the form attached to the Application to Subscribe) representing and warranting that (i) the applicant is not a resident in the United States and (ii) the applicants purchase of the Rights Shares will not violate the laws of their resident jurisdiction. Applications must be received by the Receiving Agent or by designated branches of Philippine National Bank-Trust Banking Group not later than 12:00 p.m., Manila Time on the last day of the Offer Period. Applications received thereafter or without the required documents will be rejected. Applications shall be considered irrevocable upon submission to the Receiving Agent, and shall be subject to the terms and conditions of the Offer as stated in this Prospectus and in the Application. The actual subscription and/or purchase of the Rights Shares shall become effective only upon the actual listing of the Rights Shares on the PSE. Payment Terms . . . . . . . . . . . . . . . . . . . . . . The Rights Shares must be paid for in full to the designated PNB Rights Offer settlement account upon submission of the Application. Payment must be made by (a) check drawn against any BSP authorized agent bank or any branch thereof to the order of PNB Rights Offer (b) debit to an existing PNB account. Certificated shareholders residing outside of the Philippines and outside of the United States may submit their payment by way of remittance in favor of the Receiving Agent. The check must be dated as of the date of submission of the Application and crossed Payees Account Only. Check payments for regional clearing will not be accepted. The Bank has full discretion to accept or reject all or a portion of any Application under the terms and conditions of the Offer. The actual number of Rights Shares to which any applicant may be entitled is subject to the confirmation of the Bank. Applications where checks are dishonored upon first presentment and Applications which do not comply with the terms of the Offer shall be rejected. Moreover, payment received upon submission of an Application does not constitute approval or acceptance by the Bank of the Application. An Application, when accepted, shall constitute an agreement between the applicant and the Bank for the subscription to the Rights Shares at the time, in the manner and subject to terms and conditions set forth in the Application and those described in this Prospectus. Notwithstanding the acceptance of any Application by the Bank, the actual subscription and/or purchase by an applicant of the Rights Shares will become effective only upon listing of the Rights Shares on the PSE. If such condition is not fulfilled on or before the periods

Acceptance/Rejection of Applications. . .

18

provided above, all application payments will be returned to the applicants without interest and, in the meantime, the said application payments will be held in a separate bank account with the Receiving Agent. Refunds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . In the event that the number of Rights Shares to be received by an applicant is less than the number covered by its Application, or if an Application is rejected by the Bank, then the Bank shall refund, without interest, via check payable to the relevant applicant, within five (5) banking days from the end of the Offer Period, the amount corresponding to the number of Rights Shares not issued to such applicant. Such refund check shall be made available for pickup at the offices of Philippine National Bank-Trust Banking Group at 4th Floor, PNB Building, 6754 Ayala Avenue, Makati City. Refund checks that remain unclaimed after 30 days from the date such checks are made available for pickup shall be mailed at the Applicants risk to the address indicated in the Application. All documentary stamp taxes applicable to the original issuance of the Rights Shares shall be for the sole account of the Bank.

Issuance and Transfer Taxes . . . . . . . . . . . Registration and Lodgment of Shares with the Philippine Depository & Trust Corp . . . . . . . . . . . . . . . . . . . . . . . .

Rights Shares are required to be lodged with the Philippine Depository & Trust Corp. (the PDTC). Applicants must provide the required information in the Application to effect the lodgment. Applicants may request their shares in certificated form and receive stock certificates evidencing their investment in the Rights Shares through their respective brokers after full payment and lodgment of the Rights Shares and in accordance with existing procedure. The cost of the issuance of stock certificates shall be for the account of the applicant, except for expenses to be incurred by PNB (Makati) Trust (Stock Transfer Agent) as the stock transfer agent, which shall be borne by the Bank provided, a request and submission of completed documents and requirements to PNB (Makati) Trust (Stock Transfer Agent) is made within 90 calendar days from the Listing Date. The BSP requires that investments in shares of stock funded by inward remittance of foreign currency be registered with the BSP if the foreign exchange needed to service capital repatriation or dividend remittance is to be sourced from the domestic banking system. The registration with the BSP of all foreign investments in the Rights Shares shall be the responsibility of the foreign investor. The Bank has agreed with the Joint International Lead Managers and International Underwriters that, other than in connection with the issuance of Rights Shares for purposes of the Offer, neither the Bank nor any person acting on its behalf will, for a period of 90 days after the Listing Date, without the prior written consent of the Joint International Lead Managers and International Underwriters, issue, offer, sell, contract to sell, pledge, charge, grant options over or otherwise dispose of, directly or indirectly (or publicly announce any such issuance, offer, sale, pledge, charge, options or disposal of), or enter into a transaction which would have the same effect (or publicly announce the entry into any such transaction), or enter into any swap, hedge or other arrangement (or publicly announce the entry in any such swap, hedge or other arrangement) that transfers in whole or in part, any of the economic consequences of ownership of the Common Shares, whether any such aforementioned transaction is to be settled by delivery of the Common Shares or securities convertible or

Registration of Foreign Investments . . . .

Lock-up . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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exchangeable into or exercisable for Common Shares or warrants or other rights to purchase Common Shares or any security or financial product whose value is determined directly or indirectly by reference to the price of the Common Shares, including equity swaps, forward sales and options. Listing and Trading. . . . . . . . . . . . . . . . . . . The Banks application for the listing of a portion of the Rights Shares was approved by the PSE on December 11, 2013, subject to fulfillment of certain conditions. The Rights Shares to be issued from the Banks authorized but unissued capital are expected to be listed on the PSE on February 11, 2014; such portion of the Rights Shares to be issued from the Banks increase in capital will be listed 3 trading days from submission to the PSE of evidence of approval by the PSEC of the Banks application for increase in capital. The Bank intends to file its application for increase in capital immediately after the close of the Offer Period. Trading is expected to commence on the same date that the relevant Rights Shares are listed on the PSE. Timetable . . . . . . . . . . . . . . . . . . . . . . . . . . . The timetable of the Offer is scheduled as follows:

Price Setting Date Ex-Date Record Date Offer Period Listing Date

January 10, 2014 January 13, 2014 January 16, 2014 January 27, 2014 to February 3, 2014 February 11, 2014

The dates listed above are subject to market and other conditions and may be changed at the discretion of the Bank and, the Joint Global Coordinators and Bookrunners, subject to the approval of the PSE. Underwriters Firm Commitment to Purchase . . . . . . . . . . . . . . . . . . . . . . . . . . The Sole Domestic Underwriter shall purchase, or procure qualified institutional buyers in the Philippines to purchase, a portion of the unsubscribed Offer, after the second round of the Offer, and the Joint International Lead Managers and International Underwriters shall procure subscribers for or take up the remainder of the unsubscribed Rights Shares, after the mandatory second round, to ensure that the Rights Shares covered by the Offer are fully subscribed. See Plan of Distribution.

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RISK FACTORS An investment in the Offer described in this Prospectus involves a number of risks. The price of the securities can and does fluctuate, and any individual security may experience upward or downward movements, and may become valueless. There is inherent risk that losses may be incurred rather than profit as a result of buying and selling securities. Past performance is not a guide to future performance and there may be a large difference between the buying and selling price of these securities. Investors should carefully consider all the information contained in this Prospectus, including the risk factors described below, before deciding to invest in the Rights Shares. This section entitled Risk Factors does not purport to disclose all of the risks or other significant aspects of investing in the Rights Shares. The occurrence of any of the events discussed below and any additional risks and uncertainties not presently known to the Bank or that are currently considered immaterial could have a material adverse effect on the Banks business, results of operations, financial condition and prospects and on the Rights Shares and the investors may lose all or part of their investment. Investors may request publicly available information on the Rights Shares and the Bank from the PSEC and PSE. An investor should seek professional advice if he or she is uncertain of, or has not understood any aspect of the Offer or the nature of risks involved in purchasing, holding and trading the Rights Shares. Each investor should consult its own counsel, accountant and other advisors as to legal, tax, business, financial and related aspects of an investment in the Rights Shares. The risk factors discussed in this section are of equal importance and are only separated into categories for easy reference. Risks Relating to the Bank and its Business The Bank has incurred significant losses in the past and suffered a liquidity crisis in the third quarter of 2000 due to significant levels of deposit withdrawals; in response to this crisis the Government rescued the Bank and provided emergency financial assistance to the Bank. The Asian financial crisis of 1997 and its aftermath significantly and adversely affected the Bank, leading to a consistent decline in asset quality, high levels of NPLs and declining levels of deposits from the public and other parties, which culminated in a liquidity crisis in the third quarter of 2000 and five consecutive years of losses up to 2002. As a result of the consecutive years of losses and the Banks increasing level of NPAs, the Bank recorded significant deficits (negative surplus) up to 2008. As of end of 2011, the Bank had a positive surplus. The Bank has been able to improve its capital position through the Tier 1 capital-issuances in the equity market in 2007 as well as through issuances of Tier 2 capital through the debt capital market. The Banks improving profitability position likewise bolstered its capital position. Although the Bank has successfully been able to raise capital in the past, there can be no assurance that the Bank will be able to continue to fund its capital or that it will not incur deficit in the future, nor can there be any assurance that the Bank will be able to continue to record net income in the future. Should the previous problems faced by the Bank, including liquidity difficulties, recur; this would have a material adverse effect on the financial position and results of operations of the Bank. Increased exposure to consumer debt could result in increased delinquencies in the Banks loan portfolio. The Bank has expanded and intends to aggressively expand its consumer loan operations. Such expansion increases the Banks vulnerability to changes in the general economic conditions affecting Philippine consumers. Accordingly, economic developments that have a significant adverse effect on Philippine consumers could result in the deterioration in the credit quality of the banks consumer loan portfolios. The Bank has faced significant levels of non-performing loans and provisions for impairment losses that may affect its results of operations. Volatile economic conditions may adversely affect the ability of the Banks borrowers to finance the obligations under their indebtedness and, as a result, the Bank may experience an increase in NPLs and provisions for impairment losses. While the Bank has successfully managed to reduce its NPLs, the Banks results of operations have been, and continue to be, materially adversely affected by the level of its NPLs. The Banks net NPLs reported to the BSP, as defined by BSP Circular No. 772 dated October 16, 2012 amounted to P3.0 billion as of September 30, 2013 as compared to P3.8 billion and P4.6 billion as of December 31, 2012 and 21

2011, respectively. The Banks net NPL ratio computed as net NPLs divided by total loans (receivable from customers, interbank loans and securities under agreements to re-sell) was 2.4% as of December 31, 2012. As of September 30, 2013, the Banks net NPL Ratio was 1.1%. Average net NPL ratios for universal and commercial banks in the Philippines were 0.3% and 0.5% as of the years ended December 31, 2012 and the nine months ended September 30, 2013, respectively. In order to fund its NPLs, the Bank relies on funding from its deposit base and other sources. There can be no assurance that the Bank will be able to continue to reduce its NPL levels to within industry standards. For the nine months ended September 30, 2013 and the year ended December 31, 2012, the Banks provision for credit losses for loans was P0.65 billion and P0.55 billion, respectively, representing 4.8% of the Banks gross interest income for both periods. For the year ended December 31, 2011, the Banks provision for credit losses was P0.8 billion, which represented 6.2% of the Banks gross interest income for the same period. The Banks restructured loans may become non-performing. In the restructuring of a number of loans, the Bank has agreed with borrowers to set interest payments at a relatively low level for a certain time-frame followed by much larger payments of interest in later periods. The relatively low interest payments improve the likelihood that a restructured loan will be categorized as performing during the period of such payments. As of December 31, 2011 and 2012, the Bank had P3.4 billion and P2.6 billion, respectively, of restructured loans in its loan portfolio. As of September 30, 2013, restructured loans remained at P2.1 billion. However, future interest payments that may be significantly higher may cause the loan to again become non-performing if the borrower is unable to make such larger payments in the later periods. If a significant number of the Banks customers are unable to pay larger interest payments on their respective restructured loans, a larger number of restructured loans may become non-performing, thereby requiring additional provisions, additional capital and having a material adverse effect on the Banks financial position, liquidity and results of operations. The Banks funding is primarily short-term and if depositors do not roll over deposited funds upon maturity, the Banks business could be adversely affected. A significant portion of the Banks funding needs is satisfied from short-term sources, primarily in the form of time, savings and demand deposits. As of December 31, 2010, 67.6% of the Banks funding were considered core while 32.4% was volatile. On the other hand, as of December 31, 2011, 67.2% of total deposit liabilities were considered core while 32.8% were volatile. As of December 31, 2012, 68.0% of total deposit liabilities were considered core while 32.0% were volatile. As of September 30, 2013, 75.2% of total deposit liabilities were considered as core while 24.8% were volatile. Core deposits are deposits (both Current and Term Deposits) that are expected to remain with the bank for a relatively long period of time usually beyond one year. Such deposits are attracted by the convenience and service rather than from interest rates paid. These deposits usually have a predictable cost of funding, imply a degree of customer loyalty, and are less interest rate sensitive. On the other hand, volatile deposits are those deposits (usually have a fixed term below one year) which are interest rate sensitive hence they are treated as an unstable source of funding. Clients under this classification usually shop around for highest rates offered. Accordingly, the maturity profile of the Banks assets and liabilities may from time to time show a negative gap in the short term when the Banks liabilities which are composed of short-term funding sources (primarily in the form of deposits) and other liabilities are of shorter average maturity than its loans and investments, thereby resulting in a funding mismatch and creating a potential risk for liquidity squeeze. Although these deposits have historically been a stable source of funding for the Bank, no assurance can be given that this will continue to be the case. In the event the Bank is unable to attract or retain sufficient deposits or if a substantial number of the Banks depositors do not roll over deposited funds upon maturity, its liquidity position could be adversely affected and the Bank may be unable to fund its loan portfolio and may be required to seek alternative sources of funding. The Bank can provide no assurance as to the availability or terms of such funding. To the extent the Bank is unable to obtain sufficient funding on acceptable terms or at all, the Banks financial condition and results of operations may be adversely affected. The Bank may be unable to recover the appraised value of its collateral when its borrowers default on their obligations, which may expose the Bank to significant losses. The Bank may be unable to recover the value of any collateral or enforce any guarantee due, in part, to the difficulties and delays involved in enforcing such obligations in the Philippine legal system. In order to foreclose 22

collateral or enforce a guarantee, banks in the Philippines are required to follow certain procedures specified by Philippine law. These procedures are subject to administrative and bankruptcy law requirements. The resulting delays may last several years and lead to deterioration in the physical condition and market value of the collateral, particularly where the collateral is in the form of inventory or receivables. In addition, such collateral may not be insured. These factors have exposed, and may continue to expose, the Bank to legal liability while in possession of the collateral. These difficulties may significantly reduce the Banks ability to realize the value of its collateral and therefore the effectiveness of taking security for the loans it makes. The Bank carries the value of the foreclosed properties at the lower of the appraised value and the loan balance plus accrued interest at the time of such foreclosures. While the Bank, at each statement of financial position date, accounts for its foreclosed properties in accordance with PFRS, it may incur further expenses to maintain such properties. In realizing cash value for such properties, the Bank may incur further expenses such as legal fees and taxes associated with such realization. There can be no assurance that the Bank will be able to realize the full value, or any value, of any collateral on its loans. The value of the Banks collateral may decline in the future. A substantial portion of the Banks secured loans is secured by real estate. While the Banks collateral may have sufficient value to support the outstanding loans at the time the loans were disbursed by the Bank, the value of the collateral may decline over time. If the loan becomes non-performing and the value of the property has significantly decreased as compared to its value as of the date when the loan was disbursed, the Banks loan loss provisions may be inadequate and require an increase in such provisions. Any increase in the Banks provisions would adversely affect its capital adequacy ratio, its financial condition, and results of operations. The Bank has suffered from inadequate levels of capital. As with other banks in the Philippines, the Bank is subject to capital adequacy guidelines which require it to maintain a minimum ratio of capital to risk-adjusted assets of 10.0% on both consolidated and non-consolidated basis. In 2001, the Banks total capital adequacy ratio of 8.2% fell below the minimum BSP requirement of 10.0%. Despite its failure to meet these minimum requirements, the Bank did not incur any penalty in this period because the BSP considered the Bank to be under rehabilitation. In order to improve its capital position and, in particular, its Tier 1 capital adequacy ratio, the Bank undertook a capital restructuring in 2001 and 2002. As of December 31, 2010, the capital adequacy ratio under Basel II on a consolidated basis was 19.4% and the Tier 1 capital adequacy ratio was 12.8% (as reported to the BSP). As of December 31, 2011, the Banks total capital adequacy ratio under Basel II on a consolidated basis was 21.7% and its Tier 1 capital adequacy ratio was 14.5% (as reported to the BSP). Both these ratios have decreased as of December 31, 2012, with Tier 1 capital adequacy ratio at 11.9% and total capital adequacy ratio on a consolidated basis at 18.1% (as reported to the BSP). The lower total capital adequacy ratio was due to the reversal of SPV losses against surplus and full provisioning of SPV Notes. As of September 30, 2013, Tier 1 capital adequacy ratio under the Basel II standards improved to 17.0% while total capital adequacy ratio was 20.3% (as reported to the BSP), primarily due to the additional capital acquired as a result of the merger with Allied Bank as well as the net income generated in the nine months ended September 30, 2013. While the Bank aims to maintain a two-percentage point buffer versus prudential requirements, there can be no assurance that the Bank will be able to maintain its capital at levels prescribed by BSP in the future. Further failure by the Bank to maintain its capital adequacy ratios may result in administrative actions or sanctions against the Bank which may have a material adverse effect on the Banks financial condition and results of operations. The Bank is effectively controlled by one shareholder group, with which it has extensive business connections. As of September 30, 2013, LTG held indirect ownership over 45.51% of the Banks shares through various subsidiaries. Shareholders associated with or who issue proxies/special powers of attorney in favor of Director Lucio C. Tan from time to time held a total of approximately 31.19% of the Banks shares, while the latter held direct ownership over 1.19% of the Banks shares. The remaining 22.11% of the Banks shares were owned by other stockholders. There can be no assurance that the companies and persons affiliated/associated with the LTG or any of the shareholders of the Bank will not exercise its control and influence the Bank for their benefit. 23

The Tan Companies, of which LTG is a part, comprise one of the countrys largest conglomerates with interests in banking and other financial services, aviation, beverages, chemicals, distillery, education, food, real estate development and tourism, among others. As of September 30, 2013, only 1.3% of the Banks P243.0 billion in receivable from customers was extended to Tan Companies. The Bank conducts all transactions with its related parties on an arms length basis and believes that these loans are made substantially on the same terms as loans to other individuals and businesses of comparable risks. However, there can be no assurance that the interests of the Tan Companies will necessarily coincide with the interests of the Holders. In addition, there can be no assurance that deterioration in the financial condition of the Tan Companies or negative publicity regarding the Tan Companies will not adversely affect the Banks financial condition and business opportunities. The Bank may be unable to engage in profitable lending and may, as a result, experience limited or negative future growth. The Banks ability to increase its margins, revenues and profits depends principally on its ability to achieve growth in profitable lending given that interest income from loans and receivables have contributed an average of 32.6% of total recurring income during the three years ended December 31, 2012. The Bank has experienced slow growth in its loan portfolio because of the Banks focus on managing its NPLs in the past. However, as of December 31, 2012 and September 30, 2013, the Banks loans and receivables, net of allowance for credit losses, experienced an increase in net carrying value, from P144.7 billion to P258.2 billion, respectively, constituting 43.7% and 42.6% of total assets. Due to the continued low interest rate environment and stable economic growth in 2012, the Bank was able to expand its loans and receivables, net of allowance for credit losses. The significant growth in loans and receivables as of September 30, 2013 as compared to previous periods was due primarily to the merger of PNB with Allied Banking Corporation (Allied Bank or ABC). A slowdown in the economys growth or intensified competition can curtail the growth of the Banks loan portfolio and eventually its revenues, margins or profits. This could inhibit the Banks future growth and adversely affect its financial condition and results of operations. A substantial portfolio of real and other properties acquired (ROPA) exposes the Bank to risks related to realizing the value of its ROPA and risks related to the valuation of, and provisions with respect to, its ROPA. The Bank has a substantial portfolio of ROPA, and as of December 31, 2012 and September 30, 2013, the Banks ROPA amounted to P14.5 billion and P18.7 billion, respectively. While the amount of ROPA appearing on the Banks statement of financial position is shown net of allowance for impairment losses and depreciation in value, there can be no assurance that the Bank will be able to recover the full estimated value of ROPA stated in its financial statements. The Banks ROPA is subject to the risks associated with the cyclical Philippine real estate market. Furthermore, given the Banks significant amount of ROPA, it may take several years before the Bank is able to realize a significant part of the value of its ROPA. Delays in realizing the value of its ROPA may result in further provisions as the ROPA loses value over time. Under Philippine Accounting Standards 40 Investment Property, PNB carries the value of the foreclosed properties at the fair value at the time of foreclosure and, in the case of depreciable property, depreciated over such propertys useful life. While the Bank, at each statement of financial position date, provides for impairment losses on its foreclosed properties in accordance with PFRS, it may incur further expenses to maintain such properties. In realizing cash value for such properties, the Bank may incur further expenses such as legal fees and taxes associated with such realization. There can be no assurance that the Bank will be able to realize the full value, or even partial value, of its ROPA. The Bank may not successfully introduce new products and services. As part of its strategy, the Bank intends to be a significant player across all product groups and services. It is likely to encounter significant competition from other banks which have bigger balance sheet and capitalization as well as from those protecting their market shares in the same products and services being introduced. There can be no assurance that the Bank will be able to compete effectively against such competing banks. Even if the Bank was able to promote existing products or introduce new products and services successfully, there can be no assurance that the Bank will be able to achieve its intended return on such investments.

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The Bank may incur significant losses from its trading and investment activities due to market fluctuations and volatility. Gains generated by the Banks treasury operations through the trading of securities and bonds issued by the Republic of the Philippines constitute an important portion of the Banks income. Trading and investment securities gains accounted for 25.9% of the Banks total operating income for the nine month period ended September 30, 2013 and 29.2% of the Banks total operating income for the year ended December 31, 2012. There can be no assurance that the Bank will be able to continue posting trading gains. The Banks income from trading activities is subject to substantial volatility based on, among other things, changes in interest rates, foreign currency exchange rates and debt prices, as well as stock market fluctuations. For example, an increase in interest rates or downgrade of the credit ratings of some of the fixed income securities invested may have a substantial impact on the value of the Banks investments in fixed income securities, which would negatively affect the Banks results of operations. During the height of the 2008 U.S. subprime crisis, the Bank carried substantial mark-to-market losses on its bond portfolio due to the sell-off in the global fixed income markets, and where Philippine financial assets were not spared from a consequence of the financial crisis. Fortunately, the market recovered by the end of the year. Almost all, if not all, Philippine banks suffered from the same fate. The Bank may have to comply with stricter regulations and guidelines issued by regulatory authorities in the Philippines including the BSP, PSEC, PDIC, AMLC, PSE, and the Bureau of Internal Revenue (the BIR) as well as foreign regulators and international bodies including the Financial Action Task Force (the FATF). The Bank is under the direct supervision principally by, and has reporting obligations to, the BSP. The Bank is also subject to the banking, corporate, taxation and other laws in effect in the Philippines. The regulatory and legal framework governing the Bank may continue to change as the Philippine economy and commercial and financial markets evolve. In recent years, existing rules and regulations have been modified, new rules and regulations have been enacted, and reforms have been implemented which are intended to provide tighter control and more transparency in the Philippine banking sector. These rules include new guidelines on the monitoring and reporting of suspected money laundering activities as well as regulations governing the capital adequacy of banks in the Philippines. The BSP issued regulations on the capital assessments of banks in the Philippines versus the banks risk profile along with capital planning strategies. The Bank adopted the Basel principles in managing risk which is implemented in the banking industry under BSP Circular No. 538, s. 2006 and which was updated to take account of Basel III principles is BSP Circular 709, s. 2011. Furthermore, while the Philippines enacted the Anti-Money Laundering Act of 2001 (the Anti-Money Laundering Act) to introduce more stringent anti-money laundering regulations, these regulations did not initially comply with the standards set by the FATF. However, following pressure from the FATF, an amendment to the Anti-Money Laundering Act became effective on March 23, 2003. On February 11, 2005, the Philippines was taken off the FATFs list of non-cooperative countries and territories. Currently, the Philippines is on the grey list, as the FATF, in news reports, noted a high-level political commitment from local authorities to address noted deficiencies in its anti-money laundering regime. Republic Act No. 10168 enacted on June 18, 2012 expanded the AMLA to include the crime of financing terrorism. For the nine months ended September 30, 2013, 4.9% of the Banks gross income was derived from its remittance services. As a substantial portion of the Banks remittance business is from the United States, the Bank has to comply with the increasingly stringent anti-money laundering rules and regulations in the United States. Under the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA Patriot Act) and other regulations, financial services firms, including the Bank, must establish a compliance program that includes policies and procedures to detect and report suspicious transactions to the government as well as ensure compliance with the new laws. There are requirements to implement specialized employee training programs, designate a special compliance officer and conduct independent audits of the effectiveness of the compliance program. The U.S. regulations also impose requirements regarding client information and verification of that information. Financial services firms are required to verify the identity of the clients with whom they do business, determine the source of funds in a clients account and obtain information about a clients wealth. The Bank implemented an electronic anti-money laundering solution called the GIFTSWEB Enhanced Due Diligence (EDD) in 2005 which has undergone two major systems enhancements in 2007 and recently in 2010. This web-based anti-money laundering solution was developed and marketed by Gifts Software, Inc. based in 25

New York, USA and fulfills the strict and complex regulatory requirements for the detection, monitoring and reporting of suspected money laundering activities by financial institutions. The software solution provides the analytical tools needed to proactively detect and monitor possible suspicious transaction activity, respond to regulatory subpoenas and create a database for case management reports. The system facilitates the preparation of Currency Transactions Reports and Suspicious Activity Reports. GIFTSWEB EDD has been found to adequately address Bank Secrecy Account, Know Your Customer-EDD, AMLA, Office of Foreign Assets Control, and US Patriot Act laws, rules, and regulations. It is currently used in PNB New York Branch, PNB RCI headquarters in Angeles, PNB Los Angeles Branch, PNB Tokyo Branch, PNB Hong Kong Branch, PNB Singapore and PNB Europe PLC. The Banks Manila Head Office implemented the system in early August 2006. In 2010, the Bank created the Global Compliance Unit primarily to provide AML transaction monitoring services for PNB New York and eventually to the other foreign branches and offices of the Bank by 2011. Furthermore, the Bank has invested in upgrading the GIFTSWEB servers in line with the strategic direction of centralizing the administration of the GIFTSWEB systems in Manila towards a standardized approach in the implementation of the Banks AML policy guidelines. There is no assurance that the anti-money laundering solution implemented by the Bank will always perform at 100.0% accuracy and efficiency. By its nature, it is subject to same risks relating to other information and technology systems and processes, including vulnerability to damage or interruption by human error, misconduct, malfunction, natural disasters, power loss, sabotage, computer viruses or the interruption or loss of support services from third parties. Any disruption, outage, delay or other difficulties experienced by any of these information and technology systems could result in delays, disruptions, losses or errors that may affect the performance of the anti-money laundering solution put in place by the Bank. However, the Bank has in place contingency programs to address events that may cause disruptions and has developed home grown systems to generate critical reports to ensure regulatory compliance. The Bank and its subsidiaries and overseas branches, representative offices and remittance centers have experienced incidents of fraud. The Bank and its subsidiaries and overseas branches, representative offices and remittance centers have experienced incidents of employees engaging in fraudulent activities such as misappropriation of cash and fraudulently transferring or withdrawing customer funds. The failure by employees of the Bank to comply with required internal policies and controls contributed to this and other incidents of fraud. The Banks and its subsidiaries internal control systems rely heavily on the implementation of and compliance with the same by the employees. Although the Bank and its subsidiaries are closely monitoring strict adherence to their internal control procedures, there can be no assurance that these efforts will prevent future fraudulent actions. Failure on the part of any member of the Bank and its subsidiaries to prevent future fraudulent actions may result in administrative or other regulatory sanctions by the BSP or other Government agencies and may also result in the suspension of, or other limits on, the Banks banking and other business licenses. In addition, this may also result in a loss of confidence of current and potential deposit customers. Furthermore, as the Bank continues to further automate and computerize its various internal processes and expand its internet banking operations, the potential for fraud and security problems arising from the exploitation of technological weaknesses will also increase. Increased enforcement by the Government related to priority lending for the agrarian reform and agricultural sectors could adversely affect the Banks business, financial condition and results of operations. The Government has imposed an agrarian reform and agriculture lending policy requiring Philippine banks to extend certain loan amounts to agrarian beneficiaries and the agricultural sectors of the country. Failure to meet the specified level of loans may result in fines being assessed against a non-compliant bank. As of September 30, 2013, the requirement applicable to the Bank was P27.0 billion. Because the Bank is unable to generate sufficient exposure to the agrarian reform based sector that meet its credit and risk management standards, the Bank has paid fines in the past and may continue to do so in the future. There can be no assurance that the Government will not increase its penalties for non-compliance or force banks to lend in accordance with the policy in the future. If the Government substantially increases the penalty for non-compliance or the Bank is forced to extend loans to the agrarian reform and agricultural sectors that are inconsistent with the Banks credit and risk management policies, its business, financial condition and results of operations could be adversely affected.

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The Banks failure to manage risks associated with its information and technology systems could adversely affect its business. The Bank is subject to risks relating to its information and technology systems and processes. The hardware and software used by the Bank in its information technology is vulnerable to damage or interruption by human error, misconduct, malfunction, natural disasters, power loss, sabotage, computer viruses or the interruption or loss of support services from third parties such as internet service providers, ATM operators and telephone companies. Any disruption, outage, delay or other difficulties experienced by any of these information and technology systems could result in delays, disruptions, losses or errors that may result in loss of income and decreased consumer confidence in the Bank. These may, in turn, adversely affect the Banks business, financial condition and results of operations. The Bank also seeks to protect its computer systems and network infrastructure from physical break-ins as well as security breaches and other disruptive problems caused by the Banks increased use of the internet. Computer break-ins and security breaches could affect the security of information stored in and transmitted through these computer systems and network infrastructure. The Bank employs security systems, including firewalls and password encryption, designed to minimize the risk of security breaches and maintains operational procedures to prevent break-ins, damage and failures. The potential for fraud and security problems is likely to persist and there can be no assurance that these security measures will be adequate or successful. The costs of maintaining such security measures may also increase substantially. Failure in security measures could have a material adverse effect on the Banks business, financial condition and results of operations. The recent merger between the Bank and Allied Bank may not result in the expected synergies. On March 6, 2012, the respective shareholders of the Bank and Allied Bank, representing at least two-thirds of the outstanding capital stock of both banks, approved the amended terms of the Plan of Merger of the two banks. The original Plan of Merger was approved by the affirmative vote of the Banks and Allied Banks respective shareholders on June 24, 2008, representing at least two-thirds of the outstanding capital stock of both banks. On March 26, 2012, the Bank submitted to the BSP and Philippine Deposit Insurance Corporation (PDIC) an application for PDICs consent to the merger. On April 12, 2012, the application for the merger was filed with the PSEC. On July 25, 2012, the Bank received notice that the PDIC had given its consent to the merger, and on August 2, 2012, the Monetary Board of the BSP issued a resolution also giving its consent to the merger. On January 17, 2013, the PSEC approved the merger and the corresponding amendments to the Banks Articles of Incorporation reclassifying PNBs authorized preferred shares into common shares and increasing the number of directors from eleven to fifteen. Approvals of the relevant foreign regulatory agencies of the overseas branches of the Bank and Allied Bank were secured prior to PSEC approval. On January 22, 2013, the Board of Directors had a special meeting to approve February 9, 2013 as the effective date of the merger, and the merger was then completed on that date. While the Bank expects the merger to result in significant synergies and efficiencies through the integration of operations and economies of scale in the coming years, there can be no assurance that such contemplated synergies and efficiencies will be fully realized and that the integration will be implemented with minimal disruption of operations. There can be no assurance that the merger will have the desired effect, which could have an adverse effect on the Banks financial position and results of operations. The Bank may be subject to tax liabilities in relation to its merger with Allied Bank. Pursuant to the merger of the Bank and Allied Bank, effective February 9, 2013, all the assets and liabilities of Allied Bank as of February 8, 2013 were transferred to the Bank as the surviving entity. In exchange, all of the issued and outstanding common stock of Allied Bank were converted into fully paid and nonassessable common stock of the Bank according to the ratio provided under the plan of merger. In relation to these transactions, on April 26, 2013, the Bank filed certain applications with the BIR for rulings confirming the tax treatment of their merger as tax-free merger under the Philippine tax law and regulations. As of September 30, 2013, the ruling request is still pending with the BIR.

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Previously, the BIR allowed the delegation of the authority to rule on this type of application to BIRs Assistant Commissioner. But the new BIR administration that took over in 2010 has adopted a policy that this type of application must be signed off by the BIR Commissioner. This new policy has resulted in the delayed issuance of BIR rulings. While the Bank and its counsel believe that the merger with Allied Bank is fully compliant with the requirements for tax-free status under the law and existing regulations, there can be no assurance that the requested tax rulings will be issued by the BIR in the near future, or at all. In the event that no such tax ruling is issued, the transfer of assets of Allied Bank (comprising, among others, real property and shares of stock) to the Bank as a result of the merger could be subject to the payment of applicable taxes. Thus, there can be no assurance that the BIR will not issue tax assessments on the Bank in connection with the merger. Although the Bank believes that it is adequately prepared to pay any potential tax assessments, any tax assessments in the aggregate could amount to substantial amounts, and could have an adverse effect on the Banks business reputation. The Bank is involved in litigation, which could result in financial losses or harm its business. The Bank is and may in the future be, implicated in lawsuits on an ongoing basis. Litigation could result in substantial costs to, and a diversion of effort by, the Bank and/or subject the Bank to significant liabilities to third parties. There can be no assurance that the results of such legal proceedings will not materially harm the Banks business, reputation or standing in the market place or that the Bank will be able to recover any losses incurred from third parties, regardless of whether the Bank is at fault. However, there can be no assurance that (i) losses relating to litigation will not be incurred beyond the limits, or outside the coverage, of such insurance, or that any such losses would not have a material adverse effect on the results of the Banks business, financial condition or results of operation, or (ii) provisions made for litigation related losses will be sufficient to cover the Banks ultimate loss or expenditure. Risks Relating to the Philippine Banking Industry The Banks principal businesses are in the highly competitive Philippine banking industry and increases in competition may result in declining margins in the Banks principal businesses. The Bank is subject to significant levels of competition from many other Philippine banks and branches of international banks, including, in some instances, competitors that have greater financial and other capital resources, greater market share and greater brand name recognition than the Bank. The banking industry in the Philippines is a mature market that has, in recent years, been subject to consolidation and liberalization, including liberalization of foreign ownership regulations. There were a total of 36 domestic and foreign universal and commercial banks operating in the Philippines as of September 30, 2013 according to the BSP. In the future, the Bank may face increased competition from financial institutions offering a wider range of commercial banking services and products than the Bank and having larger lending limits, greater financial resources and stronger balance sheets than the Bank. Increased competition may arise from: other large Philippine banking and financial institutions with significant presence in Metro Manila and large country-wide branch networks; foreign banks, due to, among other things, relaxed standards permitting large foreign banks to expand their branch network through acquiring domestic banks; domestic banks entering into strategic alliances with foreign banks with significant financial and management resources; and continued consolidation in the banking sector involving domestic and foreign banks, driven in part by the gradual removal of foreign ownership restrictions. There can be no assurance that the Bank will be able to compete effectively in the face of such increased competition. Increased competition may make it difficult for the Bank to increase the size of its loan portfolio and deposit bases and may cause increased pricing competition, which could have an effect on its growth plans, margins, ability to pass on increased costs of funding, results of operations and financial position, which could materially and adversely affect the Banks business, financial condition and results of operations. The Philippine banking sector may face another downturn, which could materially and adversely affect the Bank. The Philippine banking sector has recovered from the global economic crisis as evidenced by the steady decrease in average net NPL ratios (including interbank loans) in the Philippine banking system from 3.61% in 28

2010 to 0.42% as of August 31, 2013. The Bank has realized some benefits from this recovery, including increased liquidity levels in the Philippine market, lower levels of interest rates as well as lower levels of NPLs. However, the Philippine banking industry may face significant financial and operating challenges. These challenges may include, among other things, a sharp increase in the level of NPLs, variations of asset and credit quality, significant compression in bank margins, low loan growth and potential or actual under-capitalization of the banking system. Fresh disruptions in the Philippine financial sector, or general economic conditions in the Philippines, may cause the Philippine banking sector in general, and the Bank in particular, to experience similar problems to those faced in the past, including substantial increases in NPLs, problems meeting capital adequacy requirements, liquidity problems and other challenges. The Bank may have to comply with strict regulations and guidelines issued by banking regulatory authorities in the Philippines, including the BSP, the BIR and international bodies, including the FATF. The Banks banking interests are regulated and supervised principally by, and have reporting obligations to, the BSP. The Bank is also subject to the banking, corporate, taxation and other regulations and laws in effect in the Philippines, administered by agencies such as the Bureau of Internal Revenue of the Philippines (the BIR) and the Anti-Money Laundering Council (AMLC), as well as international bodies such as the Financial Action Task Force (FATF). In recent years, existing rules and regulations have been modified, new rules and regulations have been enacted and reforms have been implemented which are intended to provide tighter control and added transparency in the Philippine banking sector. These rules include new guidelines on the monitoring and reporting of suspected money laundering activities as well as regulations governing the capital adequacy of banks in the Philippines. See Banking Regulation and Supervision. Institutions that are subject to the AMLA are required to establish and record the identities of their clients based on official documents. In addition, all records of transactions are required to be maintained and stored for a minimum of ten years from the date of a transaction. Records of closed accounts must also be kept for five years after their closure. The Banks failure to comply with current or future regulations and guidelines issued by regulatory authorities in the Philippines could have a material adverse effect on the Banks business, financial condition and results of operations. As part of the administrative sanctions, the AMLC may impose sanctions, monetary penalties, warning or reprimand upon any covered person, its directors, officers, employees and other persons for violation of the AMLA, its implementing rules and regulations, or for failure to comply with AMLC orders, resolutions or issuances. The monetary penalties are in amounts as may be determined by the AMLC, taking into consideration all relevant circumstances, but not exceeding P500,000 per violation. There are penalties for, among other offences, failure to keep records, malicious reporting and breach of confidentiality. The Bank may experience difficulties due to the implementation of Basel III in the Philippines. On January 15, 2009, the BSP issued Circular No. 639 covering the Internal Capital Adequacy Assessment Process (ICAAP) which supplements the BSPs risk-based capital adequacy framework under BSP Circular No. 538. The BSP requires banks to have in place an ICAAP that (i) takes into account not just the credit, market and operational risks but also all other material risks to which a bank is exposed (such as interest rate risk in the banking book, liquidity risk, compliance risk, strategic/ business risk and reputation risk); (ii) covers more precise assessments and quantification of certain risks (i.e. credit concentration risk); and (iii) evaluates the quality of capital. In 2011, the BSP issued BSP Circular 709, which aligns with the Basel Committee on Banking Supervision on the eligibility criteria on Additional Group Concern Capital and Tier 2 Capital to determine eligibility of capital instruments to be issued by Philippine banks/quasi-banks as Hybrid Tier 1 Capital and Lower Tier 2 Capital. Further, in January 2013, the BSP issued Circular No. 781 as the Basel III Implementing Guidelines on Minimum Capital Requirements, which shall take effect on January 2014, highlights of which include: adopting a new categorization of the capital base; adopting eligibility criteria for each capital category that is not yet included in Circular 709; as applicable, allowing the BSP to adopt regulatory deductions in Basel III; keeping minimum CAR at 10%, and prescribing: a minimum Common Equity Tier 1 (CET 1) ratio of 6.0%; a minimum Tier 1 ratio of 7.5%; and 29

 a capital conservation buffer of 2.5%; by January 1, 2014, rendering ineligible existing capital instruments as of December 31, 2010 that do not meet eligibility criteria for capital instruments under the revised capital framework; and by January 1, 2016, rendering ineligible regulatory capital instruments issued under Circulars No. 709 and 716 before the revised capital framework became effective. These may result in an increase in the capital adequacy requirement applicable to the Bank. Unless the Bank is able to access the necessary amount of additional capital, any incremental increase in the capital requirement due to the implementation of ICAAP and Basel III, may impact the Banks ability to grow its business and may even require the Bank to withdraw from or to curtail some of its current business operations, which could materially and adversely affect the Banks business, financial condition and results of operations. There can also be no assurance that the Bank will be able to raise adequate additional capital in the future at all or on terms favorable to it. In addition, the implementation of Basel III may require the Bank to divest itself of certain nonallied undertakings. If the Bank is forced to sell all or a portion of certain subsidiaries or associates, its business, financial condition or results of operations could be adversely affected. There can be no assurance that the Bank will be able to meet the requirements of Basel III as implemented by the BSP. In addition, the limitations or restrictions imposed by the BSPs implementation of Basel III could materially and adversely affect the Banks business, financial condition and results of operations. As of March 31, 2013, according to the BSP, the universal and commercial banking industrys CAR was 18.9% on a consolidated basis and 17.7% on a non-consolidated basis. As of September 30, 2013, the Banks CAR as reported to the BSP was 20.3%. The local banking industry faces higher credit risks and greater market volatility than that of other developed markets. Philippine banks are subject to the credit risk that borrowers may not make timely payments of principal and interest on loans and, in particular, that upon such failure to pay, Philippine banks may not be able to enforce the security interest they may have. The credit risk of Philippine borrowers is, in many instances, higher than those of borrowers in more developed countries due to the greater uncertainty associated with the Philippine regulatory, political, legal and economic environment, the large foreign debt of the Government and corporate sectors relative to the gross domestic product of the Philippines, and the greater volatility of interest rates and Peso/U.S. dollar exchange rates. Higher credit risk has a material adverse effect on the quality of loan portfolios and exposes Philippine banks, including the Bank, to more potential losses and higher risks than banks in more developed countries. In addition, higher credit risk generally increases the cost of capital for Philippine banks compared to their international counterparts. Such losses and higher capital costs arising from this higher credit risk could materially and adversely affect the Banks business, financial condition and results of operations. According to data published by the BSP, average net NPL ratios (including interbank loans) in the Philippine banking system were 0.3% and 0.5% as of December 31, 2012 and September 30, 2013, respectively. The Banks ability to assess, monitor and manage risks inherent in its business is limited by the quality and timeliness of available data. The Bank is exposed to a variety of risks, including credit risk, market risk, foreign exchange risk and operational risk. The effectiveness of the Banks risk management, in particular its credit risk management, is limited by the quality and timeliness of available data in the Philippines in relation to factors such as the credit history of proposed borrowers and the loan exposure borrowers have with other financial institutions. Limitations in the Banks risk management systems may result in the Bank granting loans or taking positions that expose the Bank to significant credit risks or otherwise result in the Bank being over exposed to interest rate, liquidity, foreign exchange rate and other risks. Risks Relating to the Philippines Substantially all of the Banks operations and assets are concentrated in the Philippines, and therefore any downturn in general economic conditions in the Philippines could have a material adverse impact on the Bank.

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Political instability in the Philippines could destabilize the country and may have a negative effect on the Bank. The Philippines has from time to time experienced severe political and social instability, including acts of political violence. In 2001, allegations of corruption against former President Joseph Estrada resulted in protracted televised impeachment proceedings against him. These proceedings were followed by widespread street demonstrations and a public withdrawal of support for Estrada by the military that eventually forced Estrada to resign. On July 27, 2003, over 270 military officers and soldiers conducted an unsuccessful coup dtat against Estradas successor, President Gloria Macapagal-Arroyo, due to allegations of corruption. After the May 2004 elections, President Arroyo was re-elected and persistent accusations of corruption and electoral fraud were made against Arroyo during her second term. On February 24, 2006, another attempted coup dtat led President Arroyo to issue Proclamation 1017, which was criticized as a virtual declaration of martial law and portions of it were later declared unconstitutional by the Supreme Court of the Philippines. On November 29, 2007, Senator Antonio Trillanes IV, a leader of the 2003 coup dtat who was elected to the Senate while in jail, led an armed occupation by military officers and soldiers of a luxury hotel in the Makati financial district and publicly called for President Arroyos ouster. Senator Trillanes and his troops later surrendered. On November 23, 2009, in the southern island of Mindanaos Maguindanao province, approximately 100 armed men allegedly affiliated with the Ampatuan political family murdered 58 persons, including members of the Mangudadatu family (the Ampatuans political rivals in the province), lawyers, journalists and aides accompanying them, and motorists whose vehicles were behind the Mangudadatus vehicles. This was the bloodiest incident of political violence and of violence directed at journalists in the Philippines recent history and President Arroyo sent hundreds of troops to and declared martial law over Maguindanao after the incident. On December 12, 2011, the Philippine House of Representatives initiated impeachment proceedings against Renato Corona, Chief Justice of the Supreme Court of the Philippines. The impeachment complaint accused Corona of improperly issuing decisions that favored former President Arroyo, as well as failure to disclose certain properties, in violation of rules applicable to all public employees and officials. The trial of Chief Justice Corona was conducted from January 2012 until May 28, 2012. On May 29, 2012, a verdict was given by the Senate of the Philippines acting as an impeachment court, finding the former Chief Justice guilty of impeachable acts. On August 24, 2012, President Aquino appointed the Philippines first female Chief Justice in the person of Associate Justice Maria Lourdes Sereo. In October 2012, the Government and the Moro Islamic Liberation Front (MILF), signed a preliminary peace agreement, the Framework Agreement on the Bangsamoro, in Malacanang Palace in Manila, designed to implement structural reform while upholding national sovereignty through the creation of an autonomous political entity, Bangsamoro. Under the agreement, a Transition Commission and a Bangsamoro Transition Authority will be created to draft the Bangsamoro Basic Law and to recommend amendments to the Philippine Constitution, if necessary, and to bridge the period between the plebiscite and the elections planned for the new Bangsamoro region in 2016, respectively. The Transition Authority is tasked to prepare for the transformation of the region into the Bangsamoro. With a ministerial form of government, the MILF and other political forces will be able to participate in elections through political parties. Voters shall elect political parties, and the winning parties shall, in turn, elect the head of the Bangsamoro region. On July 14, 2013, the Government and the MILF signed a wealth-sharing agreement that provides guidance for drafting relevant provisions of a law expanding Muslim autonomy in the new Bangsamoro region. In February 2013, some 235 militants arrived by boat in Lahad Datu, Sabah from Simunul Island, TawiTawi, Philippines. The militants were reportedly sent by Jamalul Kiram III, one of the claimants to the throne of the Sultanate of Sulu, an archipelago in the southern region of the Philippines, in order to settle and assert the unresolved territorial claim of the Philippines to eastern Sabah. In response, Malaysian security forces surrounded the village where the group are gathered, declared the group a terrorist group and commenced military operations. According to reports from the National Disaster Risk Reduction Management Council, some 5,000 Filipinos have fled Sabah since the start of this conflict. Kiram forces in Lahad Datu, reportedly 1,600 strong, killed eight members of the Malaysian forces in an ambush on August 11, 2013. At least 36 Filipinos are on trial or have been sentenced to life imprisonment for acts related to the conflict. Notwithstanding this, the Office of the Philippine President has issued statements to the media that the relationship between the Philippines and Malaysia remains unchanged and should remain unaffected by the conflict. National and local elections as well as elections for the regional officials of the Autonomous Region of Muslim Mindanao were held on May 13, 2013. While the Government acknowledged 90 violent incidents related to the elections, including deaths, it also claimed that election-related violence had declined compared to previous years. 31

There is no guarantee that future events will not cause political instability in the Philippines. Such instability may disrupt the country and its economy, and in turn could materially and adversely affect the Banks business, financial condition and results of operations. Most of the Banks business activities and assets are based in the Philippines, which exposes the Bank to risks associated with the country, including the performance of the Philippine economy. Historically, the Bank has derived a substantial portion of its operating income and operating profits from the Philippines and, as such, it is highly dependent on the state of the Philippine economy. Demand for banking services is directly related to the strength of the Philippine economy (including its overall growth and income levels), the overall levels of business activity in the Philippines as well as the amount of remittances received from Overseas Filipino Workers (OFWs) and overseas Filipinos. Factors that may adversely affect the Philippine economy include: decreases in business, industrial, manufacturing or financial activities in the Philippines, the Southeast Asian region or globally; scarcity of credit or other financing, resulting in lower demand for products and services provided by companies in the Philippines, the Southeast Asian region or globally; foreign exchange rate fluctuations; foreign exchange controls; inflation or increase in interest rates; levels of employment, consumer confidence and income; changes in the Governments fiscal policies; Government budget deficits; a re-emergence of SARS, avian influenza (commonly known as bird flu), or H1N1, or the emergence of another similar disease in the Philippines or in other countries in Southeast Asia; natural disasters, including but not limited to tsunamis, typhoons, earthquakes, fires, floods and similar events; political instability, terrorism or military conflict in the Philippines, other countries in the region or globally; and other regulatory, social, political or economic developments in or affecting the Philippines. Any future deterioration in economic conditions in the Philippines due to these or other factors could materially and adversely affect the Banks borrowers and contractual counterparties. This, in turn, could materially and adversely affect the Banks financial position and results of operations, including the Banks ability to grow its asset portfolio, the quality of the Banks assets and its ability to implement the Banks business strategy. Therefore, changes in the conditions of the Philippine economy could materially and adversely affect the Banks business, financial condition or results of operations. Acts of terrorism could destabilize the country and could have a material adverse effect on the Banks business, financial position and results of operations. The Philippines has been subject to a number of terrorist attacks since 2000. In recent years, the Philippine army has also been in conflict with the Abu Sayyaf organization, which has ties to the al- Qaeda terrorist network, and has been identified as being responsible for certain kidnapping incidents and other terrorist activities particularly in the southern part of the Philippines. Moreover, isolated bombings have taken place in the Philippines in recent years, mainly in cities in that part of the country. On January 25, 2011, a bomb was detonated on a bus in the northern city of Makati, Metro Manila, killing five persons. Although no one has claimed responsibility for these attacks, it is believed that the attacks are the work of various separatist groups, possibly including the Abu Sayyaf organization. An increase in the frequency, severity or geographic reach of these terrorist acts could destabilize the Philippines, and adversely affect the countrys economy. The Government of the Philippines and the Armed Forces of the Philippines (AFP) have clashed with members of several separatist groups seeking greater autonomy, including the MILF and the New Peoples Army. On October 19, 2011, 19 AFP troops were killed in a fire fight with MILF members in the southern Philippines. On December 16, 2011, five AFP soldiers were killed in a clash with New Peoples Army members. 32

In July 2013, at least 12 people were killed in a Government clash with the Bangsamoro Islamic Freedom Fighters. These conflicts in the Philippines have been the subject of numerous peace talks and negotiations. The most recent round of peace negotiations took place in November 2012, but no final settlement has been reached. These continued conflicts between the Government and separatist groups could lead to further injuries or deaths by civilians and members of the military, which could destabilize parts of the country and adversely affect the countrys economy. There have also been a number of violent crimes in the Philippines, including the August 2010 incident involving the hijacking of a tour bus carrying 25 Hong Kong tourists in Manila, which resulted in the deaths of eight tourists. There can be no assurance that the Philippines will not be subject to further acts of terrorism and violence in the future. Terrorist attacks have, in the past, had a material adverse effect on investment and confidence in, and the performance of, the Philippine economy and, in turn, the Banks business. The Banks current insurance policies do not cover terrorist attacks. Any terrorist attack or violent acts arising from, and leading to, instability and unrest, could cause interruption to parts of the Banks businesses and materially and adversely affect the Banks financial conditions, results of operations and prospects. The sovereign credit ratings of the Philippines may adversely affect the Banks business. Historically, the Philippines sovereign debt has been rated relatively low by international credit rating agencies. Although the Philippines long-term foreign currency-denominated debt was recently upgraded by Fitch and Standard & Poors to the investment-grade rating of BBB- with a stable outlook, in March 2013 and May 2013, respectively, based on factors such as a healthy foreign exchange buffer, resilient remittances, manageable inflation, economic growth, stable inflation and improved fiscal discipline, and Moodys upgraded its credit rating of the Philippines to the investment-grade rating of Baa3 in October 2013, downgrades may occur in the future. The sovereign ratings of the Government may directly affect companies resident in the Philippines, as international credit rating agencies issue credit ratings by reference to that of the sovereign. No assurance can be given that international credit rating agencies will not downgrade the credit ratings of the Government in the future and, therefore, of Philippine companies, including the Bank. Any of such downgrades could have an adverse impact on the liquidity in the Philippine financial markets, the ability of the Government and Philippine companies, including the Bank, to raise additional financing and the interest rates and other commercial terms at which such additional financing is available. Investors may face difficulties enforcing judgments against the Bank. It may be difficult for investors to enforce judgments against the Bank which are obtained outside of the Philippines. In addition, substantially all of the directors and officers of the Bank are residents of the Philippines, and all or a substantial portion of the assets of such persons are located in the Philippines. As a result, it may be difficult for investors to effect service of process upon such persons, or to enforce against them judgments obtained in courts or arbitral tribunals outside the Philippines predicated upon the laws of jurisdictions other than the Philippines. The Philippines is party to the United Nations Convention on the Enforcement and Recognition of Arbitral Awards, though it is not party to any international treaty relating to the recognition or enforcement of foreign judgments. Nevertheless, the Philippine Rules of Civil Procedure provide that a judgment or final order of a foreign court is, through the institution of an independent action, enforceable in the Philippines as a general matter, unless there is evidence that: (i) the foreign court rendering judgment did not have jurisdiction; (ii) the judgment is contrary to the laws, public policy, customs or public order of the Philippines; (iii) the party against whom enforcement is sought did not receive notice; or (iv) the rendering of the judgment entailed collusion, fraud, or a clear mistake of law or fact. Overseas shareholders may be subject to restrictions on repatriation of Pesos received with respect to the Common Shares. Under BSP regulations, as a general rule, Philippine residents may freely dispose of their foreign exchange receipts and foreign exchange may be freely sold and purchased outside the Philippine banking system. Restrictions exist on the sale and purchase of foreign exchange within the Philippine banking system. In particular, a foreign investment must be registered with the BSP if foreign exchange needed to service the 33

repatriation of capital and the remittance of dividends, profits and earnings which accrue thereon is sourced from the Philippine banking system. See Philippine Foreign Exchange and Foreign Ownership Controls. The Government has, in the past, instituted restrictions on the conversion of Pesos into foreign currency and the use of foreign exchange received by Philippine residents to pay foreign currency-denominated obligations. The Monetary Board of the BSP, with the approval of the President of the Philippines, has statutory authority during a foreign exchange crisis or in times of national emergency to suspend temporarily or restrict sales of foreign exchange, to require licensing of foreign exchange transactions or to require delivery of foreign exchange to BSP or its designee. The Bank is not aware of any pending proposals by the Government relating to such restrictions. The Government has from time to time made public pronouncements of a policy not to impose restrictions on foreign exchange. Any restrictions imposed in the future pursuant to such statutory authority could adversely affect the ability of the Bank to source foreign currency to comply with its foreign currencydenominated obligations and adversely affect the ability of investors to repatriate foreign currency upon sale of the Common Shares or dividends or distributions relating to them. Any future changes in PFRS may affect the financial reporting of the Banks business. PFRS continues to evolve as standards and interpretations promulgated subsequent to December 31, 2012 come into effect. In 2011, the BSP approved the guidelines on the early adoption by banks and other BSP-supervised financial institutions of PFRS 9 Financial Instruments under Circular No. 708 s. 2011. PFRS 9 is the local adoption of International Financial Reporting Standards (IFRS) 9 Financial Instruments, which is the first phase of the three-phase improvement project by the International Accounting Standards Board (IASB) to ultimately replace International Accounting Standards (IAS) 39 Financial Instruments: Recognition and Measurement. Phases 2 and 3 of the project deal with accounting for the impairment of financial assets and hedge accounting, respectively. Phase 1 of IFRS 9, which deals with the classification and measurement of financial assets and financial liabilities, was adopted in the Philippines by the Financial Reporting Standards Council as PFRS 9. Previously, it would have become mandatory beginning January 1, 2015 and entities have been permitted to adopt early regulations since May 6, 2010. In July 2013, the IASB tentatively decided to defer the mandatory effective date of IFRS 9, and left it open, pending the finalization of the impairment and classification and measurement requirements. PFRS 9 aims to improve and simplify the classification and measurement of financial instruments. It requires entities to classify and subsequently measure financial assets at either amortized cost or fair value on the basis of both (a) the entities business model for managing the financial assets and (b) the contractual cash flow characteristics of the financial assets. Among others, PFRS 9 eliminates the Held-to-Maturity (HTM) category, together with the tainting rule, which requires entities to reclassify HTM securities to AFS securities in the event that any instrument booked under the HTM category is sold. PFRS 9 also eliminates the requirement to bifurcate embedded derivatives from financial assets host contracts. It also requires enhanced disclosures to help the users of financial statements better understand the risks and the likely cash flows from the financial assets. In addition to the required compliance with the provisions of PFRS 9 by banks and other BSP-supervised entities, the newly approved guidelines also provide for certain prudential requirements, such as approval by the entities board of directors or equivalent governing body of the early adoption and submission by early adopters of the prescribed additional reportorial requirements. Phase 2 will deal with measurements of financial assets classified as amortized cost. This may require recognition of credit loss expectations which may be significantly different from current accounting requirements under IAS 39. On the other hand, Phase 3 will propose significant hedge accounting requirements in IAS 39. The Bank does not currently apply hedge accounting. There can be no assurance as to the implementation of new accounting standards in the Philippines and the significance of the impact it may have on the future financial statements of the Banks businesses. Corporate governance and disclosure standards in the Philippines may differ from those in other countries. While a principal objective of Philippine securities laws and the PSE rules is to promote full and fair disclosure of material corporate information, there may be less publicly available information about Philippine public companies than is regularly made available by public companies in certain other countries. PSEC and PSE requirements with respect to corporate governance standards may differ from those applicable in certain other jurisdictions. For example, the SRC requires publicly listed companies to have at least two independent directors or such number of independent directors as is equal to 20% of its board of directors, whichever is lower. Currently, three of the Banks directors are independent directors. Many other jurisdictions require significantly more independent directors. 34

Natural or other catastrophes, including severe weather conditions, may materially disrupt the Banks operations and result in losses not covered by its insurance. The Philippines has experienced a number of major natural catastrophes over the years, including typhoons, droughts, volcanic eruptions and earthquakes. There can be no assurance that the occurrence of such natural catastrophes will not materially disrupt the Banks operations. These factors, which are not within the Banks control, could potentially have significant effects on the Banks branches and operations. During typhoons Ondoy and Pepeng in 2009, Sendong in 2011, Habagat and Pablo in 2012 and Yolanda in 2013, several of the Banks branches were temporarily closed as the surrounding areas were flooded. Monsoon rains may have similar effects. While the Bank carries insurance for certain catastrophic events, of types, in amounts and with deductibles that the Bank believes are in line with general industry practices in the Philippines, there are losses for which the Bank cannot obtain insurance at a reasonable cost or at all. In addition, the Bank carries business interruption insurance. However, should an uninsured loss or a loss in excess of insured limits occur, the Bank could lose all or a portion of the capital invested in such business, as well as the anticipated future turnover, while remaining liable for any costs or other financial obligations related to the business. Any material uninsured loss could materially and adversely affect the Banks business, financial position and results of operations. Risks Relating to the Projections Investors should not rely on the Banks projected financial statements. In accordance with PSE requirements for companies conducting rights issues, the Bank has prepared projected financial statements (the Projections). The Bank does not, as a matter of course, make public projections as to future financial or operational results due to the inherent unreliability of such projections. The Bank has prepared the Projections solely for the purpose of complying with requirements of the PSE. None of the Banks auditors, independent experts or any other outside party have examined, and none of them will examine, the Projections, and accordingly they have not provided any form of opinion or assurance with respect thereto. There can be no assurance that the Projections and the assumptions used in preparing them are reasonable or that they can or will be achieved. All information and assumptions used in the preparation of the Projections are as of September 30, 2013. There can be no assurance that since the date of the Projections, there has not been, and will not be, any change, development, event or circumstance that has arisen which may cause the actual financial and operational results of the Bank to differ significantly from the Projections. The forecasts contained in the Projections are subject to significant business, macroeconomic and competitive uncertainties and contingencies, all of which are difficult or impossible to predict and many of which are beyond the Banks control. Depending upon operating, macroeconomic and other business conditions, the Bank may adapt or vary its operating, financing and other business decisions in ways which could cause the Banks actual financial results to materially vary from those set out in the Projections. The Banks business involves a significant number of risks, uncertainties, contingencies and other factors that could cause its future performance, financial condition and results of operations to vary significantly from the Projections and therefore the Bank cannot provide any assurance that the Projections will accurately reflect its future results. The Bank has no obligation to update the Projections even in the event of material changes to the Banks operational and financial outlook or to the assumptions used in the Projections. None of the Bank or any of its advisers accepts any responsibility for the information contained in the Projections. As a result, investors should not rely on the Projections when making a decision to invest in the Rights Shares. Risks Relating to the Rights Shares The Banks shares are subject to Philippine foreign ownership limitations. The Philippine Constitution and related statutes restrict land ownership to Philippine Nationals. The term Philippine National as defined under Republic Act (R.A.) No. 7042, as amended, means a citizen of the Philippines, a domestic partnership or association wholly owned by citizens of the Philippines or a corporation organized under the laws of the Philippines of which at least 60.0% of the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines, or a corporation organized abroad and registered to do business in the Philippines under the Philippine Corporation Code of which 100.0% of the capital stock outstanding and entitled to vote is wholly owned by Filipinos or a trustee of funds for pension or other employee retirement or separation benefits, where the trustee is a Philippine national and at least 60.0% of the fund will accrue to the benefit of Philippine Nationals. As of the date of this Prospectus, the Bank owns private land in the Philippines. Under the General Banking Law (R.A. No. 8791) (the General Banking Law), as clarified by BSP Circular No. 256, the aggregate voting stock in a domestic bank held by foreign individuals and non-bank 35

corporations must not exceed 40.0% of the outstanding voting stock of such bank. Although the aggregate ceiling on the equity ownership in a domestic bank does not apply to Filipinos and domestic non-bank corporations, their individual ownership is limited to only up to 40.0% of the voting stock. The percentage of foreign-owned voting stock in a bank shall be determined by the citizenship of the individual stockholders in that bank. The citizenship of the corporation which is a stockholder in a bank shall follow the citizenship of the controlling stockholders of the corporation, irrespective of the place of incorporation. Since the aggregate foreign ownership in the Bank is limited to a maximum of 40.0% of its issued and outstanding capital stock, the Bank cannot allow the issuance or the transfer of its Common Shares to persons other than Philippine Nationals and cannot record transfers in its books if such issuance or transfer would result in the Bank ceasing to be a Philippine National for purposes of complying with the restrictions under the General Banking Law. This restriction may adversely affect the liquidity and market price of the Common Shares to the extent international investors are not permitted to purchase Common Shares in normal secondary transactions. The relative volatility and illiquidity of the Philippine securities market may substantially limit investors ability to sell the Rights Shares at a suitable price or at a time they desire. The Philippine securities markets are substantially smaller, less liquid, and more volatile relative to major securities markets in the United States and other jurisdictions, and are not as highly regulated or supervised as some of these other markets are. The Offer Price could differ significantly from the price at which the Common Shares will trade subsequent to completion of the Offer. There can be no assurance that even after the Rights Shares have been approved for listing on the PSE, any active trading market for the Common Shares will develop or be sustained after the Offer, or that the Offer Price will correspond to the price at which the Common Shares will trade in the Philippine public market subsequent to the Offer. There is no assurance that investors may sell the Rights Shares at prices or at times deemed appropriate. Factors that could affect the price of the Banks Common Shares include the following: fluctuations in the Banks results of operations and cash flows or those of other companies in the Banks industry; the publics reaction to the Banks press releases, announcements and filings with the PSEC and PSE; additions or departures of key personnel; changes in financial estimates or recommendations by research analysts; changes in the amount of indebtedness the Bank has outstanding; changes in general conditions in the Philippines and international economy, financial markets or the industries in which the Bank operates, including changes in regulatory requirements and changes in political conditions in the Philippines; significant contracts, acquisitions, dispositions, financings, joint marketing relationships, joint ventures or capital commitments by the Bank or its competitors; asset impairments or other charges; developments related to significant claims or proceedings against the Bank; the Banks dividend policy; and future sales of the Banks equity or equity-linked securities. In recent years, stock markets, including the PSE, have experienced extreme price and volume fluctuations. This volatility has had a significant effect on the market price of securities issued by many companies for reasons unrelated to the operating performance of these companies. These broad market fluctuations may adversely affect the market prices of the Banks Common Shares. Fluctuations in the exchange rate between the Peso and the U.S. Dollar may have an adverse effect on the value of the Common Shares. The Common Shares are listed on the PSE, where securities are quoted and traded in Pesos. If there are any cash dividends on such Common Shares, these dividends will be paid in Pesos. Fluctuations in the exchange rate between the Peso and the U.S. Dollar may affect, among other things, the U.S. Dollar value of the proceeds that a holder receives upon a sale of such shares or in respect of any cash dividends paid on such shares. 36

Developments in other markets and countries may adversely affect the Philippine economy and, therefore, the market price of the Common Shares. In the past, the Philippine economy and the securities of Philippine companies have been, to varying degrees, influenced by economic and market conditions in other countries, especially other countries in Southeast Asia, as well as investors responses to those conditions. Although economic conditions are different in each country, investors reactions to adverse developments in one country may affect the market price of securities of companies in other countries, including the Philippines. For example, the recent economic crisis in the United States and Europe triggered market volatility in other countries securities markets, including the Philippines. Accordingly, adverse developments in the global economy could lead to a reduction in the demand for, and market price of, the Rights Shares. The Banks management has broad discretion to determine how to use the proceeds received from this Offer, and may use them in ways that may not enhance the Banks operating results or the price of the Banks Common Shares. The Bank plans to use the net proceeds of this offering as described under Use of Proceeds. The Banks management will have broad discretion over the use and investment of the net proceeds of this offering, and accordingly investors in this offering will need to rely upon the judgment of the Banks management with respect to the use of proceeds with only limited information concerning managements specific intentions.

37

USE OF PROCEEDS The Bank expects to raise gross proceeds from the Offer of approximately P11,568,119,602 assuming an Offer Price of P71.00 per Offer Share. After deducting estimated applicable taxes, underwriting fees, commissions and expenses related to the Offer of approximately P241 million, net proceeds to the Bank from the Offer are expected to be approximately P11,327,286,573. Breakdown of Proceeds to the Bank:
Amount

Gross Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Estimated Offer Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Estimated Net Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Breakdown of Offer Expenses of the Bank:

P11,568,119,602 P 240,833,029 P11,327,286,573

Amount

PSEC Filing and Listing Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PSE Listing and Processing Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Underwriting and Selling Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Estimated Costs of Printing and Publication . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Estimated Legal and Other Professional Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Estimated Stock Transfer and Receiving Agent Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Estimated Offer Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P 75,486,017 P 16,811,200 P 89,400,000 P 4,917,000 P 52,418,813 P 1,800,000 P240,833,029

In the event that the actual expenses relating to the Offer are different from the above estimates, the actual net proceeds to the Bank from the Offer may be higher or lower than the expected net proceeds set forth above. Any increase or decrease in the net proceeds to the Bank shall be addressed by making a corresponding increase or decrease, as the case may be, to the Banks provision for working capital requirements. The proceeds of the Offer will be used primarily (approximately P10 billion) to build and refocus the Banks consumer lending business through capital infusions into Allied Savings Bank, a fully owned subsidiary of the Bank, with the first tranche of infusion to take place in around the first quarter of 2014 and the second tranche to take place at around the third or fourth quarter of 2014. The balance will be applied to further strengthen the capital ratios of the Bank under the Basel III standards which are to become effective January 1, 2014; to mitigate the reduction in the CAR of the Bank once certain of the Banks Tier 2 capital instruments become ineligible as capital by December 31, 2015 in accordance with BSP Circular No. 781; and to support the Banks asset growth in 2014 and in subsequent years. The foregoing discussion represents a best estimate of the use of the net proceeds of the Offer based on the Banks current plans and anticipated expenditures. Actual use of the net proceeds may vary from the foregoing discussion and management may find it necessary or advisable to use portions of the net proceeds of the Offer for other purposes. In the event that there is any change in the Banks use of proceeds, the Bank may temporarily reallocate the proceeds for other interim purposes, taking into consideration the prevailing business climate and the interests of the Bank and the shareholders taken as a whole. In the event of any deviation, adjustment or reallocation in the planned use of proceeds, the Bank will secure the approval of its Board of Directors for such deviation, adjustment or reallocation and promptly make the appropriate disclosures to the PSEC and the PSE. The Bank shall regularly disclose to the PSE, through the Online Disclosure System (PSE Edge), any disbursements from the proceeds generated from the Offer. The Bank, as of the date of this Prospectus, does not have any loan obligations with the Joint International Lead Managers and International Underwriters and the Sole Domestic Underwriter.

38

PLAN OF DISTRIBUTION The Rights Offer The Rights Shares shall be offered on a pro-rata basis to existing holders of Common Shares of the Bank as of the Record Date of January 16, 2014. Under the PSEs Revised Listing Rules, the Bank, subject to the approval of the PSE, shall set the Record Date which shall not be less than 15 trading days from approval of the PSE Board of Directors. The Offer shall be in the proportion of fifteen (15) Rights Share for every one hundred (100) Common Shares held as of the Record Date at an Offer Price of P71.00 per Rights Share. The Bank intends to source up to 32,586,252 shares of the Rights Shares from its existing authorized but unissued capital stock, while the remaining Rights Shares will be sourced from an increase in authorized capital stock of the Bank, which the Bank will apply for immediately after the conclusion of the Offer. LTG, which currently indirectly owns 59.83% of the Banks shareholdings, has agreed to subscribe to 97,477,427 of the Rights Shares, while PNB Capital has agreed to procure Eligible Shareholders to subscribe to: (i) up to 32,867,583 of the Rights Shares; and (ii) any such portion of the 97,477,427 Rights Shares not subscribed by LTG, which shall be sourced from the increase in authorized capital stock of the Bank. LTG has consented, and PNB Capital has agreed to procure the consent of the relevant Eligible Shareholders, to the delayed delivery of their subscribed Rights Shares pending the approval by the PSEC of the Banks application for an increase in its authorized capital stock. As soon as its application for increase in authorized capital stock has been approved, the Banks Rights Shares to be issued from such increase in authorized capital stock will be listed with the PSE. The unexercised Rights Shares shall be offered to those shareholders who had previously exercised their rights and had signified their intention to subscribe to any unsubscribed Rights Shares via payment of the total Offer Price of the Rights Shares they wish to subscribe in excess of their entitlements. The Additional Rights Shares to which an applicant is entitled to subscribe shall be in the proportion to the number of Common Shares held by such applicant as of the Record Date to the total number of Common Shares held by all applicants to Additional Rights Shares as of the Record Date. Existing shareholdings in certificated and scripless form will be treated as separate shareholdings for the purpose of calculating entitlements under the Offer. Fractions of Rights Shares will not be allotted to existing shareholders and fractional entitlements will be rounded down to the nearest whole number of Rights Shares. PNB Capital and Investment Corporation, Credit Suisse and Deutsche Bank have agreed to assist the Bank in soliciting interest from existing shareholders of the Bank (excluding existing shareholders in the United States) in the purchase of the Rights Shares. To the extent that any Rights Shares remain unsubscribed in the Offer, after the second round, such Rights Shares, subject to certain conditions, will be taken up by the Sole Domestic Underwriter and the Joint International Lead Managers and International Underwriters who shall procure purchasers, or failing which, shall purchase the unsubscribed Rights Shares as set out below. The Domestic Offer The Bank, through the Sole Domestic Underwriter, will offer up to 130,345,010 of any Rights Shares that remain unsubscribed in the Offer (Domestic Offer Shares), after the second round, by way of a domestic offer to qualified buyers in the Philippines (the Domestic Offer). The underwriting agreement entered into between the Bank and the Sole Domestic Underwriter dated January 10, 2014 (the Domestic Underwriting Agreement) is subject certain conditions and may be subject to termination by the Sole Domestic Underwriter if certain circumstances, including force majeure, occur on or before the Rights Shares are listed on the PSE such as the occurrence of any development or event, which, individually or in the aggregate, is reasonably expected to result in a material adverse condition (financial or otherwise), results of operations, business or properties of the Bank taken as a whole whether or not arising in the ordinary course of business. Likewise, the Domestic Underwriting Agreement is conditional, inter alia, on the Rights Shares being listed on or before February 11, 2014, or such later date as the Sole Domestic Underwriter may agree. The termination of the Domestic Underwriting Agreement at any stage of the Offer shall render the PSEs approval as null and void and may lead to PSEs declaration of failure of the Offer. The Bank has agreed to indemnify the Sole Domestic Underwriter against certain liabilities, as provided in the Domestic Underwriting Agreement. All of the Domestic Rights Shares are or shall be lodged with the PDTC and shall be issued in scripless form. Investors may maintain the Domestic Rights Shares in scripless form or opt to have the stock certificates issued to them by requesting an upliftment of the relevant Domestic Rights Shares from the PDTCs electronic system after the Domestic Rights Shares are listed on the PSE. 39

The International Offer The Joint International Lead Managers and International Underwriters will offer up to 32,586,252 Rights Shares that remain unsubscribed in the Offer (International Offer Shares), after the second round, by way of an international offer, outside of the Philippines and outside of the United States in reliance on Regulation S under the United States Securities Act of 1933, as amended (the International Offer). The underwriting agreement entered into between the Bank and the Joint International Lead Managers and International Underwriters (the International Underwriting Agreement) is subject to certain conditions and may be subject to termination by the Joint International Lead Managers and International Underwriters if certain circumstances, including force majeure, occur on or before the Rights Shares are listed on the PSE. Under the terms and conditions of the International Underwriting Agreement, the Joint International Lead Managers and International Underwriters are committed to purchase or procure purchasers for all of the International Offer Shares to be offered in the International Offer. The termination of the International Underwriting Agreement at any stage of the Offer shall render the PSEs approval as null and void and may lead to the PSEs declaration of failure of the Offer. All of the International Offer Shares are or shall be lodged with the PDTC and shall be issued in scripless form. Investors may maintain the International Offer Shares in scripless form or opt to have the stock certificates issued to them by requesting an upliftment of the relevant International Offer Shares from the PDTCs electronic system after the International Offer Shares are listed on the PSE. The Joint International Lead Managers and International Underwriters and their affiliates have engaged in transactions with and performed various investment banking, commercial banking and other services for the Bank, and their subsidiaries and affiliates in the past and may do so from time to time in the future and may be paid fees in connection with such services from time to time. However, all services provided by the Joint International Lead Managers and International Underwriters, including in connection with the Offer, have been provided as an independent contractor and not as a fiduciary to the Bank. Lock-up The Bank has agreed with the Joint International Lead Managers and International Underwriters that, other than in connection with the issuance of Rights Shares for purposes of the Offer, neither the Bank nor any person acting on its behalf will, for a period of 90 days after the Listing Date, without the prior written consent of the Joint International Lead Managers and International Underwriters, issue, offer, sell, contract to sell, pledge, charge, grant options over or otherwise dispose of, directly or indirectly (or publicly announce any such issuance, offer, sale, pledge, charge, options or disposal of), or enter into a transaction which would have the same effect (or publicly announce the entry into any such transaction), or enter into any swap, hedge or other arrangement (or publicly announce the entry in any such swap, hedge or other arrangement) that transfers in whole or in part, any of the economic consequences of ownership of the Common Shares, whether any such aforementioned transaction is to be settled by delivery of the Common Shares or securities convertible or exchangeable into or exercisable for Common Shares or warrants or other rights to purchase Common Shares or any security or financial product whose value is determined directly or indirectly by reference to the price of the Common Shares, including equity swaps, forward sales and options. Selling Restrictions No Rights Shares shall be offered or sold to any person within the Philippines, except (a) under an exemption from the registration requirements of the SRC either under Section 10.1(l) (offer or sale to qualified buyers) or Section 10.1(k) (offer or sale to fewer than 20 non-qualified persons during any 12-month period) of the SRC and (b) in compliance with applicable filing, disclosure and other requirements under the SRC and the rules and regulations issued by the PSEC to implement the SRC. Investors who acquire beneficial ownership over at least 5% of the outstanding capital stock of the Bank must disclose such acquisition to the PSEC and the PSE (through the Bank) on SEC Form 18-A within 5 business days from such acquisition. Investors who acquire beneficial ownership over at least 10% of the outstanding capital stock of the Bank must disclose such acquisition to the PSEC and the PSE (through the Bank) on SEC Form 23-A within 10 days from such acquisition.

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DIVIDEND POLICY Dividends are declared and paid out of the earned surplus or net profits of the Bank as often and at such intervals as the Board of Directors may determine and in accordance with the provisions of law and the regulations of the BSP. There are no specific requirements relating to the Banks dividend policy. Dividends to be paid in cash by the Bank are subject to approval by a majority of the Board of Directors and no further approval from the Banks shareholders is required. Dividends to be paid in the form of stock requires both the approval of a majority of the Board of Directors and the approval of shareholders representing not less than two-thirds of the Banks outstanding capital stock. Save as disclosed in this Prospectus, there are no known restrictions to the Banks ability to pay dividends on the Shares. The Banks dividend policy is an integral component of its capital management policy and process rather than a stand-alone process. Its fundamental and overriding policy is sustainability. These are referenced against the Banks capital management adequacy process. Pursuant to existing PSEC rules, cash dividends declared by the Bank must have a record date that is neither less than 10 nor more than 30 days from the date the cash dividends are declared. In case no record date is specified, the same is deemed to be fixed at 15 days from such declaration. However, companies that are obliged to pay dividends may have a single declaration for several cash dividends within a year, subject to the condition that their record and payment dates are also explicitly provided. With respect to stock dividends, the record date is to be neither less than 10 nor more than 30 days from the date of shareholders approval, provided, however, that the set record date is not to be less than 10 trading days from receipt by the PSE of the notice of declaration of stock dividend. In relation to banks, however, the record date can only be fixed after receipt of the BSPs approval for the dividend declaration. In the event that a stock dividend is declared in connection with an increase in authorized capital stock, the corresponding record date is to be fixed by the PSEC. The payment of dividends in the future will depend on the Banks earnings, cash flow, financial condition and other factors. Dividends may be declared only from unrestricted retained earnings and subject to approval from the BSP, and to the extent that the same comprises stock dividends, the PSEC. Appraisal increment amounting to P7.7 billion and translation adjustment of P1.3 billion applied to deficit through a quasireorganization in 2002 and 2000 are not available for dividend declaration. Circumstances which could restrict the payment of cash dividends include, but are not limited to, when the Bank undertakes major projects and developments requiring substantial cash expenditures. The Board of Directors may, at any time, modify the Banks dividend payout ratio depending on the results of operations and future projects and plans of the Bank. As of September 30, 2013, the Bank had retained earnings of P14.1 billion, a significant amount of which is available for the payment of dividends subject to restrictions as mentioned above. The table below sets out the earnings per Share of the Bank for the periods indicated:
Earnings per Share

For the year ended December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . For the year ended December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . For the year ended December 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . For the nine months ended September 30, 2013. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P5.38 7.05 7.02 5.71

The Bank has not declared any cash or stock dividends on its common equity for the years ended December 31, 2010, 2011 and 2012 and for the nine months ended September 30, 2013. In relation to foreign shareholders, dividends payable may not be remitted using foreign exchange sourced from the Philippine banking system unless the investment was first registered with the BSP. See Philippine Taxation.

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DETERMINATION OF OFFER PRICE The Rights Shares are being offered at a price of P71.00 per share. The Offer Price was determined based on the 10-day VWAP of the Banks Common Shares on the PSE, subject to a discount of 17.9%.

42

DILUTION After the completion of the Offer, the Eligible Shareholders will not, as a consequence of their exercise of their rights to purchase their proportionate Rights Shares, suffer any dilution in their respective shareholdings in the Bank. The net book value of the Bank as of September 30, 2013 was P74.29 per share. Net book value represents the amount of the Banks total assets less its (i) total liabilities, (ii) cumulative translation adjustments, and (iii) non-controlling interest on a consolidated basis. Upon receipt of the estimated P11,327,286,573 net proceeds of the Offer and the issuance of a total of 162,931,262 new Common Shares pursuant to the Offer, the Banks pro-forma net book value would be P73.67 per share. This represents an immediate decrease of P0.62 per share for existing holders of Common Shares. The calculation of the net book value per share before and after the Offer is presented below. Net book value in P as of September 30, 2013 (a). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Issued and outstanding Common Shares as of September 30, 2013 (b) . . . . . . . . . . . . . . . . . . . . . Net book value per share as of September 30, 2013 (c)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pro-Forma net book value in P after the Offer (d)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Issued and outstanding Common Shares after the Offer (e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pro-Forma net book value per share after the Offer (f)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Decrease per share to Existing Shareholders attributable to the Offer(4) . . . . . . . . . . . . . . . . . . . . P80,697,935,639 1,086,208,416 P 74.29 P92,025,222,212 1,249,139,678 P 73.67 P 0.62

Notes: (1) Computed by dividing (a) by (b). (2) Based on the Banks net book value as computed in (a) and adding the net proceeds from the Offer. (3) Computed by dividing (d) by (e). (4) Computed by subtracting (f) from (c).

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CAPITALIZATION The following table sets out the unaudited consolidated long-term debt and capitalization of the Bank as of September 30, 2013, and as adjusted to give effect to the issuance of the Rights Shares, after payment of underwriting discounts and selling concessions and estimated offering expenses. This table should be read in conjunction with the Banks unaudited interim condensed consolidated financial statements as of September 30, 2013 and for the nine months ended September 30, 2013 included in this Prospectus. The translation of Peso amounts in US Dollar amounts at the specified rate is provided solely for convenience using the PDS weighted average rate of P43.54 = U.S.$1 as of September 30, 2013.
As of nine months ended September 30, 2013 Actual As adjusted (U.S.$ in (U.S.$ in (Q millions) millions) (Q millions) millions)

Liabilities Deposit liabilities(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial liabilities at fair value through profit or loss. . . . . . . . . . . Bills and acceptances payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subordinated debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity Capital Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital paid in excess of par value . . . . . . . . . . . . . . . . . . . . . . . . . . . . Surplus reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Surplus. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Others(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity attributable to holders of the Parent Company . . . . . . . . . . . Non-controlling interest in a subsidiary . . . . . . . . . . . . . . . . . . . . . . . Total Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Liabilities and Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

453,978 7,364 14,466 9,950 36,458 522,216 43,448 26,500 524 13,244 (2,903) 80,813 3,073 83,886 606,102

10,426.7 169.1 332.3 228.5 837.4 11,994.0 997.9 608.6 12.0 304.2 (66.7) 1,856.0 70.6 1,926.6 13,920.6

453,978 7,364 14,466 9,950 36,458 522,216 49,965 31,327 524 13,227 (2,903) 92,140 3,073 95,213 617,429

10,426.7 169.1 332.3 228.5 837.4 11,994.0 1,147.5 720.5 12.0 303.8 (66.7) 2,116.2 70.6 2,186.8 14,180.7

Notes: (1) Demand, savings and time deposits. (2) Others include: Revaluation Increment on Land and Buildings, Remeasurement Losses on Retirement Plan, Accumulated Translation Adjustment, Net Unrealized Gain on Available-for-Sale Investments, Equity in Net Unrealized Gain on Available-for-Sale Investment of an Associate and Parent Company Shares Held by a Subsidiary.

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SELECTED STATISTICAL DATA The following unaudited information should be read together with the Banks consolidated financial statements included in this Prospectus as well as Managements Discussion and Analysis of Financial Condition and Results of Operations, Assets and Liabilities and Risk Management. AVERAGE STATEMENTS OF FINANCIAL POSITION AND RELATED INTEREST The following table shows the Banks average balances, interest earned/incurred and average interest rates for the three years ended December 31, 2010, 2011, and 2012 and the nine months ended September 30, 2013. Average balances are generally based on a daily rate.
For the nine months For the year ended December 31, ended September 30, 2010 2011 2012 2013 Average Interest Average Average Interest Average Average Interest Average Average Interest Average Daily Income/ Yield/ Daily Income/ Yield/ Daily Income/ Yield/ Daily Income/ Yield/ Balance Expense Cost (%) Balance Expense Cost (%) Balance Expense Cost (%) Balance Expense Cost (%) (Q millions, except for percentages)

Interest Earning Assets Due from BSP and other banks . . . . . . . . Interbank loans receivables. . . . Trading and investment securities . . . . . Loans and receivables. . . .

39,265 15,508

887 31

2.3 0.2

42,309 7,781

659 31

1.6 0.4

52,518 2,551

659 14

1.3 0.5

137,176 7,617

1,070 16

1.0 0.3

86,344 97,462

4,440 6,973

5.1 7.2 5.2

87,346 120,812

4,261 7,521

4.9 6.2 4.8

77,228 128,905

3,236 7,452

4.2 5.8 4.3

106,280 235,248

2,818 9,629

3.6 5.5 3.7

Total . . . . . . . . . . . 238,579 12,331 Interest Bearing Liabilities Deposit liabilities . . . . . 223,411 Bills Payable . . . . 8,002 Subordinated debt and other borrowings . . . 11,827 Total . . . . . . . . . . . 243,240

258,248 12,472

261,202 11,361

486,321 13,533

3,442 235

1.5 2.9

238,982 11,072

4,012 149

1.7 1.3

232,309 7,129

3,100 188

1.3 2.6

417,721 10,406

2,898 116

0.9 1.5

1,095 4,772

9.3 2.0

13,316 263,370

1,108 5,269

8.3 2.0

15,028 254,466

1,097 4,385

7.3 1.7

14,832 442,959

803 3,817

7.2 1.2

45

Analysis of Changes in Interest Income and Interest ExpenseVolume and Rate Analysis The following table provides an analysis of changes in interest income, interest expense, and net interest income between changes in volume (average daily balances) and changes in rates for the year ended December 31, 2010 compared with the year ended December 31, 2011, the year ended December 31, 2011 compared with the year ended December 31, 2012, and the year ended December 31, 2012 compared with the nine months ended September 30, 2013. Volume and rate variances have been calculated on the movement in average daily balances and the change in the interest rates on average interest earning assets and average interest bearing liabilities in proportion to absolute volume and rate change. The variance caused by the change in both volume and rate has been allocated in proportion to absolute volume and rate change.
For the year ended December 31, 2010 compared with the year ended December 31, 2011 Increase (Decrease) Due to Change in Change in Average Average Change in Net Change Volume Rate Term (Q millions)

Interest income on: Trading and investment securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans and receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interbank loans receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due from BSP and other banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense on: Deposit liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bills payable and other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(179) 548 (228) 570 (73) (356)

42 1,504 (31) 51 274 220 1,072

(221) (956) 31 (279) 296 (293) (1,428)

For the year ended December 31, 2011 compared with the year ended December 31, 2012 Increase (Decrease) Due to Change in Change in Average Average Change in Net Change Volume Rate Term (Q millions)

Interest income on: Trading and investment securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans and receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interbank loans receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deposit with banks and others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense on: Deposit liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bills payable and other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(1,025) (69) (17) (912) 28 (227)

(403) 479 (29) 126 (102) (109) 384

(622) (548) 12 (126) (810) 137 (611)

For the year ended December 31, 2012 compared with the nine months ended September 30, 2013 Increase (Decrease) Due to Change in Change in Change in Average Average Term Volume Rate (Q millions)

Net Change

Interest income on: Trading and investment securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans and receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interbank loans receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deposit with banks and others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense on: Deposit liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bills payable and other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(418) 2,178 1 411 (202) (366) 2,740

786 4,455 11 674 1,324 158 4,446

(303) (413) (6) (74) (696) (104) 2

46

Yields, Spreads and Margins The following table sets out, for the periods indicated, the yields, spreads and interest margins on the Banks interest-earning assets for the years ended December 31, 2010, 2011, and 2012 and the nine months ended September 30, 2013.
For the nine months ended September 30,

For the year ended December 31, 2010 2011 2012 2013 (Q in millions, except percentages)

Interest income on interest-earning assets. . . . . . . . . . . . . . . . . . . . . . . Interest expense on interest-bearing liabilities . . . . . . . . . . . . . . . . . . . Average interest-earning assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average interest-bearing liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average interest-earning assets as a percentage of average total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average interest-bearing liabilities as a percentage of average total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average interest-earning assets as a percentage of average interest-bearing liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Yield(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of funds(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Spread(3). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net interest margin(4). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

12,331 12,472 11,361 4,772 5,269 4,385 223,377 244,568 264,968 235,757 248,186 258,157 287,645 304,593 321,537 77.7% 82.0% 94.7% 5.5% 2.0% 3.5% 3.4% 80.3% 81.5% 98.5% 5.1% 2.1% 3.0% 3.0% 82.4% 80.3% 102.6% 4.3% 1.7% 2.6% 2.6%

13,533 3,817 484,459 371,132 468,554 103.4% 79.2% 130.5% 2.8% 1.0% 1.8% 2.7%

Notes: (1) Yield is interest income divided by total yearly average interest-earning assets. Averages are based on the total ending balance of the past two years divided by two. (2) Cost of funds is interest expense divided by total yearly average interest-bearing liabilities. Yearly averages are based on the total ending balance of the past two years divided by two. (3) Spread is the difference between yield and cost of funds. (4) Net interest margin is the difference between interest earned and interest expended divided by the total yearly average interest-earning assets. Net interest margin is calculated as the difference between interest earned and interest expended divided by the total yearly average interest-earning assets. Yearly averages are based on total ending balance of the past two years divided by two. Financial Data and Ratios The following table sets out certain key financial indicators of the Bank as of and for the years ended December 31, 2010, 2011 and 2012 and the nine months ended September 30, 2013.
As of and for the nine months ended September 30, 2013

As of and for the year ended December 31, 2010 2011 2012

Return on average equity(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Return on average assets(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividend payout ratio(3). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost to income ratio(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tier I capital adequacy ratio. . . . . . . . . . . . . . . . . . . . . . . . . . . . Tier II capital adequacy ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . Total capital adequacy ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net NPL ratio(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allowance as percentage of gross non-performing assets(6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average equity to total average assets(7) . . . . . . . . . . . . . . . . . Loan to deposit ratio(8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

15.2% 1.4% 57.7% 12.8% 6.7% 19.4% 4.5% 30.9% 9.2% 42.0%

15.0% 1.6% 58.7% 14.5% 7.2% 21.7% 3.1% 31.8% 10.4% 48.6%

13.5% 1.6% 60.9% 11.9% 6.3% 18.1% 2.4% 33.4% 11.6% 55.3%

12.9% 1.7% 60.2% 17.0% 3.4% 20.3% 1.1% 26.8% 13.2% 53.5%

47

Notes: (1) For the years ended December 31, 2010, 2011 and 2012: net income divided by average total equity for the period indicated. For the nine months ended September 30, 2013: net income divided by 9 multiplied by 12 then divided by the average equity. (2) For the years ended December 31, 2010, 2011 and 2012: net income divided by average total assets for the period indicated. For the nine months ended September 30, 2013: net income divided by 9 multiplied by 12 then divided by the average assets for the period. (3) Dividend payout ratio is the ratio of dividend to net income after tax (excluding non-controlling interest). (4) Total operating expenses (excluding provision for impairment, credit and other losses) divided by total operating income for the period indicated. (5) Total non-performing loans (net) divided by total adjusted loan portfolio. As of December 31, 2010, 2011 and 2012, ratios were computed based on the balances on the audited financial statements. As of September 30, 2013, ratio was computed based on figures reported to the BSP. (6) Allowance as a percentage of gross non-performing assets is the ratio of NPA provisions made to the gross NPAs, on a consolidated basis. As of December 31, 2010, 2011 and 2012, ratios were computed based on the balances on the audited financial statements. As of September 30, 2013, ratio was computed based on figures reported to the BSP. (7) Average equity to total average assets is the ratio of average equity divided by the yearly average total assets. (8) Total loans divided by total deposits. Return on Equity and Assets The following table presents selected financial ratios for the periods indicated.
As of and for the nine months ended As of and for the year ended December 31, September 30, 2010 2011 2012 2013 (Q in millions, except percentages)

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average shareholders equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income as a percentage of average total assets . . . . . . . . . . . . Net income as a percentage of average shareholders equity(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average shareholders equity as a percentage of average total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4,032 287,645 26,460 1.4% 15.2% 9.2%

4,756 5,028 5,990 304,593 321,537 468,554 31,673 37,361 61,817 1.6% 1.6% 1.3% 15.0% 10.4% 13.5% 11.6% 9.7% 13.2%

Note: (1) For the years ended December 31, 2010, 2011 and 2012: net income divided by average total equity for the period indicated. For the nine months ended September 30, 2013: net income divided by 9 multiplied by 12 then divided by the average equity. Investment Portfolio As of September 30, 2013, the Banks investments comprised 19.2% of its total assets. The Bank carries out its investment activities according to various investment and trading policies. These policies set forth delegation of powers, types of instruments, maximum limits on investments in different types of securities, position limits, stop loss limits, duration limits, and minimum acceptable credit spreads.

48

Total Investment Portfolio The following table sets forth, as of the dates indicated, information relating to the Banks total investment portfolio.
As of December 31, 2010 2011 2012 As of September 30, 2013

Net Net Net Net Carrying Market Unrealized Carrying Market Unrealized Carrying Market Unrealized Carrying Market Unrealized Value Value Gain/Loss Value Value Gain/Loss Value Value Gain/Loss Value Value Gain/Loss (Q millions)

Debt Securities Government securities. . . 69,906.4 72,669.9 Private securities. . . 17,194.3 17,444.5 Total debt securities . . . . . . . 87,100.7 90,114.4 Equity securities . . . 728.9 728.9 Derivative assets. . . 910.5 910.5 Total . . . . . . . . . . . . . 88,740.1 91,753.8

(502.9) 44,793.2 44,793.2 (125.5) 13,459.1 13,459.1 (628.4) 58,252.3 58,252.3 30.9 493.1 493.1 251.3 454.1 454.1 (346.2) 59,199.5 59,199.5

515.8

57,529.3 57,529.3

183.3 284.3 467.6 339.4 0.5 807.5

69,260.8 65,031.8 (4,323.0) 17,839.2 17,279.6 (571.0)

(34.6) 12,267.4 12,267.4 481.2 69,796.7 69,796.7 81.6 769.4 769.4 (456.5) 454.5 454.5 106.3 71,020.6 71,020.6

87,100.0 82,311.4 (4,894.0) 1,654.2 2,082.5 337.6 418.7 454.5 (14.3) 89,172.9 84,848.4 (4,570.7)

Held-to-Maturity Investments The following tables set forth, as of the dates indicated, information related to the Banks investments held to maturity.
As of December 31, 2010 Carrying Value 2011 2012 As of September 30, 2013

Net Net Net Net Market Unrealized Carrying Market Unrealized Carrying Market Unrealized Carrying Market Unrealized Value Gain/Loss Value Value Gain/Loss Value Value Gain/Loss Value Value Gain/Loss (Q millions)

Debt Securities Government securities . . . . . . . 32,739.6 35,503.1 Private securities . . 5,488.6 5,738.8 Total debt securities . . . . 38,228.2 41,241.9 Equity securities . . . . . . . Total . . . . . . . . . . . . . . . . . 38,228.2 41,241.9

Available-for-Sale Investments The following table sets forth, as of the dates indicated, information related to the Banks investments under AFS.
As of December 31, 2010 2011 2012 As of September 30, 2013

Net Net Net Net Carrying Market Unrealized Carrying Market Unrealized Carrying Market Unrealized Carrying Market Unrealized Value Value Gain/Loss Value Value Gain/Loss Value Value Gain/Loss Value Value Gain/Loss (P millions)

Debt Securities Government securities. . . 27,568.1 27,568.1 Private securities. . . 6,434.7 6,434.7 Total debt securities . . . . . . . 34,002.8 34,002.8 Equity securities . . . 528.5 528.5 Total . . . . . . . . . . . . . 34,531.3 34,531.3

(418.1) 42,614.5 42,614.5 (245.3) 9,391.5 9,391.5

484.1

55,558.5 55,558.5

158.3 242.9 401.2 343.3 744.5

65,740.1 61,511.1 (4,106.3) 17,619.6 17,060.0 (550.0)

(30.3) 10,920.2 10,920.2 453.8 86.4 540.2 66,478.7 66,478.7 518.8 518.8 66,997.5 66,997.5

(663.4) 52,006.0 52,006.0 24.4 317.8 317.8 (639.0) 52,323.8 52,323.8

83,359.7 78,571.1 (4,656.3) 1,461.3 1,8889.9 348.9 84,821.0 80,461.0 (4,307.4)

49

Held-for-Trading Investments The following table sets forth, as of the dates indicated, information related to the Banks investments held for trading.
As of December 31, 2010 2011 2012 As of September 30, 2013

Net Net Net Net Carrying Market Unrealized Carrying Market Unrealized Carrying Market Unrealized Carrying Market Unrealized Value Value Gain/Loss Value Value Gain/Loss Value Value Gain/Loss Value Value Gain/Loss (P millions)

Debt Securities Government securities . . . . . . Private securities . . . . . .

9,598.7 9,598.7 5,271.0 5,271.0

(84.8) 119.8 35.0 6.5 251.3 292.8

2,178.7 2,178.7 4,067.6 4,067.6 6,246.3 6,246.3 175.3 175.3 454.1 454.1 6,875.7 6,875.7

31.7 (4.3) 27.4 (4.8) (456.5) (433.9)

1,970.8 1,970.8 1,347.2 1,347.2 3,318.0 3,318.0 250.6 250.6 454.5 454.5 4,023.1 4,023.1

25.0 41.4 66.4 (3.9) 0.5 63.0

3,520.7 3,520.7 219.6 219.6

(216.7) (21.0) (237.7) (11.3) (14.3) (263.3)

Total debt securities . . . 14,869.7 14,869.7 Equity securities. . . . . . . 200.4 200.4 Derivative assets . . . . . . 910.5 910.5 Total . . . . . . . . . . . . . . . . 15,980.6 15,980.6

3,740.3 3,740.3 192.9 192.6 418.7 454.5 4,351.9 4,387.4

Cash Flow Mismatch Analysis The following table sets forth the Banks structural liquidity gap position as of September 30, 2013:
Up to 1 Month 1 to 3 Months As of September 30, 2013(1)(2)(3) 3 to 6 to Beyond 6 Months 12 Months 1 Year (P in millions, except percentages)

Total

Cash and Due from BSP. . . . . . . . . . . . . 138,018.0 Due from Other Banks . . . . . . . . . . . . . . 15,769.4 Interbank Loans and Securities Held under Agreements to Resell . . . . . . . . . . . . . . . . . . . . . . 37,090.2 AFS and Financial Assets at FVPL . . . 12,147.6 Loans and Receivables . . . . . . . . . . . . . . 46,144.3 Property and Equipment . . . . . . . . . . . . . Deferred Tax Assets . . . . . . . . . . . . . . . . Other Assets (including Investment Properties and Investment in an Associate) . . . 5,440.0 Total Inflows . . . . . . . . . . . . . . . . . . . . . . 254,609.3 Equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bills Payable . . . . . . . . . . . . . . . . . . . . . . . Deposits from Other Accounts . . . . . . . Subordinated Debt . . . . . . . . . . . . . . . . . . Other Liabilities . . . . . . . . . . . . . . . . . . . . Total Outflows . . . . . . . . . . . . . . . . . . . . 10,573.9 12,827.9 25,853.9 49,255.7

138,018.0 15,769.4

410.7 24,729.3

724.5 3,555.8

2,501.9 7,188.6

37,090.2 75,807.6 91,592.2 161,402.3 243,020.2 22,973.7 22,973.7 1,149.9 1,149.9

1,406.8 26,546.7 1,391.9 19,031.7 1,805.6 22,229.2

14,031.7 18,312.0 810.0 20,591.7 84.9 21,486.7

384.7 10,075.1 1,228.5 60,036.4 332.6 61,597.5

35,225.6 296,559.1

56,488.8 606,102.2

83,886.1 83,886.1 462.3 14,466.6 341,489.9 453,977.6 9,949.8 9,949.8 15,745.1 43,822.1 451,533.2 606,102.2

Liquidity Gap . . . . . . . . . . . . . . . . . . . . . . 205,353.7 4,317.6 (3,174.7) (51,522.4) (154,974.1) Cumulative Gap . . . . . . . . . . . . . . . . . . . . 205,353.7 209,671.2 206,496.5 154,974.1 Liquidity gap as % of Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . 34% 1% -1% -9% -26% Notes: (1) Classification methodologies are based on PFRS. (2) Assets and liabilities are classified into categories as per residual maturity. (3) Assets and liabilities that do not mature or have ambiguous maturities are classified as per historical behavioral analysis or management judgment.

50

Interest Rate Sensitivity Analysis The following table sets forth the interest rate sensitivity analysis of the Banks assets and liabilities as of September 30, 2013:
Up to 1 Month 1 to 3 Months As of September 30, 2013 3 to 6 6 to 12 Months Months (P in millions) Beyond 1 Year

Total

Cash and Due from BSP. . . . . . . . . . . . . . . . Due from Other Banks . . . . . . . . . . . . . . . . . Interbank Loans and Securities Held under Agreements to Resell . . . . . . . . . . AFS and Financial Assets at FVPL . . . . . . Loans and Receivables . . . . . . . . . . . . . . . . . Other Assets (including Property and Equipment, DTA, Investment Properties and Investments in an Associate) . . . . . . . . . . . . . . . . . . . . . . . . . . Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . Capital and Reserves. . . . . . . . . . . . . . . . . . . Bills Payable. . . . . . . . . . . . . . . . . . . . . . . . . . Deposits from Other Accounts . . . . . . . . . . Subordinated Debt . . . . . . . . . . . . . . . . . . . . . Other Liabilities . . . . . . . . . . . . . . . . . . . . . . . Total Liabilities and Equity . . . . . . . . . . .

64,778.0 15,769.4 39,657.8 625.0 75,883.5

132.4 410.5 47,663.5

819.4 8,128.9

2,519.5 15,822.4

73,2340.0 87,217.8 95,522.0

138,018.0 15,769.4 37,090.2 91,592.2 243,020.2

302.2 194,315.8 10,573.9 112,943.7 123,517.6

97.8 48,304.1 1,391.9 38,942.7 40,334.6

2,745.7 11,693.9 810.0 13,546.0 14,356.0

20.8 18,362.6 1,228.5 10,494.1 11,722.5

77,446.0 333,425.8 83,886.1 462.3 278,051.3 9,949.8 43,822.1 416,171.6

80,612.4 606,102.2 83,886.1 14,466.6 453,977.6 9,949.8 43,822.1 606,102.2

ALLIED BANK The merger between the Bank and ABC became effective on February 9, 2013. The tables below display selected historical statistical data for ABC prior to its merger with the Bank. AVERAGE STATEMENTS OF FINANCIAL POSITION AND RELATED INTEREST Analysis of Changes in Interest Income and Interest ExpenseVolume and Rate Analysis The following table shows Allied Banks average balances, interest earned/incurred and average interest rates for the three years ended December 31, 2010, 2011 and 2012. Average balances are generally based on a daily rate.
2010 Average Daily Balance For the years ended December 31, 2011 2012 Interest Average Average Interest Average Average Income/ Yield/ Daily Income/ Yield/ Daily Expense Cost (%) Balance Expense Cost (%) Balance (Q millions, except for percentages)

Interest Average Income/ Yield/ Expense Cost (%)

Interest-earning assets Deposits with banks and interbank loans receivable . . . . . . . . . . . . Trading and investment securities . . . . . . . . . . . . . Loans and receivables . . . .

41,675.4 1,094.9 42,961.4 3,032.1 85,824.5 5,505.4 170,461.3 9,632.4

2.6% 7.1% 6.4%

40,241.8

639.9

1.6%

43,747.6

491.5

1.1% 5.8% 6.3% 5.0%

42,990.3 2,728.5 92,954.3 6,061.9

6.3% 39,053.6 2,258.8 6.5% 103,196.8 6,481.9 5.4% 185,998.0 9,232.2

5.7% 176,186.4 9,430.3

Interesting-bearing liabilities Deposit liabilities . . . . . . . . 144,536.7 2,466.1 Bills payable and other borrowings . . . . . . . . . . . 7,329.1 375.0 151,865.8 2,841.1

1.7% 144,301.9 2,414.9 5.1% 7,419.5 414.7

1.7% 147,090.9 1,944.4 5.6% 9,160.4 505.5

1.3% 5.5% 1.6%

1.9% 151,721.4 2,829.6 51

1.9% 156,251.3 2,449.9

Analysis of Changes in Interest Income and Interest ExpenseVolume and Rate Analysis The following table provides an analysis of changes in interest income, interest expense, and net interest income between changes in volume (average daily balances) and changes in rates for the year ended December 31, 2010 compared with the year ended December 31, 2011 and the year ended December 31, 2011 compared with the year ended December 31, 2012. Volume and rate variances have been calculated on the movement in average daily balances and the change in the interest rates on average interest earning assets and average interest bearing liabilities in proportion to absolute volume and rate change. The variance caused by the change in both volume and rate has been allocated in proportion to absolute volume and rate change.
For the year ended December 31, 2010 compared with the year ended December 31, 2011 For the year ended December 31, 2011 compared with the year ended December 31, 2012

Increase (Decrease) Due to Increase (Decrease) Due to Change in Change in Change in Change in Net Average Average Change in Net Average Average Change in Change Volume Rate Term Change Volume Rate Term (Q millions)

Interest income on: Trading and investment securities. . . . (303.6) 1.8 Loans and receivables . . . . . . . . . . . . . . 556.5 465.0 Deposits with banks and interbank loans receivable . . . . . . . . . . . . . . . . . (455.0) (22.8) Interest Expense on: Deposit liabilities . . . . . . . . . . . . . . . . . . (51.2) (3.9) Bills payable and other borrowings . . 39.7 5.1 Net Interest Income . . . . . . . . . . . . . . . (190.6) 204.7 Yields, Spreads and Margins

(305.4) (91.5) (432.2) (47.3) 34.6 (54.4)

(469.7) (227.7) 420.0 643.3 (148.4) 39.4

(242.0) (223.3) (187.8) (507.4) (5.3) (22.5)

(470.5) 36.9 90.8 96.1 181.6 179.4

The following table sets out, for the periods indicated, the yields, spreads and interest margins on Allied Banks interest-earning assets and interest-bearing liabilities for the years ended December 31, 2010, 2011 and 2012.
Year ended December 31, 2010 2011 2012 (Q in millions, except percentages)

Interest income on interest-earning assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense on interest-bearing liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . Average interest-earning assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average interest-bearing liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average interest-earning assets as a percentage of average total assets . . . . . Average interest-bearing liabilities as a percentage of average total assets . . Average interest-earning assets as a percentage of average Interest-bearing liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Yield(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of funds(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Spread(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net interest margin(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

9,632.4 9,430.3 9,232.2 2,841.1 2,829.6 2,449.9 170,461.3 176,186.4 185,998.0 151,865.8 151,721.4 156,251.2 188,417.1 195,991.4 200,154.6 90.5% 89.9% 92.9% 80.6% 77.4% 78.1% 112.2% 5.7% 1.9% 3.8% 4.0% 116.1% 5.4% 1.9% 3.5% 3.7% 119.0% 5.0% 1.6% 3.4% 3.6%

Notes: (1) Yield is interest income divided by total yearly average interest-earning assets. (2) Cost of funds is interest expense divided by total yearly average interest-bearing liabilities. Interest-bearing liabilities include deposit liabilities, bills payable and subordinated debt. (3) Spread is equal to interest income on interest-earning assets less interest expense on interest-bearing liabilities. (4) Net interest margin is the difference between interest income and interest expense divided by the total yearly average interest-earning assets. Net interest margin is calculated as the difference between interest income and interest expense divided by the total yearly average interest-earning assets. Yearly averages are based on the total ending balance of the past two years divided by two.

52

Financial Ratios The following table sets out certain key financial indicators of Allied Bank as of and for the years ended December 31, 2010, 2011 and 2012.
As of and for the year ended December 31, 2010 2011 2012

Return on average equity(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Return on average assets(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividend payout ratio(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost to average assets(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tier I capital adequacy ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tier II capital adequacy ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total capital adequacy ratio. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net non-performing assets ratio(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allowance as percentage of gross non-performing assets(6) . . . . . . . . . . . . . . Average equity to average total assets(7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Liquidity Ratio(8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

6.0% 0.6% 5.8% 15.5% 3.9% 19.4% 4.4% 35.8% 10.5% 47.1%

5.8% 0.7% 5.4% 15.8% 3.8% 19.6% 4.1% 38.1% 11.6% 57.3%

7.6% 1.0% 1.6% 6.1% 17.1% 3.9% 21.0% 4.0% 50.8% 12.5% 57.0%

Notes: (1) Return on average equity is the ratio of the net income attributable to equity holders of Allied Bank to the yearly average equity attributable to equity holders of Allied Bank. (2) Return on average assets is the ratio of the net income attributable to equity holders of Allied Bank to the yearly average assets. (3) Dividend payout ratio is the ratio of dividend declared to net income attributable to equity holders of Allied Bank. (4) Cost to average assets is the ratio of the operating expenses (excluding depreciation and amortization) plus interest expense to the yearly average assets. (5) Net non-performing assets ratio is the ratio of net non-performing assets divided by total assets. (6) Allowance as a percentage of gross non-performing assets is the ratio of allowance for credit and impairment losses on loans and ROPA to the gross NPAs. (7) Average equity to total average assets is the ratio of average equity attributable to equity holders of Allied Bank divided by the yearly average total assets. (8) Liquid assets divided by liquid liabilities. Return on Equity and Assets The following table presents selected financial ratios for the periods indicated.
As of and for the year ended December 31, 2010 2011 2012 (Q in millions, except percentages)

Net income(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average shareholders equity(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income as a percentage of average total assets . . . . . . . . . . . . . . . . . . . . . Net income as a percentage of average shareholders equity . . . . . . . . . . . . Average shareholders equity as a percentage of average total assets . . . . . Note: (1) Attributable to the equity holders of Allied Bank. Investment Portfolio

1,177.5 1,318.5 1,901.6 188,417.1 195,991.4 200,154.6 19,765.6 22,696.7 25,052.1 0.6% 0.7% 1.0% 6.0% 5.8% 7.6% 10.5% 11.6% 12.5%

As of December 31, 2012, Allied Banks trading and investment securities comprised 18.7% of its total assets. Allied Bank carries out its investment activities according to various investment and trading policies. These policies set forth delegation of powers, types of instruments, maximum limits on investments in different types of securities, position limits, stop loss limits, duration limits, and minimum acceptable credit spreads.

53

Total Investment Portfolio The following table sets forth, as of the dates indicated, information relating to Allied Banks total investment portfolio.
As of December 31, 2010 As of December 31, 2011 As of December 31, 2012 Net Net Net Carrying Market Unrealized Carrying Market Unrealized Carrying Market Unrealized Gain/Loss Gain/Loss Gain/Loss Value Value Value Value Value Value (Q in millions)

Debt securities: Government securities. . . . . . . . 31,779.3 32,287.1 Private securities . . . 12,547.4 13,192.3 Total debt securities. . . . . 44,326.7 45,479.4 Equity securities . . . . . . . . 365.2 365.2 Derivative assets. . . . . . . . 259.0 259.0

685.6 30,545.9 30,545.9 2,759.1 28,814.3 28,814.3 1,812.5 260.4 9,608.2 9,608.2 292.6 7,162.2 7,162.2 436.3 946.0 40,154.1 40,154.1 3,051.7 35,976.5 35,976.5 2,248.8 20.9 677.3 677.3 178.3 952.4 952.4 277.5 95.0 198.2 198.2 (50.9) 148.7 148.7 6.1

Total. . . . . . . . . . . . . . . . . . 44,950.9 46,103.6 1,061.9 41,029.6 41,029.6 3,179.1 37,077.6 37,077.6 2,532.4

Held to Maturity Investments The following tables set forth, as of the dates indicated, information related to Allied Banks investments held to maturity.
As of December 31, 2010 Carrying Market Value Value As of December 31, 2011 Carrying Market Value Value (Q in millions) As of December 31, 2012 Carrying Market Value Value

Debt securities: Government securities . . . . . . . . . . Private securities . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

13,541.1 7,402.2 20,943.3

14,048.9 8,047.1 22,096.0

Available for Sale Investments The following table sets forth, as of the dates indicated, information related to Allied Banks investments available for sale.
As of December 31, 2010 As of December 31, 2011 As of December 31, 2012 Net Net Net Carrying Market Unrealized Carrying Market Unrealized Carrying Market Unrealized Value Value Gain/Loss Value Value Gain/Loss Value Value Gain/Loss (Q in millions)

Debt securities: Government securities . . . . 15,412.2 15,412.2 Private securities . . . . 4,795.7 4,795.7 Total debt securities. . . . . . . . . 20,207.9 20,207.9 Equity securities . . . . 292.7 292.7 Total . . . . . . . . . . . . . . 20,500.6 20,500.6

689.5 266.2 955.7 955.7

30,115.0 30,115.0 2,728.3 22,455.2 22,455.2 1,684.4 9,589.8 9,589.8 288.3 6,340.9 6,340.9 482.0

39,704.8 39,704.8 3,016.6 28,796.1 28,796.1 2,166.4 627.0 627.0 178.6 906.0 906.0 277.2 40,331.8 40,331.8 3,195.2 29,702.1 29,702.1 2,443.6

54

Financial Assets at FVPL The following table sets forth, as of the dates indicated, information related to Allied Banks investments held for trading.
As of December 31, 2010 As of December 31, 2011 As of December 31, 2012 Net Net Net Carrying Market Unrealized Carrying Market Unrealized Carrying Market Unrealized Gain/Loss Gain/Loss Gain/Loss Value Value Value Value Value Value (Q in millions)

Debt securities: Government securities . . . . . Private securities . . . . . Total debt securities . . . . . . . . . Equity securities . . . . . Derivative assets . . . . . Total . . . . . . . . . . . . . . .

2,826.0 2,826.0 349.5 349.5

(3.9) (5.8) (9.7) 20.9 95.0 106.2

430.9 18.4 449.3 50.3 198.2 697.8

430.9 18.4 449.3 50.3 198.2 697.8

30.8 4.3 35.1 (0.3) (50.9) (16.1)

6,359.1 6,359.1 821.3 821.3

128.1 (45.7) 82.4 0.3 6.1 88.8

3,175.5 3,175.5 72.5 72.5 259.0 259.0 3,507.0 3,507.0

7,180.4 7,180.4 46.4 46.4 148.7 148.7 7,375.5 7,375.5

Cash Flow Mismatch Analysis The following table sets forth Allied Banks structural liquidity gap position as of December 31, 2012:
As of December 31, 2012(1)(2)(3) Over Over 3 Months to 1 Year to Over 1 Year 5 Years 5 Years (Q in millions, except percentages)

Up to 3 Months

Total

Due from BSP and other Banks . . . . . . . . . . . . . . . . . . Interbank Loans and SPURA. . . . . . . . . . . . . . . . . . . . . Trading and Investment Securities . . . . . . . . . . . . . . . . Loans and Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . Total Inflows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deposit Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bills Payable and Other Borrowings . . . . . . . . . . . . . . Total Outflows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Liquidity Gap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cumulative Gap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Liquidity gap as % of Total Liabilities . . . . . . . . . . . .

33,584.9 7,531.0 1,761.7 46,782.3 89,659.9 134,555.9 4,484.1 139,040.0

4,269.5 424.0 7,417.8 7,113.2 19,224.5 5,414.6 558.5 5,973.1

1,320.5 8,473.4 9,793.9 3,782.0 3,782.0

25,556.7 41,756.7 67,313.4 3,319.6 4,517.4 7,837.0

37,854.4 7,955.0 36,056.7 104,125.6 185,991.7 147,072.1 9,560.0 156,632.1

(49,380.1) 13,251.4 6,011.9 59,476.4 29,359.6 (49,380.1) (36,128.7) (30,116.8) 29,359.6 29,359.6 (29.5)% 7.9% 3.6% 35.6% 17.6%

Notes: (1) Classification methodologies are based on residual maturity. (2) Assets and liabilities are classified into categories as per residual maturity. (3) Assets and liabilities that do not mature or have ambiguous maturities are classified as per historical behavioral analysis or management judgment.

55

Interest Rate Sensitivity Analysis The following table sets forth the interest rate sensitivity analysis of Allied Banks assets and liabilities as of December 31, 2012:
Up to 3 Months 3 Months to 1 Year As of December 31, 2012 1 Year to Over Non5 Years 5 Years Sensitive (Q in millions)

Total

Due From BSP and Other Banks . . . . . . . . . . . . . . Interbank Loans and SPURA . . . . . . . . . . . . . . . . . Trading and Investment Securities . . . . . . . . . . . . Loans and Receivable . . . . . . . . . . . . . . . . . . . . . . . Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deposit Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . Bills Payable and Other Borrowings. . . . . . . . . . . Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . .

29,519.6 4,518.3 5,012.6 36,044.4 75,094.9 50,260.9 3,952.1 54,213.0

1,884.3 28,405.9 8,338.5 41,018.9 10,222.8 6,328.9 1,041.9 7,370.8 69,424.8 79,795.1 4,508.7 84,303.8

29,519.6 4,518.3 35,302.8 85,401.8 154,742.5 136,384.9 9,502.7 145,887.6

56

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of the Banks financial condition and results of operations should be read in conjunction with the consolidated financial statements and the related notes included elsewhere in this Prospectus and the sections entitled Summary of Consolidated Financial Information, Selected Statistical Data, Assets and Liabilities, Risk Management and Business in this Prospectus. The Banks audited consolidated financial statements as of January 1, 2011 and December 31, 2011 and 2012, and for the years ended December 31, 2010, 2011 and 2012 have been prepared in accordance with PFRS. The balances as of December 31, 2010 are equivalent to the balances as of January 1, 2011 as reflected in the audited consolidated financial statements. The unaudited interim condensed consolidated financial statements as of September 30, 2013 and for the nine months ended September 30, 2012 and 2013 have been prepared in accordance with PAS 34, Interim Financial Reporting. This discussion contains forward-looking statements and reflects the Banks current views with respect to future events and financial performance. Actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors such as those set out under Risk Factors and elsewhere in this Prospectus. OVERVIEW The Bank provides a full range of banking and other financial services to large corporate, middle market, SME and retail customers, including OFWs, as well as to the Government, Government agencies, LGUs and Government-owned and -controlled corporations in the Philippines. For the year ended December 31, 2012, the Banks total assets were P331.0 billion and its net income was P5.0 billion, compared to total assets of P312.1 billion and P297.1 billion as of December 31, 2011 and January 1, 2011, respectively, and net income of P4.8 billion and P4.0 billion in the years ended December 31, 2011 and 2010, respectively. For the nine months ended September 30, 2013, the Banks total assets were P606.1 billion and its net income was P6.0 billion. As of September 30, 2013, PNB had a network of 656 branches and offices and 854 automated teller machines (ATMs) in the Philippines. The following table sets out selected key financial ratios for the Bank for the periods indicated.
For the nine months ended September 30, 2013

Selected financial ratios

For the year ended December 31, 2010 2011 2012

Net interest margin(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost-income ratio(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Return on average assets(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Return on average equity(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . NPL ratio(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total equity to total assets(6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans to deposits(7). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Liquidity Ratio(8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3.4% 57.7% 1.4% 15.2% 4.5% 9.5% 42.0% 35.3%

3.0% 58.7% 1.6% 15.0% 3.1% 11.2% 48.6% 46.3%

2.6% 60.9% 1.6% 13.5% 2.4% 12.0% 55.3% 44.6%

2.7% 60.2% 1.7% 12.9% 1.1% 13.8% 53.5% 46.6%

Notes: (1) Net interest income divided by average interest-earning assets. Averages are based on the total of the ending balances of the past two years divided by two. (2) Total operating expenses (excluding provisions) divided by operating income. (3) Net income divided by average total assets for the period indicated. (4) Net income divided by average equity for the period indicated. (5) Total non-performing loans (net) divided by total adjusted loan portfolio. As of December 31, 2010, 2011 and 2012, ratios were computed based on the balances on the audited financial statements. As of September 30, 2013, the ratio was computed based on figures reported to the BSP. (6) Total equity divided by total assets. (7) Receivable from customers divided by total deposits. (8) Total liquid assets divided by total assets.

57

FACTORS AFFECTING RESULTS OF OPERATIONS The performance of the Bank is dependent on the general economic and political developments in the Philippines and, in particular, the financial condition of the industries to which it has extended credit. The operating results and financial condition of the Bank have been and will continue to be affected by its nonperforming assets and provisioning. As at September 30, 2013, the Bank had P3.0 billion worth of net NPLs and P18.7 billion worth of net ROPA as reported to the BSP. The operating results of PNB are also significantly driven by its net interest income, which is primarily affected by yields on earning assets, average volume of assets, costs of interest-bearing liabilities and average volume of liabilities. PNBs yields and costs are both a function of its lending and deposit rates, which are significantly affected by market prevailing interest rates. Interest rates in the Philippines have ranged from an average of 3.7% in 2010, 1.4% in 2011, 1.6% in 2012 and 0.4% in the first nine months of 2013, according to the Philippine Bureau of Treasury based on volume-weighted 91-day Treasury bill averages. Competition has also significantly impacted the results of operations of PNB and will continue to shape the products, efficiencies and ultimately the profitability of the leading Philippine commercial banks. Transfer of NPAs As part of its asset management and efforts to reduce NPAs, the Bank has entered into transactions whereby it has transferred NPAs, primarily NPLs, to SPVs in accordance with the provisions of the SPV Act and subsequently not recognized such loans on its statement of financial position. These arrangements could have an effect on the Banks financial condition, results of operations and liquidity. In 2005, the Bank sold a pool of NPLs with an outstanding principal balance of P4.7 billion to an SPV. In 2006, the Bank entered into another asset sale and purchase agreement with another SPV for the sale of certain NPLs and foreclosed properties booked under investment properties. The loss on the sale amounting to P1.9 billion was deferred and is being amortized over ten years as allowed under R.A. 9182 and recorded as a charge against the banks equity. The more significant terms of the sale are as follows: certain NPAs of the Bank were sold to the SPV and divided into two pools. The sale of Pool 1 of the NPAs was made on December 29, 2006 for a total consideration of P11.7 billion. The sale of Pool 2 was completed in March 2007 for a total consideration of P7.6 billion. The agreed purchase price of the first pool of NPAs were paid as follows: an initial amount of P1.1 billion, which was received in full and acknowledged by the Bank on February 14, 2007; and the balance of P10.6 billion, through issuance of notes through SPVs, shall be paid over a period of five years based on a cash flow waterfall arrangement and interest rate of three-month MART reference rate prevailing as of the end of the quarter prior to the payment date. The Bank availed itself of the incentives provided under R.A. 9182 which permit the deferment of loss from the sale amounting to P1.9 billion. Under the related asset sale and purchase agreement, the sale of the second pool of NPAs amounting to P7.6 billion with allowance for credit losses of P5.5 billion was effective in 2007. The BSP confirmed in its letter date February 28, 2007 that these NPAs qualify as a true sale under R.A. 9182 as of December 31, 2006. Since PNB again availed of the incentives mentioned above, PNB did not recognize the required additional allowance for credit losses on these NPAs amounting to P1.3 billion. The sale of the NPAs to the SPV in 2006 and 2007 is considered as a true sale under R.A. No. 9182 which permits the deferment of loss under BSP regulatory reporting rules. However, PFRS requires that the accounts of the SPV that acquired the NPAs of PNB in 2006 and 2007 should be consolidated into PNBs accounts. Had the accounts of the SPV been consolidated into PNBs accounts, total assets, liabilities and non-controlling interest in equity of consolidated entities would have increased by P0.5 billion, P0.03 billion and P0.5 billion, respectively, as of December 31, 2011. Net income and non-controlling interest in net income would have increased by P0.08 billion in 2011. As of December 31, 2010, total assets, liabilities and non-controlling interest in equity of consolidated entities would have been increased by P1.1 billion, P0.1 billion and P1.0 billion, respectively. Net income and non-controlling interest in net income would have increased by P0.4 billion in 2010 and P0.8 billion in 2009. 58

In 2012, PNB restated its 2011 and 2010 financial statements to recognize the losses from the sale of NPAs to special purpose vehicles in the years the NPAs were sold as required by PFRS and consolidated the accounts of the SPV that acquired the NPAs in 2007 and 2008. Consequently, PNB presented its statement of financial position as of January 1, 2011, the first day of the earliest period presented. Certain balance sheet information as of January 1, 2011 may be presented under the December 31, 2010 column of financial tables in this Prospectus. General Economic Conditions in the Philippines The Bank derives the large majority of its revenues and operating profits from sales in the Philippines and its business is highly dependent on the Philippine economy. Demand for, and prevailing prices of, consumer goods and land, are all directly related to the strength of the Philippine economy, the overall levels of business activity in the Philippines and the amount of remittances received from OFWs. The Banks results of operations are expected to vary from period to period in accordance with fluctuations in the Philippine economy which is in turn influenced by a variety of factors, including political developments among others. Any deterioration in the Philippine economy may adversely affect consumer sentiment and lead to a reduction in the Banks consumer banking business. There can be no assurance that current or future Governments will adopt economic policies conducive to sustaining economic growth or improving the stability of the Philippine banking sector. Interest Rates Beginning in 2004, the Philippine Government reduced its borrowings and its budget deficit, achieved in part through Government improvements in cash and revenue management as well as various privatization programs. The 91-day Treasury bill rates have decreased from an average rate of 7.3% in 2004 to an average rate of 0.4% as of September 30, 2013. The interbank call loan rate, which is the rate on loans among Philippine banks for periods less than 24 hours, primarily for the purpose of covering reserve deficiencies, has decreased from an average rate of 4.2% in 2010 to 4.6% in 2011, 4.1% in 2013 and 2.5% as of September 30, 2013. Commercial lending rates have generally followed the trends in Government borrowing rates, moving from an average range of 6.6% to 8.7% in 2010, 5.6% to 7.7% in 2011, 5.6% to 7.8% in 2012 and 4.7% to 7.0% as of September 30, 2013, based on data from the BSP. The following tables set out certain domestic interest rates for the periods indicated:
2010 2011 2012 2013(2) (weighted averages per period)

91-day Treasury bill rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interbank call loan rate(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Philippine commercial bank average lending rates(3)(4) . . . . . . . . . . . . . . .

3.7% 1.4% 1.6% 0.4% 4.2% 4.6% 4.1% 2.5% 6.6-8.7% 5.6-7.7% 5.6-7.8% 4.7-7.0%

Source: BSP Notes: (1) Rate on loans among Philippine banks for periods less than 24 hours. (2) As of September 30, 2013. (3) Range of monthly rates reflect the annual percentage equivalent of all commercial banks actual monthly interest income on Peso-denominated loans to the total outstanding level of the Peso-denominated demand/ time loans, bills discounted, mortgage contract receivables and restructured loans. (4) Based on Philippine commercial bank average lending rates as of September 30, 2013. Fluctuations in domestic market interest rates can have a significant impact on the Bank by affecting its interest income, cost of funding and general performance of its existing loan portfolio and other assets. For example, in a period of rising domestic interest rates, the Bank competes aggressively to attract deposits by offering higher rates to depositors in order to increase its loanable funds. However, when interest rates payable on deposits increase, the Banks cost of funding rises correspondingly. As the cost of funding increases, the Bank aims to protect its profitability by adjusting its lending rates upward. Depending on the extent of these adjustments, the Banks profitability can be positively or negatively impacted. However, increased interests rates on its customers floating rate loans can also negatively affect the Banks business by increasing default rates among its borrowers, which could in turn lead to increases in the Banks NPL portfolio and its ROPA. Finally, continued increases in market interest rates could adversely affect the liquidity levels of the Bank and the Philippine banking industry in general, which have recently been supported by the relatively low interest rate environment in the Philippines. The Bank actively manages its assets and liabilities to maximize interest income 59

and minimize the cost of funding, as well as to ensure that exposure to fluctuations in interest rates is kept within acceptable limits. In recent times, decreases in interest rates in the Philippines have resulted in increases in the Banks fixed-rate maturity securities portfolio and resulted in increased levels of trading and investment securities gains. However, such trends may not continue in the future. Inflation The Philippines reports inflation as the annual percentage change in the consumer price index, which measures the average price of a standard basket of goods and services used by a typical customer. Based on the 2006 CPI basket, inflation was 3.1% in 2012 on a year-on-year basis. The rise in consumer prices has slowed to an average of 2.8% in the first nine months of 2013. The following table sets out the consumer price index (based on the 2006 CPI basket), the producer price index for manufacturing (which is based on the 2000 PPI benchmark), as well as the annual percentage change in each index.
2010 2011 2012 2013(1)

Consumer Price Index (average). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Increase over previous year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Producer Price Index for manufacturing (average) . . . . . . . . . . . . . . . . . . . . . . . Increase (decrease) over previous year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Source: National Statistics Office Note: (1) As of September 30, 2013.

120.4 126.1 130.1 133.3 3.8% 4.8% 3.1% 2.3% 164.2 165.8 165.1 152.8 (5.0)% 1.0% (0.5)% (8.3)%

The consumer price index has been on an increasing trend for the past three years. The producer price declined in 2009 and 2010 as costs of imported inputs for the manufacturing sector declined, but registered a slight increase from 2010 to 2012. The Philippines has experienced significant increases in inflation rates in the past. For example, in 2008, the consumer price index increased by 8.3% and the producer price index increased by 4.1%. Recent increases in cash inflows from foreign investors, as well as positive trends in the economic growth rates in the Philippines, could contribute to increasing inflation rates in the Philippines in the near future. Philippine inflation has also been historically vulnerable to fluctuations in the global energy and commodity prices. Continued increases in inflation rates in the Philippines could materially adversely affect the Philippine economy and thereby impact the Banks financial position and results of operations. In addition, high rates of inflation in the Philippine economy could also impact the Banks ability to sustain profitable net interest margins because it could lower loan demand, discourage diversification of the Banks loan portfolio or require the Bank to increase the cost of funding for its deposits. Exchange Rate The Peso has been on an appreciating trend against the U.S. dollar since 2009. The Peso strengthened against the U.S. dollar by 5.3% in 2010 and by 4.0% in 2011 due to influx of foreign funds seeking higher returns amidst positive sentiments on the Philippine economy. The appreciation of the Peso slowed somewhat to 1.2% in the first nine months of 2013.
2010 PesoU.S. Dollar Rate 2011 2012 2013(1)

Average Q/U.S.$ Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . % Appreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Source: BSP Note: (1) For the nine months ended September 30, 2013. Philippine Property Market

45.110 5.3

43.313 4.0

42.229 2.5

42.060 1.2

The Philippines real estate sector has shown sustained gains in the last few years largely due to increased remittances from OFWs, boom in the business process outsourcing and call center businesses, and relatively lower interest rates. Growth and developments are most pronounced in the residential houses and condominiums, office and commercial buildings, and shopping malls/centers subsectors. 60

The Bank has benefited from the resurgence of the property market. For the last three years, the Bank has profitably sold foreclosed residential houses to low- to middle-income individuals/families and real estate investors. Most of these properties are located in the key cities and urban centers in the provinces where there are higher growth potentials. Competition The Philippine banking industry is very competitive and the bank competes against domestic and foreign banks which offer similar products and services as the bank. Competition with other banks has and will continue to affect the cost of the Banks funding and the Banks ability to increase its market share of loans and deposits. The Bank also faces increasing competition in its target growth areas such as small and medium enterprises, consumer loans, fixed-income distribution and cash management services. Some of the Banks competitors are larger domestic banks with more established operations and banking presence across the country. These banks benefit from economies of scale and a wider distribution network, although their size and maturity may cause them to be less able to adapt to major economic or regulatory changes. The liberalization of foreign participation in the Philippine banking industry has resulted in increased competition. Since liberalization, foreign banks have expanded from their traditional focus on Metro Manila and large-scale corporations to building their own networks to increase market share, primarily through acquisitions of small domestic savings banks. Foreign banks tend to benefit from the support of their parent companies or established regional operations but they are limited by local regulations to a maximum of six Philippines branches in order to protect the growth and participation of local banks. An increase in competition from foreign banks could adversely affect the Banks results of operations and financial condition. Banking Regulation The Philippine banking industry is highly regulated by the BSP and operates within a framework that includes guidelines on capital adequacy, corporate governance, management, anti-money laundering and provisioning for NPLs. On December 14, 2012, the Monetary Board in its Resolution No. 2096 approved the implementing guidelines on the revised risk-based adequacy framework, particularly on the minimum capital and disclosure requirements for the Philippine banking system in accordance with the Basel III standards. Accordingly, on January 15, 2013, the BSP issued Circular No. 781 setting out the Basel III implementing guidelines on minimum capital requirements. Under the implementing guidelines the risk-based capital ratio of a bank, expressed as a percentage of qualifying capital to risk weighted assets, shall not be less than 10% for both solo basis (head office plus branches) and consolidated basis (parent bank plus subsidiary financial allied undertakings, but excluding insurance companies). Other minimum capital ratios include CET1 ratio and Tier 1 capital ratios of 6.0% and 7.5%, respectively. A capital conservation buffer of 2.5%, comprised of CET1 capital, will also be implemented. Existing capital instruments as of December 31, 2010 which do not meet the eligibility criteria for capital instruments under the revised capital framework shall no longer be recognized as capital. Capital instruments issued under Circulars Nos. 709 and 716 and before effectivity of Circular No. 768 dated September 21, 2012 shall be recognized as qualifying capital until December 31, 2015. Effects of Financial Crises As a bank with substantially all of its operations in the Philippines, the Banks financial position and results of operations have been and will continue to be significantly affected by economic and political conditions in the Philippines. After the onset of the Asian economic crisis in 1997, the Philippines experienced economic turmoil characterized by currency depreciation, interest rate volatility, a significant decline in share prices on the PSE and a reduction of foreign currency reserves. More recently, the slowdown in the U.S. economy, which began in 2007, as well as the subsequent crisis in worldwide financial markets has had an adverse effect on the Philippine economy, which affected the Banks financial results in December 31, 2008. The Eurozone debt crisis and resulting economic instability poses a continuing threat to the global financial system, with any reduction in global liquidity likely to have an adverse effect on the Banks financial results. The Philippine Peso has appreciated against the U.S. dollar in the recent past. Appreciation of the Peso may have a negative impact on the Philippine economy by making Philippine exports more expensive and thereby negatively impacting economic growth and the exporters ability to meet their financial obligations to PNB and other financial institutions. However, in 2013, the Peso opened at P41.08 and depreciated 5.4% to a close of P43.31 against the U.S. Dollar as of September 30, 2013. Additionally, interest rates in the Philippines have recently declined, due to greater liquidity and stable inflation. Lower interest rates on the Banks asset products would reduce its margins and thus its net income.

61

Results following merger with Allied Bank On February 9, 2013, the Bank completed its merger with Allied Bank. The respective shareholders of the Bank and Allied Bank, representing at least two-thirds of the outstanding capital stock of both banks, approved the amended terms of the Plan of Merger of the two banks on March 6, 2012. The original Plan of Merger was approved by the affirmative vote of the Bank and Allied Banks respective shareholders on June 24, 2008, representing at least two-thirds of the outstanding capital stock of both banks. While the Bank expects the merger to result in significant synergies and efficiencies through the integration of operations and economies of scale in the coming years, there can be no assurance that such contemplated synergies and efficiencies will be fully realized by the Bank, as the resulting entity, and that the integration will be implemented with minimal disruption of operations. Thus there can be no assurance that the merger will have the desired effect on the Banks financial position and results of operations. CRITICAL ACCOUNTING POLICIES Critical accounting policies are those that are both (i) relevant to the presentation of the Banks financial position and results of operations and (ii) require managements most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. As the number of variables and assumptions affecting the possible future resolution of the uncertainties increase, those judgments become even more subjective and complex. In order to provide an understanding of how the Banks management forms its judgments about future events, including the variables and assumptions underlying its estimates, and the sensitivity of those judgments to different circumstances, the Bank has identified certain critical accounting policies. For a complete discussion of PNBs critical accounting policies and managements use of judgment, accounting estimates and assumptions, see Note 2 and Note 3 to the Banks financial statements included in this Prospectus. Description of Statements of Income Interest income For all financial instruments measured at amortized cost and interest-bearing financial instruments classified as held-for-trading and available for-sale investments, interest income is recorded at the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or a shorter period, where appropriate, to the net carry amount of the financial asset or financial liability (the Effective Interest Rate or EIR). The calculation takes into account all contractual terms of the financial instrument (for example, prepayment options), includes any fees or incremental costs that are directly attributable to the instrument and are an integral part of the EIR, but not future credit losses. The adjusted carrying amount is calculated based on the original EIR. The change in carrying amount is recorded as interest income. Once the recorded value of a financial asset or group of similar financial assets has been reduced due to an impairment loss, interest income continues to be recognized using the original EIR applied to the new carrying amount. Interest expenses Interest expenses includes interest payable on deposit liabilities, bills payable and other borrowings. Interest expenses are recognized as accrued. Other income Other incomes includes net gains on trading and investment securities, net gains on sale or exchange of assets, net gains on foreign exchange, and other miscellaneous items. Operating expenses Operating expenses includes compensation and fringe benefits, taxes and licenses, occupancy and equipment-related costs, provision for impairment, credit and other losses, depreciation and amortization and miscellaneous. Provision for income tax Income taxes include corporate and other deferred income tax and final taxes paid which represents final withholding tax on gross interest income from government securities and other deposit substitutes and income from the Foreign Currency Deposit Unit (FCDU) transactions. 62

Description of Balance Sheet Items Assets Cash and Other Cash Items include cash in transits, vault/teller cash, cash on hand from ATM and extension offices and checks and other clearing items from other banks. Due from BSP includes balance of deposit accounts with BSP including Special Deposit Accounts. Due from Other Banks includes balances of Due from Foreign Banks representing debit balances maintained with foreign banks, and balances of Due from Local Banks representing deposit with other local banks. Interbank Loans Receivable include interbank call loans receivable and interbank term loans receivable. Securities Held under Agreement to Resell include Government securities purchased under reverse repurchase arrangements with BSP. Financial Assets at fair value through profit or loss (FVPL) include Government securities, derivatives assets, equity securities, and private debt securities. AFS Investments include Government securities, other debt securities and equity securities (net of allowance for impairment loss) classified as available-for-sale. Loans and Receivables include loans and discounts, customer liabilities on acceptances, letters of credit and trust receipts, bills purchased, lease contracts receivable, credit card receivables, accrued interest receivable, accounts receivable, sales contract receivable and miscellaneous. Receivables from Special Purpose Vehicle include the present value of notes received by PNB from the sale of the first and second pool of non-performing assets to an SPV. HTM Investments include government securities and other debt securities classified as held-to-maturity. Property and Equipment include the value of lands, buildings, leaseholds, furniture, fixtures and equipment. Land is stated at appraised value less any impairment in value. Buildings are stated at appraised value less accumulated depreciation and impairment. Depreciable properties such as leaseholds, furniture, fixtures and equipment are stated at cost less accumulated depreciation and amortization. Investments in Subsidiaries and an Associate include investments in various PNB subsidiaries and SPVs. Investment Properties or Real and Other Properties Acquired (ROPA) include real properties foreclosed or acquired in settlement of loans. Deferred Tax Assets refer to income taxes recoverable in future periods in respect of deductible temporary differences, carry forward of unused tax losses and carry forward of unused tax credits. Other Assets include deferred charges, real estate under joint venture agreements, software costs, deferred reinsurance premiums, prepaid expenses, sundry debits, and miscellaneous. Liabilities Deposit Liabilities include savings, time and demands deposits, as well as long-term negotiable certificates of time deposits (LTNCDs). Financial Liabilities at FVPL include subordinated debt issued in 2008 and derivative liabilities. Bills and Acceptances Payable include bills payable to BSP and local banks, foreign banks and others, including the Development Bank of the Philippines, Land Bank of the Philippines and the Social Security System. Accrued Taxes, Interest and Other Expenses include interest, employee benefits, incomes taxes, PDIC fees and other licensing and tax fees. 63

Subordinated Debt includes the aggregate principal amounts of P3.5 billion and P6.5 billion unsecured subordinated notes issued by the Bank in 2012 and 2011 respectively, in addition to the P5.5 billion aggregate principal amount of unsecured subordinated notes issued in 2006. Other Liabilities include accounts payable, bills purchased, insurance contract liabilities, retirement liabilities, interoffice float items, managers checks and demand drafts outstanding, deferred reinsurance premiums, deposits on lease contracts, other dormant credits, amounts due to the Treasurer of the Philippines, margin deposits and cash letters of credit, deferred credits, payment order payable, withholding tax payable, due to BSP, due to other banks and miscellaneous. RESULTS OF OPERATIONS Nine months ended September 30, 2013 The following is a discussion of the Banks results of operations for the nine months ended September 30, 2013 and should be read in conjunction with the Banks consolidated interim financial statements for the nine months ended September 30, 2012 and 2013, including the related notes, contained in this Prospectus. The Banks results of operations for the nine months ended September 30, 2012 are not discussed below because the Banks results of operations for that period do not include the results of operations of Allied Bank as the merger had not yet been completed by September 30, 2012, and as a result, are not comparable with the results of operations for the nine months ended September 30, 2013, which include the results of Allied Bank since the merger was completed on February 9, 2013. The Banks results of operations for the nine months ended September 30, 2013 are not necessarily indicative of the Banks operating results for the full year 2013 and are not indicative of operating results for any future period. Operating income The Banks total operating income was P20.2 billion for the nine months ended September 30, 2013. PNB recorded interest income of P13.5 billion in the nine months ended September 30, 2013, primarily comprising interest income on loans and receivables of P9.6 billion and interest income on trading and investment securities of P2.8 billion. PNB recorded interest expenses of P3.8 billion in the nine months ended September 30, 2013, primarily comprising interest expense on deposit liabilities of P2.9 billion. PNB recorded other income of P8.6 billion in the nine months ended September 30, 2013, primarily comprising income from trading and investment securities gains of P5.2 billion. If the acquisition of ABC had been completed as at January 1, 2013, the Banks total operating income would have been P22.6 billion. Operating expenses PNB recorded operating expenses of P12.9 billion in the nine months ended September 30, 2013, mainly composed of compensation and fringe benefits of P4.5 billion and miscellaneous expenses of P4.4 billion. If the acquisition of ABC had been completed as at January 1, 2013, the Banks operating expenses would have been P14.1 billion. Income before income tax The Bank recorded income before income tax of P7.3 billion in the nine months ended September 30, 2013. From the date of acquisition, ABC and its subsidiaries have contributed P4.5 billion to the Banks revenue and P29.6 million loss to the Banks income before income tax. If the acquisition of ABC had been completed as at January 1, 2013, the Banks income before income tax would have been P8.5 billion. Provision for income taxes PNB recorded provision for income tax of P1.3 billion in the nine months ended September 30, 2013. If the acquisition of ABC had been completed as at January 1, 2013, the Banks provision for income tax would have been P1.3 billion. Net income As a result of the foregoing, PNBs net income was P6.0 billion for the nine months ended September 30, 2013. If the acquisition of ABC had been completed as at January 1, 2013, the Banks net income would have been P7.1 billion. 64

Financial position Assets PNB had total assets of P606.1 billion as of September 30, 2013, including amounts due from BSP of P129.2 billion and loans and receivables of P258.2 billion. As of completion of the acquisition on February 9, 2013, total assets of ABC were recorded at P195.3 billion. Liabilities PNB had total liabilities of P522.2 billion as of September 30, 2013, primarily comprising deposit liabilities of P454.0 billion. As of the completion of the acquisition on February 9, 2013, total liabilities of ABC were recorded at P164.0 billion. Year ended December 31, 2012 compared to year ended December 31, 2011 Interest income PNB recorded interest income of P11.4 billion in 2012, a decrease of 8.9% from P12.5 billion in 2011, primarily due to lower yields on investments and lower average daily balances of loans and receivables as well as yield. Interest expenses PNB recorded interest expenses of P4.4 billion in 2012, a decrease of 16.8% from P5.3 billion in 2011, mainly due to lower interest paid on deposit liabilities. Other income The following table sets forth the components of PNBs other income for the years indicated:
For the year ended December 31, 2011 2012 (Q millions) Percentage change (%)

Trading and investment gainsnet. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net gain on sale or exchange of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign exchange gainsnet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3,573.1 1,350.4 1,216.3 1,910.9 8,050.7

5,133.5 359.9 1,405.1 1,842.2 8,740.7

43.7 (73.3) 15.5 (3.6) 8.6

PNB recorded other income of P8.7 billion in 2012, an increase of 8.6% from P8.1 billion in 2011, primarily due to higher net trading gains from investments. Operating expenses The following table sets out the components of PNBs operating expenses for the years indicated:
For the year ended December 31, 2011 2012 (Q millions) Percentage change (%)

Compensation and fringe benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Taxes and licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Occupancy and equipment-related costs . . . . . . . . . . . . . . . . . . . . . . . . . Provision for impairment, credit and other losses . . . . . . . . . . . . . . . . . Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3,815.2 1,319.1 1,015.4 1,552.4 656.4 3,397.2 11,755.7

3,720.9 1,134.3 1,004.3 933.7 713.2 4,133.8 11,640.2

(2.5) (14.0) (1.1) (39.9) 8.7 21.7 (1.0)

PNB recorded operating expenses of P11.6 billion in 2012, a decrease of 1.0% from P11.8 billion in 2011. In particular, compensation and fringe benefits decreased by 2.5% or P0.09 billion primarily due to lower manpower costs of some of PNBs overseas subsidiaries as a result of the closure of branches of one of PNBs 65

overseas subsidiaries. Taxes and licenses decreased by P0.2 billion due to lower gross receipts tax (GRT) and documentary stamp taxes (DST) paid in 2012. Occupancy and equipment-related costs decreased by P0.01 billion due to lower rental of overseas offices after closure of the PNB Guam and RCI branches. Provision for impairment and other losses decreased by P0.6 billion, or 39.9%, primarily due to reversal of provision of various accounts. Miscellaneous expense increased by P0.7 billion due to additional accrual of expenses. Provision for income taxes PNB recorded provision for income tax of P924.7 million in 2012, an increase of 5.2% from P879.4 million in 2011, mainly due to higher revenues. Net income As a result of the foregoing, PNBs net income increased to P5.0 billion in 2012, an increase of 5.7% from P4.8 billion in 2011. Financial position Assets The following table sets out selected components of PNBs assets as of the years indicated:
As of December 31, 2011 2012 (Q millions) Percentage change (%)

Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash and Other Cash Items. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due from the BSP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due from Other Banks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interbank Loans Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities Held under Agreements to Resell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial Assets at Fair Value Through Profit or Loss . . . . . . . . . . . . . . . . . . . . Available-for-Sale Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans and Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property and Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investments in Subsidiaries and an Associate . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred Tax Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

312,066.6 331,006.5 5,404.1 5,599.1 38,152.8 37,175.4 6,424.0 4,042.8 17,097.6 11,498.8 18,300.0 18,300.0 6,875.7 4,023.1 52,323.8 66,997.5 126,249.0 144,707.5 16,564.5 16,503.6 2,901.8 2,905.3 16,100.1 14,478.3 1,775.8 1,780.7 3,897.4 2,994.4

6.1 3.6 (2.6) (37.1) (32.7) (41.5) 28.0 14.6 (0.4) 0.1 (10.1) (0.3) (23.2)

PNB had total assets of P331.0 billion as of December 31, 2012, an increase of 6.1% from total assets of P312.1 billion as of December 31, 2011. The increase in total assets was primarily attributable to the factors discussed below. Changes in PNBs cash and other cash items, due from BSP, due from other banks and interbank loans receivable and Securities Purchased under Resale Agreement (SPURA) are based on the liquidity requirements and investment mix for the periods covered. Cash and Other Cash Items increased by P0.2 billion, or 3.6%, primarily due to higher cash on hand. Due from BSP decreased by P1.0 billion, or 2.6%, mainly due to lower Special Deposit Account balances. Due from Other Banks decreased by P2.4 billion, or 37.1%, primarily as the bank reduced its working balances on deposits with foreign as well as local banks. Interbank Loans Receivable decreased by P5.6 billion, or 32.7%, primarily due to lower Interbank call loans of BSP. Securities Held under Agreement to Resell stood at P18.3 billion in 2011 and 2012. Financial Assets at FVPL decreased by P2.9 billion, or 41.5%, primarily due to sales of various trading investment securities. 66

AFS Investments representing 20.2% and 16.8% of PNBs total assets as of December 31, 2012 and December 31, 2011, respectively, increased by P14.7 billion, or 28.0%, primarily due to purchase of additional investments in Retail Treasury Bonds, fixed rate treasury notes and Government bonds. Loans and Receivables representing 43.7% and 40.5% of PNBs total assets as of December 31, 2012 and December 31, 2011, respectively, increased by P18.5 billion, or 14.6%, primarily due to higher loan bookings for corporate accounts. Property and Equipment decreased by P0.1 billion, or 0.4%, primarily due to depreciation. Investment Properties decreased by P1.6 billion, or 10.1%, primarily due to higher sale of ROPA or foreclosed assets. Liabilities The following table sets out the selected components of PNBs liabilities as of the dates indicated:
As of December 31, 2011 2012 (Q millions) Percentage change (%)

Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deposit Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial Liabilities at Fair Value Through Profit or Loss . . . . . . . . . . . . . . . . . Bills and Acceptances Payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued Taxes, Interest and Other Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subordinated Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

277,092.2 237,533.9 6,650.2 8,458.4 3,981.2 6,452.5 14,016.0

291,259.6 240,854.4 6,479.8 13,076.9 4,063.3 9,938.8 16,846.4

5.1 1.4 (2.6) 54.6 2.1 54.0 20.2

PNB had total liabilities of P291.3 billion as of December 31, 2012, an increase of 5.1% from P277.1 billion as of December 31, 2011. The increase was primarily attributable to growth in deposit, bills and acceptances payable and subordinated debt. Deposit Liabilities increased by P3.3 billion, or 1.4%, primarily due to the growth in PNBs savings deposits by P8.1 billion, or 4.4%. This growth was offset by the P1.7 billion, or 5.8%, and P3.1 billion, or 13.3%, decreases in PNBs demand and time deposits for the year, respectively. Financial Liabilities at FVPL decreased by P0.2 billion, or 2.6%, primarily as a result of fair market valuation of financial liabilities. Bills and Acceptances Payable represented 4.5% and 3.1% of PNBs total liabilities as of December 31, 2012 and 2011, respectively. The increase of P4.6 billion, or 54.6%, was primarily a result of higher availment from the rediscounting facility of BSP and from additional borrowings from foreign banks. Accrued Taxes, Interest and Other Expenses increased by P0.1 billion, or 2.1%, primarily due to additional accrual for litigation expenses. Subordinated Debt increased by P3.5 billion, or 54.0%, primarily due to issuance of additional P3.5 billion unsecured subordinated debt. Other Liabilities increased by P2.8 billion, or 20.2%, primarily as a result of additional provisions for losses arising from litigation cases. Year ended December 31, 2011 compared to year ended December 31, 2010 Interest income PNB recorded interest income of P12.5 billion in 2011, an increase of 1.6% from P12.3 billion in 2010, primarily due to increase in interest income on loans and receivables resulting from growth in PNBs loan portfolio.

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Interest expenses PNB recorded interest expenses of P5.3 billion in 2011, an increase of 10.4% from P4.8 billion in 2010, mainly due to increase in interest expense on deposit liabilities resulting from higher deposits, which offset lower interest expense on bills payable and other borrowings. Other income The following table sets forth the components of PNBs other income for the years indicated:
For the year ended December 31, 2010 (Q millions) 2011 Percentage change (%)

Trading and investment gainsnet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net gain on sale or exchange of assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign exchange gainsnet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3,080.9 2,109.5 906.9 1,595.5 7,692.8

3,573.1 1,350.4 1,216.3 1,910.9 8,050.7

16.0 (36.0) 34.1 19.8 4.7

PNB recorded other income of P8.1 billion in 2011, an increase of 4.7% from P7.7 billion in 2010, primarily due to increased net income on trading and investments, increased foreign exchange gains and miscellaneous income, which offset lower gain on sales or exchange of assets. The increase in miscellaneous income was primarily due to higher income of some subsidiaries. Operating expenses The following table sets out the components of PNBs operating expenses for the years indicated:
For the year ended December 31, 2010 2011 (Q millions) Percentage change (%)

Compensation and fringe benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Taxes and licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Occupancy and equipment-related costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for impairment, credit and other losses . . . . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3,384.0 1,176.4 915.8 2,399.8 837.6 3,706.7 12,420.3

3,815.2 1,319.1 1,015.4 1,552.4 656.4 3,397.2 11,755.7

12.7 12.1 10.9 (35.3) (21.6) (8.3) (5.4)

PNB recorded operating expenses of P11.8 billion in 2011, a decrease of 5.4% from P12.4 billion in 2010. In particular, compensation and fringe benefits increased by P0.4 billion due to higher retirement expenses paid in 2011, while provision for impairment, credit and other losses decreased by P0.8 billion due to lower provisions made on investment properties. Provision for income taxes Provision for income tax was P0.9 billion in 2011, generally unchanged from provision for income tax of P0.9 billion in 2010. Net income As a result of the foregoing, net income increased to P4.8 billion in 2011, an increase of 17.9% from P4.0 billion in 2010.

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Financial position Assets The following table sets out selected components of PNBs assets as of the years indicated:
As of December 31, 2010 2011 (Q millions) Percentage change (%)

Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash and Other Cash Items. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due from the BSP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due from Other Banks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interbank Loans Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities Held under Agreements to Resell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial Assets at Fair Value Through Profit or Loss . . . . . . . . . . . . . . . . . . . . Available-for-Sale Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans and Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Held-to-Maturity Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property and Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investments in Subsidiaries and an Associate . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred Tax Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

297,120.0 312,066.6 5,457.2 5,404.1 24,286.0 38,152.8 5,141.5 6,424.0 12,692.0 17,097.6 6,800.0 18,300.0 15,980.6 6,875.7 34,531.3 52,323.8 110,315.5 126,249.0 38,228.2 16,631.9 16,564.5 2,832.1 2,901.8 17,913.2 16,100.1 1,829.4 1,775.8 4,481.1 3,897.4

5.0 (1.0) 57.1 24.9 34.7 169.1 (57.0) 51.5 14.4 (100.0) (0.4) 2.5 (10.1) (2.9) (13.0)

PNB had total assets of P312.1 billion as of December 31, 2011, an increase of 5.0% from total assets of P297.1 billion as of December 31, 2010. The increase in total assets was primarily attributable to proceeds from higher deposits and the issuance of P6.5 billion unsecured subordinated Tier 2 Capital Notes in June 2011. Changes in PNBs cash and other cash items, due from BSP, due from other banks and interbank loans receivable and SPURA are based on the liquidity requirements and investment mix for the periods covered. Due from BSP increased by P13.9 billion, or 57.1%, mainly due to the increase in PNBs reserve deposit account as well as increased placements with BSP. Due from Other Banks increased by P1.3 billion, or 24.9%, primarily due to reduction of deposits and placements with other banks. Interbank Loans Receivable increased by P4.4 billion, or 34.7%, primarily due to the increase in PNBs lending to the BSP in 2011. Securities Held under Agreement to Resell increased by P11.5 billion, or 169.1%, primarily due to increased lending transactions with the BSP during the year. Financial Assets at FVPL decreased by P9.1 billion, or 57.0%, primarily due to the sale of Government and other investment securities. AFS Investments representing 16.8% and 11.6% of PNBs total assets as of December 31, 2011 and December 31, 2010, respectively, increased by P17.8 billion, or 51.5%, primarily due to additional investments in Government securities and reclassification of HTM investments in compliance with the provisions of PAS 39. Loans and Receivables representing 40.5% and 37.1% of PNBs total assets as of December 31, 2011 and December 31, 2010, respectively, increased by P15.9 billion, or 14.4%, primarily due to increased loans made during the year across industries including the power, telecommunications, government, manufacturing and transportation industries. Investment in Subsidiaries and an Associate increased by P0.1 billion, or 2.5%, primarily due to income from operations of Allied Commercial Bank. Investment Properties decreased by P1.8 billion, or 10.1%, primarily due to the sale of foreclosed properties during the tax year. Other Assets decreased by P0.6 billion, or 13.0%, primarily due to lower deferred charges and stationeries and supplies, which offset higher reinsurance premiums and prepaid expenses. 69

Liabilities The following table sets out the selected components of PNBs liabilities as of the dates indicated:
As of December 31, 2010 2011 (Q millions) Percentage change (%)

Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deposit Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial Liabilities at Fair Value Through Profit or Loss . . . . . . . . . . . . . . . . . Bills and Acceptances Payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued Taxes, Interest and Other Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subordinated Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

268,748.4 226,435.9 6,574.6 12,004.1 4,325.0 5,486.7 13,922.1

277,092.2 237,533.9 6,650.2 8,458.4 3,981.2 6,452.5 14,016.0

3.1 4.9 1.1 (29.5) (7.9) 17.6 0.7

PNB had total liabilities of P277.1 billion as of December 31, 2011, an increase of 3.1% from P268.7 billion as of December 31, 2010. The increase was primarily attributable to increase in deposits, which also offset the drop in bills payable. Deposit Liabilities increased by P11.1 billion, or 4.9%, primarily due to the growth in demand and savings deposits by P1.9 billion, or 6.9%, and P13.4 billion, or 7.8%, respectively, which offset the P4.2 billion, or 15.5%, decrease in time deposits. Financial Liabilities at FVPL increased by P0.1 billion, or 1.1%, primarily as a result of fair market valuation of financial liabilities. Bills and Acceptances Payable represented 3.1% and 4.5% of PNBs total liabilities as of 1 December 2011 and 2010, respectively. The decrease of P3.5 billion, or 29.5%, was primarily a result of PNBs payment of certain borrowings with other banks during the year. Accrued Taxes, Interest and Other Expenses decreased by P0.3 billion, or 7.9%, primarily due to lower interest and other taxes and licenses. Subordinated Debt increased by P1.0 billion, or 17.6%, primarily due to the issuance of the Tier 2 Capital Notes in June 2011 to refinance certain redeemed notes issuances. LIQUIDITY AND CAPITAL RESOURCES The following table sets out PNBs statement of cash flows:
For the nine months ended September 30, 2013

For the year ended December 31, 2010 2011 2012 (Q millions)

Net cash provided by (used in) operating activities . . . . . . . . . . . . Net cash provided by (used in) investing activities . . . . . . . . . . . . Net cash provided by (used in) financing activities . . . . . . . . . . . . Net increase (decrease) in cash and cash equivalents . . . . . . . . . . Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . . Cash flows from operating activities

(214.2) (21,698.7) 4,201.0 (17,711.9) 62,288.6 44,576.7

3,858.5 19,456.7 (2,713.4) 20,601.8 44,576.7 65,178.5

(9,626.8) 12,971.7 8,092.6 11,437.5 65,178.5 76,616.0

51,888.8 68,963.1 (6,590.4) 114,261.5 76,616.0 190,877.5

PNBs operating activities generated a net cash outflow of P0.2 billion, net cash inflow of P3.9 billion, net cash outflow of P9.6 billion and net cash inflow of P51.9 billion in 2010, 2011 2012 and the nine months ended September 30, 2013, respectively. In 2010, PNBs outflow of cash in operating activities was primarily due to higher loans made during the year. In 2011, PNBs main inflows and outflows of cash aside from the income from continuing operations included cash from increased deposits. In 2012, PNBs net cash outflow was primarily due to increase in loans. In the nine months ended September 30, 2013, the net cash inflow was primarily due to an increase in deposit liabilities. 70

Cash flows from investing activities PNB recorded a net cash outflow from investing activities of P21.7 billion for the year ended December 31, 2010, net cash inflows of P19.5 billion and P13.0 billion for the years ended December 31, 2011 and 2012, and net cash inflow of P69.0 billion in the nine months ended September 30, 2013, respectively. In 2010, PNBs net cash outflow from investing activities was primarily due to acquisitions of additional AFS investments and placements with the BSP. In 2011 and 2012, PNBs cash inflow from investing activities was primarily due to proceeds from the sales of AFS investments and BSP placements. For the nine months ended September 30, 2013, the net cash inflow was primarily due to an increase in cash and cash equivalents resulting from the merger. Cash flows from financing activities PNB recorded a net cash inflow from financing activities of P4.2 billion in 2010, which was primarily attributable to proceeds from new bills and acceptances payable being greater than outflows for settlement of bills and acceptances payable. PNB recorded a net cash outflow from financing activities of P2.7 billion in 2011, which was primarily due to the redemption of PNBs subordinated notes issued in 2006, as well as payment of bills and acceptances payable. PNB recorded a net cash inflow from financing activities of P8.1 billion in 2012, which was mainly attributable to proceeds from bills and acceptances payable. PNB recorded a net cash outflow from financing activities of P6.6 billion in the nine months ended September 30, 2013, which was mainly attributable to settlement of unsecured subordinated debt. Contingent financial obligations and off-balance sheet transactions In the normal course of business, PNB has various commitments and contingent liabilities that are not presented in the accompanying financial statements. PNB does not anticipate any material losses as a result of these commitments and contingent liabilities. The following is a summary of PNBs commitments and contingent liabilities at their equivalent Peso contractual amounts:
As of December 31, 2010 2011 2012 (Q millions) As of September 30, 2013

Trust department accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deficiency claims receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Credit card lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inward bills for collection. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Outstanding guarantees issued. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Outward bills for collection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unused commercial letters of credit . . . . . . . . . . . . . . . . . . . . . . . . . . Other contingent accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Confirmed export letters of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . Items held as collateral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Material commitments for capital expenditures

30,427.5 55,565.2 55,976.5 7,516.7 6,335.0 6,309.3 2,621.9 1,542.5 140.6 938.4 728.3 628.4 76.9 123.2 105.0 11.4 85.3 36.1 41.3 41.3 41.3 14.6 5.3 78.1 0.3 0.3 0.2

77,365.4 11,764.5 10,174.9 452.8 1,212.9 485.3 98.8 444.7 81.7 0.1

PNBs planned capital expenditures include purchase of hardware and software needed for the implementation of new ATM upgrades, purchase of Flexcube licenses and upgrades, and purchase of trust and treasury system upgrades. Funding for capital expenditures is expected to be sourced primarily from revenues. PNBs capital expenditures in 2010, 2011, 2012 and the nine months ended September 30, 2013 were P0.3 billion, P0.4 billion, P0.4 billion and P0.8 billion, respectively. PNBs primary capital expenditures during those years were mainly invested in information technology.

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Credit ratings PNBs borrowing costs are affected directly by PNBs credit ratings. PNBs post-merger credit ratings by Moodys Investor Service as of September 2013 are set forth below: Outlook: Stable Local Currency Deposit Rating: Ba2 Foreign Currency Deposit Rating: Ba2 Banks Financial Strength Rating (BFSR): E+ Baseline Credit Assessment (BCA): b1 Adjusted Baseline Credit Assessment: b1 SubordinateDomestic Currency: Ba2 PNBs credit ratings by Standard and Poors as of March 2013 are set forth below: Outlook: Stable Long-Term Counterparty Credit: B+ Short-term Counterparty Credit: B A securities rating is not a recommendation to buy, sell or hold securities. A securities rating may be subject to withdrawal or revision at any time. Each rating should be evaluated separately of any other rating. Capital adequacy The Philippines adopted capital adequacy requirements based on the Basel II Capital Accord through the issuance of BSP Circular 538 effective on 1 July 2007. As of September 30, 2013, PNBs risk-weighted capital adequacy ratio (the ratio of total qualifying capital to risk-weighted assets), on a consolidated basis as reported to the BSP, was 20.3%. The BSPs minimum risk weighted capital adequacy ratio is 10.0%. PNBs consolidated Tier 1 ratio was 17.0% as of September 30, 2013 as reported to the BSP.

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The following table sets out details of capital resources and capital adequacy ratios of PNB, as of the dates indicated, as reported to the BSP:
As of December 31, 2010 2011 2012 (Q millions) As of September 30, 2013

Consolidated

Tier 1 (core) Capital: Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital paid in excess par value. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cumulative Foreign Currency translation . . . . . . . . . . . . . . . . . . . . . Undivided profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-controlling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Hybrid Tier 1 Capital Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deduction from Tier 1: Common stock treasury shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net unrealized loss on equity securities . . . . . . . . . . . . . . . . . . . . . . . Unsecured DOSRI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net Tier 1 capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net Tier 2 capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross qualifying capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deductions from gross qualifying capital . . . . . . . . . . . . . . . . . . . . . Total qualifying capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital ratios: Tier 1 capital ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total capital ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

26,489.8 26,489.8 26,489.8 2,037.3 2,037.3 2,037.3 2,972.9 6,313.2 2,278.8 (427.3) (340.6) (909.1) 153.6 46.9 54.0 633.6 717.9 87.2 3,350.4 3,327.8 3,355.0 27,242.1 30,421.1 24,947.3 14,225.9 14,986.1 13,145.8 41,468.4 45,566.7 41,215.8 0.4 159.5 3,122.7 41,468.0 45,407.2 38,093.1 12.8% 19.4% 14.5% 21.7% 11.9% 18.1%

43,448.3 26,499.9 4,337.6 (381.2) 5,796.4 2,558.5 55.5 3,870.8 15,764.5 62,234.1 12,352.6 75,256.0 669.3 74,586.7 17.0% 20.3%

The following table sets out PNBs consolidated assets according to risk weight as of the dates indicated:
As of December 31, 2011 2012 (Q millions) As of September 30, 2013

Consolidated

2010

Risk-weighted on-balance sheet assets: 20% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Risk-weighted off-balance sheet: 20% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Risk-weighted interest rate and exchange rate-related . . . . . . . Risk-weighted securitization exposures . . . . . . . . . . . . . . . . . . . Risk-weighted assets covered by Mitigants Total credit risk-weighted assets . . . . . . . . . . . . . . . . . . . . . Market risk weighted assets . . . . . . . . . . . . . . . . . . . . . . . . . Operational risk weighted assets . . . . . . . . . . . . . . . . . . . . . Total risk weighted assets . . . . . . . . . . . . . . . . . . . . . . . . . . . RELATED PARTY TRANSACTIONS

3,850.8 8,317.3 2,540.7 129,185.6 36,851.2 9.5 2,560.5 8,884.4 184,085.8 9,260.2 20,310.6 213,656.6

2,752.8 5,383.5 2,504.1 137,279.0 32,431.7 8.7 2,672.0 3,645.3 184,059.9 3,992.8 21,638.3 209,691.0

3,346.2 3,874.1 3,509.7 140,892.4 28,641.1 1,856.2 606.6 2,869.5 183,598.7 3,255.3 23,385.2 210,239.2

4,341.9 12,999.0 15,403.5 238,201.3 37,158.3 43.9 2,263.2 498.5 4,391.6 1,306.7 316,607.9 9,329.0 40,938.8 366,875.7

In the ordinary course of business, PNB has loans and other transactions with its subsidiaries and affiliates, and with certain Directors, Officers, Stockholders and Related Interests (DOSRI). Under PNBs policy, these loans and other transactions are made substantially on the same terms as those with other individuals and 73

businesses of comparable risk. Under BSP Circular 423, the amount of direct credit accommodations to each of PNBs DOSRI, 70% of which must be secured, should not exceed the amount of each DOSRIs respective deposits and book value of each DOSRIs respective investments in PNB. In the aggregate, DOSRI loans generally should not exceed PNBs net worth or 15% of PNBs loan portfolio, whichever is lower. As of December 31, 2010, 2011 and 2012 and September 30, 2013, PNB was in compliance with the BSP regulations. For further details on PNBs related party transactions, see Note 31 to PNBs audited consolidated financial statements for the years ended December 31, 2010, 2011 and 2012 and as of January 1, 2011 and December 31, 2011 and 2012, and Note 20 to the interim consolidated financial statements as of and for the nine months ended September 30, 2013, included in this Prospectus.

74

DISCUSSION OF HISTORICAL FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF ALLIED BANK The merger between PNB and Allied Bank was completed on February 9, 2013. The following discussion of Allied Banks historical financial results prior to the merger is included for reference only and does not purport to reflect the financial condition or results of operations of the post-merger entity during any past or future period. The discussion should be read in conjunction with the auditors reports and Allied Banks consolidated financial statements and notes thereto contained in this Prospectus and Selected Statistical Data. Allied Banks audited consolidated financial statements as of January 1, 2011 and December 31, 2011 and 2012 and for the years ended December 31, 2010, 2011 and 2012 were audited by SGV & Co. and prepared by Allied Banks management in compliance with PFRS. OVERVIEW Prior to its merger with PNB, Allied Bank was a universal bank which provided a full range of banking, insurance, financing and leasing services to personal, commercial, corporate and institutional clients. Allied Banks banking products and services included deposit taking, lending and related services, international banking, treasury, foreign exchange and trust services. In addition, Allied Bank engaged in regular financial derivatives as a means of reducing and managing Allied Banks and its customers foreign exchange exposure. For the year ended December 31, 2012, Allied Banks total assets were P197.8 billion and its net income was P1.8 billion, compared to total assets of P202.5 billion and P189.5 billion, and net income of P1.5 billion and P1.3 billion in the years ended December 31, 2011 and 2010, respectively. As of December 31, 2012, Allied Bank had a network of 317 branches and 342 ATMs in the Philippines. The following table sets out selected key financial ratios for Allied Bank for the periods indicated.
Selected financial ratios For the year ended December 31, 2010 2011 2012

Net interest margin(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost-income ratio(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Return on average assets(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Return on average equity(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . NPL ratio(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total equity to total assets(6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Receivables from customers to deposits(7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Liquidity ratio(8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4.0% 69.9% 0.7% 5.2% 4.4% 13.7% 52.8% 47.1%

3.7% 77.3% 0.8% 5.4% 3.9% 14.9% 62.1% 57.3%

3.6% 66.3% 0.9% 5.8% 3.8% 15.4% 64.9% 57.0%

Notes: (1) Net interest income divided by average interest-earning assets. Interest-earning assets include due from BSP, due from other banks, interbank loans receivable and securities purchased under resale agreements, financial assets at fair value through profit or loss, available-for-sale investments, held-to-maturity investments and loans and receivable-gross. (2) Total operating expenses less provision for credit and impairment losses divided by total operating income. (3) Net income divided by average total assets for the period indicated. (4) Net income divided by average equity for the period indicated. (5) Total non-performing loans (net) divided by adjusted loan portfolio. (6) Total equity divided by total assets. (7) Receivables from customers divided by total deposits. (8) Liquid assets divided by liquid liabilities. Liquid liabilities include deposit liabilities and bills payable. CRITICAL ACCOUNTING POLICIES Critical accounting policies are those that are both (i) relevant to the presentation of Allied Banks financial condition and results of operations and (ii) require managements most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. As the number of variables and assumptions affecting the possible future resolution of the uncertainties increase, those judgments become even more subjective and complex. In order to provide an understanding of how Allied Banks management forms its judgments about future events, including the variables and assumptions underlying its estimates, and the sensitivity of those judgments to different circumstances, Allied 75

Bank has identified certain critical accounting policies. For a complete discussion of Allied Banks critical accounting policies and managements use of judgment, accounting estimates and assumptions, see Note 2 and Note 3 to Allied Banks financial statements included in this Prospectus. RESULTS OF OPERATIONS Description of Statements of Comprehensive Income Interest income For all financial instruments measured at amortized cost and interest-bearing financial instruments classified as FVPL investments, AFS investments and HTM investments, interest income is recorded at the effective interest rate, which is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset. The calculation takes into account all contractual terms of the financial instrument, including any fees or incremental costs that are directly attributable to the instrument and are an integral part of the EIR, but not future credit losses. The adjusted carrying amount of a financial instrument is calculated based on the original EIR. The change in carrying amount is recorded as interest income. Once the recorded value of a financial asset or group of similar financial assets has been reduced due to an impairment loss, interest income continues to be recognized using the original EIR applied to the new carrying amount. Interest expenses Interest expense is calculated using the effective interest method to determine the costs that Allied Bank incurs in relation to borrowing of funds, including deposit liabilities, bills payable and other borrowings. This item also includes discounted amounts of provisioned income, as well as financing charges on Allied Banks leases. Other operating income Other operating income includes commission and handling charges, trading and investment securities gains-net, gain on acquisition of investment properties, foreign exchange gains (losses)-net and miscellaneous. Operating expenses Expenses are recognized when it is probable that decrease in future economic benefits related to the decrease in asset or an increase in liability has occurred and that the decrease in economic benefits can be measured reliably. Expenses that may arise in the course of ordinary activities of Allied Bank are reflected as operating expenses on the statements of income. Operating expenses includes compensation and fringe benefits, occupancy and other equipment-related costs, taxes and licenses, depreciation and amortization, provision for credit and impairment losses and miscellaneous. Net income from disposal group In preparation for its merger with PNB, Allied Bank placed its interest in Oceanic Bank Holdings, Inc. (OBHI) into a trust to be sold to third parties. PFRS requires that the results of operations of the OBHI disposal group be classified separately from continuing operations on Allied Banks statements of income. Accordingly, net income from disposal group consists of income attributable to the results of operations of OBHI and loss on completed sale of the disposal group. Provision for income tax Income tax on profit or loss for the year is recognized in the statement of income, except to the extent that the taxes relate to items of other comprehensive income, in which case they are recognized directly on the statement of other comprehensive income. Description of Balance Sheet Items Assets Cash and Other Cash Items include cash in transit, vault/teller cash, cash on hand from ATM and extension offices and checks and other cash items from other banks. 76

Due from BSP refers to the balance of the deposit account maintained with the BSP including Special Deposit Accounts. Due from Other Banks includes the balances of due from foreign banks representing debit balances maintained with foreign banks, and balances of due from local banks representing deposits with other local banks. Interbank Loans Receivable and SPURA consist of interbank loans receivable and securities purchased under agreements to resell with the BSP, as well as overnight placements with the BSP where the underlying securities cannot be sold or repledged. Financial Assets at FVPL include derivative assets and debt and equity securities held for trading. AFS Investments include government and private debt securities and quoted and unquoted equity securities classified as available for sale. HTM Investments include government and private debt securities classified as held-to-maturity. Loans and Receivables include corporate, small business and consumer loans, as well as unquoted debt securities, accrued interest received, accounts receivable, sales contract receivables and finance lease receivables. Investment in Subsidiaries includes Allied Banks investments in its subsidiaries. Property and Equipment include land, buildings, leasehold improvements and furniture, fixtures and equipment. Investment Properties represent real estate properties foreclosed or acquired in settlement of loans and receivables. Deferred Tax Assets refer to income taxes recoverable in future periods in respect of deductible temporary differences carry forward of unused tax losses and carry forward of unused tax credits. Other Assets include creditable withholding tax, retirement asset, prepaid expenses, goodwill, security deposits, deferred charges and other items. Liabilities Deposit Liabilities include demand, savings and time deposits, and long-term negotiable certificates of time deposit. Bills Payable includes short- and long-term borrowings from the BSP, foreign banks and other banks. Derivative Liabilities include credit default swaps, call options and interest rate derivatives embedded in structured debt instrument. Managers Checks and Demand Draft Outstanding include the total amount of checks drawn by the bank upon itself to the payees named in the check. Income Tax Payable includes accrual of corporate income tax. Accrued Taxes, Interest and Other Expenses include accrued expenses for leave absences, interest payable, other taxes and license fees, directors dues and fringe benefits. Subordinated Debt includes the amortized amount of ten year subordinated notes issued by Allied Bank in March 2008. Insurance Provisions include policy and contract claims payable. Deferred Tax Liability is the amount of income taxes payable in future periods in respect of taxable temporary differences. Other Liabilities include accounts payable, domestic bills purchased, outstanding acceptances payable, cash letters of credit, and other items. 77

Year ended December 31, 2012 compared to year ended December 31, 2011 Interest income Allied Bank recorded interest income of P9.2 billion in 2012, a decrease of 2.1% from P9.4 billion in 2011, primarily due to lower yields on trading and investment securities. Interest expenses Allied Bank recorded interest expenses of P2.4 billion in 2012, a decrease of 13.4% from P2.8 billion in 2011, mainly due to lower interest paid on deposit liabilities. Other operating income The following table sets forth the components of the Allied Banks other operating income for the years indicated:
For the year ended December 31 2011 2012 (Q millions) Percentage change (%)

Commission and handling charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trading and investment securities gainsnet . . . . . . . . . . . . . . . . . . . . . . . Gain on acquisition of investment properties . . . . . . . . . . . . . . . . . . . . . . . . Foreign exchange gains (losses)net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

719.7 537.6 36.6 187.3 1,991.8 3,473.0

760.1 2,852.3 27.1 (237.7) 2,569.9 5,971.7

5.6 430.6 (26.0) (226.9) 29.0 71.9

Allied Bank recorded other operating income of P6.0 billion in 2012, an increase of 71.9% from P3.5 billion in 2011, primarily as a result of higher trading and investment securities gainsnet of P2.9 billion and growth in miscellaneous income of P0.6 billion. Operating expenses The following table sets out the components of Allied Banks operating expenses for the years indicated:
For the year ended December 31, 2011 2012 (Q millions) Percentage change (%)

Compensation and fringe benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Taxes and licenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Occupancy and equipment-related costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for impairment, credit and other losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2,827.1 772.8 860.4 362.3 432.8 2,896.1 8,151.5

2.629.8 845.3 900.2 1,783.5 397.3 3,685.4 10,241.5

(7.0) 9.4 4.6 392.2 (8.2) 27.3 25.6

Allied Bank recorded operating expenses of P10.2 billion in 2012, an increase of 25.6% from P8.2 billion in 2011. In particular, compensation and fringe benefits decreased by P0.2 billion due to the alignment of Allied Banks retirement plan with actuarial valuation. Taxes and licenses increased by P0.1 billion due to higher gross receipts tax recorded in 2012. Occupancy and other equipment-related costs increased by P39.8 million due to renewal and additional rent recorded for branches during the year. The increase in operating expenses in 2012 is also driven by higher provision for credit and impairment losses and miscellaneous expenses. Net income from continuing operations Allied Bank recorded net income from continuing operations of P2.0 billion in 2012, an increase of 37.0% from P1.5 billion in 2011, primarily due to the decrease in interest expenses and increase in other operating income.

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Provision for income taxes Allied Bank recorded provision for income tax of P0.5 billion in 2012, an increase of 11.1% from P0.5 billion in 2011, due to higher interest income that is subject to final tax. Net income As a result of the foregoing, net income increased to P1.8 billion in 2012, an increase of 16.2% from P1.5 billion in 2011. Financial position Assets The following table sets out selected components of Allied Banks assets as of the years indicated:
As of December 31 2011 2012 (Q millions) Percentage change (%)

Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash and Other Cash Items. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due from Bangko Sentral ng Pilipinas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due from Other Banks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interbank Loans Receivable and Securities Purchased Under Resale Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial Assets at Fair Value Through Profit or Loss . . . . . . . . . . . . . . . . . . . . Available-for-Sale Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Assets of Disposal Group Classified as Held-for-Sale. . . . . . . . . . . . . . . . . . . . . Loans and Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property and Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred Tax Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

202,532.1 4,023.6 18,286.3 10,821.1 12,578.3 697.8 40,331.8 7,422.7 97,504.2 4,538.7 4,317.9 33.6 1,976.1

197,777.2 3,885.6 26,082.6 11,771.8 7,955.0 7,375.5 29,702.1 100,136.9 4,816.2 3,971.4 98.0 1,982.1

(2.3) (3.4) 42.6 8.8 (36.8) 957.0 (26.4) (100.0) (2.7) 6.1 (8.0) 191.7 0.3

Allied Bank had total assets of P197.8 billion as of December 31, 2012, a decrease of 2.3% from total assets of P202.5 billion as of December 31, 2011. The decrease in total assets was primarily attributable to the factors discussed below. Changes in Allied Banks cash and other cash items, due from BSP, due from other banks and interbank loans receivable and SPURA are based on the liquidity requirements and investment mix for the periods covered. Cash and Other Cash Items decreased by P0.1 billion, or 3.4%, due to lower cash on hand. Due from BSP increased by P7.8 billion, or 42.6%, due to higher balance of Allied Banks special deposit account with the BSP. Due from Other Banks increased by P1.0 billion, or 8.8%, primarily due to the higher balance of due from foreign banks. Interbank Loans Receivable and SPURA decreased by P4.6 billion, or 36.8%, primarily due to the maturity of loan repurchase agreements which was partially offset by a higher balance of interbank loans receivable. Financial Assets at FVPL increased by P6.7 billion, or 957.0%, mainly due to various acquisitions of held for trading securities. AFS Investments representing 15.0% and 19.9% of Allied Banks total assets as of December 31, 2012 and December 31, 2011, respectively, decreased by P10.6 billion, or 26.4%, primarily due to the sale of government and private debt securities. Assets of Disposal Group Classified as Held-for-Sale was nil in 2012 due to the sale of Oceanic Bank Holding, Inc.

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HTM investments remained nil in 2011 and 2012. Loans and Receivables representing 50.6% and 48.1% of Allied Banks total assets as of December 31, 2012 and December 31, 2011, respectively, increased by P2.6 billion, or 2.7%, primarily due to the growth in corporate, small business and consumer loans in 2012. Property and Equipment increased by P0.3 billion, or 6.1%, primarily due to an increase in the appraised value of Allied Banks land portfolio. Investment Properties decreased by P0.3 billion, or 8.0%, primarily due to higher sales and disposals of ROPA in 2012. Deferred Tax Asset increased by P64.4 million or 191.7%. Other Assets increased by P6.0 million, or 0.3%, primarily due to higher miscellaneous assets and interoffice float items. Liabilities The following table sets out the selected components of Allied Banks liabilities as of the dates indicated:
As of December 31, 2011 2012 (Q millions) Percentage change (%)

Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deposit Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Derivative Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bills Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Marginal Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Managers Checks and Demand Draft Outstanding . . . . . . . . . . . . . . . . . . . . . . . Liabilities of Disposal Group Classified as Held-for-Sale . . . . . . . . . . . . . . . . . Income Tax Payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued Taxes, Interest and Other Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subordinated Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Insurance Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred Tax Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

172,406.8 147,109.6 90.4 4,277.9 13.8 928.0 6,017.1 21.4 1,168.4 4,482.8 3,286.7 417.5 4,593.2

167,270.8 147,072.1 106.1 5,062.7 34.4 438.5 39.0 1,347.7 4,497.3 4,073.5 510.4 4,089.1

(3.0) 0.0 17.3 18.3 149.8 (52.7) (100.0) 82.1 15.3 0.3 23.9 22.3 (11.0)

Allied Bank had total liabilities of P167.3 billion as of December 31, 2012, a decrease of 3.0% from P172.4 billion as of December 31, 2011. The decrease was primarily attributable to the factors described below. Deposit Liabilities, decreased by P37.5 million, due to a reduction in time deposits by P3.5 billion, or 11.3%, and in savings deposits by P2.8 billion, or 4.0%, offset by the growth in demands deposits by P6.3 billion, or 13.8%. Bills Payable represented 3.0% and 2.5% of Allied Banks total liabilities as of December 31, 2012 and 2011, respectively. The growth of P0.8 billion, or 18.3%, resulted primarily from a higher rediscounting facility with BSP availed of and from additional borrowings from foreign banks. Derivative Liabilities, which include credit default swaps, interest rate derivatives and call options embedded in structured debt instrument increased by P15.7 million, or 17.3%. This increase was primarily the result of fair market valuation of derivative liabilities. Managers Checks and Demand Drafts Outstanding decreased by P0.5 billion, or 52.7%, primarily as a result of the lower availment of these instruments by customers. Accrued Interest and Other Expenses increased by P0.2 billion, or 15.3%, mainly due to the accrual of expenses incurred in 2012 which will be settled in 2013. Income Tax Payable increased by P17.6 million, or 82.1%. Subordinated Debt increased by P14.5 million, or 0.3%. 80

Insurance Provisions increased by P0.8 billion or 23.9%. Deferred Tax Liability increased by P0.1 billion or 22.3%. Other Liabilities decreased by P0.5 billion, or 11.0%, mainly due to lower balances of due to other banks, cash letters of credit and payment orders payable. Year ended December 31, 2011 compared to year ended December 31, 2010 Interest income Allied Bank recorded interest income of P9.4 billion in 2011, a decrease of 2.1% from P9.6 billion in 2010, due to lower yields on trading and investment securities, deposits with banks and interbank loans receivable. Interest expenses Allied Bank recorded interest expenses of P2.8 billion in 2010 and 2011. Other operating income The following table sets forth the components of the Allied Banks other operating income for the years indicated:
For the year ended December 31, 2010 2011 (Q millions) Percentage change (%)

Commission and handling charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trading and investment gainsnet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gain on acquisition of investment properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign exchange gains (losses)net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

796.6 902.4 30.5 30.9 1,848.3 3,608.7

719.7 537.6 36.6 187.3 1,991.8 3,473.0

(9.7) (40.4) 19.9 506.1 7.8 (3.8)

Allied Bank recorded other operating income of P3.5 billion in 2011, a decrease of 3.8% from P3.6 billion in 2010, due to lower gains on trading and investment securities, which offset higher foreign exchange gains and miscellaneous income. Operating expenses The following table sets out the components of Allied Banks operating expenses for the years indicated:
For the year ended December 31, 2010 2011 (Q millions) Percentage change (%)

Compensation and fringe benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Occupancy and other equipment-related costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Taxes and licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for credit and impairment loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2,768.1 2,827.1 856.5 860.4 798.1 772.8 460.0 432.8 1,252.7 362.3 2,391.9 2,896.1 8,527.3 8,151.5

2.1 0.5 (3.2) (5.9) (71.1) 21.1 (4.4)

Allied Bank recorded operating expenses of P8.2 billion in 2011, a decrease of 4.4% from P8.5 billion in 2010, primarily as a result of curtailment of provision for credit and impairment losses by P0.9 billion which offset higher miscellaneous expenses. Net income from continuing operations Allied Bank recorded net income from continuing operations of P1.5 billion in 2011, an increase of 15.0% from P1.3 billion in 2010, mainly due to lower provisions for income taxes during the year. 81

Provision for income taxes Allied Bank recorded provision for income tax of P0.5 billion in 2011, a decrease of 23.0% from P0.6 billion in 2010, due to lower interest income that is subject to final tax. Net income As a result of the foregoing, net income increased to P1.5 billion in 2011, an increase of 16.3% from P1.3 billion in 2010. Financial position Assets The following table sets out selected components of Allied Banks assets as of the years indicated:
As of December 31, 2010 2011 (Q millions) Percentage Change (%)

Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash and Other Cash Items. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due from Bangko Sentral ng Pilipinas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due from Other Banks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interbank Loans Receivable and Securities Purchased Under Resale Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial Assets at Fair Value Through Profit or Loss . . . . . . . . . . . . . . . . . . . . Available-for-Sale Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Assets of Disposal Group Classified as Held-for-Sale. . . . . . . . . . . . . . . . . . . . . Held-to-Maturity Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans and Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investments in Subsidiaries Property and Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred Tax Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

189,450.8 4,636.8 16,297.9 7,442.2 15,058.0 3,507.0 20,500.6 8,336.0 20,943.3 81,216.2 4,659.6 4,536.4 41.1 2,275.7

202,532.1 4,023.6 18,286.3 10,821.1 12,578.3 697.8 40,331.8 7,422.7 97,504.2 4,538.7 4,317.9 33.6 1,976.1

6.9 (13.2) 12.2 45.4 (16.5) (80.1) 96.7 (11.0) (100.0) 20.1 (2.6) (4.8) (18.2) (13.2)

Allied Bank had total assets of P202.5 billion as of December 31, 2011, an increase of 6.9% from total assets of P189.5 billion as of December 31, 2010. The increase in total assets was primarily attributable to the factors discussed below. Changes in Allied Banks cash and other cash items, due from BSP, due from other banks and interbank loans receivable and SPURA are based on the liquidity requirements and investment mix for the periods covered. Cash and Other Cash Items decreased by P0.6 billion, or 13.2%, primarily due to the decrement in cash on hand by P0.5 billion, or 11.9%, and checks and other cash items which fell by P0.1 billion, or 32.5%. Due from BSP increased by P2.0 billion, or 12.2%. Due from Other Banks increased by P3.4 billion, or 45.4%, mainly due to the robust growth in due from foreign banks by P2.9 billion, or 163.5%, and due from local banks by P0.5 billion, or 9.1%. Interbank Loans Receivable and SPURA decreased by P2.5 billion, or 16.5%, primarily due to lower SPURA during the year, which offset the increase in interbank loans receivable. Financial Assets at FVPL decreased by P2.8 billion, or 80.1%, primarily due to lower government debt held for trading. AFS Investments representing 19.9% and 10.8% of Allied Banks total assets as of December 31, 2011 and 2010, respectively, increased by P19.8 billion, or 96.7%, mainly due to the reclassification of certain HTM investments to AFS made in 2011.

82

Assets of Disposal Group Classified as Held-for-Sale decreased by P0.9 billion, or 11.0%, mainly due to the lower HTM investments held at Oceanic Bank during the year. HTM Investments decreased by 100.0% from P20.9 billion in 2010, primarily due to the sale and reclassification of the said securities upon tainting of the investment securities portfolio in 2011. Loans and Receivables representing 48.1% and 42.9% of Allied Banks total assets as of December 31, 2011 and 2010, respectively, increased by P16.3 billion, or 20.1%, primarily due to higher corporate, small business and consumer loans made in 2011. Property and Equipment registered at P4.5 billion in 2011, minimally changed from P4.7 billion in 2010. Investment Properties decreased by P0.2 billion, or 4.8%. Deferred Tax Assets decreased by P7.5 million, or 18.2%. Other Assets decreased by P0.3 billion, or 13.2%, mainly due to lower miscellaneous assets and interoffice float items. Liabilities The following table sets out the selected components of Allied Banks liabilities as of the dates indicated:
As of December 31, 2010 2011 (Q millions) Percentage change (%)

Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deposit Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Derivative Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bills Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Marginal Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Managers Checks and Demand Draft Outstanding . . . . . . . . . . . . . . . . . . . . . . . Liabilities of Disposal Group Classified as Held-for-Sale . . . . . . . . . . . . . . . . . Income Tax Payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued Taxes, Interest and Other Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subordinated Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Insurance Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred Tax Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

163,532.5 141,494.2 138.4 1,609.0 38.3 418.2 6,965.4 16.6 1,112.7 4,469.4 2,512.1 410.9 4,347.3

172,406.8 147,109.6 90.4 4,277.9 13.8 928.0 6,017.1 21.4 1,168.4 4,482.8 3,286.7 417.5 4,593.2

5.4 4.0 (34.7) 165.9 (64.0) 121.9 (13.6) 28.9 5.0 0.3 30.8 1.6 5.7

Allied Bank had total liabilities of P172.4 billion as of December 31, 2011, an increase of 5.4% from P163.5 billion as of December 31, 2010. The increase was primarily attributable to the growth in demand deposits as well as bills payable. Deposit Liabilities increased by P5.6 billion, or 4.0%, due to the growth in demand and savings deposits by P3.6 billion, or 8.7%, and P2.0 billion, or 2.9%, respectively. Bills Payable represented 2.5% and 1.0% of Allied Banks total liabilities as of December 31, 2011 and 2010, respectively. Bills payable increased by P2.7 billion, or 165.9%, primarily due to higher levels of borrowings from the BSP during the year, which offset lower borrowing from foreign banks. Derivative Liabilities decreased by P48.0 million, or 34.7%. This decrease was primarily the result of the lower fair values of Allied Banks U.S. dollar forward contracts and other derivatives. Managers Checks and Demand Drafts Outstanding increased by P0.5 billion, or 121.9%. Accrued Taxes, Interest and Other Expenses increased by P55.7 million, or 5.0%, primarily due to higher accrued interest payable and other taxes and licenses. Income Tax Payable increased by P4.8 million, or 28.9%. Subordinated Debt increased by P13.4 million, or 0.3%, due to amortization of discount. 83

Insurance Provisions increased by P0.8 billion, or 30.8%, primarily due to higher aggregate reserves held for Allied Banks outstanding insurance policies. Deferred Tax Liability increased by P6.6 million, or 1.6%. Other Liabilities increased by P0.2 billion, or 5.7%, mainly due to higher accounts payable and amounts due to other banks. LIQUIDITY AND CAPITAL RESOURCES The following table sets out Allied Banks statement of cash flows:
2010 For the year ended December 31 2011 2012 2012(1) (Q millions) (U.S.$ millions)

Net cash provided by (used in) operating activities . . . . . . . . . . . . Net cash provided by (used in) investing activities . . . . . . . . . . . . Net cash provided by (used in) financing activities . . . . . . . . . . . . Cumulated translation adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . Net increase (decrease) in cash and cash equivalents . . . . . . . . . . Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . .

1,062.1 (4,994.7) (9,397.3) (4,590.3) 5,106.3 6,337.5 (1,149.8) 1,983.3 34.9 (571.4) 86.6 (508.1) (5,249.4) 2,181.5 (3,533.0) 49,666.1 44,416.7 46,598.2 44,416.7 46,598.2 43,065.2

(228.9) 154.4 0.9 (12.5) (86.1) 1,135.2 1,049.1

Note: (1) The translations from Pesos to U.S. dollars have been made on the basis of the PDS Rate on December 31, 2012 of P41.050 = U.S.$1.00. See Exchange Rate. Cash flows from operating activities Allied Banks operating activities generated a net cash inflow of P1.1 billion, net cash outflow of P5.0 billion and net cash outflow of P9.4 billion in 2010, 2011 and 2012, respectively. In 2010, Allied Banks net cash inflow from operating activities was primarily the result of collections on loans and receivables. In 2011, Allied Banks net cash outflow from operating activities was mainly due to payments of loans and receivables. In 2012, Allied Banks net cash outflow from operating activities was primarily due to acquisitions of financial assets at FVPL and loan drawdowns. Cash flows from investing activities Allied Bank recorded a net cash outflow from investing activities of P4.6 billion for the year ended December 31, 2010 and net cash inflows of P5.1 billion and P6.3 billion for the years ended December 31, 2011 and 2012, respectively. In 2010, Allied Banks net cash outflow from investing activities was primarily due to lower than normal proceeds from the sale of AFS investments. In 2011, Allied Banks net cash inflow from investing activities was primarily due to proceeds from the sale of AFS investments as well as proceeds from maturities of various HTM investments. In 2012, Allied Banks net cash inflow from investing activities was mainly a result of higher proceeds from AFS investments. Cash flows from financing activities Allied Bank recorded a net cash outflow from financing activities of P1.1 billion in 2010 which was mainly attributable to payments of bills payable. Allied Bank recorded a net cash inflow from financing activities of P2.0 billion in 2011, which was primarily due to availments of bills payable. Allied Bank recorded a net cash inflow from financing activities of P34.9 million in 2012 which was primarily attributable to availments of bills payable. Contingent financial obligations and off-balance sheet transactions In the normal course of business, Allied Bank has various commitments and contingent liabilities that are not presented in the accompanying financial statements. Allied Bank does not anticipate any material losses as a result of these commitments and contingent liabilities. 84

The following is a summary of Allied Banks commitments and contingent liabilities at their equivalent Peso contractual amounts:
2010 As of December 31 2011 2012 (Q millions)

Trust department accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unused credit card lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deficiency claims receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unused commercial letters of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inward bills for collection. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Late deposits/payment received. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Outward bills for collection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Outstanding guarantees issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Confirmed export letters of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Material commitments for capital expenditures

24,807.8 35,062.9 41,838.2 17,013.5 21,755.2 10,759.7 5,514.0 5,520.9 5,536.7 5,026.6 5,320.2 5,576.4 961.2 309.0 353.2 489.5 314.2 278.2 315.3 371.8 264.9 338.6 314.0 323.2 167.1 1.1 2.3 557.2 609.5 543.4

Allied Bank has commitments for capital expenditures, including for investments in IT-related projects, relocation and renovation of branch premises, and acquisition and major repairs of furniture, fixtures and equipment needed to maintain Allied Banks competitiveness. Funding for capital expenditures is expected to be sourced primarily from sale of foreclosed assets, excess cash inflows and income streams. Allied Banks capital expenditures in 2010, 2011 and 2012 were P0.4 billion, P0.3 billion and P0.3 billion, respectively. Allied Banks primary capital expenditures during those years were mainly invested in acquisition of property and equipment, and for the renovation and relocation of branches. Credit ratings Allied Banks borrowing costs are affected directly by Allied Banks credit ratings. Allied Banks credit ratings by Capital Intelligence and Moodys as of August 31, 2012 and December 31, 2012, respectively, are set forth below:
Capital Intelligence Moodys Foreign

Currency Long Term P: Short Term P: Financial Strength: Support: Outlook:

BB B BB 3 Stable

Ba3/Positive E+ Positive

A securities rating is not a recommendation to buy, sell or hold securities. A securities rating may be subject to withdrawal or revision at any time. Each rating should be evaluated separately of any other rating. Capital adequacy The Philippines adopted capital adequacy requirements based on the Basel II Capital Accord through the issuance of BSP Circular 538 effective on July 1, 2007. As of December 31, 2012, Allied Banks risk-weighted capital adequacy ratio (the ratio of total qualifying capital to risk-weighted assets) as reported to the BSP, on a consolidated basis, was 21.0%. The BSPs minimum risk weighted capital adequacy ratio is 10.0%. Allied Banks consolidated core Tier 1 as reported to the BSP was 17.1% as of December 31, 2012.

85

The following table sets out details of capital resources and capital adequacy ratios of Allied Bank as of the dates indicated, as reported to the BSP:
As of December 31, 2011 2012 (Q millions)

Consolidated

2010

Tier 1 (core) Capital: Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital paid in excess of par value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cumulative Foreign Currency translation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Undivided profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-controlling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Hybrid Tier 1 Capital Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deduction from Tier 1: Common stock treasury shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net unrealized loss on equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unsecured DOSRI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred income tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross Tier 1 capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross Tier 2 capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross qualifying capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deductions from gross qualifying capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total qualifying capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital ratios: Tier 1 capital ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total capital ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3,252.0 3,252.0 3,252.0 11,372.0 12,655.0 14,097.0 659.0 657.0 410.0 1,383.0 1,551.0 2,080.0 5,015.0 5,176.0 4,718.0 87.0 3.0 1.0 412.0 392.0 390.0 21,183.0 22,896.0 24,166.0 5,470.0 5,638.0 5,677.0 26,653.0 28,534.0 29,843.0 324.0 319.0 366.0 26,329.0 28,215.0 29,477.0 15.5% 19.4% 15.8% 19.6% 17.1% 21.0%

The following table sets out Allied Banks consolidated assets according to risk weight as of the dates indicated, as reported to the BSP:
As of December 31, 2011 (Q millions)

Consolidated

2010

2012

Risk-weighted on-balance sheet assets: 20% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Risk-weighted off-balance sheet: 20% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Risk-weighted interest rate and exchange rate-related . . . . . . . . . . . . . . . . . . . . Risk-weighted securitization exposures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Risk-weighted assets covered by Mitigants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total credit risk-weighted assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Market risk weighted assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operational risk weighted assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total risk weighted assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . RELATED PARTY TRANSACTIONS

3,222.0 3,677.0 7,382.0 81,412.0 9,665.0 409.0 2,689.0 547.0 5,448.0 109,003.0 12,624.0 13,941.0 135,568.0

2,135.0 4,228.0 9,742.0 94,030.0 9,369.0 424.0 2,738.0 490.0 8,687.0 123,155.0 6,029.0 14,991.0 144,175.0

3,294.0 2,657.0 11,077.0 86,274.0 5,949.0 406.0 3,043.0 279.0 6,138.0 112,485.0 11,595.0 16,436.0 140,516.0

In the ordinary course of business, Allied Bank has loans and other transactions with its subsidiaries and affiliates, and with certain DOSRI. Under Allied Banks policies, these loans and other transactions are made substantially on the same terms as those with other individuals and businesses of comparable risk. Under BSP 86

Circular 423, the amount of direct credit accommodations to each of Allied Banks DOSRI, 70% of which must be secured, should not exceed the amount of each DOSRIs respective deposits and book value of each DOSRIs respective investments in Allied Bank. In the aggregate, DOSRI loans generally should not exceed Allied Banks net worth or 15% of Allied Banks loan portfolio, whichever is lower. As of December 31, 2010, 2011 and 2012, Allied Bank was in compliance with the BSP regulations. For further details on Allied Banks related party transactions, please see Note 30 to Allied Banks financial statements included in this Prospectus.

87

BUSINESS Description of the Bank As of September 30, 2013, the Bank, subsequent to its merger with ABC effective February 9, 2013, was the fourth largest privately-owned Philippine commercial bank in terms of total assets, with total assets of P606.1 billion. As of September 30, 2013, the Bank had 656 branches and offices and 854 ATMs located throughout the Philippines. The Bank has the largest overseas network among Philippine banks with 81 branches, representative offices, remittance centers and subsidiaries in 16 locations in the United States, Canada, Europe, the Middle East and Asia. As of September 30, 2013, the Bank also maintained correspondent relationships with 1,120 banks and financial institutions worldwide. As a result of this large geographic coverage, the Bank is one of the leading providers of remittance services to Overseas Filipino Workers (OFWs). The Bank provides a full range of banking and other financial services to large corporate, middle-market, SMEs and retail customers including OFWs, as well as to the Philippine Government, NGAs, LGUs and GOCCs. While the Banks principal focus has historically been to serve the banking needs of Government-related entities and GOCCs, the Banks focus since 2000 after the privatization has been to further develop its banking services for large corporates, middle-market, SMEs, retail customers and OFWs. The Banks principal commercial banking activities include deposit-taking, lending, bills discounting, trade finance, foreign exchange dealings, fund transfers/remittance servicing, a full range of retail banking and trust services, and treasury operations. Through its subsidiaries, the Bank also engages in a number of diversified financial and related businesses such as remittance servicing in the United States, Canada, Hong Kong, Italy, France and the United Kingdom, investment banking, non-life insurance, stock brokerage, leasing and financing and freight forwarding services. As of December 31, 2012, the Banks consolidated Tier 1 capital adequacy ratio and total consolidated capital adequacy ratio under the Basel Committee on Banking Supervisions Revised International Convergence of Capital Management and Capital Standards (BASEL II) as reported to the BSP were 11.9% and 18.1%, respectively. As of September 30, 2013, consolidated Tier 1 capital adequacy ratio and total consolidated capital adequacy ratio as reported to the BSP were 17.0% and 20.3%, respectively. The Bank has been listed on The Philippine Stock Exchange (PSE) since June 1989. The market capitalization of the Bank on September 30, 2013 (based on the closing price of the shares of the Bank on the PSE on that date of P87.40 per Share) was P94.9 billion. For the nine months ended September 30, 2013, the Banks total assets were P606.1 billion and its net income was P6.0 billion, compared to total assets of P331.0 billion and P312.1 billion as of December 31, 2012 and 2011, respectively, and net income of P5.0 billion and P4.8 billion in the years ended December 31, 2012 and 2011, respectively. The Banks results as of and for the nine months ended September 30, 2013 include the results of ABC beginning on the merger effectivity date of February 9, 2013. The following table sets out the Banks selected key financial ratios for the periods indicated.
For the year ended December 31, 2010 2011 2012 For the nine months ended September 30, 2013

Selected financial ratios

Net interest margin(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost-income ratio(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Return on average assets(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Return on average equity(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . NPL ratio(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total equity to total assets(6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans to deposits(7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Liquidity ratio(8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3.4% 57.7% 1.4% 15.2% 4.5% 9.5% 42.0% 35.3%

3.0% 58.7% 1.6% 15.0% 3.1% 11.2% 48.6% 46.3%

2.6% 60.9% 1.6% 13.5% 2.4% 12.0% 55.3% 44.6%

2.7% 60.2% 1.7% 12.9% 1.1% 13.8% 53.5% 46.6%

Notes: (1) For the years ended December 31, 2010, 2011 and 2012: net interest income divided by average interestearning assets. For the nine months ended September 30, 2013: net interest income divided by 9 multiplied by 12 divided by average interest earning assets. Interest-earning assets which mainly consist of Due from BSP and other banks, Interbank loans and Securities Purchased Under Resale Agreements, Trading and investment securities, and receivable from customers, net of NPLs. 88

(2) Total operating expenses (excluding provision for impairment, credit and other losses) divided by operating income. (3) For the years ended December 31, 2010, 2011 and 2012: Net income divided by average total assets for the period indicated. For the nine months ended September 30, 2013: Net income divided by 9 multiplied 12 then divided by the average assets for the period. (4) For the years ended December 31, 2010, 2011 and 2012: Net income divided by average total equity for the period indicated. For the nine months ended September 30, 2013: Net income divided by 9 multiplied by 12 then divided by the average equity. (5) Total non-performing loans (net) divided by total adjusted loan portfolio. As of December 31, 2010, 2011 and 2012, ratios were computed based on the balances on the audited financial statements. As of September 30, 2013, the ratio was computed based on figures reported to the BSP. (6) Total equity divided by total assets. (7) Receivables from customers divided by total deposits. (8) Total liquid assets divided by total assets. History The Bank was established in 1916 by the Philippine Government. At that time, in addition to engaging in the general commercial banking business, the Bank also served as the de facto central bank of the Philippines. The Bank acted as the sole depository of Philippine Government deposits, the clearing house for the Philippine banking system, the custodian of bank reserves and the issuer of Philippine bank notes and Government bonds, functions which the Bank performed until 1949, when the Central Bank of the Philippines, which has since been renamed the BSP was established. Historically, as a bank which was then solely owned by the Government, the Bank played an important role in implementing the Governments financial policies. This included being a major provider of banking services to the Government as well as its agencies, LGUs and GOCCs, serving as a depository bank for working balances, providing fund transfers, disbursements, credits and import/export financing, administering trust funds, and acting as a channel for the sale of Government securities. Following Proclamation No. 50, the Government embarked on the privatization of the Bank. In June 1989, the Government offered to the Philippine public 30.0% of the outstanding shares of the Bank for a total consideration of P1.1 billion. In April 1992, the Government disposed of a further 10.0% of the outstanding shares in the Bank to the Philippine public for a total consideration of P2.1 billion. In December 1995, the Government disposed of a further 7.2% of the outstanding shares of the Bank. On May 27, 1996, it was incorporated with the PSEC as a juridical entity. Its Articles of Incorporation and By-Laws were duly filed. As a result of the Asian financial crisis, the Bank suffered a liquidity crisis for the five years ended December 31, 2002, which necessitated significant levels of financial assistance from the BSP and the Philippine National Government (through the PDIC). The Bank had to undergo a rehabilitation program pursuant to a MOA signed by the Republic of the Philippines, the PDIC and certain Tan Companies. The MOA, which was signed on May 3, 2002, stipulated the following financial conditions: conversion into equity of P7.8 billion of the P25.0 billion assistance extended by the BSP and the PDIC; settlement of the P10.0 billion obligation by way of dacion en pago through the assignment of government and government related receivables; and the conversion of P6.1 billion into a ten-year loan with interest equivalent to the 91-day T-Bill rate plus 1.0%. In June 2007, the Bank settled its P6.1 billion loan to PDIC, four years ahead of maturity date. In August 2007, the Bank successfully completed a Tier 1 Follow-On Equity Offering where it raised about P5.1 billion, net of issuance cost of P199.5 million, in Tier 1 Capital. Together with the sale of 89 million primary shares, 71.8 million secondary shares owned by the Government through PDIC and the Department of Finance (DOF) were sold to the public paving the way for a complete exit of the Government from the Bank. As of September 30, 2013, LTG held indirect ownership over 45.51% of the Banks shares through various subsidiaries. Shareholders associated with or who issue proxies/special powers of attorney in favor of Director Lucio C. Tan from time to time held a total of about 31.19% of the Banks shares, while the latter held direct ownership over 1.19% of the Banks shares. The remaining 22.11% of the Banks shares were owned by other stockholders.

89

Notwithstanding its status as a private bank, the Bank remains one of the Authorized Government Depository banks having been granted by the BSP the authority to accept government deposits on a continuing basis since the Bank has successfully met the BSP requirements for this license. Merger with Allied Banking Corporation On February 9, 2013, the Bank concluded its planned merger with ABC as approved and confirmed by the Board of Directors of the Bank and of ABC on January 22 and January 23, 2013, respectively. The respective shareholders of the Bank and ABC, representing at least two-thirds of the outstanding capital stock of both banks, approved the amended terms of the Plan of Merger of the two banks on March 6, 2012. The original Plan of Merger was approved by the affirmative vote of ABC and the Banks respective shareholders on June 24, 2008, representing at least two-thirds of the outstanding capital stock of both banks. On March 26, 2012, the Parent Company submitted to the BSP and PDIC applications for consent to the merger. On April 12, 2012, the application for the merger was filed with the PSEC. On July 25, 2012, the Parent Company received notice that the PDIC had given its consent to the merger. Likewise, on August 2, 2012, the Monetary Board of the BSP issued a resolution giving its consent to the merger. Finally, on January 17, 2013, the PSEC granted its approval to the merger. In addition, with respect to ABCs overseas subsidiaries, the Parent Company has also filed notices in relation to the merger with various relevant foreign regulatory agencies; and as of January 17, 2013 had received all necessary approvals to effectuate the merger. As of September 30, 2013, the merged Bank has a combined distribution network of 656 branches and offices and 854 ATMs nationwide. Based on September 30, 2013 figures, the merged entity was the fourth largest private domestic bank in the Philippines in terms of local branches and the fourth largest in terms of consolidated total assets (P606.1 billion), net loans and receivables (P258.2 billion) and deposits (P454.0 billion). In addition, it has the widest international footprint among Philippine banks spanning Asia, Europe, the Middle East and North America. With a combined 133 years of banking experience, the new Philippine National Bank now operates under the motto Bigger, Stronger, and Better. The Bank reaffirms its commitment towards building fruitful and solid partnerships with its clientele to help them achieve their financial goals. Recent Developments Impact of 2013 Typhoons and the Earthquake in Bohol As a result of the typhoons Maring and Santi, the earthquake in Bohol and, in particular typhoon Yolanda which caused significant damage in Central Visayas and certain parts of Southern Luzonthe Bank expects to incur losses as a result of claims for property damage by clients of the Banks non-life insurance company, PNB Gen. While the amount of these losses, particularly with respect to losses arising as a result of typhoon Yolanda have not been fully assessed at this time, the Bank currently estimates that these losses will be between P700 million and P800 million. In addition, the Bank is still assessing the impact of typhoon Yolanda on the Banks owned and invested properties. Competitive Strengths The Bank considers the following to be its principal competitive strengths relative to the banking sector: Well-positioned franchise in the robust Philippine banking sector The Bank believes that it is well-positioned in the robust Philippine banking sector. The Philippines has one of the lowest banking penetrations in Asia, leaving significant headroom for growth. According to the Economist Intelligence Unit, loan growth is expected to be strong at 13.5% on average over the next five years driven by strong domestic consumption and favorable demographics. The banking sector has also stabilized over the years, with the average net NPL ratio generally declining to 3.1% as of December 31, 2011, from 15.0% in 2002 according to data from the BSP. Under the new methodology adopted by the BSP, the banking sectors average net NPL ratios were 0.3% and 0.5% as of December 31, 2012 and September 30, 2013, respectively. The Banks scale, reach, business mix, product offerings and brand recognition have made it among the leading financial institutions in the Philippines. According to the Banks published SEC Form 17-Q Report, as of September 30, 2013, the Bank is the Philippines fourth largest private commercial bank in terms of total assets, deposits, net loans and receivables. 90

Extensive and strategically located distribution network The Bank believes it has one of the most extensive branch networks among its competitors in the Philippines. As of September 30, 2013, the Bank had 656 domestic branches and offices and 854 ATMs. The Banks branches and ATMs are strategically located to maximize market potential and cover areas where competitors are less present, making financial services accessible to untapped customers and investment opportunities. The Banks extensive distribution network allows for a strong deposit gathering capability and the ability to sell and distribute fee-generating product lines such as bancassurance, trust, fixed-income securities and credit cards. According to BSP data, the 653 domestic branches and offices of the Bank comprised approximately 14% of the total number of branches of all private commercial and universal banks in the Philippines as of June 30, 2013. The 854 ATMs of the Bank represented about 8.1% of the total number of Bancnet ATMs of commercial and universal banks. Industry-leading OFW remittance business The Banks OFW remittance business accounted for approximately 21% market share by remittance volume as of August 31, 2013, based on data from the BSP, making it one of the largest in the Philippines. The Banks large-scale remittance business is supported by the Banks extensive overseas network of 81 branches, representative offices and remittance centers across 16 countries in North America, Europe, the Middle East and Asia. As of September 30, 2013, the Bank also maintained correspondent relationships with 1,120 banks and financial institutions worldwide. Diversified customer base The Bank provides a full range of banking and other financial services to a diversified customer base including government entities, large corporate, middle-market, SMEs and retail customers, with the Bank having the distinction of being one of only five authorized Government depository banks in the Philippines. As of September 30, 2013, the Banks receivables from customers were well-diversified across the large corporate, Government, SMEs and retail segments. The Bank believes that with the merger, additional customers contributed by ABC will strengthen the Banks ability to withstand periods of volatile economic markets as compared to many of its peers. Solid capitalization, improving asset quality and stable financial performance The Bank believes its capital position is strong, with a consolidated Tier 1 ratio of 17.0% and consolidated CAR of 20.3% as of September 30, 2013 as reported to the BSP. Meanwhile, ABC maintained a strong capital position prior to its merger with the Bank, with a consolidated CAR of 21.0% for the year ended December 31, 2012 as reported to the BSP, higher than the BSP minimum required CAR of 10.0%. The Banks strong capital position gives it the flexibility to expand its business, invest in new products and services, information technology and other infrastructure required for the execution of its growth strategy. Moreover, the Bank has been committed to prudent credit approval and risk management processes, which have resulted in improving asset quality. As of September 30, 2013, the Bank recorded a net NPL ratio of 1.1%, a net NPA ratio of 3.6% and an NPL coverage ratio of 94.0% as reported to the BSP. The Bank believes that its asset quality would remain at a healthy level subsequent to its recent merger with ABC with the latter similarly maintaining strong asset quality. Moreover, the Bank believes it will benefit from ABCs stable financial performance in recent years. ABC has continuously maintained its position among the 10 largest private Philippine universal banks in terms of total assets, loan portfolio, deposits and net worth, according to data from the BSP. Synergies from its strong shareholder group As a member of the Tan Companies, the Bank believes that it will continue to benefit from being part of one of the largest and most diversified conglomerates in the Philippines, with interests ranging from beverages, airlines, tobacco, property development, education and others. The Bank believes that it has been able to achieve significant synergies with the Tan Companies, such as partnering with ABC (prior to its merger with the Company) and Philippine Airlines to introduce one of the most popular mileage rewards credit cards in the Philippine market, providing collection facilities through its nationwide branches for sellers of Philip Morris Fortune Tobacco Corporation, Inc.s products and for other Tan Companies and facilitating guarantees for ticketing agents of Philippine Airlines. 91

Credit ratings upgrade The Banks borrowing costs are affected directly by the Banks credit ratings. The Banks post-merger credit ratings by Moodys Investor Service as of September 2013 and Standard & Poors as of March 2013 are set forth below:
Moodys September 2013 Standard & Poors March 2013

Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stand-alone Credit Profile. . . . . . . . . . . . . . . . . . . . Long-Term Counterparty Credit . . . . . . . . . . . . . . Short-Term Counterparty Credit . . . . . . . . . . . . . . Local Currency Deposit Rating . . . . . . . . . . . . . . . Foreign Currency Deposit Rating . . . . . . . . . . . . . Banks Financial Strength Rating (BFSR) . . . . . . Baseline Credit Assessment (BCA). . . . . . . . . . . . Adjusted Baseline Credit Assessment. . . . . . . . . . SubordinateDomestic Currency. . . . . . . . . . . . .

Stable

Stable B+ B

Ba2 Ba2 E+ b1 b1 B2

A securities rating is not a recommendation to buy, sell or hold securities. A securities rating may be subject to withdrawal or revision at any time. Each rating should be evaluated separately of any other rating. Business Strategies The Bank aims to fortify its position as one of the leading banks in the Philippines, delivering high profitability supported by a solid balance sheet. To achieve this corporate goal, the Bank will undertake the following strategic initiatives as discussed in its Strategic Planning Workshop last March 2013. Improve revenue mix As part of the strategy to improve its profitability and at the same time minimize dependence on any specific revenue source, the Bank will take steps to modify its revenue mix towards a more stable stream of income. Along this line, the Bank will continue to determine the proper allocation of the use of funds between loans and investments to ensure a more stable level of accrued interest income and higher yields from loans versus the volatile movements in trading gains/losses from investment securities held for trading. Likewise, the Bank intends to further leverage on its strong franchise and increase fee-based income by intensifying its cross-selling efforts to its existing customers, including its OFWs customers. The Bank will also review its fee structure and align bank fees and service charges with market rates to remain competitive. With its bancassurance license from the BSP, the Bank plans to intensify its efforts in the marketing of bancassurance products. Shift loan portfolio mix in favor of SMEs and consumer segments The Banks lending strategy will entail a shift in marketing focus from large institutional accounts to SMEs and individuals. This shift in lending strategy by increasing the number of smaller accounts is intended to help the Bank in achieving higher lending margins as smaller accounts are less sensitive to changes in interest rates. The Bank intends to leverage on its extensive customer base of OFWs to expand its consumer lending business. The Banks consumer finance business will be transferred to the Banks subsidiary, Allied Savings Bank (to be renamed PNB Savings Bank) which will play a pivotal role in strengthening the banks foothold on the retail and consumer segment. Strengthen leadership in the global Filipino Market The Bank intends to further increase its share in the global Filipino market by going beyond merely providing them with remittance services to offering them a more diverse menu of financial services. The Bank will continue to enhance its products aimed at delivering optimum services, particularly by introducing electronic-remittance channels. In addition to its large global distribution network, the Bank will keep on partnering with companies that are considered leaders in their home markets to reinforce its overseas presence. The sustained focus on service quality, continued product innovation and marketing initiatives are expected to result in increased remittance volume and/or increased foreign currency business. 92

Rationalize cost of funds The Bank will leverage on the strength of its nationwide branch network to generate low-cost deposits from its existing and growing customer base. In support of the expansion in total assets, the Bank will also keep an acceptable level of high-cost deposits to complement the low-cost deposit base. Maximize synergies from the merger with ABC The merger brings together a combined complementary client base ranging from large corporations, local government units, government-owned and controlled corporations, OFWs, the Chinese-Filipino community to the provincial market. The merged bank will also be able to leverage and harness on the wide network of its major shareholder, LTG, the primary holding company belonging to one of the largest conglomerates in the Philippines. Together, PNB and Allied Bank will have a better platform to offer a wide range of personal and corporate banking services and products, and become a leading player in its chosen markets. The merger is expected to create substantial revenue and cost synergies. Revenues should be enhanced as a result of new customers, increased business from existing customers, low funding cost from improved risk profile and greater opportunities for cross-selling bancassurance, trust, credit card and other products to a larger customer base via a wider distribution network. In addition, the merger will result in cost efficiency improvements through branch re-engineering, economies of scale, systems integration, realignment of front offices and optimization of back office processing and support functions. Accelerate ROPA disposition Through its Special Asset Management Group (SAMG), the Bank will aggressively dispose of foreclosed assets as well as maximize recoveries from asset sales and income potential of acquired assets. Under the Banks three-year business plan, SAMG will focus its efforts on the following: (i) pursue implementation of development plans for selected ROPAS e.g., portfolio sale, joint-venture with developers, sale of small and medium ROPAs; (ii) collection of CARP accounts; (iii) strong marketing initiatives; (iv) efficient account management of SCR accounts; and (v) more effective and efficient lease management practices. Banking Activities The Banks banking activities are undertaken through different groups within the Bank, including the Institutional Banking, Retail Banking, Consumer Finance, Treasury, Global Filipino Banking and Trust Banking Group. Institutional Banking Group The Banks Institutional Banking Group (IBG) is responsible for credit relationships with large corporate, middle-market and SME customers as well as with Government and Government Owned & Controlled Corporation (GOCC) and financial institutions. The IBG is subdivided into five distinct business divisions, namely, the Corporate Banking Division (CBD), the Government Banking Division (GBD), the Commercial Banking Division (ComBD), the Financial Institutions Division (FID) and the Transaction Banking Division (TBD). Set out below is a summary of the IBG loans by type for the periods indicated.
As of December 31, 2010 2011 2012 (in Q millions) As of September 30, 2013

Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Government. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Metro Manila . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provincial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial Institution. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93

40,105 47,583 21,419 30,143 12,930 13,298 3,707 3,817 9,223 9,481 1,315 74,544 92,339

59,151 28,286 19,177 6,221 12,956 106,614

98,468 31,034 64,625 40,347 24,278 194,127

Corporate Banking Division The CBD provides a range of traditional corporate banking products and services to large corporates, including term loans, revolving credit lines, foreign currency loans and trade finance. Cash management solutions such as disbursement, collection and liquidity management facilities are also offered. Loans to large corporate customers (comprising the Philippines top 100 corporations by revenue according to Business World online magazine (the Top 100 Corporations) managed by CBD. The Bank also provides omnibus credit lines to top corporate customers, allowing the customer to draw on such credit lines in the form of short-term loans or to secure trade financing or other forms of credit. The CBD also offers a wide variety of trade finance-related products and services, including letters of credit, export advances, commercial and export bills discounting, documentary credits, negotiating bills under documentary credits and bills collection. With trade finance loans, the Bank is able to provide customers with working capital for trade finance with short-term maturities. Over the past four years, CBD played major roles in structuring complex transactions such as aircraft financing and project finance deals for power and infrastructure industries. Government Banking Division The GBD is responsible for providing loans, credit and other banking services to the National Government, NGAs, LGUs (comprising of cities, municipalities and provinces), water districts and electric cooperatives and GOCCs. This specialized group caters to the banking needs of the Government and Government-related entities, which continue to be a significant source of profitability and growth prospects for PNB. Government loans include loans to finance infrastructure projects as well as bridge-financing of certain operating expenditures. Commercial Banking Division Metro Manila Commercial Banking Division The Metro Manila Commercial Banking Division (MMCBD) offers a wide array of loan, trade, and other credit products and services mainly to small entrepreneurs and mid-sized businesses primarily based in Metro Manila. Provincial Commercial Banking Division The Provincial Commercial Banking Division (PCBD) provides a wide range of loan products and services to its large corporate customers, middle-market customers and small entrepreneurs that are located outside of Metro Manila. The products and services offered by the PCBD are similar to the MMCBD, with the main difference being in their geographical target markets, with the formers customers, in particular SMEs, located outside Metro Manila being the focus. In addition, the centers are the main platform for promoting and developing the Banks agricultural loan portfolio. Special loan packages such as the Sugar Crop Production Line and Sugar Quedan Financing Line facilities are actively marketed by the Bank in specific areas. These centers also provide a strong presence for the Bank in the palay/corn industry and are positioned to compete for a larger share in other agricultural and farming markets in the future due to the strategic location of provincial branches. Financial Institutions Division The Financial Institutions Division (FID) is responsible for the relationships with correspondent banks and non-bank financial institutions such as insurance companies, pre-need companies, government financial institutions, investment houses and asset management companies. There are five general functions and responsibilities of the FID, namely: handling the relationship with banks and non-bank financial institutions; setting-up of credit facilities for financial institutions; establishing remittance tie-up with local and foreign banks; marketing and cross-selling of various products and services of the Bank; and mobilizing the utilization of the rediscounting or specialized lending facilities of the BSP, Developmental Bank of the Philippines, Land Bank of the Philippines and other specialized lending institutions. 94

As of September 30, 2013, the Bank had 1,120 correspondent banks located in various regions, namely Asia, Australia, Europe, the Middle East, Africa, the USA, Canada and Latin America. These correspondent banks generally receive and process trade and payments for PNB in foreign jurisdictions, as well as handle OFW remittances for PNB. With these correspondent banks in place, the Bank is able to service customers in these regions more effectively. Transactional Banking Division The Transactional Banking Division (TBD) is responsible for the conceptualization, development and management of cash and trade products that will help the Banks corporate customers to effectively manage their day-to-day operations resulting to cost and time savings while optimizing resources. The TBD promotes the use of business solutions aimed at enhancing the customers management of its collection, liquidity and disbursement processes. The Banks product offerings have expanded its traditional over-the-counter channels to include electronic banking capabilities for payroll, tax payments, check issuance and funds transfer, among others. The TBD also provides marketing support to the corporate relationship managers and to the branch manager of the Retail Banking Group in cross-selling the Banks cash and trade services to their clients. Retail Banking Group The Retail Banking Group (RBG) principally focuses on retail deposit products (i.e., current accounts, savings accounts and time deposit and other accounts) and services. While the focal point is the generation of lower cost of funding for the Banks operations, the RBG also concentrates on the cross-selling of consumer finance products, trust products, fixed income products, credit cards and bancassurance products to existing customers and referred customers by transforming its domestic branch distribution channels into a sales-focused organization. The Banks bancassurance product, which provides it with additional fee income, is a BSPapproved service allowing banks such as the Bank to sell life and non-life insurance products to the banks client base and through their branch network. The Bank offers its non-life insurance and life-insurance products through its partners PNB General Insurers Co., Inc. (PNB Gen), a wholly-owned subsidiary, and PNB Life Insurance, Inc., respectively. Deposits The Bank offers a full range of deposit products, including current accounts (both interest-earning and noninterest bearing demand deposits), savings accounts and time deposits in Pesos, U.S. dollars and other foreign currencies. These are being provided to its customers which include individuals, private businesses, NGAs, LGUs and GOCCs. Of the former group, the Bank is targeting in particular the OFW and OFW beneficiaries deposit segment. To generate more deposits, the Bank continues to implement measures that will enhance existing products and services and optimize the use of latest technology to deliver more responsive banking services to its clients, reduce costs and improve productivity. Likewise, new products and promotions were introduced, such as a time deposit-backed credit card to keep customer deposits with the Bank for longer periods of time. As of December 31, 2012 and September 30, 2013, the Banks total deposit liabilities amounted to P240.9 billion and P454.0 billion, of which 79.7% and 92.3%, respectively, were denominated in Pesos, with the remainder denominated in foreign currencies, principally in U.S. dollars. The ratio of CASA to high cost deposit as of December 31, 2012 and as of September 30, 2013 was approximately at 168.7% and 175.8%, respectively. By sector, approximately 81.7% of the Banks total deposits were generated from the private sector, while the remaining 18.3% were accounted for by NGAs, LGUs, and GOCCs as of December 31, 2012. As of September 30, 2013, the private sector accounted for 93.1% of total deposits and the balance by the government sector. In terms of customer base, the Bank had approximately 4.0 million deposit accounts as of September 30, 2013. Branch Banking As of September 30, 2013, the Banks domestic branch network consisted of 656 branches and offices. Approximately 39.8% of the Banks branches and offices are located in Metro Manila while the rest are strategically located in other key cities or areas in the provincial areas. Such a distribution system allows the Bank to cover places which are not covered by its competitors, which also tend to be the places where many beneficiaries of OFWs reside, giving the Bank direct access to OFWs and their beneficiaries. 95

In 2011, the Bank was able to open 10 new branches. The Bank plans to open 5-10 new branches every year in periphery cities such as Taguig, Caloocan, Muntinlupa, Las Pias, Tagaytay and Calamba. In 2012, the Bank was able to open four new branches. Along with these branch openings, the Bank is also currently renovating existing branches to align with its re-branding efforts, with an estimated 100 branches expected to be renovated in the next two years. As of December 31, 2012, the Bank operated a network of 480 ATMs at its branch premises and off-site locations. The Bank installed 44 new ATMs in 2012. As of September 30, 2013, the Bank had 656 branches and offices and 854 ATMs. The following table sets out the Banks branches and ATM information in the Philippines:
As of December 31, 2010 2011 2012 As of September 30, 2013

Number of Branches Metro Manila . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rest of Luzon . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Visayas. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mindanao. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ATMs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

109 113 52 51 409 734

113 117 53 52 459 794

114 118 54 53 480 819

261 202 99 94 854 1,510

The Banks branch managers are responsible for the performance and profitability of their branches. The Bank regularly monitors the progress of each of its branches, and keeps the relevant branch manager informed of such progress via a monthly dashboard. Although the Bank annually plans to expand its branch network to locations not currently served by the Bank, such expansion is subject to prior approval of the Monetary Board. The Bank has also been rationalizing its branch network and adjusting the size of certain branches in order to maximize operating efficiency. The Bank is a member of Bancnet, the largest consortium of ATMs in the Philippines. Bancnet comprises 105 banks whose ATMs have been pooled for the common use of their respective customers. As of December 31, 2012, the Banks customers had access to approximately 8,178 ATMs through the Bancnet system. As a member bank of Bancnet, the Banks ATM cardholders have access to an additional 4,823 ATMs resulting from Bancnets inter-consortium agreement with Megalink and Expressnet. Security is an important consideration in the Philippine banking industry. All of the Banks branches employ time delay security devices and closed circuit televisions to prevent robberies. In addition, the Bank generally employs two security guards at each of its branches. These security services are provided by independent contractors to the Bank. The Bank has also established a 24-hour customer care center, which handles all inbound inquiries for deposit accounts, as well as ATM, remittance and e-banking services offered by the Bank. Consumer Finance Group The Banks consumer financing business is seen to be a major contributor to its revenue stream in the medium term. Strategic initiatives have been undertaken to put in place the proper infrastructure to support the Consumer Finance Groups (CFG) business growth. In 2012, the CFG continued to leverage on the strength of the Banks branch distribution network and depositor base to generate volume. As of December 31, 2012 and September 30, 2013, consumer loan levels were at P12.4 billion and P26.5 billion, respectively, accounting for 9.3% and 10.9% of the Banks receivables from customers.

96

Set out below is a summary of the Banks consumer loans by type for the periods indicated.
As of As of December 31, September 30, 2010 2011 2012 2013 (in Q millions)

Consumer Finance Loans by Type(1) Housing Loan(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Credit Card. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Motor Vehicle Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Multi-Purpose Personal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Notes: (1) Based on RFP submitted to BSP (2) Excludes contract-to-sell accounts

3,792 5,741 486 333 1,322 1,678 334 1,068 5,934 8,820

8,661 287 2,406 1,062 12,416

11,932 4,098 3,548 6,967 26,545

The Banks strategic initiatives for the CFG in 2012 focused on heavy cross-selling at branch level, harnessing business opportunities from its corporate relationships, introduction of new product variants and continuous improvements in process and policies to improve turnaround time and manage inherent portfolio risks. As of September 30, 2013, turnaround time for the processing and approval of housing loans was approximately two weeks and eight hours for auto loans. Set out below are the various types of loans for the Banks consumer loan portfolio. Home Mortgage Loans Home Mortgage Loan is extended to both property buyers and owners in the Philippines who intend to have their acquisition or construction of residential homes financed by the bank or mortgage their property to generate funds for personal investment. Interest rates are set at fixed rates for the loan term chosen. At present, the Bank offers competitively priced one-year, five-year and ten-year rate-fixing for home mortgages. The Bank even offers an Own a Philippine Home Loan program for immigrants or non-Filipino Citizens who wish to buy a property in the country. All of the Banks home mortgage loans are secured by a first legal charge on the property. In addition, the Bank generally requires residential mortgage borrowers to have an equity interest of at least 20% of the value of the property. Interest rates on the Banks home mortgage loans range from 5.25% to 11.0%. In accordance with industry practice in the Philippines, interest rates on the Banks home mortgage loan portfolio are set at a fixed rate applicable for an initial period of between one and 15 years, depending on the maturity of the loan. Following the expiry of this initial period, the interest rate is reset at a fixed rate applicable for succeeding periods. When a borrower falls into arrears with its mortgage payments, it can either agree to a voluntary disposal of the property to the Bank or the Bank may commence foreclosure proceedings. Foreclosure of the property commences when the account becomes 180 days past due. Once the mortgaged collateral is foreclosed, the Bank classifies such collateral as ROPA. However, the mortgagor continues to have the right to redeem such collateral within a year from the date of foreclosure in return for payment of principal and interest owed plus the Banks out-of-pocket expenses. Sale of the foreclosed collateral is generally sold through public auctions. For the years ended December 31, 2010, 2011 and 2012 and the nine months ended September 30, 2013, the Bank has sold P3.0 billion, P3.0 billion, P1.2 billion and P0.8 billion, respectively, worth (by net book value) of investment properties. Efforts to diversify methods for the disposal of investment properties have been actively pursued by the Bank and include public auctions, sales conducted through brokers and pursuant to employee referrals, as well as going into joint venture projects with property developers. In addition to lending to individuals for home purchases, the Bank also purchases contracts to sell (CTS) from established developers. CTS involves a buyer obtaining in-house financing from a developer for a purchase whereby the developer will retain title to the property until full payment of the loan. During this period, if the buyer defaults on the payment of the monthly installments due, the developer, if under a recourse arrangement, pays for the installment or total outstanding amount due. The Bank also has the right to cancel the contract and acquire ownership of the property. The Bank buys CTS on both with recourse and non-recourse basis. For the nine months ended September 30, 2013, CTS constituted 11.4% of the Banks real estate loans. 97

The home mortgage loan portfolio stood at P5.7 billion and P8.7 billion as of December 31, 2011 and 2012, respectively, accounting for 65.1% and 69.8% of the Banks total consumer loans portfolio. As of September 30, 2013, home mortgage loan portfolio was P11.9 billion and accounted for 45.0% of the total consumer loan portfolio. Credit Cards In 2009, the Bank launched its PNB Essentials MasterCard and PNB Platinum MasterCard credit cards under a co-brand arrangement with ABC. This arrangement was initiated in preparation for the winding down of PNBs PNB Visa credit card, a previous arrangement with Equitable Card Network. The arrangement with ABC was also established for merger of the Bank and ABC, and the Banks planned use of ABCs credit card system after completion of the merger. In 2010, the Bank introduced its Mabuhay Miles Platinum MasterCard and Mabuhay Miles World MasterCard, which are part of a credit card program developed in coordination with Mabuhay Miles, the frequent flyer program of Philippine Airlines. These cards offer a point-to-mile rate of P33 per mile, a high rate of acceptance worldwide and dual currency flexibility options. The Banks cardholder base for its Mabuhay Miles Platinum MasterCard and Mabuhay Miles World MasterCard exceeded 20,000 within the first year of launch of these cards. In 2011, the Bank introduced its new PNB Visa Credit Card line, replacing a previous PNB Visa line it had offered in partnership with Equitable Card Network. The new PNB Visa Credit Card line includes classic and gold variants and is catered to meet the credit needs of a broad market of customers. The Bank also tied up with four prestigious school organizations in 2011 for the issuance of the Allied Bank-AAXS (Alumni Association for Xavier Schools), Allied Bank-ICAAA (Immaculate Conception Academy Alumni Association), Allied Bank-UERM-CMAA (UERM-College of Medicine Alumni Association) and Allied Bank-DLSZAA (De La Salle Zobel Alumni Association). 2011 also produced the Jaguar and Land Rover MasterCards, catering to the high-end market. These co-brand cards cater to each organizations unique needs and passion. They also offer the same exciting and rewarding features as the core Allied Bank Credit Card like conversion of points to miles or cash rebates, installment payment, and others. The Bank also tied up with Super 8 Grocery Warehouse to tap the affordable consumer market. Under this card, Allied Bank-Super 8 cardholders are given a 2.0% rebate for transactions made at Super 8 stores. The Travel Club Platinum MasterCard was launched in June 2012, and is a co-brand tie-up with the Primer Group of Companies. The card offers 5% discount in all The Travel Club stores, 20% discount on all regularpriced The Travel Club house brands on the cardholders birthday month, 1% rebate on The Travel Club installment transactions, rewards points which can be used as cash rebate or converted to Mabuhay Miles and a waived annual fee for life. In 2013, the Bank re-launched the core Essentials and Platinum MasterCard to represent a bigger and better merged bank, offering bigger and better rewards to its cardholders. A partnership with Jewelmer Joaillerie launched the Jewelmer Joaillerie Platinum MasterCard, the first jewelry co-brand credit card in the country. Among the exclusive features of the card are a 20% discount on Jewelmer Joaillerie stores on the cardholders birthday month, loyalty gifts from Jewelmer Joaillerie, rewards points may be exchanged for airline miles, rebates from various outlets and Jewelmer Joaillerie gift vouchers. As of September 30, 2013, total credit card portfolio reached P4.1 billion and accounted for 15.4% of the consumer loans of the bank. This was primarily due to the merger with Allied Bank. Motor Vehicle Loans The Bank offers Sure Wheels Auto Loans which provide consumers with an easy way to acquire the vehicles of their choice. Sure Wheels Auto Loan finances as much as 80.0% of the purchase price of brand new vehicles. Its competitive rates and flexible payment terms translate to affordable monthly amortizations for the borrowers. Depending on the vehicle financed, payment terms can be from 12 to 60 months. New and second hand sedans, sport utility vehicles, action utility vehicles or light commercial vehicles are eligible for financing. As of December 31, 2011 and 2012, the auto loan portfolio has reached P1.6 billion and P2.3 billion, respectively, accounting for 24.0% and 22.5%, respectively, of the Banks total consumer loans portfolio. As of September 30, 2013, motor vehicle loan portfolio stood at P3.5 billion representing 13.4% of the total consumer loan portfolio. 98

Multi-Purpose Personal Loans Personal and salary loans are made available to permanent officers and employees of private companies and government agencies. This is availed of either over-the-counter where the client applies on his own or coursed through the company where they are employed provided that the company is accredited under the program. The accreditation process defines the repayment of loan to be made via salary deduction. As of December 31, 2011 and 2012, the Banks total personal loan portfolio stood at P1.1 billion. As of September 30, 2013, it reached P7.0 billion and accounted for 26.2% of the total consumer loan portfolio. The Bank sees the growth of this portfolio to come from salary-deduction type arrangements from existing and new corporate relationships as well as expanding the distribution to cover OFWs and other Filipinos overseas. Treasury Group The Treasury Group primarily manages the liquidity and regulatory reserves of the Bank and risk positions on interest rates and foreign exchange borne out from the daily inherent operations in deposit taking and lending and from proprietary trading. This includes an oversight on risk positions of its foreign branches and subsidiaries. The Banks Treasury Group is divided into five divisions: The Liquidity Management Division (LMD) is responsible for managing the overall liquidity of the Banks Regular Banking Unit (RBU) and Foreign Currency Deposit Unit (FCDU) books. It ensures that the requirements of all units of the Bank are efficiently served in terms of deposit withdrawals, loan drawdowns, remittances, and other related activities. This includes management and strict compliance to the required regulatory reserves on deposits by the BSP. The Banks overall asset/liability mix is also managed by this group. The Trading Division is composed of the following: 1) International Markets trading department which is responsible for the management of the foreign currency denominated trading and investment assets of the bank which are 99.9% denominated in US Dollar; 2) Domestic Markets trading department which manages the local currency fixed income securities trading and investment assets; 3) Equities Trading department which manages the equities trading books; and, 4) the Foreign Exchange trading department which manages the proprietary trading in foreign currencies, substantially in the USD/P spot market. These trading departments also oversee the management of the fixed income securities and foreign exchange risk positions of the local and overseas branches of the Bank. The Treasury Marketing Division (TMD) distributes and makes markets on treasury products of the Bank to its client investor base. TMD mainly distributes: 1) P and USD denominated fixed income securities issued by the Republic of the Philippines and Philippine registered fixed income securities, 2) Spot and Forward foreign currency contracts, and 3) Long-term debt papers issued by the Bank, local financial institutions and Corporates. Further, TMD is responsible in generating relatively high-cost deposits or bought-money for the Banks temporary liquidity requirements of the Bank. And the main driver in the distribution of the. TMD distributes: 1) directly to institutional, commercial and high networth individuals, and, 2) indirectly, through the branches of the Bank located nationwide. The Branches are being developed as a strong marketing arm for the distribution of treasury related products. Corporate Foreign Exchange Division (CFED) specifically caters to the needs of the medium to large corporate accounts of the Bank. These are mainly Spot and Forward foreign exchange contracts. CFED also enters into P Interest Rate Swaps (IRS) and USD/P Cross Currency Swaps (CCS) with, within the BSP rules on sale of derivative products to clients, qualified corporate accounts for hedge requirements of their targeted market. Product Engineering Division (PED) is in its infancy stage. The PED will be involved in securing the derivatives license of the Bank from the BSP, look into yield enhancement products for the investment portfolio of the Bank, and product development. Global Filipino Banking Group As of September 30, 2013, the Bank has the largest overseas network among Philippine banks with 81 branches, representative offices, remittance centers and subsidiaries in the United States, Canada, Europe, the Middle East and Asia. The Bank also maintains correspondent relationships with 1,120 banks and financial institutions worldwide. The Bank is one of the leading providers of OFW remittance services in the market. The Bank derives income from OFW remittances principally through fees and foreign exchange margin. Its remittance business continued its growth with 21% market share as of September 30, 2013. 99

The Bank already offers several modes of remittance, namely, on-line credit to accounts, Door-to-Door Delivery, Credit to other Banks and Cash Pick-up, and plans to continue expanding the range of its OFW services. Its newest range of services catering to OFWs and Filipinos abroad includes: Phone Remita service allowing the Bank remitters to send money to their beneficiaries in the Philippines with the use of a phone. Remitters simply call the assigned Phone Remit number and give the remittance instructions debit their overseas accounts or debit/credit cards issued overseas as a source of the funds for the remittance. This service is currently available in Europe and the United States. Web Remita service allowing customers to send remittances via the PNB Web Remit site. This service is available in Europe and will soon be offered in the United States, Canada and Singapore. Super Remit Cardis a remittance card that allows PNB Hong Kong customers to send money to beneficiaries in the Philippines through the Banks partner merchant outlets, namely Seven Eleven convenience stores. Remitters/cardholders simply present their card in any of the said outlets and tenders the money to be remitted to the cashier, and the beneficiarys PNB account will be credited within 24 to 48 hours. Overseas Bills Paymenta service that allows payment of overseas remitters to various institutions in the Philippines for the settlement of financial obligations in the form of membership contribution, loan amortization, and insurance premium, among others. Participating billers include SSS, Pag-ibig, various real estate companies, insurance companies, schools, retail stores, to name a few. Food Remittancea service which allows overseas remitters to order food packages for delivery to or pick-up by their beneficiaries in the Philippines. Other Services Text Alertfor every remittance sent by the remitter, his/her beneficiary is sent a text alert on the details of the transaction and how/where the money can be claimed. Remittance Trackerremitters can track remittances online. They will know the status, if the money has been credited, delivered or picked up by beneficiaries. Recent initiatives undertaken by the Bank and its overseas branches include: Introduction of a 24x7 Remittance Helpdesk which can immediately respond to customer inquiries via phone or email at all hours and all days of the week. The Bank likewise intends to expand its international presence through the passporting license of PNB Europe Plc in the EU states and by establishing tie-ups in the Middle East and North America. Aside from its own offices and correspondent bank associations, the Bank has a number of remittance arrangements and tie-ups with banks and money transfer companies in regions with high concentrations of OFWs. The Bank has long been a partner of Arab National Bank. The Bank also partnered with Xoom, Western Union and Al Raji Bank in 2008, 2010 and 2011, respectively. As of September 30, 2013, the Bank had a total of 238 overseas agents and tie-up partners. The following table sets out the total volume and value of remittances made by the Banks overseas operations in the periods indicated:
As of December 31, As of September 30, 2010 2011 2012 2013 (in U.S.$ millions)

Foreign offices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Correspondent banks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other financial institutions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2,148.3 516.2 361.1 3,025.7

2,008.6 589.1 1,109.6 3,707.3

1,937.0 659.2 1,544.8 4,141.0

1,726.5 818.0 1,218.0 3,762.6

In addition to providing remittance services, the Bank also offers a number of lending facilities geared specifically for overseas Filipinos and OFWs: PNB Pangarap Loan is an all-purpose credit facility available to OFWs in Hong Kong, Singapore; Own-a-Philippine-Home Loan is a loan extended to OFWs for the acquisition of real estate properties in the Philippines and is offered at the Banks overseas branches. 100

Trust Banking Group The Bank provides a wide range of personal and corporate trust and fiduciary banking services and products. Personal trust products and services for customers include living trust accounts, educational trust, estate planning, guardianship, insurance trust, and investment management. Corporate trust services and products include trusteeship, securitization, investment portfolio management, administration of employee benefits, pension and retirement plans, and trust indenture services for local corporations. Trust agency services include acting as bond registrar, collecting and paying agent, loan facility agent, escrow agent, share transfer agent, and receiving bank. In accordance with regulations governing the conduct of trust business by banks, the Trust Banking Group reports directly to the Banks Trust Committee which is composed of five directors, including the President and the head of the Trust Banking Group. The Trust Committee is, in turn, responsible to the Banks Board of Directors. All investment decisions of the Trust Banking Group must be approved and authorized by the Trust Committee. The Trust Banking Group manages thirteen Unit Investment Trust Funds (UITFs) (including U.S. dollardenominated funds). These UITFs, which are centrally managed but marketed through the Banks branches, invest in a diversified portfolio, composed primarily of fixed-income securities for money market and bond funds. Four out of thirteen funds are invested in stocks listed in the PSEi. As of September 30, 2013, the Trust Banking Group managed P77.4 billion of funds. Revenue from the trust business is generated through trust fees from the management of UITFs and corporate and personal trust products and services, as well as from other agency services. The Banks Trust Banking Group intends to enhance its high net worth client base with an end-to-end wealth management suite of services, beginning from fund management, tax planning, retirement planning, to comprehensive estate planning services. Its Trust Banking Group also intends to build its corporate trust market base through the customizable PNB Employee Enrichment Solutions program that features a built-in corporate social responsibility module. Likewise, its Trust Banking Group shall continue to offer broad-range and highly diversified investment outlets. Credit approvals Credit policies One of the basic credit risk management infrastructures of the Bank is the adoption of effective credit policies to govern its various lending operations. These policies are directed towards the following institutional objectives: (i) to maintain a sound and prudent lending portfolio; (ii) to be responsive to market changes; (iii) to maintain the liquidity of its risk asset portfolio; and (iv) to attain profitability commensurate to risks taken. All credit policies adopted by the Bank are approved by the Banks Board of Directors and any amendments or revisions require prior approval of the Board unless expressly delegated to the President and other committees. These policies reflect the Banks credit risk tolerance which are communicated constantly to all lending units and support offices. Limits are imposed to manage credit concentration risks and provide more control of the Banks lending operations. The Bank has also put in place pro-active monitoring systems to ensure compliance with statutory and internal limits. Escalations of any deviations to credit policies are immediately undertaken for appropriate action. Credit approval process Loan recommendations are submitted to the different levels of credit committees or to designated approving officers within the Bank. The aggregate amount of the credit facility, generally, will determine the approving body which will approve the transaction. However, loan recommendations requiring Executive Committee and Board approval needs the endorsement of the Senior Management Credit Committee (SMCC). Before the Bank approves any extension of credit, the Bank identifies the needs of the prospective borrower, analyzes the appropriateness of the exposure and evaluates any inherent risks. The Bank assigns an account officer to every prospective borrower to start the credit approval process. The account officer identifies the borrowing requirements of the client and obtains the loan application form from client together with the required 101

documents. The account officer further determines if exposure can be covered by collateral. In cases where a property appraisal is warranted, this is undertaken by the Banks appraisal unit or by an external appraiser. The account officer conducts credit evaluation on the prospective borrower with the assistance of the credit support units. For borrowers from the middle-market segments, the account officer will validate the borrowers financial position from different information sources. For transactional lending, the account officer may focus more on the size and quality of cash flows from the transaction, but also continues to consider the financial position of the borrower itself. Lending centers credit committees have authority to approve secured credits of not more than P5.0 million. Requests for secured credit accommodations up to P10.0 million are approved by the Institutional Banking Group Credit Committee while those up to P50.0 million are for approval of the SMCC. In the case of unsecured credits, the lending centers credit committees and the Institutional Banking Group Credit Committee have authority to approve up to P2.0 million and P5.0 million, respectively, provided the conditions for lower committee approvals are met. Approval of the SMCC is required for unsecured credit accommodations up to P10.0 million and trade transactions up to P50.0 million. Any request for approval of an extension of credit in excess of P50.0 million for unsecured loans, over P10.0 million sublimit for unsecured loans and over P50.0 million for trade transactions must be submitted by the Banks Executive Committee (Excom) for approval. Specific transactions which are beyond the authority of the Excom shall require Board approval. The decision on whether or not to extend the credit is determined by a combination of internal policies and guidelines and the regulatory policies of the BSP. The internal credit policies are continuously reviewed and updated by the Credit Policies Division. Except as may be otherwise approved by the BSP (as required under the General Banking Law of the Philippines), the Bank generally cannot grant to a single borrower a loan equivalent to more than 25.0% of the Banks net worth. This can be increased by 10.0% provided these are secured by trust receipts, shipping documents or other documents transferring title to readily marketable non-perishable goods covered by insurance. In determining whether the Bank meets the single borrowers limit of the BSP, the Bank includes exposure to related accounts (i.e. exposure to subsidiaries and parent companies of the borrower including guarantees by the borrower or its related companies or its principal officers) but excludes, amongst others, loans and other credit accommodations guaranteed by the BSP or the Philippine Government and Government corporations, loans secured by hold-outs/margin deposits maintained in the Bank and other loans and credit accommodation classified as non-risk by the Monetary Board. Additionally, exposure to specific sectors of the economy is subject to internally approved limits or ceilings which are regularly monitored. There are however certain sectors which are already subject to specific predetermined lending requirements as imposed by law on all banks, specifically in the area of lending to small and medium scale industries, to the agricultural/agrarian sector and to the real estate industry. The Bank also follows guidelines of the BSP in the grant of loans to its directors, officers, stockholders and other related interests (i.e. certain relatives, affiliates, subsidiaries and parent companies thereof). Grants of these facilities require the approval of the Banks Board of Directors and compliance with individual and aggregate ceilings as well as the BSP reporting requirements. For control purposes, implementation of credit approvals is subject to review at least once a year by the Internal Audit Group. This audit is designed to determine the efficiency of the internal control system in place as well as the quality of lending operations. Additionally, the Board Audit and Compliance Committee monitors the past due level and status of past due accounts. Risk Management Group also does this via the Credit Dashboard reported to the Risk Oversight Committee. In compliance with BSP requirements, the Bank has an Internal Credit Risk Rating System (ICRRS) for corporate accounts and credit scoring for consumer and small loans to standardize the assessment of its credit portfolio in terms of risk profile. The ICRRS grades new and existing corporate loan borrowers with total assets of more than P15.0 million, regardless of the total credit facilities. Existing or prospective loan borrowers with asset size of P15.0 million and below are rated using the respective credit scoring system for small and medium enterprises as well as consumer loan borrowers. Credit monitoring and review process Pursuant to the BSPs Manual of Regulations for Banks (the Manual), the Bank is required to establish a system of identifying and monitoring existing or potential problem loans and other risk assets and of evaluating 102

credit policies with regard to prevailing circumstances and emerging portfolio trends. In compliance with this requirement, the Bank has established credit support units under its credit risk management group to review and monitor individual accounts within a particular portfolio to identify existing and potential areas of deterioration and assess the risks involved. In addition, the credit support units evaluate the degree to which a particular lending unit is complying with existing credit management policies. The evaluation of the individual loan accounts culminates in the classification of the account. The classification indicates the degree or gravity of the perceived problems of the account reviewed. The reviewed loan accounts are classified in accordance with the standard classifications set forth in the Manual. The review and recommended classification of a loan account are initiated by the assigned account officer and approved by the Group Head or the Chief Credit Officer for loans of P10.0 million or joint approval of the Group Head and the Chief Credit Officer for loans over P10.0 million. DOSRI The Bank and its subsidiaries will, from time to time and in the ordinary course of business, enter into loans with directors, officers, shareholders and/or related interests (DOSRI). All such loans are on commercial, arms-length terms. The General Banking Law and BSP regulations require that the aggregate amount of such DOSRI loans should generally not exceed 100.0% of the Banks net worth or 15.0% of the Banks total loan portfolio, whichever is lower. The amount of any loan to a DOSRI of the Bank, of which 70.0% must be secured, may not exceed the aggregate amount of their unencumbered deposits with the Bank and the book value of their paid-in capital investments in the Bank. The Bank is required to report the level of DOSRI loans to the BSP on a weekly basis. The Bank is required to submit to BSP a copy of the approval within 20 days from the date of approval. DOSRI loans accounted for P2.7 billion, or 2.0% of the Banks total receivables from customers as of December 31, 2012. As of September 30, 2013 DOSRI loans accounted for P4.3 billion, or 1.8% of the Banks receivables from customers. Treasury Group The Treasury Group is principally responsible for managing the Banks funding and liquidity requirements as well as its investment and trading portfolio. The Group engages in interbank borrowing and lending activities, fixed income securities trading, foreign exchange spot and swap dealing, overseeing the Banks long-term funding requirements and enters into derivative transactions for hedging purposes. Subsidiaries Universal banks in the Philippines, such as the Bank, may invest in the equity of banking-related companies or allied undertakings. Financial allied undertakings include leasing companies, banks, and investment houses, financing companies, credit card operations and financial institutions catering to small and medium-scale businesses. Publicly listed universal banks may acquire up to 100.0% of the voting stock of one other commercial or universal bank, up to 100.0% of the voting stock of thrift banks and rural banks, up to 100.0% of other financial allied undertakings and up to 100.0% of non-financial undertakings. Prior Monetary Board approval is required for investments in financial allied undertakings and investments of more than 40.0% in non-financial undertakings. The Banks subsidiaries include the following: Domestic subsidiaries PNB Capital and Investment Corporation (PNB Cap), an investment house with a non-bank, nonquasi-banking license, was incorporated on July 30, 1997 and commenced operations on October 8, 1997. It is a wholly-owned subsidiary of the Bank. As of December 31, 2012, it had an authorized and paid-up capital of P350.0 million or 3,500,000 shares at P100.0 par value. Its principal business is providing investment banking services, namely: debt underwriting (bonds, commercial papers), equity underwriting, private placements, loan syndications and financial advisory services. PNB Capital is authorized to buy and sell for its own account, securities issued by private corporations and the government of the Philippines. As of December 31, 2012 and September 30, 2013, total assets of PNB Capital were P584.8 103

million and P533.8 million, respectively, while total capital was P436.0 million and P520.2 million, respectively. For the year ended December 31, 2012 and the nine months ended September 30, 2013, net income was P35.8 million and P88.5 million, respectively. PNB Holdings Corporation (PHC), a wholly-owned subsidiary of the Bank, was established on May 20, 1920 as Philippine Exchange Co., Inc. The PSEC approved the extension of the corporate life of PNB Holdings for another fifty (50) years effective May 20, 1970. In 1991, it was converted into a holding company and was used as a vehicle for the Bank to go into the insurance business. As of December 31, 2012, PHC had an authorized capital of P500.0 million or 5,000,000 shares at P100 par value per share. As of September 30, 2013, total paid-up capital of PHC was P255.1 million while additional paid-in capital was P3.6 million, while total assets and total capital were P337.9 million and P335.2 million, respectively, and net income was P1.8 million (determined on a parent only basis) for the nine months ended September 30, 2013. PNB General Insurers Co., Inc. (PNB Gen), a wholly-owned subsidiary of PNB Holdings Corporation was established in 1991. It is a non-life insurance company that offers fire and allied perils, marine, motor car, aviation, surety, casualty, engineering, accident insurance and other specialized lines. As of September 30, 2013, total assets and total capital of PNB Gen was at P5.6 billion and P1.5 billion, respectively. As of the same period, its net income stood at P147.5 million. PNB Securities, Inc. (PNBSI), a wholly-owned subsidiary of the Bank, was incorporated on January 18, 1991 with an authorized capital of P200.0 million or 2,000,000 shares at P100 par value per share. As of December 31, 2012, total paid-up capital was at P100.0 million. PNBSI is engaged in the stockbrokerage business that deals in the trading of shares of stocks listed at the stock exchange. As of September 30, 2013, total assets and total capital were P260.6 million and P228.1 million, respectively. Net income for the nine months ended September 30, 2013 was P23.0 million. Japan-PNB Leasing and Finance Corporation (JPNB Leasing) was formerly PF Leasing and Finance Corporation (PF Leasing) and was incorporated in April 24, 1996 under the auspices of the Provident Fund of the Bank. PF Leasing was largely inactive until it was used as the vehicle for the joint venture between the Bank (60.0%), IBJ Leasing Co. Ltd., Tokyo (20.0%), Industrial Bank of Japan, now called Mizuho Corporate Bank (5.0%) and Mitsubishi Trust Banking Corporation (15.0%). The corporate name was changed to Japan-PNB Leasing and Finance Corporation and the joint venture company commenced operations as such in February 1998. In 2001, IBJ Leasing Co., increased its stake to 35% as it acquired the 15.0% share of Mitsubishi Trust Banking Corporation. The Bank and Mizuho Corporate Bank, Ltd. maintained their shares at 60% and 5%, respectively. Its major activities are financial leasing, chattel mortgage loans and installment note discounting. All the leasing and lending activities of the company are in the domestic market. Effective January 31, 2011, the Bank increased its equity interest in JPNB Leasing from 60.0% to 90.0%. The Banks additional holdings were acquired from minority partners, IBJ Leasing Co., Ltd. (IBJL) and Mizuho Corporate Bank which divested their 25.0% and 5.0% equity interest, respectively. IBJL remains an active joint venture partner with a 10.0% equity interest. As of December 31, 2012, J-PNB Leasing had an authorized capital of P150.0 million, represented by 1,500,000 shares with a par value of P100 per share, which are fully subscribed and paid up. As of September 30, 2013, J-PNBs total assets and total equity stood at P3.7 billion and P562.1 million, respectively. Its net income for the nine months ended September 30, 2013 was P73.8 million. PNB Forex, Inc. (PFI), a wholly-owned subsidiary of the Bank which was incorporated on October 13, 1994 as a trading company, engaged in the buying and selling of foreign currencies in the spot market for its own account and on behalf of others. The company temporarily ceased operations on 1 January 2006. As of September 30, 2013, total assets and total capital of PFI were P91.7 million and P91.5 million, respectively. For the nine months ended September 30, 2013, net income was P2.8 million. PNB Life Insurance, Inc. (PNB Life), a majority owned (80%) domestic subsidiary of the Philippine National Bank. PNB Life traces its roots from New York Life Insurance Philippines, Inc. (NYLIP) as a Philippine subsidiary of US-based New York Life International, LLC and commenced operation in August 2001. In 2003, Allied Banking Corporation took minority interest in NYLIP opening bancassurance to the banks branches nationwide. In 2007, New York Life International, LLC divested its interest in NYLIP in favor of Allied Bank and its principals making the company a majority-owned subsidiary of Allied Bank.

104

In May 2008, the company changed its corporate name to PNB Life Insurance, Inc. reflecting the change in ownership and in expectation of the impending merger of ABC and the Bank, signifying the companys deeper appreciation of the Philippine market and the dynamism of the Filipino consumer. In October 2009, the Philippine National Bank has acquired a minority stake in PNB Life paving the way for the expansion of its bancassurance market. In 2011, the company strengthens its presence in Luzon with the opening of two regional business centers in Pampanga and La Union to serve as business hubs for Central and North Luzon, respectively; It also launched Asian Summit, its first capital guaranteed unit-linked product which resulted in historic premiums and hit the billion mark. In 2012, it opened the Zamboanga Regional Business Center to serve as business hub in the Zamboanga Peninsula region. As a 100% Filipino owned and managed company, PNB Life is now even more dedicated to strengthen and broaden its role in the financial services market. Today, PNB Life offers innovative financial solutions through a variety of platforms through its bancassurance with Allied Bank and Philippine National Bank, and alternative distribution channels. Ranked among the top life insurance companies in the country in terms of premium income and a leading provider of variable life products, PNB Life remains steadfast in Providing New Beginnings in your Life and aims to be the Dominant Provider of Financial Security to Filipinos Worldwide. Allied Savings Bank, formerly First Malayan Development Bank, is a thrift bank registered as a domestic corporation with the PSEC and a wholly-owned subsidiary of the Bank. It was renamed First Allied Development Bank but after obtaining the license to operate as a savings bank in 1996, it was renamed to First Allied Savings Bank and again to Allied Savings Bank in 1998. Allied Savings Bank is authorized by the BSP to engage in thrift banking business by offering deposit products, loans and trade finance. On January 6, 1996, Allied Savings Bank was granted a foreign currency deposit license by the Monetary Board of the BSP. In addition to its head office at the Allied Bank Center in Makati City, as of December 31, 2012, Allied Savings Bank had 27 branches in Metro Manila and in the Southern Tagalog, Northern Tagalog and Bicol regions, as well as in Western Visayas and Northern Mindanao. As of December 31, 2012, it had an authorized and paid-up capital of P500.0 million. As of December 31, 2012 and September 30, 2013, total assets of Allied Savings Bank were P4.2 billion and P10.7 billion, respectively, while total capital was P978.6 million and P1.0 billion, respectively. For the periods ended December 31, 2012 and September 30, 2013, its net income was P3.9 million and P20.6 million, respectively. Allied Leasing and Finance Corporation (ALFC), is a corporation registered with the PSEC in 1978 and operates as a leasing and financing entity under Republic Act No. 8556, otherwise known as the Financing Company Act of 1998. It operates a single unit with office address at the 5th Floor, Allied Bank Center, Ayala Avenue, Makati City. It caters financing and leasing needs on various types of equipment, machineries and vehicles, receivables, financing and direct loans. As of September 30, 2013, ALFC had an authorized capital stock of P500.0 million of which P152.5 million has been subscribed and fully paid-up. The Bank owned 57.21% out of the subscribed and paid-up capital. Foreign branches and subsidiaries To expand its international footprint and gain access to more Filipino customers worldwide, the Bank has established a number of branches, remittance offices and other business presences in various foreign jurisdictions. As of September 30, 2013, the Bank had more than 81 business presences in 16 jurisdictions. Its foreign subsidiaries include the following: PNB International Investment Corporation (PNB IIC), formerly Century Bank Holding Corporation, a wholly-owned subsidiary of the Bank, is a U.S. non-bank holding company incorporated in California on December 21, 1979. It changed its name to PNB International Investment Corporation on December 1, 1999. PNB IIC owns PNB Remittance Center, Inc. (PNB RCI) which was incorporated in California on October 19, 1990. PNB RCI is a company engaged in the business of transmitting money to the Philippines. As of September 30, 2013, PNB RCI has 20 branches in 7 states of the United States of America. PNB RCI owns PNB RCI Holding Company, Ltd. which was incorporated in California on August 18, 1999 and PNB Remittance Company, Nevada (PNBRCN) which was incorporated in Nevada on June 12, 2009. PNBRCN is engaged in the business of transmitting money to the Philippines. PNB RCI Holding Company, Ltd. is the holding company for PNB Remittance Company Canada (PNB RCC). PNB RCC is also a money transfer company incorporated in Canada on April 26, 2000. PNB RCC has 8 branches in Canada as of September 30, 2013. 105

PNB RCI is regulated by the U.S. Internal Revenue Service and the Department of Financial Institutions of the State of California and other state regulators of financial institutions while PNBRCN is regulated by the Nevada Department of Business and IndustryDivision of Financial Institutions. PNB RCC is regulated by the Office of the Superintendent of Financial Institutions of Canada and Financial Transactions and Reports Analysis Centre of Canada. PNB IIC does not actively compete for business, being a holding company only. PNB RCI, PNBRCN and PNB RCC have numerous competitors from local U.S. banks, the Bank affiliates doing business in North America, as well as other money transfer companies like Western Union, Money Gram, Lucky Money and LBC. PNB Global Remittance & Financial Company (HK) Limited (PNB Global), a wholly-owned subsidiary of the Bank, is registered with the Registrar of Companies in Hong Kong. On July 1, 2010, PNB Global took over the remittance business of PNB Remittance Center Limited with the former as the surviving entity. PNB Global operates as a money lender and a remittance company. As of September 30, 2013, it maintains 7 branches in Hong Kong inclusive of its main branch in Wan Chai District. PNB Global is regulated by Customs and Excise Department. PNB Globals major competitors are the remittance subsidiaries of Metrobank, BDO, RCBC, BPI and DBP and non-bank competitors such as Frankie Money Exchange, Czarina, Kabayan, I-Remit, LBC. Effective August 2012, PNB Global has launched its tie-up arrangement with Western Union strengthening its cash pick up services throughout the Philippines. It has likewise, tied up during the same period with EPS Company (EPSCO) enabling the company to receive remittances via Circle K, Vango and Vanguard stores throughout Hong Kong with combined outlets of approximately 600. PNB (Europe) PLC (PNBE) was originally set up as a PNB London Branch in 1976. In 1997, it was converted into PNB Europe Plc, a wholly-owned subsidiary of the Bank, incorporated in the United Kingdom with a full banking license. It is also authorized to provide cross-border services to 18 member states of the European Economic Area (EEA). In 2007, PNBE opened its branch in Paris, France which is engaged in remittance services. PNB Europe Plc is regulated by the Prudential Regulation Authority and Financial Conduct Authority of the Bank of England while its Paris branch is governed by the Banque de France. The major competitors of PNB Europe Plc are Metro Remittance UK Ltd., Bank of the Philippine Islands (Europe) Plc, I Remit, ABS CBN, Philrem, CBN, Gem and Sunrise. Competitors in Paris consist of CBN, BDO, ABS CBN and RIA. PNB Italy, SpA (PISPA), a wholly-owned subsidiary of the Bank was incorporated in 1994 as a Financial Intermediary (FI). On July 17, 2012, PISPAs license was converted into a Payment Institution. It is authorized to do money transfer services. Its main office is located in Rome while its branches are situated in Milan and Florence. It has 11 individual agents and 2 remittance partners. PISPA is regulated by Banca dItalia (Bank of Italy). PISPAs major competitors include Metrobank, BPI, BDO, RCBC, Land Bank, Western Union, Money Gram, I-Remit, Telegiro, RIA, I Transfer, NYBR. PNB Austria Financial Services GmbH is a wholly-owned subsidiary of PNB which started operations on June 6, 2006. It is registered as a limited liability company in Vienna to engage in remittance business. PNB Austria is regulated by the Austrian Financial Market Authority. Its principal competitors are Metrobank, I-Remit, CBN (Banco de Oro) and Coinstar. PNB Global Filipino Remittance Spain, S.A., was established as a wholly-owned subsidiary of the Bank on November 15, 2006. Prior to this, the Bank maintained a representative office in Madrid since 1972. The subsidiary possesses a license from Banco de Espaa to provide remittance services. Its major competitors are Metrobank, Bank of the Philippine Islands (BPI), CBN/BDO, RIA, Europhil and other local banks. Allied Commercial Bank, a 90.41% owned subsidiary of the Bank and formerly known as Xiamen Commercial Bank, was established in Xiamen in September 1993 as a foreign owned bank. A Branch in Chongqing was established in 2003. As approved by the Chinese regulators, ACB may offer the following foreign currency denominated banking products to foreign companies; foreign-funded companies in China, representative offices of foreign companies including those of Hong Kong, Macau and Taiwan; foreign nationals including compatriots from Hong Kong, Macau and Taiwan. These are as follows: a. b. Deposits; Short, Medium and long term loans; 106

c. d. e. f. g. h. i. j. k. l.

Discounting and acceptance of notes and bills; Trading of government bonds, treasury bills and non-stock securities; Letter of credit services and guarantees; Domestic and international settlements; Foreign exchange trading and brokering; Foreign currency conversion; Inter-bank call loans; Credit cards; Safety deposit boxes; credit information services; and

m. Other banking business approved by the China Banking Regulatory Commission. And, Allied Commercial Bank may offer the following foreign currency denominated banking products to non-foreign funded companies in China: a. b. c. d. Deposits from proceeds of loans; Export settlements; Import financing; and Remittances.

Allied Banking Corporation (Hong Kong) Limited (ABCKHL), a private limited company incorporated in Hong Kong in 1978, and is licensed as a restricted license bank under the Hong Kong Banking Ordinance. Due to the merger, the Bank now owns 51% of this foreign subsidiary. ABCHKL was the Allied Banks first majority-owned overseas subsidiary. It provides a full range of commercial banking services predominantly in Hong Kong, which include lending and trade financing, documentary credits, participation in loans syndications and other risks, deposit taking, money market and foreign exchange operations, money exchange, investment and corporate services. ABCHKLs core revenue primarily comprises interest income from its lending activities complemented with fees and commissions from other fee-based services. ABCHKL has a wholly owned subsidiary, ACR Nominees Limited, a private limited company incorporated in Hong Kong, which provides management and corporate services to its customers. It also holds and operates one branch office in Tsimshatsui, Kowloon. In addition to its normal banking services, ABCHKL acts and is licensed as an insurance agent. ABCKHLs main businesses are the following: a. b. c. d. e. f. Property Mortgage Loans; Trade Finance; Deposits (not less than HK$500,000); Remittances; Foreign Exchange; and Secretarial and Nominee Services.

Allied Bank Philippines (UK) Plc (ABUK), a wholly-owned subsidiary of the Bank, formally commenced operations in 1992 after functioning as ABCs representative office in the 1970s and as a branch in the mid-1980s. ABUK was the first Philippine private commercial bank in London to be granted the status of licensed deposit taker by the Bank of England under the Financial Services and Markets Act 2000. ABUK mainly operates to facilitate trade between the Philippines and the United Kingdom, service the banking requirements of the growing Filipino population in the United Kingdom and other European countries, and promote foreign investments to the Philippines. ABUKs main businesses are the following: a. b. Remittances; Deposit taking (GBP and USD Savings Accounts); 107

c. d. e.

Passporting; Advises and confirms letters of credit (LC) opened by Allied Banking Corporation in favor of beneficiaries located in the UK; and When nominated, ABUK acts as paying and reimbursing bank for LCs opened by ABC.

Electronic Banking The Banks electronic banking services encompass a full range of facilities: automated teller machines, internet/online banking, phone & mobile banking. The strategy has always been the use of available technologies to complement the distribution capabilities of the Bank through its domestic branches and overseas branches and/ or offices. Positioned as alternative banking channels, these electronic banking facilities enable clients to meet their banking needs beyond over-the-counter take-up. Automated Teller Machines As of September 30, 2013, the Bank had a network of 854 ATMs nationwide strategically located onsite in branches as well as offsite in malls, schools, hospitals, partner tie-up companies, and all other locations which have predominantly high pedestrian traffic. Well-placed ATMs allow the capture of other Banks ATM cardholders by way of its Bancnet, Megalink and Expressnet interconnection, thus making its own ATMs an income generating channel by way of increased acquirer fees. Bancnet is the leading ATM consortium in the country. Recently, the Bank has utilized the ATM channel in cross-selling ATMSafea non-life product that replaces or pays up lost money withdrawn from the ATM due to qualified incidents of theft, force withdrawal or machine tampering. The move to employ ATMs to offer products on sachet-basis is an innovative way of making certain products and services more affordable and easily accessed by customers. There are a number of PNB ATMs that have the cardless deposit/payment facility where customers can initiate deposits or bills payment of various merchants without the need of the ATM card in initiating the transaction. Internet Banking Service Through this online banking facility, clients can do a number of routine banking transactions conveniently and securely through the internet: account balance inquiry, one-time or scheduled bills payments, funds transfer across personal PNB accounts or third-party accounts, checkbook orders, and transaction monitoring with email or text notifications. The Bank continuously innovates its internet facility by further enabling other types of transactions not widely offered by other peer banks. These are the opening of Unit investment Trust Funds (UITFs) and/or multiple deposit accounts online. PNBs internet facility provides an added security feature by requiring challenge questions as part of the authentication and validation process prior to clients being allowed access. Phone and Mobile Banking PNB Phone banking is a 24/7 service that facilitates automated customer interface for various accountrelated inquiries, requests, and transactions. Clients may do the following: account balance inquiry, statement request, bills payment, funds transfer, checkbook orders, and reporting of lost/stolen passbook or ATM cards. The facility is also a venue to access information on the products and services of the Bank. The mobile banking system is an electronic service offered to Globe (telco) subscribers who have accounts with PNB. Clients can use their mobile phones to inquire balance, transfer funds, and pay bills among others. Information Technology The Banks strategy is to increase the use of information technology in its business, including its frontoffice and back-office operations, in order to enhance its business capabilities, products and services. The Bank is focused on using technology to achieve greater productivity and greater operational efficiencies among its business divisions as well as to ensure competitiveness in the market. The Bank is also dedicated to ensuring 108

security and regulatory compliance in its information technology systems across local and foreign monetary bodies. The Bank maintains a global off-site backup data center to store vital records of the Bank and participates in annual disaster recovery exercises. Core-banking system In 2009, the Bank has successfully replaced its mainframe-based core banking system with a cost-effective open-platform core-banking system from Oracle Financial Services called FLEXCUBE.FLEXCUBE standardizes and services both the Banks domestic and international branches from its global data center located in the Philippines. This is the biggest but by no means the final step in the technology. In 2010, the Bank continued its focus to ensure stability, availability, and responsiveness of the core banking systems by upgrading its hardware, software, and network capacities. In 2013, the Bank replaced its ATM switch to a newer, more robust platform. In order to cater to the expected growth of volume and greater need for stability brought about by the merger, the Bank is in the process of migrating its core banking platform to a mainframe based platform using Systematics, which is the core banking system of ABC. The migration is expected to be completed in 2015. Anti-money laundering systems To improve its systems for money laundering monitoring, the Bank implemented an electronic anti-money laundering solution called the GIFTSWEB Enhanced Due Diligence (EDD) in 2005 which has undergone two major systems enhancements in 2007 and recently in 2010. This web-based anti-money laundering solution was developed and marketed by Gifts Software, Inc. based in New York, United States and fulfills the strict and complex regulatory requirements for the detection, monitoring and reporting of suspected money laundering activities by financial institutions. The software solution provides the analytical tools needed to proactively detect and monitor possible suspicious transaction activity, respond to regulatory subpoenas and create a database for case management reports. The system facilitates the preparation of Currency Transactions Reports and Suspicious Activity Reports. GIFTSWEB EDD has been found to adequately address Bank Secrecy Account, Know Your Customer-EDD, AMLA, Office of Foreign Assets Control, and USA Patriot Act laws, rules and regulations. It is currently used in PNB New York Branch, PNB RCI headquarters in Angeles, PNB Los Angeles Branch, PNB Tokyo Branch, PNB Hong Kong Branch, PNB Singapore and PNB (Europe) Plc.s Manila Head Office implemented the system in early August 2006. In 2010, PNB created the Global Compliance Unit primarily to provide AML transaction monitoring services for PNB New York and eventually to the other foreign branches and offices of the Bank by 2011. Furthermore, the Bank has invested in upgrading the GIFTSWEB servers in line with the strategic direction of centralizing the administration of the GIFTSWEB systems in Manila towards a standardized approach in the implementation of the Banks AML policy guidelines. As mentioned above, the Bank is focusing its attention on integrating the two banks technology platforms, a project that is expected that is expected to be completed in 2015. In addition to this integration, major activities planned for 2013 include improvements to the Banks remittance system and its deployment to the Banks overseas locations. Capital Expenditure The Banks capital expenditures or acquisitions of property and equipment for the three years ended December 31, 2012 as well as for the nine months ended September 30, 2013:
For the year ended December 31, 2010 2011 2012 (Q millions) For the nine months ended September 30, 2013

Capital Expenditure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

316.5

353.9

401.3

761.6

The Bank has budgeted P1.5 billion for capital expenditures in 2013, to be used mainly for the upgrading of the Banks IT systems and infrastructure. Insurance The Banks has insured its material properties against fire and other usual risks. The Bank also maintains insurance for operational risks such as the loss of cash or securities through loss or theft by obtaining insurance from third party providers. The Bank does not have business interruption insurance covering loss of revenues in the event that its operations are affected by unexpected events. The Bank believes that its insurance coverage is appropriate for its business and operations and its peers in the industry. 109

Properties The Banks head office is located at Philippine National Bank Financial Center, Pres. Diosdado Macapagal Boulevard, Pasay City. The Bank owns the premises occupied by its head office, including most of its branches. The following table provides a geographic breakdown of the Philippine branch network owned by the Bank as of September 30, 2013:
Location Number of Owned Branches

Rest of Metro Manila. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Luzon . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Visayas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mindanao . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

46 79 43 45 213

The Bank holds clean titles to these properties except for one branch. The Bank leases premises for remaining branches. Generally, The Banks lease contracts for its branches are for periods ranging from three to five years and are renewable under certain terms and conditions. Various lease contracts include escalation clauses, most of which bear an annual rent increase of 5% to 10%. The following table provides a geographic breakdown of the Banks Philippine branches that occupy leased premises:
Location Number of Leased Branches

Rest of Metro Manila . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Luzon . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Visayas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mindanao . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

215 123 56 49 443

Intellectual Property The Bank has applied for, and received, intellectual property protection for its brand names Philippine National Bank and PNB with the IPO in Makati City and with appropriate agencies in Canada and the European Community. Specifically, these cover its corporate logo, financial, investment banking and various remittance services. The Bank has not been the subject of any disputes relating to its intellectual property rights. Legal Proceedings The Bank is a party in legal proceedings which arise in the ordinary course of its business activities. None of such legal proceedings arising in the ordinary course, either individually or in the aggregate, are expected to have a material adverse effect on the Bank or its consolidated financial condition. Competition The Bank faces competition in all its principal areas of business, from both Philippine and foreign banks, as well as finance companies, mutual funds and investment banks. The Bank believes that offering diverse products and services, investing in technology, leveraging synergies within the Tan Companies and with its Government customers, as well as building on relationships with the Banks other key customers, have allowed it maintain its market position in the industry. The Bank believes its principal competitors are BDO Unibank, Inc., BPI, Metropolitan Bank and Trust Company and Rizal Commercial Banking Corporation. Employees and Labor Relations The total employees of the Bank as of September 30, 2013 is 8,662 wherein 3,622 were classified as Bank officers and 5,040 as rank and file employees. The average age of the Bank officers and staff is 38 years and the average tenure with the Bank is 12 years.

110

The Banks regular rank & file employees are represented by two existing unions under the merged Bank as follows:
Name Membership Total Membership Effectivity

Allied Bank Employee Union (ABEU)

Original Allied Bank employees (absorbed under the merged Bank)

Philnabank Employees Association (PEMA)

Original PNB employees and new hires under the merged bank (February 9, 2013 and onwards)

1,736, or 84.3%, of the non-officer population are members of the union as of September 30, 2013 2,465, or 82.7% of the non-officer population are members of the union as of September 30, 2013

October 1, 2011 to September 30, 2014

July 1, 2012 to June 30, 2014

The Bank has not suffered any strikes, and the Management of the Bank believes that its relations with its employees and the Union as harmonious and mutually beneficial.

111

DESCRIPTION OF ALLIED BANK PRIOR TO THE MERGER Following the merger between PNB and Allied Bank, all operations previously conducted by Allied Bank are now conducted by the newly merged entity, operating as Philippine National Bank. Allied Bank has ceased to exist and its operations, including the Allied Bank brand, are currently being integrated with those of PNB, to be conducted solely under the PNB brand. Because this process of integration is ongoing as of the date of this Prospectus, the following description of Allied Banks historical operations has been included for the readers convenience. Some or all of Allied Banking Corporations historical operations described below may be only partially integrated within PNB, or these may not be integrated at all and eliminated entirely. ALLIED BANK Prior to its merger with PNB, Allied Bank was a universal bank which provided a full range of banking, insurance, financing and leasing services to personal, commercial, corporate and institutional clients. Allied Banks banking products and services included deposit taking, lending and related services, international banking, treasury, foreign exchange and trust services. In addition, Allied Bank engaged in regular financial derivatives as a means of reducing and managing Allied Banks and its customers foreign exchange exposure. For the year ended December 31, 2012, Allied Banks total assets were P197.8 billion and its net income was P1.8 billion, compared to total assets of P202.5 billion and P189.5 billion, and net income of P1.5 billion and P1.3 billion in the years ended December 31, 2011 and 2010, respectively. As of December 31, 2012, Allied Bank had a network of 317 branches and 342 ATMs in the Philippines. The following table sets out selected key financial ratios for Allied Bank for the periods indicated.
Selected financial ratios For the year ended December 31, 2010 2011 2012

Net interest margin(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost-income ratio(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Return on average assets(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Return on average equity(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . NPL ratio(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total equity to total assets(6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Receivables from customers to deposits(7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Liquidity ratio(8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4.0% 69.9% 0.7% 5.2% 4.4% 13.7% 50.6% 47.1%

3.7% 77.3% 0.8% 5.4% 3.9% 14.9% 59.8% 57.3%

3.6% 66.3% 0.9% 5.8% 3.8% 15.4% 61.9% 57.0%

Notes: (1) Net interest income divided by average interest-earning assets. Interest-earning assets include due from BSP, due from other banks, interbank loans receivable and securities purchased under resale agreements, financial assets at fair value through profit or loss, available-for-sale investments, held-to-maturity investments and loans and receivable-gross. (2) Total operating expenses less provision for credit and impairment losses divided by total operating income. (3) Net income divided by average total assets for the period indicated. (4) Net income divided by average equity for the period indicated. (5) Total non-performing loans (net) divided by adjusted loan portfolio. (6) Total equity divided by total assets. (7) Receivables from customers divided by total deposits. (8) Liquid assets divided by liquid liabilities. Liquid liabilities comprise deposit liabilities and bills payable. UNIVERSAL BANKING ACTIVITIES Allied Banks commercial activities are undertaken through three main segments: banking, insurance and others. Banking Allied Banks banking segment comprises the following business groups: Commercial Bankinghandles lending, deposit-taking, treasury operations, corporate and consumer banking, credit cards, special assets and cash management, as well as fund and clearing services; Thrift Bankingoperated primarily through Allied Savings Bank (ASB), caters to the needs of individual consumers and small and middle-market businesses which include key products such as deposit taking, investments, payment and remittances; and 112

Other Bankingengages in the business of dealing and brokering in all currencies and handles foreign exchanges remittances. Insurance Allied Bank provides insurance services such as life insurance policies and other insurance products. Alliedbankers Insurance Through Alliedbankers Insurance, Allied Bank also offers general and business insurance products such as fire insurance, engineering, marine cargo policies, motor vehicle insurance, aviation insurance, surety and other miscellaneous casualty lines such as money, securities, payroll and robbery insurance, comprehensive general liability insurance, travel accident, fidelity guarantee, personal accident insurance products and ATMSAFE insurance, which provides protection to ATM cardholders of Allied Bank in the event of theft. PNB Life Insurance Allied Bank clients gain access to a wide range of life insurance solutions through its subsidiary PNB Life Insurance, Inc. (PNB Life). PNB Lifes trained and licensed financial advisors meet with depositors and borrowers right in their home branch and recommend traditional or variable life insurance products that are suitable for their needs. PNB Life also provides protection and wealth preservation, education funding plans, retirement funding vehicles, air accident insurance and credit life coverage to individuals and groups. Others Allied Bank manages revenues principally generated from holding and leasing services of Allied Leasing and Finance Corporation, a leasing entity that offers direct leasing, sales and leaseback arrangements. The following table sets out Allied Banks total operating income for the periods indicated as derived from each main business sector/segment.
For the years ended December 31, 2010 2011 2012 (Q in millions)

Banking Commercial BankingPhilippines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial BankingChina and Hong Kong . . . . . . . . . . . . . . . . . . . . . . . . . Thrift Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Eliminations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

8,634.3 450.6 195.1 1,061.5 73.0 (14.5) 10,400.0

7,756.1 10,112.2 578.7 544.4 230.5 279.9 1,450.1 1,762.8 83.0 80.9 (24.7) (26.2) 10,073.7 12,754.0

Allied Banks banking activities are the most significant contributor to its revenue stream. Allied Bank conducts its banking business through its branch and ATM network across the Philippines. Branch Banking As of December 31, 2012, Allied Banks branch network in the Philippines comprised 317 branches and operated a network of 342 ATMs at its branch premises and off-site locations. The following table sets out branch and ATM information in the Philippines for Allied Bank:
As of December 31, 2010 2011 2012

Number of Branches Metro Manila . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rest of Luzon. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Visayas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mindanao . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Branches. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total ATMs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

142 86 43 41 312 314 626

145 86 43 41 315 327 642

147 86 43 41 317 342 659

113

Allied Banks ALLY ATMSAFE program provides protection to existing and new automated teller or cash card cardholders in the event of theft, losses incurred due to ATM mechanical problems or machine tampering incidents and other ATM-related problems. Enrolled cardholders enjoy a 24/7 coverage in Philippine and international locations where Allied Bank automated teller cards or cash cards are accepted. Loan Products As of December 31, 2011 and 2012, Allied Banks corporate loans were P66.4 billion and P66.7 billion, representing 72.7% and 69.8% of Allied Banks total receivables from customers, and 32.8% and 33.7% of Allied Banks total assets, respectively. As of December 31, 2011 and 2012, consumer loans were at P10.3 billion and P11.3 billion, respectively, accounting for 11.2% and 11.9% of Allied Banks receivables from customers. In 2011 and 2012, there was a substantial increase in Allied Banks consumer loan portfolio. Demand for housing and auto loans rose substantially while still maintaining a past due rate below industry level, while granting and booking of developmental loans was intentionally concentrated on existing developers as well as new pocket developers, which strategy was adopted in view of a projected glut in the property market. Set out below is a summary of Allied Banks consumer loans by type for the periods indicated.
2010 As of December 31, 2011 2012 (in Q millions)

Consumer Finance Loans by Type Housing Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Auto Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Salary Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Credit Card. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Educational Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Medical Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Others(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Note: (1) Others comprises travel and miscellaneous loans. Consumer Loan Products Housing Loans

1,461.5 987.7 65.2 1,833.1 89.1 0.6 4,273.3 8,710.5

1,680.6 1,197.5 58.0 2,935.1 80.5 1.2 4,324.6 10,277.5

2,122.7 1,358.4 61.8 3,906.4 75.2 0.4 3,788.9 11,313.8

Allied Banks housing loans are offered at competitive interest rates generally ranging from 6.0% to 11.0% per annum over loan fixing periods of one to 15 years, and can be used for home purchases, house or lot construction, refinancing, home renovations or home expansions. Allied Banks housing loan portfolio stood at P1.7 billion and P2.1 billion as of December 31, 2011 and 2012, respectively, accounting for 16.4% and 18.8% of the Allied Banks total consumer loans portfolio. Auto Loans Allied Banks Top Speed Auto Loans cover loans for purchases of brand-new vehicles across all types, such as cars, vans, sport utility vehicles or action utility vehicles. Allied Bank offers loans for up to 80% of the vehicle price, at an easy monthly payment scheme. Allied Bank believes its offered rates are competitive with its peers in the market, ranging from effective rates of 7.0% to 11.0% per annum over terms from 12 to 60 months. Allied Banks auto loan portfolio stood at P1.2 billion and P1.4 billion as of December 31, 2011 and 2012, respectively, accounting for 11.7% and 12.0% of the Allied Banks total consumer loans portfolio. Salary Loans Allied Banks salary loans are designed to augment the financial needs of employees of accredited companies, with employees of such accredited companies allowed to avail of loan amounts for up to three times their gross monthly salary. Allied Bank typically deducts monthly loan payments from the employees salary. Allied Banks salary loan portfolio stood at P58.0 million and P61.8 million as of December 31, 2011 and 2012, respectively, accounting for 0.6% and 0.5% of the Allied Banks total consumer loans portfolio. 114

Credit cards As of December 31, 2012, Allied Bank had 248,866 credit card holders in the aggregate; its major credit card launches are set out below: Allied Bank Essentials and Premium MasterCardlaunched in 2007, the cards featured a rewards program wherein every P50.0 spent entitles the cardholder to points, which can then be converted into cash credits or Mabuhay Miles; Mabuhay Miles World and Platinum MasterCardlaunched in 2008, considered Allied Banks flagship credit card product. These cards offer a low point-to-mile conversion of one mile for every P33.0 spent, allowing cardholders to earn free flights fast. Select cardholders may also be eligible for the Mabuhay Miles Elite Membership Card, where frequent travellers and loyal cardholders get exclusive access to privilege such as access to the Mabuhay Lounge, an additional 10 kg free luggage allowance, priority check-in and boarding and other benefits. The Mabuhay Miles World MasterCard comes with a free travel and concierge assistance with World Assist powered by International SOS; PNB Essentials and Platinum MasterCardlaunched in 2009 under a co-brand arrangement with PNB. This arrangement was initiated in preparation for the winding down of PNBs PNB Visa credit card, a previous arrangement with Equitable Card Network. The arrangement with PNB was also established to prepare for the planned merger between PNB and Allied Bank, and PNBs planned use of Allied Banks credit card system upon completion of the merger; China Union Pay (CUP) Credit Cardintroduced in 2010, this card was the first-ever, locally- issued CUP Credit Card, and is available in two variants: (1) Allied Bank Platinum China UnionPay Card; and (2) Allied Bank Diamond China UnionPay Card. With this card, Filipinos enjoy the full advantage of having the most widely-used and accepted credit card in China. As an issuer of CUP, Allied Bank captures an untapped market with great potential and also serves as a way for Allied Bank to entrench itself within the FilipinoChinese client segment; PNB Visa Credit Cardslaunched in 2011, the PNB Visa Classic and Gold card variants cater to the payment requirements of the broad mass market. The unique feature of the PNB Visa Card is that it offers a 1.0% rebate on the revolving interest, a first in the market when launched. Packaged as the card that pays back, this product is ideal for cardholders who are practical and who want a no-frills credit card as it offers automatic savings while providing payment flexibility; Other co-branded credit cardsAllied Bank tied up with four prestigious school organizations in 2011 for the issuance of the Allied Bank-AAXS (Alumni Association for Xavier Schools), Allied Bank- ICAAA (Immaculate Conception Academy Alumni Association), Allied Bank-UERM-CMAA (UERM- College of Medicine Alumni Association) and Allied Bank-DLSZAA (De La Salle Zobel Alumni Association) credit cards. These co-brand cards cater to each organizations unique needs and passion. They also offer the same exciting and rewarding features as the core Allied Bank Credit Card like conversion of points to miles or cash rebates, installment payment, and others. Allied Bank has also tied up with Super 8 Retail Systems, Inc. to tap the affordable consumer market. Under this card, Allied Bank- Super 8 cardholders are given a 2.0% rebate for transactions made at Super 8 stores; and Jaguar MasterCard and the Land Rover MasterCardcatering to the high-end market, both cards are exclusively for owners of the car brands. The cards give discounts for dealer products and services (including annual oil changes), as well as earning points convertible into cash credits or Mabuhay Miles. Corporate Cards Allied Banks introduction of corporate credit cards in the last quarter of 2009 set a new milestone for Allied Banks credit card department. The new product targets and answers the needs of corporations that want to simplify the management of their business expenses. Allied Bank corporate credit cards are available in two variants: (1) Allied Bank Multi corporate cards for purchasing and other corporate payment needs and (2) Allied Bank T & E corporate cards for travel & entertainment related expenses. These two cards universally help address corporate clients payment needs via these useful features: customization of spending limit by frequency, amount or by preferred merchants, options for single or dual currency, free travel insurance and domestic concierge assistance, electronic statement billing and monthly reports. 115

Point-of-Sale Terminals After investing in the necessary systems and technology, the Credit Card Department officially entered the business in September 2011. Three months later, a total of 938 point-of-sale (POS) terminals had been installed in branches of Allied Banks top merchants. Credit Card Awards On March 1, 2012, Allied Bank Credit Cards received recognition from MasterCards Hall of Fame Awards for the fourth year in a row, besting top banks in the Asia-Pacific Region and winning more awards than any other local bank. Allied Bank received recognition from MasterCards Hall of Fame Awards by winning the Best Activation Campaign and being Best in Class Finalist for its Mabuhay Miles MasterCard Elite Program. Aside from this, the LuXeclusive Program was also a Finalist for Most Innovative Card Marketing Program and Best Creative Execution. Previous years also saw the Mabuhay Miles MasterCard awarded as the Best Premium Program in the MasterCards Asia Pacific, Middle East and Africa Product Conference and Technology Fair 2008. The Take off with P35/Mile Promo was named as the Most Effective Card Marketing Program in the MasterCard Hall of Fame Awards 2009. Where in the World is my Mabuhay Miles MasterCard? program won the award for being the Most Innovative Card Marketing Program at the MasterCard Hall of Fame Awards 2010. Small and Medium Enterprises (SME) Loans Allied Bank was among the market leaders in the Philippine middle-market/SME banking segment including a wide range of entities with total assets of P15.0 million up to P100.0 million prior to its merger with PNB. Many of these entities are owned and operated by members of the Filipino-Chinese community to which Allied Bank developed extensive ties. Allied Banks small business loans stood at P14.7 billion and P17.5 billion as of December 31, 2011 and 2012, respectively, accounting for 16.1% and 18.3% of the Allied Banks total loans. Deposits Allied Bank offers a full range of deposit products, including current accounts (both interest-earning and non-interest bearing demand deposits), savings accounts and time deposits in Pesos, U.S. dollars and other foreign currencies. These are being provided to its customers that include individuals, private businesses and various Government-related entities. As of December 31, 2011 and 2012, Allied Banks total deposit liabilities amounted to P147.1 billion and P147.1 billion, respectively, of which 79.0% and 81.2%, respectively, were denominated in Pesos, with the remainder denominated in foreign currencies, principally in U.S. dollars. Allied Banks ratio of low cost to high cost deposit as of December 31, 2012 was approximately 163.2%. Trust Banking Allied Bank offers a range of trust and agency banking services and products, such as UITFs (including U.S. dollar-denominated fund and equities fund), institutional trust accounts and individual trust accounts, all under Wealth / Asset Fund Management. For Other Fiduciary Services, Allied Bank offers UITFs-other fiduciary services, court trusts, legislated and quasi-judicial trust, property administratorship, corporate fiduciary accounts, escrow, safekeeping, life insurance trust, among others. Allied Banks Agency Services under Wealth / Asset / Fund Management include institutional agency accounts and individual accounts. Allied Banks trust banking activities also include Advisory / Consultancy and Special Purpose Trust. As of December 31, 2011 and 2012, Allied Banks Trust and Investment Division managed, in aggregate, P35.1 billion and P41.8 billion of funds, respectively. Revenue from the trust business is generated through trust fees from the management of Trust and Agency services, as well as from other services. Investment/Merchant Banking Services Allied Bank performs its investment banking function through its Merchant Banking Division. Services include syndication of debt and equity underwriting, financial advisory services, portfolio management and other specialized financing programs. As of December 31, 2012, its total loans amounted to P16.4 billion or 17.2% of Allied Banks total loans. 116

FUNDING Sources of funding Allied Banks main sources of funding are deposit liabilities, bills payable, subordinated debt and capital stock. Allied Banks deposit liabilities consist of demand, savings and time deposits. The majority of the deposits consisted of savings accounts. Allied Banks total amount of customer deposit liabilities, as a percentage of total funding sources, was 92.4% and 92.0% as of December 31, 2011 and 2012, respectively. Allied Bank traditionally derives the majority of its deposit liabilities in the form of deposits under short-term savings accounts, reflecting the relative strength of Allied Bank in the retail segment of the banking market. Although the majority of Allied Banks customer deposits are short-term, Allied Banks depositors typically roll over their deposits at maturity, effectively providing Allied Bank with a source of longer term funding. Allied Banks total deposit liabilities for both December 31, 2011 and 2012 amounted to P147.1 billion. As of December 31, 2011 and 2012, Allied Bank had total bills payable amounting to P4.3 billion and P5.1 billion, respectively. As of December 31, 2012, Allied Bank had 3,252,495 outstanding common shares with a par value of P1,000.0 each, as well as 50,000 outstanding preferred shares with a par value of P1,000.0 each. As of December 31, 2010 and 2011, Allied Bank had total equity (including non-controlling interest) of P25.9 billion and P30.1 billion, respectively. As of December 31, 2012, Allied Banks total equity was P30.5 billion. For both years ended December 31, 2010 and 2011, Allied Banks average cost of funding for deposits was 1.7%. As of December 31, 2012, the average cost of funds was 1.3%. The following table sets forth an analysis of Allied Banks main sources of funding and the average cost of each funding source:
As of December 31, 2010 2011 2012 Amount Ave. cost(1) Amount Ave. cost(1) Amount Ave. cost(1) (in Q millions, except Average Cost, which is in percentage terms)

Deposits By type Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41,848.5 Savings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68,425.6 Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,220.1 Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . 141,494.2 By currency Philippine Peso . . . . . . . . . . . . . . . . . . . . . . . . . . 111,310.1 Foreign currency . . . . . . . . . . . . . . . . . . . . . . . . 30,184.1 Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . 141,494.2 Bills Payables Philippine Peso . . . . . . . . . . . . . . . . . . . . . . . . . . 477.6 Foreign currency . . . . . . . . . . . . . . . . . . . . . . . . 1,131.4 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,609.0 Unsecured Subordinated Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,469.4 Capital stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,302.5 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150,875.1

0.4% 2.2% 8.9% 1.7% 2.2% 0.3% 1.7% 3.1% 0.6% 1.6% 7.4%

45,490.5 70,422.5 31,196.6 147,109.6 116,164.3 30,945.3 147,109.6 3,519.4 758.5 4,277.9 4,482.8 3,302.5 159,172.8

0.5% 2.1% 9.1% 1.7% 2.1% 0.3% 1.7% 2.9% 2.4% 2.8% 7.4%

51,759.1 67,634.2 27,678.8 147,072.1 118,405.0 28,667.1 147,072.1 2,661.0 2,401.7 5,062.7 4,497.3 3,302.5 159,934.6

0.3% 1.6% 8.9% 1.3% 1.4% 0.9% 1.3% 4.8% 1.3% 3.6% 7.5%

Note: (1) Average cost of funding represents total interest expense for the year, divided by the average daily liability for the respective period, expressed as a percentage.

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Deposits Deposits continue to be Allied Banks main funding source. Demand and savings deposits can be withdrawn on request and without any prior notice from the customer. As such, they represent funding of the shortest term available to Allied Bank. Time deposits, on the other hand, can be withdrawn, together with interest earned on said deposits, by the customer after the expiry of the time deposit period, typically between six months and three years. Customers may demand the withdrawal of their time deposits prior to maturity upon the giving of a short notice, but they will forfeit the interest payable on such deposits. Allied Banks total deposits amounted to P141.5 billion as of December 31, 2010 and P147.1 billion for both December 31, 2011 and 2012. As a proportion of Allied Banks total main sources of funding, deposits accounted for 93.8%, 92.4% and 92.0% as of December 31, 2010, 2011 and 2012, respectively. In terms of currency, Allied Banks deposits are primarily denominated in Pesos, reflecting the general profile of its customer base. As of December 31, 2010, 2011 and 2012, 78.7%, 79.0% and 80.5%, respectively, of Allied Banks deposits were denominated in Pesos. According to type of deposits, on the other hand, 77.9%, 78.8% and 81.2% of Allied Banks outstanding deposits as of December 31, 2010, 2011 and 2012, respectively, comprised of demand and savings deposits. The following table presents a more detailed maturity analysis of the deposit base of Allied Bank as of the dates indicated:
2010 As of December 31, 2011 (in Q millions) 2012

Deposit by Type Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30-90 days. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91-180 days. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 181 days and longer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

41,848.5 68,425.6 31,220.1 27,275.1 143.0 3,802.0 141,494.2

45,490.5 70,422.5 31,196.6 27,239.5 139.7 3,817.4 147,109.6

51,759.1 67,634.2 27,678.8 19,447.1 4,677.6 3,554.1 147,072.1

Bills payable As of December 31, 2010 and 2011 and 2012, bills payable amounted to P1.6 billion, P4.3 billion and P5.1 billion, respectively. As of December 31, 2010, 2011 and 2012, 29.7%, 82.3% and 52.6% respectively, of Allied Banks bills payable were denominated in Pesos. The following table sets forth an analysis of the maturities of the bills payable by contractual maturity dates of Allied Bank, as of the specified dates:
As of December 31, 2010 2011 2012 (in Q millions)

Bills Payable Due within one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due beyond one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Bills Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,596.3 12.7 1,609.0

4,215.5 62.4 4,277.9

5,042.6 20.1 5,062.7

Capital stock As of December 31, 2012, Allied Banks capital stock amounted to P3.3 billion and consisted of 3,252,495 common shares with par value of P1,000.0 each and 50,000 preferred shares with par value of P1,000.0 each. 118

Liquidity Allied Banks policy objective is to efficiently manage its liquidity by ensuring that funds are always available so that it can meet the credit demands of customers, customer deposit maturities/withdrawals, investments and other commitments under all kinds of market conditions, especially during periods of intense market stress. In order to achieve this objective, Allied Bank established policies and guidelines in addition to the prudential limits required by regulations to serve as the Treasury departments guide in managing Allied Banks liquidity position. Allied Banks ALCO meets regularly to monitor and review Allied Banks liquidity position and ensure that sufficient liquid assets are available to cover expected and potential funding requirements. It also reviews and assesses market conditions to make sure that credit facilities are always available in times of funding needs and that Allied Bank is not being over-reliant on a few sources of funding or the more volatile sources of funds. As an offshoot of several financial crises, the BSP instituted several measures aimed at enhancing and strengthening the liquidity management of the financial system by providing guidelines and rules that Philippines banks must follow/practice regularly. This includes, among others, the preparation of a Contingency Funding Plan which must be reviewed regularly to adjust to changes in market conditions, a review of the structure of each banks operation and sources of funding, the regular conduct of stress tests and establishment procedures for management of liquidity and other types of risks. As a rule, Allied Bank always maintains an adequate level of secondary liquidity (in the form of availablefor-sale securities) that can be immediately liquidated in times of unexpected need for funds, in addition to primary liquid assets such as cash, regular and special deposit with the BSP, deposits with other banks, interbank call loans and other investments. In addition, Allied Bank invests in highly liquid assets that can be sold to BSP or other banks with the agreement to buy it back, or may be used as collateral for borrowing from BSP or other banks. These securities holdings, together with the bank loans and other marketable assets, can also be used as collateral for the BSP Interbank Liquidity Facility. On the liabilities side, Allied Banks deposits are generally short-term in nature, which is the same as the nature of deposits of the other Philippine banks. However, these deposits, the majority of which are held by retail and middle-market accounts, remain with Allied Bank and are historically rolled over on maturity. Allied Bank identified these stable deposits as core deposits that have been the single source of large and low-cost deposit over the years. The volume, nature and structure of these deposits are being reviewed regularly by ALCO to identify changes that may affect future liquidity movements. Interbank borrowings, rediscounting with BSP, trade financing, as well as issuance of bonds, are the additional sources of funds for Allied Bank. In addition, ALCO regularly reviews interbank credit facilities that can be availed of immediately, particularly in times of market stress. Allied Bank has committed borrowing facilities in the form of commercial paper facilities and other standby facilities that it can access to meet funding needs. Under relevant Philippines laws, peso deposits and deposit substitute liabilities are subject to a unified, 18.0% statutory, legal and liquidity reserve requirement. Peso government deposits are subject to 50.0% liquidity floor requirement, inclusive of the 18.0% unified reserve requirement. Allied Bank has complied with the legal and liquidity reserves set by the BSP for both its Peso and Foreign currency books. As of December 31, 2010, 2011 and 2012, Allied Banks liquid assets amounted to P67.4 billion, P86.7 billion and P86.8 billion respectively, representing 35.6%, 42.8% and 43.9% of Allied Banks total assets as of such dates, respectively. For the year ended December 31, 2012, Allied Banks unified reserves on the Peso book stood at 18.5% of total Peso liabilities while Allied Banks liquid asset cover stood at 103.2% of total FCDU liabilities. Allied Banks liquid assets include cash and other cash items, amounts due from the BSP, amounts due from other banks, interbank loans receivables, securities held under agreements to resell, financial assets at fair value through profit or loss and available-for-sale investments.

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The following table sets forth information with respect to Allied Banks liquidity position as of the dates indicated:
As of December 31, 2010 2011 2012 (P millions, except percentages)

Liquidity position Liquid Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash and Other Cash Items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross Loans to Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due from BSP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due from Other Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interbank Loans Receivables and Securities Purchased under Resale Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial Assets Designated at Fair Value through Profit or Loss . . . . . . Available-for-sale investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial Ratios Liquid Assets-to-Total Assets . . . . . . . . . . . . . . . . . . . . . . Liquid Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Liquid Assets-to-Total Deposit Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . Liquid Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Deposit Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net Loans-to-Total Deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net Loans (receivables from customers net of allowance for credit losses, unearned interest discount and capitalized interest) . . . . . . . . . . LOAN PORTFOLIO Overview

67,442.5 4,636.8 74,775.7 52.8% 16,297.9 7,442.2

86,738.9 4,023.6 91,369.8 62.1% 18,286.3 10,821.1

86,772.6 3,885.6 95,469.6 64.9% 26,082.6 11,771.8

15,058.0 12,578.3 7,955.0 3,507.0 697.8 7,375.5 20,500.6 40,331.8 29,702.1 35.6% 42.8% 43.9% 67,442.5 86,738.9 86,772.6 189,450.8 202,532.1 197,777.2 47.7% 59.0% 59.0% 67,442.5 86,738.9 86,772.6 141,494.2 147,109.6 147,072.1 50.6% 59.8% 61.9% 71,525.9 87,911.5 91,046.2

As of December 31, 2011 and 2012, Allied Banks gross loan portfolio (comprising receivables from customers, interbank loans and securities purchased under resale agreements) amounted to P103.9 billion and P103.4 billion, respectively, representing 51.3% and 52.3% of total assets as of those dates, respectively. Allied Bank has established different lending limits for its credit committees to provide greater control in Allied Banks lending operations. Depending on the credit size, credit applications exceeding certain limits must be approved by the Executive Committee or the Board of Directors. Allied Bank has also adopted a strategy of selective lending by focusing on industries such as power and other infrastructure, rice/corn trading and food processing, in which Allied Bank believes growth prospects remain stable and in which the ratio of NPLs is relatively low. At the same time, Allied Bank is reducing its exposure to industries with high NPL ratios. Industry concentration The following table sets forth an analysis of Allied Banks receivables from customers by economic activity, as defined and categorized by the BSP:
2010 As of December 31, % 2011 % 2012 (in P millions, except percentages) %

Wholesale and retail trade. . . . . . . . . . . . . . . . . . . . . . . . Manufacturing (various industries) . . . . . . . . . . . . . . . . Real estate, renting and business services . . . . . . . . . . Transportation, storage and communication . . . . . . . . Other community, social and personal activities . . . . Agriculture. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Others(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

15,900.8 14,820.6 13,084.1 10,513.9 6,468.1 6,732.2 7,256.0 74,775.7

21.3% 19.8% 17.5% 14.0% 8.7% 9.0% 9.7%

19,034.0 17,541.6 18,893.3 11,781.4 7,885.2 1,071.9 15,162.4

20.8% 19.2% 20.7% 12.9% 8.6% 1.2% 16.6%

22,392.8 17,403.1 19,981.8 9,664.3 9,988.8 795.9 15,242.9

23.5% 18.2% 20.9% 10.1% 10.5% 0.8% 16.0% 100.0%

100.0% 91,369.8

100.0% 95,469.6

Note: (1) Others includes financial intermediaries, mining and quarrying services and miscellaneous business. 120

The manufacturing, wholesale and retail trade, real estate, renting, business activities and transport industries represent the largest components of Allied Banks loan portfolio. As of December 31, 2012, these sectors represented 18.2%, 23.5%, 20.9%, and 10.1% respectively, of Allied Banks receivables from customers. Under guidelines established by the BSP, loan concentration exists when the total loan exposure to a particular industry exceeds 30.0% of the total loan portfolio. Allied Bank maintains a flexible policy toward its exposure to various sectors of the economy, in principle avoiding exposure of more than 30.0% to a particular industrial sub-sector of the economy. The distribution of Allied Banks loan portfolio by industry is also subject to seasonal fluctuations. In addition, Allied Bank monitors its exposure to specific sectors of the economy to ensure compliance with specific pre-determined lending requirements imposed by law on all Philippine banks. Allied Bank must comply with legal requirements to make loans available to the agricultural sector and to SMEs. Mandatory credit allocation laws require all Philippine banks to make available 25.0% of their loanable funds to the agricultural sector in general, with 10.0% of such funds being made available exclusively to agrarian reform beneficiaries, and to allocate 8.0% of their loan portfolios to small-sized, and 2.0% to mediumsized, enterprises. As of December 31, 2011 and 2012, Allied Bank was in compliance with these requirements, except for the agrarian reform sector, due to the lack of available qualified securities in the market. Maturity The following table sets forth an analysis of Allied Banks receivables from customers by maturity:
2010 Amount As of December 31, 2011 2012 % Amount % Amount (in Q millions, except percentages)

Due within one year . . . . . . . . . . . . . . . . . . . . . . . Due beyond one year . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

46,148.5 28,627.2 74,775.7

61.7% 38.3%

51,114.0 40,255.8

55.9% 44.1%

52,651.9 42,817.7

55.2% 44.8% 100.0%

100.0% 91,369.8

100.0% 95,469.6

Loans due within one year primarily consist of loans to corporations for working capital and loans to consumers for general use. Loans with a maturity of over one year consist primarily of term loans to corporations and businesses. Currency The following table shows an analysis of Allied Banks receivables from customers by currency:
2010 Amount As of December 31, 2011 2012 % Amount % Amount (in Q millions, except percentages)

Peso. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign USD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other Foreign Currency . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

63,077.6 7,837.7 3,860.4 74,775.7

84.4% 10.5% 5.1%

78,622.2 8,313.7 4,433.9

86.0% 9.1% 4.9%

84,962.1 6,118.8 4,388.7

89.0% 6.4% 4.6% 100.0%

100.0% 91,369.8

100.0% 95,469.6

As of December 31, 2012, 89.0% of Allied Banks receivables from customers was denominated in Pesos with 11.0% being denominated in foreign currency, most of which consisted of U.S. dollars. Allied Bank adopted a policy with respect to foreign currency lending pursuant to which foreign currency- denominated loans can only be granted to importers who have authorization from the BSP to purchase foreign currency to service their foreign currency-denominated obligations. Interest rates Interest rates on loans are generally set on the basis of Allied Banks average or marginal cost of funds which in turn is largely determined by the interest rate on the PDST-F plus a spread. The PDST-F reflects the secondary trading levels of the benchmark government securities, which are partially affected by the monetary policies of the BSP. 121

As of December 31, 2012, P82.1 billion or 86.0% of Allied Banks receivables from customers of P95.5 billion was subject to re-pricing. A majority of Allied Banks rate-sensitive assets and liabilities re-price every 30 to 90 days which limits Allied Banks exposure to fluctuations in domestic interest rates. Size and concentration of loans The following table sets forth a breakdown of Allied Banks receivables from customers by principal amount as of December 31, 2012:
Principal Amount (Q) (%)

Less than 1,000,000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000,000 to 2,500,000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,500,000 to 5,000,000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000,000 to 10,000,000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000,000 to 50,000,000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000,000 to 100,000,000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Greater than 100,000,000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

0.3 3.1 3.1 3.5 14.8 13.1 62.1 100.0

The BSP currently imposes a limit on the size of Allied Banks financial exposure to any single person or entity or group of connected persons or entities to 25.0% of Allied Banks net worth. As of December 31, 2012, Allied Bank has complied with the single borrowers limit for all of its loans. As of December 31, 2012, Allied Banks single largest corporate borrower accounted for P4.5 billion, or 4.7% of Allied Banks outstanding receivables from customers. As of December 31, 2012, Allied Banks 10 largest borrowers in the aggregate accounted for P19.9 billion, or 20.8%, of Allied Banks outstanding receivables from customers. Secured and unsecured loans The following table sets forth Allied Banks secured and unsecured loans according to type of collateral:
2010 As of December 31, 2011 (in Q millions, except percentages) 2012

Secured by: Real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Chattel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deposit hold-out . . . . . . . . . . . . . . . . . . . . . . . . . . Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unsecured . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

27,408.1 2,396.5 2,575.5 1,723.3 13,069.2 27,603.1 74,775.7

36.7% 30,559.9 3.2% 2,762.1 3.4% 1,886.6 2.3% 1,543.8 17.5% 6,471.0 36.9% 48,146.4 100.0% 91,369.8

33.4% 34,576.2 3.0% 1,738.2 2.1% 2,023.3 1.7% 287.1 7.1% 7,793.8 52.7% 49,051.0 100.0% 95,469.6

36.2% 1.8% 2.1% 0.3% 8.2% 51.4% 100.0%

Allied Bank principally focuses on cash flows in assessing the creditworthiness of borrowers. However, it will seek to minimize credit risk in support of a loan by requiring borrowers to pledge or mortgage collateral to secure the payment of loans. As of December 31, 2011 and 2012, 47.3% and 48.6% respectively, of total loans were extended on a secured basis. As of the same dates, 33.4% and 36.2% of total loans were backed by real estate mortgages. Allied Banks general policy in the acceptance of support or security arrangements for loans provides for the guidelines on acceptable and unacceptable forms of collateral. Allied Banks maximum loan value for real estate collateral is 60.0% of its appraised value. CREDIT APPROVALS Credit policies One of the basic credit risk management infrastructures of Allied Bank is the adoption of effective credit policies to govern its various lending operations. These policies are directed towards the following institutional objectives: (i) to maintain a sound and prudent lending portfolio; (ii) to be responsive to market changes; (iii) to maintain the liquidity of its risk asset portfolio; and (iv) to attain profitability commensurate to risks taken. 122

All credit policies adopted by Allied Bank are approved by Allied Banks Board of Directors and any amendments or revisions require prior approval of the Board unless expressly delegated to the President and other board credit committees. These policies reflect Allied Banks credit risk tolerance which are communicated constantly to all lending units and support offices. Limits are imposed to manage credit concentration risks and provide more control of Allied Banks lending operations. Allied Bank has also put in place pro-active monitoring systems to ensure compliance with statutory and internal limits. Escalations of any deviations to credit policies are immediately undertaken to regularize the breaches. Credit approval process Loan recommendations are submitted to the different levels of credit committees or to designated approving officers within Allied Bank. The aggregate amount of the credit facility, generally, will determine the approving body which will approve the transaction. However, loan recommendations requiring Executive Committee and Board approval needs the endorsement of the Loan Committee. Before Allied Bank approves any extension of credit, Allied Bank identifies the needs of the prospective borrower, analyzes the appropriateness of the exposure and evaluates any inherent risks. Allied Bank assigns an account officer to every prospective borrower to start the credit approval process. The account officer identifies the borrowing requirements of the client and obtains the loan application form from client together with the required documents. The account officer further determines if exposure can be covered by collateral. In cases where a property appraisal is warranted, this is undertaken by Allied Banks appraiser or by an external appraiser. The account officer conducts credit evaluation on the prospective borrower with the assistance of the credit support units. For borrowers from the middle- market segments, the account officer will pay attention to validating the borrowers financial position from different information sources. For transactional lending, the account officer may focus more on the size and quality of cash flows from the transaction, but also continues to consider the financial position of the borrower itself. The decision on whether to extend the credit is determined by a combination of internal policies and guidelines and the regulatory policies of the BSP. The internal credit policies are continuously reviewed and updated by the Credit Policies Division. Except as may be otherwise approved by the BSP (as required under the General Banking Law of the Philippines), Allied Bank generally cannot grant to a single borrower a loan equivalent to more than 25.0% of Allied Banks net worth. This can be increased by 10.0% provided these are secured by trust receipts, shipping documents or other documents transferring title to readily marketable nonperishable goods covered by insurance. In determining whether Allied Bank meets the single borrowers limit of the BSP, Allied Bank includes exposure to related accounts (i.e. exposure to subsidiaries and parent companies of the borrower including guarantees by the borrower or its related companies or its principal officers) but excludes, amongst others, loans and other credit accommodations guaranteed by the BSP or the Philippine Government and Government corporations, loans secured by holdouts/margin deposits maintained in Allied Bank and other loans and credit accommodation classified as non-risk by the Monetary Board. Additionally, exposure to specific sectors of the economy is subject to internally approved limits or ceilings which are regularly monitored. There are however, certain sectors which are already subject to specific pre-determined lending requirements as imposed by law on all banks, specifically in the area of lending to small and medium scale industries, to the agricultural/agrarian sector and to the real estate industry. Allied Bank also follows guidelines of the BSP in the grant of loans to its directors, officers, stockholders and other related interests (i.e. certain relatives, affiliates, subsidiaries and parent companies thereof). Grants of these facilities require the approval of Allied Banks Board of Directors and compliance with individual and aggregate ceilings as well as the BSP reporting requirements. For control purposes, implementation of credit approvals is subject to review at least once a year by Allied Banks internal audit group. This audit is designed to determine the efficiency of the internal control system in place as well as the quality of lending operations. In addition, Allied Banks Audit and Compliance Committee monitors the past due level and status of past due accounts. In compliance with BSP requirements, Allied Bank has an ICRRS for corporate accounts and credit scoring for consumer and small loans to standardize the assessment of its credit portfolio in terms of risk profile. The ICRRS grades new and existing corporate loan borrowers with total assets of more than P15.0 million or those with loan of at least P5.0 million. 123

Credit monitoring and review process Pursuant to the Manual, Allied Bank is required to establish a system of identifying and monitoring existing or potential problem loans and other risk assets and of evaluating credit policies with regard to prevailing circumstances and emerging portfolio trends. In compliance with this requirement, Allied Bank has established credit support units under its credit risk management group to review and monitor individual accounts within a particular portfolio to identify existing and potential areas of deterioration and assess the risks involved. In addition, the credit support units evaluate the degree to which a particular lending unit is complying with existing credit management policies. The evaluation of the individual loan accounts culminates in the classification of the account. The classification indicates the degree or gravity of the perceived problems of the account reviewed. The reviewed loan accounts are classified in accordance with the standard classifications set forth in the Manual. DOSRI Allied Bank will, from time to time and in the ordinary course of business, enter into loans with DOSRI. All such loans are on commercial, arms-length terms. The General Banking Law and BSP regulations require that the aggregate amount of such DOSRI loans should generally not exceed 100.0% of a banks net worth or 15.0% of the banks total loan portfolio, whichever is lower. The amount of any loan to a DOSRI of a bank, of which 70.0% must be secured, may not exceed the aggregate amount of their unencumbered deposits with the bank and the book value of their paid-in capital investments in the bank. Allied Bank is required to report the level of DOSRI loans to the BSP on a weekly basis, and is required to submit to BSP a copy of the approval within 20 days from the date of approval. Total outstanding non-risk DOSRI loans was P0.9 billion as of December 31, 2011 and P0.4 billion as of December 31, 2012. DOSRI loans accounted for P3.6 billion, or 3.1% of Allied Banks total loans as of December 31, 2011. As of December 31, 2012 DOSRI loans accounted for P2.1 billion, 1.8% of Allied Banks total loans. LOAN LOSS MANAGEMENT AND PROVISIONING Overview Allied Banks NPLs, as defined by BSP Circular No. 248 dated June 26, 2000 and Sec. X309.1 of the Manual, amounted to P3.9 billion as of December 31, 2012 as compared to P4.0 billion as of December 31, 2011. Allied Banks NPL ratios were 3.9% as of December 31, 2011 and 3.8% as of December 31, 2012. The average net NPL ratio for local banks in the Philippine banking system was 0.3% and 0.5% as of December 31, 2012 and September 30, 2013, respectively. For the year ended December 31, 2011, Allied Banks provision for credit losses on loans and receivables was P0.3 billion, which represented 3.5% of Allied Banks gross interest income for the same period. In the year ended December 31, 2012, Allied Banks provision for credit losses on loans and receivables was P1.7 billion, which represented 18.8% of Allied Banks gross interest income for the same period. NPL coverage ratio stood at 69.1% and 90.3% as of December 31, 2011 and 2012, respectively. Volatile economic conditions may adversely affect the ability of Allied Banks borrowers to repay their indebtedness and, as a result, Allied Bank may experience an increase in NPLs and provisions for probable losses. Loan loss classification For the purpose of regulatory reporting in the Philippines, current BSP regulations require that Philippine banks classify NPLs based on four different categories corresponding to levels of risk: loans especially mentioned, substandard, doubtful and loss. This classification depends on managements evaluation of the collectability of the loan, after consideration of prevailing and anticipated economic conditions, collection and credit experience with the specific account, fair market value of collateral, financial capabilities of any guarantors and the present value of future cash collections. Based on these considerations, loans are classified and mandated levels of provisions are taken based on such classifications. For the purpose of preparing its financial statements in accordance with PFRS, the introduction of new accounting standards in the Philippines has required Allied Bank to introduce new methodologies for calculating loan loss provisions and asset impairment which has resulted in it recognizing higher levels of impairment losses in respect of its loans and other receivables. PAS 39, which applies to Allied Bank from January 1, 2005, requires Allied Bank to evaluate allowances for loan loss based principally on the discounted cash flows to be derived from loans and other receivables. This has resulted, and may in the future result, in Allied Bank recognizing higher provisions for loan loss as a result of lower future discounted cash flows to be received in respect of NPLs. 124

BSP classification At the date of this Prospectus, for the purpose of reporting to the BSP, Allied Bank classifies its borrowers and assesses its asset quality based on its self-assessment procedures developed in accordance with current guidelines published by the BSP. Unless otherwise stated, the presentation of Allied Banks classification of its loan portfolio and related ratios in this section, including impairment losses and allowance for probable losses, for the years ended December 31, 2010, 2011 and 2012 are on the basis of BSP guidelines and reflects the new accounting standards referred to above. Allied Bank performs self-assessment at least quarterly. The self-assessment process involves classifying borrowers based on their financial condition and then categorizing claims against borrowers in order of collection risk. Based on these classifications, Allied Bank establishes allowances and discloses its problem loans using criteria required under BSP regulations and these allowances are subject to BSP review and confirmation. In categorizing its loan portfolio, Allied Bank follows the BSPs categorization of risk assets according to their risk profile. All risk assets, in particular Allied Banks loan portfolio, are either classified or unclassified. Those loans which do not have a greater than normal risk, and for which no loss on ultimate collection is anticipated, are unclassified. All other loan accounts, comprising those loan accounts which have a greater than normal risk, are classified as especially mentioned, substandard, doubtful or loss assets, and the appropriate loan loss allowance (in accordance with BSP guidelines) is made as follows:
BSP Risk Classification Loan loss allowance % of principal amount of loan

Especially mentioned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Substandard (secured). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Substandard (unsecured) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Doubtful . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5.0 10.0 25.0 50.0 100.0

Allied Bank adopts a qualitative analysis of its loan portfolio for the purposes of this risk classification, which is not solely dependent on the number of days the relevant loan is overdue. Allied Banks review of its risk assets is conducted quarterly in accordance with Allied Banks prescribed policy guidelines based on BSP categorization. Allied Banks guidelines classify especially mentioned assets as those assets which have demonstrated minor deficiencies in credit quality but in respect of which repayments on the asset are up to date. Allied Banks guidelines classify substandard assets as those which Allied Bank believes represent a substantial and unreasonable degree of risk to Allied Bank. Especially mentioned and substandard classifications may apply to current loans in accordance with BSP regulations. Doubtful assets are those in respect of which Allied Bank believes that collection in full, either according to their terms or through liquidation, is highly improbable and that substantial loss is probable. Assets which are considered impossible to collect or worthless are characterized as loss assets. Once a loan is classified in a particular category, Allied Bank records a loan loss allowance against such loan. The following is a summary of the risk classification of the receivables from customers (as a percentage of total outstanding loans) and allowance for credit losses of Allied Bank as of the dates indicated below:
2010 Amount As of December 31, 2011 2012 % Amount % Amount (in Q millions, except percentages)

Risk Classification Especially mentioned . . . . . . . . . . . . . . . . . . . . . . . . Sub-standard Secured . . . . . . . . . . . . . . . . . . . . . . . . Unsecured . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Doubtful. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total classified . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unclassified . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allowance for credit losses . . . . . . . . . . . . . . . . . .

3,974.4 2,050.1 1,449.7 89.0 916.2 8,479.4 66,296.3 74,775.7 3,007.7

5.3% 2.8% 1.9% 0.1% 1.2%

3,974.4 2,050.1 1,449.1 89.0 916.2

4.4% 2.2% 1.6% 0.1% 1.0%

3,974.4 2,050.1 1,449.7 89.0 916.2

4.1% 2.2% 1.5% 0.1% 1.0% 8.9% 91.1% 100.0%

11.3% 8,479.4 88.7% 82,890.4 100.0% 91,369.8 3,203.7

9.3% 8,479.4 90.7% 86,990.2 100.0% 95,469.6 4,249.9

Loans classified as loss assets are generally written off by Allied Bank. The write-offs are done in accordance with BSP guidelines. The guidelines allow banks, upon approval by their board of directors, to write 125

off loans, other credit accommodations, advances and other assets, regardless of amount, against allowance for impairment losses (valuation reserves) or current operations as soon as they are satisfied that such loans, other credit accommodations, advances and other assets are of no value. However, prior approval of the Monetary Board is required to write off loans and advances to DOSRI. In addition to making specific allowances for impairment losses based on the risk classification of its loan portfolio, Allied Banks allowances for impairment losses also included general allowances and the substantial majority of classified loans are also recognized as NPLs by Allied Bank. As of December 31, 2012, Allied Banks allowance for credit losses on loans on a consolidated basis was P4.2 billion, compared to P3.2 billion, as of December 31, 2011. As a percentage of Allied Banks NPL portfolio, such allowance for credit losses was 90.3% as of December 31, 2012, compared to 69.1% as of December 31, 2011. Non-performing loans Unless otherwise stated, the presentation of Allied Banks classification of its loan portfolio and related ratios in this section, including impairment losses and allowance for probable losses are on the basis of BSP guidelines. Under BSP guidelines, loans are classified as non-accruing (or past due) if (i) any repayment of principal at maturity or any scheduled payment of principal or interest due quarterly (or longer) is not made when due and (ii) in the case of any principal or interest due monthly, if the amount due is not paid and has remained outstanding for three months. In the case of (i), such loans are treated as non-performing if the payment is not made within a further 30 days. In the case of (ii), such loans are treated as non-performing upon the occurrence of the default in payment. Loans whose collaterals have been foreclosed or have been transferred to Allied Banks ROPA account are not classified as NPLs but rather as NPAs. The table below sets forth details of the NPLs, non-accruing loans (comprise past due, items in litigation and restructured loans), ROPA, NPAs (as described below), restructured loans and write-offs for loan losses as of the three years ended December 31, 2010, 2011 and 2012:
As of December 31, 2010 2011 2012 (in P millions, except ratios, which are in percentages)

Non-performing loans(1) (gross) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-performing loans(1) (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjusted loan portfolio(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-performing loans (net) to adjusted loan portfolio (%) . . . . . . . . . . . . . . . . Non-accruing loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Receivables from customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-accruing loans to gross loans (%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ROPAgross. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ROPAnet. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-performing assets(3) (gross) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-performing assets(4) (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-performing assets (net) as percentage of total assets(5) . . . . . . . . . . . . . . . Allowance for impairment and credit losses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allowance for credit losses on loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allowance for impairment losses on ROPA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allowance for credit losses on loans as a percentage of total nonperforming loans (%)(6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allowance for credit losses on loans and impairment losses on ROPA as a percentage of non-performing assets (%)(7) . . . . . . . . . . . . . . . . . . . . . . . . . . . Total restructured loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Current. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Past due . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Items in litigation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restructured loans as percentage of total loans (%) . . . . . . . . . . . . . . . . . . . . . . Loanswritten off . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126

4,574.4 4,637.2 4,706.4 3,887.9 3,997.4 3,920.3 89,147.2 103,308.3 102,638.5 4.4% 3.9% 3.8% 4,424.7 4,338.2 5,004.7 74,775.7 91,369.8 95,469.6 5.9% 4.7% 5.2% 4,930.0 4,652.2 4,293.3 4,536.4 4,317.9 3,971.4 189,450.8 202,532.1 197,777.2 9,504.4 9,289.4 8,999.7 8,424.3 8,315.2 7,891.7 4.4% 4.1% 4.0% 3,401.3 3,538.1 4,571.8 3,007.7 393.6 65.7% 35.8% 366.3 310.8 55.5 0.5% 64.5 3,203.7 334.4 69.1% 38.1% 325.3 287.6 37.7 0.4% 47.0 4,249.9 321.9 90.3% 50.8% 202.0 180.3 21.4 0.3 0.2% 104.3

Notes: (1) Loans refer to receivables from customers. (2) Adjusted loan portfolio is the total of loans and receivables interbank loans and securities purchased under resale agreements, less loans with 100% valuation reserves as agreed with the BSP. (3) Non-performing assets (gross) comprise ROPA (gross) and non-performing loans (gross). (4) Non-performing assets (net) comprise ROPA (net) and non-performing loans (net). (5) Refers to NPA ratio. (6) Refers to NPL coverage ratio. (7) Refers to NPA coverage ratio. In order to manage its loan portfolio and reduce its exposure to NPLs, Allied Banks practice is to restructure those classified loans which it considers suitable for restructuring. Allied Bank restructures loans on a case-by-case basis. Restructuring methods used by Allied Bank have included extending the maturity of loans beyond their original maturity date and providing for rescheduled payments of principal consistent with the expected cash flows of the borrower in question. Allied Bank has also agreed to debt-for-equity swaps but it rarely uses this as a restructuring solution. In accordance with BSP guidelines, in general, NPLs which are successfully restructured are considered current and no longer non-performing following three consecutive payments of the required amortization of principal and/or interest. For restructured loans with capitalized interest and which are not fully secured, six consecutive payments are required for the loan to be considered performing. As of December 31, 2012, Allied Bank had a stand-alone unconsolidated portfolio of approximately P0.2 billion of restructured loans which were treated as performing. Allied Banks NPAs principally comprise ROPA and NPLs. Allied Bank has established the Special Asset Management Group to actively manage and, where appropriate, sell its ROPA. Allied Bank has sold P0.3 billion and P0.1 billion of ROPA for the years ended December 31, 2011 and 2012, respectively. These ROPAs were disposed through direct sales and joint ventures. Sectoral analysis of non-performing loans The following table sets forth, as of the dates indicated, Allied Banks gross NPLs by the respective borrowers industry or economic activity and as a percentage of Allied Banks gross NPLs:
2010 As of December 31, % 2011 % 2012 (in Q millions, except percentages) %

Wholesale and retail trade . . . . . . . . . . . . . . . . . . . . . . . . Manufacturing (various). . . . . . . . . . . . . . . . . . . . . . . . . . Real estate, renting and business services . . . . . . . . . . . Transportation, storage and communication. . . . . . . . . Other community, social and personal activities . . . . . Agriculture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Others(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2,027.0 608.4 1,454.5 8.7 187.1 42.9 245.8 4,574.4

44.3% 2,001.7 13.3% 686.5 31.8% 1,576.0 0.2% 13.4 4.1% 135.1 0.9% 23.8 5.4% 200.7 100.0% 4,637.2

43.2% 2,076.2 14.8% 370.5 34.0% 1,570.3 0.3% 10.6 2.9% 471.7 0.5% 19.5 4.3% 187.6 100.0% 4,706.4

44.1% 7.9% 33.4% 0.2% 10.0% 0.4% 4.0% 100.0%

Note: (1) Others includes financial intermediaries, mining and quarrying services and miscellaneous business. Top 10 non-performing loans As of December 31, 2012, Allied Banks exposure to its 10 largest NPLs ranged from P1.2 billion to P50.0 million, and amounted to P2,753 billion in the aggregate. These 10 largest NPLs accounted for 2.9% of Allied Banks total gross loans and 64.5% of its gross NPLs to customers. ROPA MANAGEMENT Allied Banks NPAs are principally comprised of ROPA and NPLs. Allied Bank established the Special Asset Management Group to actively manage and, where appropriate, sell its ROPA. Allied Bank sold P0.3 billion and P0.5 billion of ROPA for the years ended December 31, 2011 and the 2012, respectively. These ROPAs were disposed of through direct sales and joint ventures. 127

The main objective of the SAG is to manage and dispose of 453 ROPAs of Allied Bank as of December 31, 2012, amounting to P4.8% billion in appraised value. Of this total ROPA, 9.3% are classified as commercial, 71.5% residential, 11.0% agricultural and 8.2% others. In terms of the total value, 47.9% of the P4.3 billion are commercial and 28.7% are residential. Allied Bank has generated average annual ROPA sales of P0.6 billion for the last three years, which have yielded a weighted average of 36.0% premium to book value. In the year ended December 31, 2012, ROPA sales amounted to P0.8 billion. Allied Bank remains focused, determined and challenged to achieve and even surpass its 2011 targets even though there is a general weakness on demand for real estate properties, aggressive pricing and discounting schemes by Banks competitors. SAG will be maintaining its aggressive marketing efforts and strategies in achieving its 2012 targets. These include quarterly auctions, regular sales promotional schemes and marketing events, formulation of fresh concepts to effectively market unclean properties and tapping the services of wellknown marketing companies to sell unclean properties. Leasing is another option being considered to generate additional income. RISK MANAGEMENT The ability to manage risks effectively is vital for Allied Bank to sustain its growth and continued value creation for its shareholders. Thus, Allied Bank has established a risk management framework and governance structure that are intended to provide comprehensive controls and ongoing management of the major risks inherent in Allied Banks activities. Given its risk philosophy which defines its conservative risk management culture, juxtaposed with a revenue strategy, Allied Banks governance structure enables the implementation of the balance between maximizing returns and minimizing risks. Allied Bank monitors the most significant risks facing Allied Bank, including credit risk, market risk, liquidity risk, interest rate risk and operational risk. Allied Bank has documented its entire risk governance structure and risk management framework in the Internal Capital Adequacy and Assessment Program (ICAAP) document, which was recently updated as of January 31, 2012. The document embodies the various methodologies that are to be utilized for assessing Allied Banks risk exposures and setting its capital requirements, and also apprises the Board of Directors and all of Allied Banks stakeholders of the ongoing assessment of Allied Banks risks, how Allied Bank intends to mitigate those risks, and how much current and future capital are necessary to address these risks after considering other mitigating factors. Allied Bank adopts a top down/bottom up approach with respect to its risk appetite framework. Allied Banks Board, through its Risk Management Committee (RMC), determines and sets Allied Banks risk appetite, while the ICAAP Management Committee, which is chaired by the President and comprised of the heads of Allied Banks profit and cost centers, ensures that internal capital targets are met in accordance with established risk appetite policies. The RMC monitors the risk environment and provides direction for policies to mitigate, to an acceptable level, the risks that may adversely affect Allied Banks ability to achieve its goals. After the monthly RMC meetings, the RMC reports to the Board on the Banks overall risk exposure, current status of risk and action items. In addition, Allied Bank has in place an enterprise risk management (ERM) framework that is documented and is comprised of the following elements: (i) risk management policies and strategies, (ii) a risk identification process, (iii) risk measurement tools, (iv) model back-testing and validation procedures, (v) risk reporting & monitoring systems, (vi) risk mitigation tools and techniques, (vii) risk control mechanisms, (viii) capital adequacy assessment process, (ix) capital allocation methods and (x) Allied Banks risk management organization structure. Allied Bank continually monitors the most significant risks it faces, comprising major risk categories such as credit risk, market risk, liquidity risk, interest rate risk and operational risk. Allied Banks monitoring policies also include other material risks such as compliance, strategic and business, reputational, legal and regulatory, information technology & information security, human resource, customer franchise, and credit concentration risks. These are dealt with and monitored in an enterprise-wide and integrated manner. Credit risk management Credit risk is the risk to earnings or capital arising from a counterpartys failure to perform and meet the terms of its contract with, subjecting Allied Bank to a financial loss. Credit risk may last for the entire tenor of a 128

counterpartys obligation and may approximate to the full amount of a transaction and in some cases may exceed the original principal exposure. Credit risk is inherent in Allied Banks lending, trading, investments and other activities. Allied Bank manages credit risk in accordance with a credit risk management framework that spans from risk identification, measurement, control, monitoring and reporting. Allied Bank undertakes credit risk management at the strategic, transaction and portfolio levels. At the strategic level, the Board sets revenue goals and defines a credit risk philosophy to create a credit risk culture. These revenue goals are detailed in Allied Banks overall business plan to include the amount of potential risks inherent in the revenue generation activities and corresponding measures that would address them. At the transaction level, Allied Banks Account Officers and Credit Officers directly handle credit risk management, determining opportunities and making the decision on whether or not to take on risk. These officers align their risk-taking activities with the Allied Banks revenue goals, ensure compliance with standard credit risk policies and procedures, and also maintain its exposure within set limits. Credit risk management at the portfolio level falls within the purview of the Risk Management Division (RMD). The RMD maintains its independence and undertakes an unbiased, in-depth, comprehensive review and oversight of credit risk-taking and management activities through periodic credit risk reporting. Allied Bank employs both qualitative and quantitative techniques to measure and monitor credit quality and risk. Assessment of individual credit exposures are made according to the following two classification systems, namely: (1) ICRRS, and (2) the BSP System of Loan Classification. Moreover, RMD employs the following internal measurement approaches to estimate the probability of default rate: (1) ICRRS migration analysis for corporate accounts, (2) delinquency migration analysis for consumer accounts, and (3) flow rate for credit card accounts. Allied Bank applied stress testing techniques in the management of credit risk during times of financial crisis, as in such times, stressful credit events that were not observed during ordinary business conditions could possibly occur. Allied Bank measures how such stressful events could affect the credit quality of its portfolio and ultimately its capital adequacy. The end view of Allied Banks stress testing exercise is to provide guidance on how to refocus risk-taking strategies and revise existing risk management strategies to make its credit portfolio more resilient to credit event shocks that may occur during crisis situations. Market risk management Market risk is the risk to earnings or capital arising from adverse movements in factors that affect the market value of instruments, products and transactions in an institutions overall portfolio, both on an on- or offbalance sheet basis. The value of these financial instruments may change as a result of changes in interest rates, foreign exchange rates, equity prices and other market changes. A banks market risk originates from marketmaking, dealing and position taking in interest rate, foreign exchange, equity, and commodities market. Allied Bank recognizes that market risk is inherent in its activities with its inventory of foreign currencies, investment securities, and free standing derivatives. In recognition of Allied Banks ERM process, the role of risk identification is incumbent upon the specific personnel evaluating the risk-taking transaction (transactional level) together with the RMD (portfolio level) and the oversight of the Board through the RMC (strategic). The Banks Board-approved market risk management manual documents set out the protocol with regard to these risks. Market risk assessment is performed through the use of various Board-approved tools, such as mark-tomarket valuation, value-at-risk (VaR) analysis, bond duration, and DV01 (sensitivity of derivative transactions). VaR, the primary tool for assessing market risk, is a technique that estimates the potential losses that could occur on risk positions as a result of movements in market rates and prices over a 10- day time horizon at 99% confidence level, under normal market conditions. Board-approved limits and management action triggers, imposed on both the transactional and portfolio levels, are integral in the management of market risk. These limits are reviewed at least once a year to ensure that risk exposures comply with the Boards risk appetite and reflect changes in strategies and market environment. Compliance to limits are regularly monitored and reported to the Board through the RMC. An approval matrix is implemented in cases of limit breach. Allied Bank employs both scenario and sensitivity-based approaches in stress testing to determine the resilience of the Banks trading book to various extreme but plausible market risk factor (such as foreign exchange risk from foreign exchange holdings, interest rates from fixed income security holdings, and equity 129

price from equity security holdings) movements. Stress testing is conducted to estimate the potential impact of shocks in the market risk factors on the market value of the Allied Banks assets and ultimately measure its impact on the Allied Banks CAR. Liquidity risk management Liquidity risk is the current and prospective risk to earnings or capital arising from a financial institutions inability to meet its obligations when they come due without incurring unacceptable losses or costs. It includes the inability to manage unplanned decreases or changes in funding sources. Liquidity risk also arises from the failure to recognize or address changes in market conditions that affect the ability to liquidate assets quickly and with minimal loss in value, and also refers to the inability to find additional funds or replace maturing liabilities under potential, future stressed environment. Liquidity risk emanates from the imbalances between the maturity dates of Allied Banks assets and the maturity dates of its liabilities, its sensitivity to changes in interest rates and its inability to unwind positions due to temporary or permanent factors. Liquidity risk can also be a consequence of certain organizational issues such as lack of internal controls and oversight, or an effect from other risk exposures such as reputational and legal risk concerns. Allied Banks policy is to manage its operations with the objective of ensuring that funds available are adequate to meet credit demands of its customers and to enable deposits to be repaid on maturity. To provide flexibility in meeting these liquidity needs, Allied Bank maintains diversified liquidity sources. The primary source of liquidity is deposits of retail clients, denominated in both Pesos and U.S. Dollars, generated by Allied Banks network of domestic branches. The deposit base of Allied Bank is short-term in nature which is comparable to the nature of the business in the Philippines banking industry. Due to the profile of the deposit account base and its structure for the past years, Allied Bank has confidently classified majority of its deposits as core deposits, i.e. a type of funds that remains and is said to remain with Allied Bank for the longterm. As of December 31, 2012, only 91.4%, or approximately P143.4 billion, of outstanding deposits of Allied Bank had a maturity period of one month or less. Allied Banks other sources of funds include short-term borrowings in the interbank market in the Philippines and abroad, borrowings through Allied Banks FCDU to fund its foreign currency- denominated assets, and funds from maturing assets and profits from operations. Allied Banks policy is to maintain what it believes to be an adequate portion of its asset portfolio in short-term assets. As of December 31, 2012, of Allied Banks gross receivables from customers, 55.2% was represented by loans with remaining maturities of less than one year, and receivables from customers represented 46.3% of the Allied Banks total gross financial assets. In addition to maintaining a significant portion of its asset portfolio in loans, Allied Banks trading and investment account includes securities issued by sovereign issuers (mostly Government Treasury Bills, Floating Rate Treasury Notes and Fixed Rate Treasury Notes). Of Allied Banks P37.1 billion portfolio of gross trading and investment securities as of December 31, 2012, P9.3 billion, or 24.9%, was invested in securities with remaining maturities of one year or less. The trading and investment securities account amounted to 18.4% of Allied Banks total financial assets as of December 31, 2012. Other assets of Allied Bank include funds due from BSP and other banks and interbank loans receivables and securities purchased under resale agreements, which accounted for 18.8% and 4.0%, respectively, of Allied Banks total financial assets as of December 31, 2012. Deposits with banks are made on a short- term basis, 33.0% of which was available on demand or within one month as of December 31, 2012. Loans to banks with remaining maturities of a month or less accounted for 100.0% of Allied Banks total lending to banks as of December 31, 2012. Allied Banks Liquidity Management Plan involves maintaining sufficient and diverse funding capacity to accommodate fluctuations in asset and liability levels due to changes in business operations or unanticipated events created by customer behavior or capital market conditions. Allied Bank seeks to ensure sufficient liquidity through a combination of active management of liabilities, a liquid asset portfolio substantially comprising deposits in primary and secondary reserves, the securing of money market lines and the maintenance of repurchase facilities to pre-empt any unexpected liquidity situations.

130

Although Allied Bank adopts what it believes to be a prudent policy on managing liquidity risks, a maturity gap exists between Allied Banks long-term assets and short-term liabilities. This is attributable to Allied Banks policy of taking advantage of higher yields of long-term assets which is financed by the lower yields of shortterm liabilities. Such strategy generally leads to the average maturity of its financial assets exceeding that of its liabilities. This liquidity risk arising from the mismatch is monitored and controlled by a gap analysis of maturities of relevant assets and liabilities reflected in the MCO report and EAR report. Allied Bank conducts analysis and assessment of liquidity risks in a manner suited to the scale of its business and risk profile, and it monitors liquidity risk indicators which assist it in analyzing if liquidity risk is imminent. A Board-approved MCO gap limit, which complements the MCO tool, is used to control cumulative net outflows resulting from maturity mismatches. Compliance to the MCO limit is regularly monitored and reported to the Board through the RMC, and an approval matrix is implemented in cases of breach. Allied Bank ensures that an approved MCO limit can be supported by available liquid assets and fund raising capacity. The Board-approved Contingency Funding Plan (CFP) is formulated to ensure that an organized structure for meeting various scenarios of liquidity crisis are in place. It is a major requirement to ensure resilience under stressed conditions. This enumerates the events that may trigger contingency funding, the procedures in carrying out the plan, the detailed roles and responsibilities of all personnel in the event of contingencies, quantification of potential funding needs, criteria for selection of funding sources, sources of liquidity, asset-liability management strategies, and the mechanism for monitoring potential liquidity crunch. Further, Allied Bank employs scenario-based, historical and hypothetical stress testing to determine the resilience of its portfolio to various extreme adverse conditions and to generate the potential risk measures under plausible events in abnormal markets. In anticipation of the Basel III implementation in the Philippines, the Bank conducted its own Quantitative Impact Study to determine the impact of the new liquidity rules, and particularly what Allied Banks capital should be to comply under Basel III. Interest rate risk management Interest rate risk is the current and prospective risk to earnings or capital arising from movements in interest rates. It arises from differences between the timing of rate changes and the timing of cash flows (repricing risk); from changing rate relationships among different yield curves affecting financial institution activities (basis risk); from changing rate relationships across the spectrum of maturities (yield curve risk); and from interest related options embedded in financial institution products (options risk). The amount at risk is a function of the magnitude and direction of interest rate changes and the size and maturity structure of the mismatch position. Interest rate risk is intertwined with other risks inherent in banking such as credit and liquidity risks. Allied Banks policy on managing its assets and liabilities is to ensure that exposure to fluctuations in interest rates are kept within acceptable limits. In its lending activities, Allied Bank seeks to match the terms and interest rate of its loans and investments with those of its fund sources as much as possible. A large portion of Allied Banks funds is in the form of short-term deposit instruments on which it pays rates prevailing in the market. These funds are predominantly short-term in view of the relatively high volatility of domestic interest rates. This volatility is due largely to the fact that Government debt security issues are used extensively by the BSP, particularly in recent years, as instruments of monetary policy. While domestic interest rates have been deregulated since the early 1980s, the BSP policy rates still influence the interest rates commercial banks charge for peso-denominated borrowings and lendings. Since the deregulation, the results of treasury bills auctioned every other week by the Philippine Bureau of Treasury serve as benchmarks for domestic interest rates. However, in the current economic environment where there are strong foreign funds inflows that distort the treasury bill rates, banks are currently quoting deposit rates at between 50 and 200 basis points above long-term treasury bill rates using the BSP policy rate as the benchmark. As of December 31, 2012, 55.2% of Allied Banks receivables from customers is for a term of less than one year, and 44.8% is due beyond one year. A majority of the interest rates in the floating rate loan portfolio is reset at 90-day intervals. Interest rates on loans are usually set on the basis of Allied Banks average or marginal costs of funds which in turn, are largely determined by the movements in Treasury bill rates plus a spread. Of Allied Banks total receivables from customers of P95.5 billion as of December 31, 2012, of which 86.0% is subject to re-pricing, 44.8% is expected to mature in more than one year. A majority of Allied Banks rate sensitive assets and liabilities is on a 30- to 90-day interest rate resetting. Allied Bank measures the sensitivity of its assets and liabilities to interest rate fluctuations by way of a re-pricing gap analysis using the re-pricing characteristics of 131

its statement of financial position and approved assumptions. For risk management purposes, the re-pricing gap covering the one- year period is multiplied by an assumed change in interest rates to yield an approximation of the change in net interest income that would result from such an interest rate movement. Allied Banks Board sets a limit on the level of EAR exposure acceptable to Allied Bank. Compliance with the EAR limit is monitored monthly by the Risk Management Division. The following table sets forth Allied Banks re-pricing gap position as of December 31, 2012:
As of December 31, 2012 Over Over 1 Month to 3 Months to 6 to 3 Months 6 Months 12 Months (Q in millions)

Up to 1 Month

Beyond 1 Year

Cash and other cash items. . . . . . . . . . . . . . . . . . . . . . . . Due from BSP and other banks . . . . . . . . . . . . . . . . . . . Interbank loan receivables . . . . . . . . . . . . . . . . . . . . . . . Securities held under agreements to resell . . . . . . . . . . Held-for trading: Government securities . . . . . . . . . . . Derivative assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Private debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Designated at FVPL: Private debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans receivablesgross . . . . . . . . . . . . . . . . . . . . . . . . Unquoted debt securitiesgross . . . . . . . . . . . . . . . . . . AFS Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Miscellaneous OCI. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total financial assets . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial Liabilities Deposit liabilities: Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial liabilities at FVPL. . . . . . . . . . . . . . . . . . . . . . Bills and acceptances payables . . . . . . . . . . . . . . . . . . . Subordinated Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued interest and Other Financial Liabilities . . . . Total Financial Liabilities . . . . . . . . . . . . . . . . . . . . . . Re-pricing Gap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cumulative Gap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3,885.6 26,082.6 7,955.0 6,359.1 148.8 821.3 46.4 34,303.6 32.7 79,635.1

14,355.8 14,355.8

6,122.0 40,688.2 1.3 6,368.7 315.8 29,455.0 6,439.1 76,511.9

51,759.1 67,494.3 24,178.8 3,285.9 4,500.0 191.7 151,409.8

49.7 1,269.7 26.1 1,345.5

90.2 90.2

3,500.0 498.5 2.6 4,001.1

8.6 47.0 55.6

(71,774.7) 13,010.3 (90.2) 2,438.0 76,456.3 (71,774.7) (58,764.4) (58,854.6) (56,416.6) 20,039.7

Allied Bank monitors its exposure to fluctuations in interest rates by measuring the impact of interest rate movements on its interest income. This is done by modeling the impact of various changes in interest rates to the Banks interest-related income and expenses. Allied Bank monitors its exposure to interest rate changes in its trading book by measuring its VaR with respect to interest rate fluctuations, and uses back testing to verify the results of the daily VaR calculation. Allied Bank performs stress tests on its trading portfolios to determine the effects of extreme market developments on the value of market risk sensitive exposures. Allied Bank also measures interest rate risk through EAR at preset confidence levels, including the potential adverse effects of changes in interest rates on reported earnings over the next 12 months. EAR is constructed by classifying all rate sensitive assets and liabilities according to their re-pricing dates or maturity, whichever is earlier. The EAR computation is accomplished monthly, with a quarterly stress test. Finally, Allied Bank implements an EAR limit system, designed to automatically decrease the size of open risk positions when increases in market volatility occur. EAR calculated from re-pricing rate gap positions is to be compared against Board-approved EAR limits. Any excess over the limit means that the open gap position, even within its nominal limit, has potential to cause more loss than management can accept, and must be reduced. In case of breach, Allied Bank has an approval matrix in place for implementation.

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Operational risk management Operational risk arises from possible failures of the business operation process and the control system of a bank. Operational risk can occur in any business area of the business process. Allied Bank recognizes operational risk management as a significant element of the corporate governance process. Allied Bank has an appropriate organizational structure within its ERM structure for the effective management of operational risk and observes the principle of segregation of conflicting duties in allocating responsibilities. Allied Bank has developed the following operational risk assessment techniques, keeping in view its entire range of activities, its business profile, and the availability of data. Allied Bank has adopted tools for measuring and monitoring operational risks such as the (i) Risk Control Self-Assessment (RCSA) process, (ii) key risk indicators (KRIs), (iii) risk mapping, (iv) loss event reporting (LER), and (v) various stress tests and scenario analyses. These tools are also employed for measuring and assessment of other risks that are considered significant and material. The RCSA is Allied Banks in-house process to evaluate the strengths and weaknesses of the operational risk environment within the Bank. A risk map is prepared and updated annually for each of Allied Banks thirteen (13) material risks, containing the following eight elements such as (i) definition of the material risk, (ii) sources of this type of risk, (iii) summary of relevant policies, (iv) owners of risk, (v) materiality definition of the risk, (vi) methodology in assessing the risk, (vii) risk appetite, and (viii) stress testing. The RCSA aids in the relevant officers conducting comprehensive and reasoned risk assessments that encompasses all material activities and significant exposures of the Bank. Allied Bank uses KRIs to identify critical areas where operational risk can materialize and activities and risk factors that have the potential to inflict losses on the Bank. KRIs provide early warning signals on critical areas where there may be operational constraints and deficiencies in control, and direct Allied Bank to take immediate corrective measures. These risks and measures are regularly reported to the RMC and Allied Bank senior management. Risk mapping is another method employed by Allied Bank to identify areas of weaknesses for prioritization of remedial action. Risk maps for significant risks are updated regularly. Identified operational risk loss data from the RCSA process are grouped by risk categories and mapped according to their causes and associated business units. Allied Bank has also taken various measures to monitor and control information technology (IT) security risks. These include: (i) monitoring of Service Level Agreement and IT Service Delivery to ensure that downtime due to telecommunication problems are immediately resolved, (ii) business continuity testing to measure the readiness of units and the appropriateness of the plan to address contingency and ensure availability of systems and processes in case of disaster, (iii) an Information Security Awareness Program (comprising classroom orientation, email blasts, posters and publication, among others) implemented to promote awareness on information security of employees who are considered the weakest link on the information security chain, (iv) relevant manuals (IT Division, Information Security, Software Development Life Cycle, Business Continuity Program), (v) issuance of operations memoranda to support the policies and strengthen the handling of information and processes, and (vi) implementation of a Data Leakage Protection program to control the spread or compromise of sensitive or confidential information. Allied Bank has strengthened its database of internal loss events indicating frequency and severity of occurrence, and uses extreme loss events data for scenario analysis. These loss events include internal and external frauds, damage to physical assets, and business disruption due to hardware/software failures. Software application is used to automate the data aggregation process and consolidation of the RCSA. Finally, Allied Bank follows a risk-based internal audit policy where its operational risk management functions are subject to regular comprehensive internal audit for independent evaluation and assessment of total risks. TRADING AND INVESTMENT SECURITIES Allied Bank engages in fixed income securities trading. As of December 31, 2012, Allied Banks trading and investment securities (which consist of financial assets at FVPL and available-for-sale investments) 133

amounted to P37.1 billion or 18.8% of total assets. As of the same period, 77.7% of Allied Banks trading and investment portfolio are in Government securities while the balance is in privately issued securities. As of December 31, 2012, financial assets at FVPL amounted to P7.4 billion or 3.7% of Allied Banks total assets. Derivatives Allied Bank trades in financial instruments where it either takes positions in traded and over-the-counter instruments, including derivatives, to take advantage of short-term market movements in equities and bonds and in currency and interest rate or for hedging open risk positions. Allied Bank places trading limits on the exposure that can be taken at any point in time. Allied Bank engages in derivatives for hedging and proprietary trades. Under BSP Circular 594, Allied Bank is authorized, as an end-user, to enter into Generally Authorized Derivatives Activities which covers FX forwards, FX swaps, Currency Swaps, IRAs, SPs and CLNs. These derivatives transactions are covered by Bank policies on trading limits wherein the exposure can be monitored at any point in time. SUBSIDIARIES Universal banks in the Philippines, such as Allied Bank, may invest in the equity of banking-related companies or allied undertakings. Financial allied undertakings include leasing companies, banks and investment houses, financing companies, credit card operations and financial institutions catering to small and medium-scale businesses. Publicly listed universal banks may acquire up to 100.0% of the voting stock of one other commercial or universal bank, up to 100.0% of the voting stock of thrift banks and rural banks, up to 100.0% of other financial allied undertakings and up to 100.0% of non-financial undertakings. Prior Monetary Board approval is required for investments in financial allied undertakings and investments of more than 40.0% in non-financial undertakings. As of December 31, 2012, Allied Banks subsidiaries included the following: Domestic subsidiaries Allied Savings Bank, formerly First Malayan Development Bank, is a thrift bank registered as a domestic corporation with the PSEC and a wholly-owned subsidiary of Allied Bank. It was renamed First Allied Development Bank but after obtaining the license to operate as a savings bank in 1996, it renamed to First Allied Savings Bank and again to Allied Savings Bank in 1998. Allied Savings Bank is authorized by the BSP to engage in thrift banking business by offering deposit products, loans and trade finance. On January 6, 1996, Allied Savings Bank was granted a foreign currency deposit license by the Monetary Board of the BSP. In addition to its head office at the Allied Bank Center in Makati City, as of December 31, 2012, Allied Savings Bank has 27 branches in Metro Manila and in the Southern Tagalog, Northern Tagalog and Bicol regions, as well as in Western Visayas and Northern Mindanao. As of December 31, 2012, it had an authorized and paid-up capital of P500.0 million. As of December 31, 2011 and 2012, total assets of Allied Savings Bank were P4.0 billion and P4.2 billion, respectively, while total capital was P1.0 billion and P1.0 billion, respectively. For the years ended December 31, 2011 and 2012, its net income was P0.8 million and P3.9 million, respectively. Allied Forex Corporation (AFC), a wholly-owned subsidiary of Allied Bank, registered with the PSEC on February 8, 1996 and began operations on June 26, 1997. AFC was organized primarily to engage in the buying and selling of foreign currencies of both domestic and international exchange traders. On February 24, 2003, the shareholders and AFCs board of directors approved the suspension of AFCs operations effective March 1, 2003, due to AFCs inability to generate adequate returns from its operations and condition. On January 28, 2009, AFCs board approved the cessation of the operations and changed its basis of accounting for subsequent periods from the going concern-basis to the liquidation basis. Accordingly, the carrying values of the remaining assets and all liabilities as of December 31, 2011 are presented at estimated realizable values and at estimated settlement amounts. On November 18, 2011, the Bureau of Internal Revenue issued a certification that states that AFC has no outstanding internal revenue tax liability. AFCs administrative and accounting functions are undertaken by its parent company at no cost to AFC. The PSEC approved the dissolution of AFC on December 27, 2012, and de-recognition of AFC was subsequently implemented on December 28, 2012. PNB Life Insurance, Inc., (PNB Life) PNB Life Insurance, Inc. traces its roots to New York Life Insurance Philippines, Inc. (NYLIP), a Philippine subsidiary of US-based New York Life International, LLC, 134

which commenced operation in August 2001. In 2003, Allied Bank took a minority interest of 25.0% in NYLIP, allowing it to provide bancassurance services. In 2007, New York Life International, LLC divested its interest in NYLIP in favor of Allied Bank and its principals making NYLIP a 75.0% majority-owned subsidiary of Allied Bank. In May 2008, NYLIP changed its corporate name to PNB Life Insurance, Inc. reflecting the change in ownership and in expectation of the impending merger of Allied Bank and PNB. In October 2009, PNB acquired a minority stake of 5.0% in PNB Life paving the way for the expansion of its bancassurance market. Aside from the existing business service centers in Cebu, Davao and Manila, in 2011, PNB Life strengthened its presence in Luzon with the opening of two regional business centers in Pampanga and La Union to serve as business hubs for the Central and North Luzon regions, respectively. PNB Life also launched Asian Summit, its first capital guaranteed unit-linked product which resulted in PNB lifes premium reaching the P1 billion level for the year. In 2012, PNB Life opened its Zamboanga Regional Business Center to serve as business hub in the Zamboanga region. Allied Leasing and Finance Corporation (ALFC), is a corporation that was registered with the PSEC in 1978 and operates as a leasing and financing entity under Republic Act No. 8556, otherwise known as the Financing Company Act of 1998. It operates a single unit with office address at the Allied Bank Center, Makati City. It offers financing and leasing of various types of equipment, machineries and vehicles, receivables, financing and direct loans. ALFC has an authorized capital stock of P500.0 million of which P152.5 million has been subscribed and fully paid-up as of December 31, 2012. Out of ALFCs subscribed and paid-up capital, 57.2% was owned by Allied Bank as of December 31, 2012. Overseas subsidiaries Allied Bank Philippines (UK) Plc (ABUK), a wholly-owned subsidiary of Allied Bank, formally commenced operations in 1992 after functioning as Allied Banks representative office in the 1970s and as a branch in the mid 1980s. ABUK was the first Philippine private commercial bank in London to be granted the status of licensed deposit taker by the Bank of England under the Financial Services and Markets Act 2000. ABUK mainly operates to facilitate trade between the Philippines and the United Kingdom, service the banking requirements of the growing Filipino population in the United Kingdom and other European countries, and promote foreign investments to the Philippines. Allied Commercial Bank (ACB), a 51.0% (as of December 31, 2012) owned subsidiary of Allied Bank and formerly known as Xiamen Commercial Bank, started as a representative office of Allied Bank in 1992 in Xiamen, Fujian Province and started operating as an Allied Bank subsidiary in 1993 with a branch in Chongqing. As approved by Chinese regulators, ACB provides foreign exchange transaction services to foreign-funded enterprises, China-based foreign institutions, China-based representative offices established by investors from Hong Kong, Macao and Taiwan, foreigners and compatriots from Hong Kong as well as to non-foreign-funded enterprises. ACB offers the following services: acceptance of public savings; the granting of short-, medium- and long-term loans; handling the acceptance and discount of negotiable instruments; buying and selling government and financial bonds and non-stock negotiable instruments denominated in foreign currency; providing letter of credit services and guarantees; handling domestic and overseas settlements; buying and selling foreign currencies for itself and on a commissioned basis; exchange of foreign currencies; inter-bank funding; engaging in a bank card business; safety deposit box services; credit-standing investigation and consultation services; and engaging in foreign exchange transactions geared to non-foreign investment enterprises. Allied Banking Corporation (Hong Kong) Limited (ABCHKL), is a private limited company incorporated in Hong Kong in 1978, and is licensed as a restricted license bank under the Hong Kong Banking Ordinance. ABCHKL was the Allied Banks first majority-owned overseas subsidiary. It provides a full range of commercial banking services predominantly in Hong Kong, which include lending and trade financing, documentary credits, participation in loans syndications and other risks, deposit taking, money market and foreign exchange operations, money exchange, investment and corporate services. ABCHKLs core revenue primarily comprises interest income from its lending activities complemented with fees and commissions from other fee-based services. ABCHKL has a wholly owned subsidiary, ACR Nominees Limited, a private limited company incorporated in Hong Kong, which provides management and nominee services to its customers. It also holds and operates one branch office in Tsimshatsui, Kowloon. In addition to its normal banking services, ABCHKL acts and is licensed as an insurance agent. 135

Oceanic Holding (BVI) Ltd. (OHBVI), is a bank holding company based in Road Town, British Virgin Islands. As of December 31, 2012, Allied Bank has a 27.78% interest in OHBVI, which in turn wholly- owns Oceanic Bank Holding, Inc., a U.S. bank holding company which conducts its primary business through its wholly-owned subsidiary, Oceanic Bank. Oceanic Bank is chartered by the State of California and operates two branches in San Francisco, California, and one branch in Guam. Oceanic Bank offers full range of commercial banking services, and its principal business is to attract deposits from the general public and use such funds, along with borrowings from other sources, to originate real estate, commercial, consumer and other loans. OHBVIs revenue consists primarily of interest income from its loans and securities portfolio. In March 2012, the board of directors of OHBVI approved the sale of 100 per cent. of the outstanding capital stock of Oceanic Bank Holding, Inc. to a bank in Northern California, in view of Allied Banks impending merger with PNB. On September 21, 2012, the First National Bank of Northern California (FNB Bancorp) completed its acquisition of Oceanic Bank Holding, Inc., the sole shareholder of Oceanic Bank. The merger of Oceanic Bank and FNB Bancorp. was also completed on the same day. On September 24, 2012, all former branch offices of Oceanic Bank began operations under the name of First National Bank of Northern California. INFORMATION TECHNOLOGY Allied Banks strategy for providing better customer services, improving operations management and enhancing operating efficiency is dependent upon its core banking and related IT systems. The core banking system Allied Bank has utilized since 1998 is Systematics, which was provided by Fidelity Information Systems. The system was migrated from the IBM 9672 mainframe to the newer IBM z-10 mainframe in 2010. Related IT systems supporting Allied Banks non-core banking business needs were implemented using in-house developed applications and third-party solutions such as the Treasury Departments OPICS+ and the Trade Finance Departments Trade Innovations, both from Misys. Allied Banks third-party IT systems hardware, software, and network infrastructure run on enterprise-class servers, storage systems and network devices. Allied Bank will continue to focus its IT initiatives on solutions such as VoIP PBX, as well as call center and customer relationship management systems that can generate better banking experiences among its clients and employees through service level improvements. In terms of managing the rapidly evolving IT landscape, Allied Bank will continue to invest in network management solutions such as network monitoring application systems and link load balancer devices to provide clearer network visibility, monitoring and decision making to address the Allied Banks growing banking transactions. Allied Bank has also continued to invest in its IT manpower by providing training programs such as those relating to information security and systems administration. Anti-money laundering system In compliance with the BSP Circular 495 dated September 20, 2005 and to improve its systems for money laundering monitoring, Allied Bank implemented an electronic anti-money laundering solution called the GIFTSWEB EDD in 2006 which has undergone two major system enhancements in 2007 and in 2010. Another enhancement has been advised for 2013 which will align this system process to the FINCEN e-filing format with new SAR, CTR forms This web-based anti-money laundering solution was developed and marketed by Gifts Software, Inc. based in New York, United States and fulfills the regulatory requirements for the detection, monitoring and reporting of suspected money laundering activities by financial institutions. The software solution provides the analytical tools needed to proactively detect and monitor possible suspicious transaction activity, respond to regulatory subpoenas and create a database for case management reports. The system facilitates the preparation of currency transactions reports and suspicious activity reports. Allied Banks Compliance Division, which currently uses this system, believes GIFTSWEB EDD adequately addresses relevant anti-money laundering rules and regulations applicable to Allied Bank. CAPITAL EXPENDITURE Set out below are the Allied Banks capital expenditures or acquisitions of property and equipment for the years ended December 31, 2010, 2011 and 2012:
For the year ended December 31, 2010 2011 2012 (in P millions)

Capital Expenditure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

408.6

298.1

330.9

136

INSURANCE Allied Banks policy is to adequately insure all of its properties against fire and other usual risks. Allied Bank also maintains insurance for operational risks such as the loss of cash or securities through loss or theft, both through a program of self-insurance and by obtaining insurance from third party providers. Allied Bank does not have business interruption insurance covering loss of revenues in the event that its operations are affected by unexpected events. Allied Bank also has a policy of requiring appropriate insurance coverage for any collateral provided by its customers. Allied Banks insurance policies are subject to exclusions which are customary for insurance policies of the type held by Allied Bank, including those exclusions which relate to war and terrorism-related events. Allied Bank believes that its insurance policies are appropriate for its business and operations and its peers in the industry. Allied Banks deposits are insured with the PDIC. PROPERTIES Allied Banks head office is located at Allied Bank Center 6754 Ayala Avenue corner Legaspi Street, Makati City. Allied Bank owns the premises occupied by its head office, including most of its branches. The following table provides a geographic breakdown of the Philippine branch network owned by Allied Bank as of December 31, 2012:
Location Number of owned branches

Metro Manila . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rest of Luzon . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Visayas. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mindanao. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

30 18 15 19 82

Allied Bank holds clean title and deeds of absolute sale for the above mentioned properties. Allied Bank leases premises occupied by its remaining 217 branches, including those of its subsidiaries, for periods ranging from two to 10 years, renewable upon mutual agreement of the parties. Various lease contracts include escalation clauses, most of which bear an annual rent increase of 5% to 10%. The following table provides a geographic breakdown of the Allied Banks Philippine branches that occupy leased premises:
Location Number of leased branches

Metro Manila. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rest of Luzon . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Visayas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mindanao . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

117 68 28 22 235

INTELLECTUAL PROPERTY Allied Bank applied for and received intellectual property protection for its brand names with the Intellectual Property Philippines Office in Makati City. Allied Bank has not been the subject of any disputes relating to its intellectual property rights. LEGAL PROCEEDINGS Allied Bank is a party in legal proceedings which arise in the ordinary course of its business activities. Allied Bank believes that none of such legal proceedings arising in the ordinary course, either individually or in the aggregate, are expected to have a material adverse effect on Allied Bank or its consolidated financial condition. On June 19, 1986, the PCGG sequestered shares of stock in Allied Bank. In response, Allied Bank and concerned stockholders instituted a special civil action (G.R. No. 75643) before the Supreme Court praying for the nullification of the above writs of sequestration. On February 15, 1990, the Supreme Court referred the action, together with related parties, to the Sandiganbayan, the Philippine anti-graft court, for appropriate disposition. In its Joint Decision of March 2, 2006, the Sandiganbayan nullified the writs of sequestration over, 137

among others, shares of stock of Allied Bank. With its motion for reconsideration of the decision having been denied, the PCGG appealed to the Supreme Court through a petition for review. The Supreme Court affirmed the decision of the Sandiganbayan on December 7, 2007, and PCGGs motion for reconsideration was thereafter denied. On January 29, 2008, the Supreme Court ruled with finality on the lifting of the writs of sequestration. On December 19, 2008, the Republic of the Philippines, through the office of the Solicitor General, filed before the Sandiganbayan Civil Case No. 0005, entitled Republic v. Lucio Tan, et. al., an Application for the Issuance of a Temporary Restraining Order and/or Writ of Preliminary Injunction, seeking to enjoin the merger of Allied Bank and PNB. The Sandiganbayan, in its Resolution of March 19, 2009, however, denied said application. On January 2010, Allied Bank received the Resolution of December 18, 2009 issued by the Sandiganbayan denying the motion for reconsideration of the Office of the Solicitor General. On February 20, 2012, the PCGG again filed before the PSEC its opposition to the merger, the primary basis of which was the pending resolution of the ill-gotten wealth case filed against Dr. Lucio C. Tan, identified as Civil Case No. 0005. The PCGG alleged the following: (i) there was no compliance with Sec. 77 of the Corporation Code; (ii) there was a violation of Sec. 2 of EO No. 2 Series of 1986; and (iii) there was no prior approval from the Sandiganbayan. Since there has been no determination or resolution on Civil Case No. 0005, it was alleged that the Republic of the Philippines will be disadvantaged by the proposed merger. By denying the issuance of the Temporary Restraining Order the PSEC noted that the Sandiganbayan impliedly gave its approval for the merger. On June 11, 2012, the Sandiganbayan finally issued its resolution dismissing the ill-gotten wealth case against Dr. Lucio C. Tan and finally disposing of Civil Case No. 0005. The PSEC on the other hand, issued its order on September 6, 2012 denying the opposition of the PCGG to the merger of Allied Bank and PNB. The PCGG requested that Dr. Lucio C. Tans shares of Allied Bank be tagged pending further appeals. Allied Bank complied with the request, tagging a total of 354,419 common shares in Allied Bank. Upon completion of the merger between Allied Bank and PNB, wherein the Allied Bank shares were exchanged for PNB shares, the PNB shares thus received by Dr. Lucio C. Tan were also tagged. On October 30, 2012, the PCGG filed a petition G.R. No. 203592 before the Supreme Court to overturn the Sandiganbayans resolution dismissing the case against Dr. Lucio C. Tan. On March 18, 2013, the Republic of the Philippines filed a motion before the Supreme Court requesting that Allied Bank and all of its assets be placed in court custody, asserting that Allied Bank shares were substantially diluted as part of its merger with PNB and demanding an explanation for this dilution, and requesting the substitution of PNB in lieu of Allied Bank when appropriate. The Supreme Court has not yet taken action with respect to this motion and the petition remains pending. See Risk FactorsRisks Relating to the Bank and its businessThe Bank is involved in litigation, which could result in financial losses or harm its business. COMPETITION Allied Bank faces competition in all its principal areas of business, from both Philippine and foreign banks, as well as finance companies, mutual funds and investment banks. Allied Bank believes that offering diverse products and services, investing in technology, leveraging synergies within the Tan Companies and with their Government customers, as well as building on relationships with Allied Banks other key customers, have allowed it maintain its market position in the industry. Universal and commercial banks in the Philippines strengthened their overall positions in 2012, experiencing an increase in total resources from the previous year. The financial system continued to enjoy growth in liquid assets. Moreover, there was an increase in bank lending during 2012, with banks aggregate loan portfolio expanding by 10% as compared to 2011, as the low interest rate environment increased demand for loans to finance economic activities. Deposits grew by almost 7.5%. Total net worth registered a 15.8% growth attributable to healthy bank profits posted for the year.

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The table below summarizes the total resources of the ten largest Philippine commercial banks as of December 31, 2012. ALLIED BANK COMPARED TO TOP 10 PRIVATE PHILIPPINE BANKS Selected Accounts As of December 31, 2012 In Billion Pesos
Total Assets Loans Deposits Equity

BDO Unibank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Metrobank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . BPI. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . RCBC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PNB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Chinabank. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . UnionBank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Security Bank. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . UCPB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allied Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allied Bank rank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Source: Published Consolidated Statements of Condition

1,250.3 1,037.5 975.7 369.0 326.9 322.0 275.0 259.1 218.0 189.0 10th

737.7 508.7 558.1 178.1 143.3 186.5 116.9 130.0 79.5 91.1 9th

930.2 739.4 803.6 249.2 240.9 272.2 190.0 142.5 172.8 146.7 9th

155.6 121.5 92.0 42.2 31.6 39.0 44.6 36.7 20.3 26.5 9th

In terms of assets, BDO Unibank, Metrobank and Bank of the Philippine Islands remained as the three largest banks with total assets of P1,250.3 trillion, P1,037.5 trillion and P1.0 trillion, respectively. BDO Unibank maintained its position as the countrys largest bank by assets and possessed the industrys largest loan portfolio, deposit base and capitalization. Allied Bank closest competitors in terms of size were Security Bank and United Coconut Planters Bank (UCPB). As of December 31, 2012, Allied Banks total assets reached P189.0 billion making it the tenth largest private domestic bank, while Security Bank was the eight largest with P259.1 billion and UCPB remained the ninth largest with P218.02 billion. In terms of deposits, Allied Bank surpassed Security Bank by P4.2 billion, while in terms of loans and capitalization, Allied Bank was the ninth largest commercial bank, ahead of UCPB which was the tenth largest. EMPLOYEES AND LABOR RELATIONS As of December 31, 2012, Allied Bank had a total of 4,153 employees for its Philippine branches and operations, consisting of 2,649 rank-and-file employees and 1,504 officers. All of Allied Banks regular rank-and-file employees are represented by the Allied Bank Employees Union (ABEU), other than those expressly excluded under the collective bargaining agreement, consisting of 484 employees belonging to supervisory/specialist positions and other excluded departments. Allied Banks collective bargaining agreement with ABEU covers rank-and-file employees for a three- year period from October 1, 2011 to September 30, 2014. As one of its primary objectives, Allied Bank believes it has always maintained peaceful and harmonious employer-employee relations by sufficiently addressing employee concerns in a timely manner and complying with all applicable labor rules and regulations. Allied Bank is one of the representatives of the banking industry before the Banking Tripartite Committee of the Philippine Department of Labor and Employment.

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THE PHILIPPINE BANKING INDUSTRY OVERVIEW The banking industry in the Philippines is composed of universal banks, commercial banks, savings banks, savings and mortgage banks, private development banks, stock savings and loan associations, rural banks cooperative banks and Islamic banks. According to statistics published on the official website of the BSP, as of June 30, 2013, the commercial sector consisted of 36 universal and commercial banks, of which 20 were universal banks and 16 were commercial banks. Of the 20 universal banks, 11 were private domestic banks, three were government banks, and six were branches of foreign banks. Of the 16 commercial banks, six were private domestic banks, two were subsidiaries of foreign banks, and eight were branches of foreign banks. As of June 30, 2013, the 36 universal and commercial banks had a total of 5,234 branches, with 2,449 branches located in Metro Manila. Commercial banks have all the general powers incident to corporations and all powers that may be necessary to carry on the business of commercial banking, such as the power to accept drafts and to issue letters of credit, to discount and negotiate promissory notes, drafts, bills of exchange and other evidences of indebtedness, accept or create demand deposits, receive other types of deposits and deposit substitutes, buy and sell foreign exchange and gold and silver bullion, and extend credit on a secured or unsecured basis. Universal banks are banks that have authority, in addition to commercial banking powers, to exercise the powers of investment houses, to invest in the equity of businesses not related to banking, and to own up to 100% of the equity in a thrift bank, a rural bank, or a financial allied or non-allied enterprise. A publicly listed universal or commercial bank may own up to 100% of the voting stock of only one other universal or commercial bank. Thrift banks primarily accumulate the savings of depositors and invest them, together with their capital, in loans secured by bonds, mortgages in real estate and insured improvements thereon, chattel mortgage, bonds and other forms of security or in loans for personal and household finance, secured or unsecured, or in financing for home building and home development; in readily marketable debt securities; in commercial papers and accounts receivables, drafts, bills of exchange, acceptances or notes arising out of commercial transactions. Thrift banks also provide short-term working capital and medium-and long- term financing for businesses engaged in agriculture, services, industry, and housing as well as other financial and allied services for its chosen market and constituencies, especially for mid-market corporates and individuals. As of March 31, 2013, there were 70 thrift banks, according to the BSP. Rural banks are organized primarily to make credit available and readily accessible in the rural areas on reasonable terms. Loans and advances extended by rural banks are primarily for the purpose of meeting the normal credit needs of farmers and fishermen, as well as the normal credit needs of cooperatives and merchants. As of March 31, 2013, there were 581 rural and cooperative banks, according to the BSP. Specialized government banks are organized to serve a particular purpose. The existing specialized banks are the Development Bank of the Philippines (DBP), Land Bank of the Philippines (LBP), and Al- Amanah Islamic Investment Bank of the Philippines (AAIIB). DBP was organized primarily to provide banking services catering to the medium- and long-term needs of agricultural and industrial enterprises, particularly in rural areas and preferably for mid-market corporates. LBP primarily provides financial support in all phases of the Philippines agrarian reform program. In addition to their special functions, DBP and LBP are allowed to operate as universal banks. AAIIB was organized to promote and accelerate the socio-economic development of the Autonomous Region in Muslim Mindanao through banking, financing and investment operations and to establish and participate in agricultural, commercial and industrial ventures based on Islamic banking principles and rulings. During the past fifteen years, the Philippine banking industry has been marked by two major trendsthe liberalization of the industry, and mergers and consolidation. Foreign bank entry was liberalized in 1994, enabling foreign banks to invest in up to 60% of the voting stock of an existing bank or a new banking subsidiary, or to establish branches with full banking authority. This led to the establishment of ten new foreign bank branches in 1995. The General Banking Law enacted in 2000 further liberalized the industry by providing that the Monetary Board may authorize foreign banks to acquire up to 100% of the voting stock of one domestic bank. Under the General Banking Law, any foreign bank, which prior to the effectiveness of the said law availed itself of the privilege to acquire up to 60% of the voting stock of a domestic bank, may further acquire voting shares of such bank to the extent necessary for it to own 100% of the voting stock thereof. As of March 31, 2013, there were 18 foreign banks with branches and two foreign banks with subsidiaries in the Philippines, according to the BSP. 140

The BSP has also been encouraging mergers and consolidations in the banking industry, seeing this as a means to create stronger and more globally competitive banking institutions. To encourage this trend, the BSP offered various incentives to merging or consolidating banks. On October 11, 2012, BSP Circular No. 771 was issued in order to grant incentives for investors who merely purchase a controlling stake in a bank. Accordingly, the coverage of relief incentives for mergers and consolidations now includes the purchase and acquisition of a majority of or all of the outstanding shares of stock of a bank. Based on BSP data, since the new package of incentives took effect in September 1998, there have been an increasing number of mergers, acquisitions, and consolidations of banks. However, while recent mergers increased market concentrations, BSP studies showed that they were not enough to pose a threat to the overall competition levels since market share remained relatively well dispersed among the remaining players. The following table sets out a comparison of the leading Philippine banks as of the dates indicated in the footnotes to the table:
Market Capitalization(2) Total Total Capital(3)(4) Assets(4) (Q in billions) Total Loans(4) Total Deposits(4)

Banco De Oro Unibank, Inc.(1) . . . . . . . . . . . . . . . . . . . . . . Metropolitan Bank & Trust Company(1). . . . . . . . . . . . . . Bank of the Philippines Islands(1) . . . . . . . . . . . . . . . . . . . Philippine National Bank(1). . . . . . . . . . . . . . . . . . . . . . . . .

268.3 227.8 342.8 94.9

162.6 145.8 107.4 83.9

1,508.1 1,252.4 1,083.6 606.1

848.2 574.6 548.7 258.2

1,202.7 896.9 888.9 454.0

Notes: (1) Data is provided on a consolidated basis. (2) Source: PSE monthly report as of September 30, 2013. (3) Includes interests in subsidiaries and allied undertakings. (4) Source: PSEC, based on quarterly reports for the period ended September 30, 2013. Restrictions on Branch Opening Section 20 of the General Banking Law provides that universal and commercial banks may open branches within or outside the Philippines upon prior approval of the BSP. The same provision allows banks, with prior Monetary Board approval, to use any or all of its branches as outlets for the presentation and/or sale of financial products of its allied undertakings or investment house units. BSP Circular No. 505 (2005), as amended by BSP Circular No. 696 (2010), prescribes the minimum capitalization for banks in order to be given authority to establish branches, as follows:
Minimum Capital (in Q Millions)

Expanded Commercial Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-expanded Commercial Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thrift Bank: With Head Office within Metro Manila . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . With Head office in Cebu or Davao . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . With Head Office outside Metro Manila, Cebu or Davao . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rural Banks: Within Metro Manila . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cities of Cebu and Davao. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . All other cities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1st to 4th class municipalities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5th to 6th class municipalities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4,950 2,400 1,000 500 250 100 50 25 10 5

Generally, only universal/commercial and thrift banks may establish branches on a nationwide basis. Once approved, a branch may be opened within six months from the date of approval (extendable for another six-month period, upon the presentation of justification therefore). Pursuant to BSP Circular No. 505 (2005), banks are allowed to establish branches in the Philippines, except in the cities of Makati, Mandaluyong, Paraaque, Pasay, Pasig, Quezon and San Juan. However, under BSP Circular No. 728 (2011), the moratorium on the establishment of banks in these cities would be fully lifted by 2014 as a result of the BSPs two-phased liberalization approach.

141

Under the first phase, second-tier universal and commercial banks with capital accounts of at least P10 billion and thrift banks with capital of at least P3 billion that have less than 200 branches in restricted areas as of December 2010 would be allowed to apply and establish branches in these restricted areas until June 30, 2014. The second phase of the current liberalization approach would start on July 1, 2014 wherein branching in the restricted areas will be opened up to all banks except rural and cooperative banks that are not allowed to establish branches in Metro Manila. Branches of microfinance-oriented banks, microfinance-oriented branches of regular banks and branches that will cater primarily to the credit needs of Barangay Micro Business Enterprises duly registered under Rep. Act No. 9178 may still be established anywhere upon the fulfillment of certain conditions. Competition The Bank faces competition from both domestic and foreign banks, in part, as a result of the liberalization of the banking industry by the Government. Since 1994, a number of foreign banks, which may have greater financial resources than the Bank, have been granted licenses to operate in the Philippines. Such foreign banks have generally focused their operations on the larger corporations and selected consumer lending products, such as credit cards. The foreign banks have not only increased competition in the corporate market, but have, as a result, caused more domestic banks to focus on the commercial mid-market, placing pressure on margins in both markets. Since September 1998, the BSP has been encouraging consolidation among banks in order to strengthen the Philippine banking system. Mergers and consolidation result in greater competition, as a smaller group of top tier banks compete for business. Philippine National Bank compared to top 10 private Philippine banks Selected Accounts As of September 30, 2013 In Billion Pesos
Total Assets Loans Deposits Equity

BDO Unibank. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Metrobank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . BPI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PNB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . RCBC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Chinabank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . UnionBank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Security Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . UCPB. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PNB rank. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Source: SEC 17-Q

1,508.1 1,252.4 1,083.6 606.1 391.0 359.0 345.9 276.3 257.7 4th

848.2 1,202.7 574.6 896.9 548.7 888.9 258.2 454.0 214.9 258.9 206.3 303.2 120.6 258.5 145.2 184.0 92.4 212.5 4th 4th

162.6 145.8 107.4 83.9 46.4 44.3 44.9 41.5 20.8 4th

Recent Government policies and regulations in relation to the Philippine banking system The Philippine banking industry is highly regulated by the BSP and operates within a framework that includes guidelines on capital adequacy, corporate governance, management, anti-money laundering and provisioning for NPLs. The BSP can alter any of these and can introduce new regulations to control any particular line of business. Certain policies that the Bank believes could affect its results of operations include the following: Regulations Governing the Derivatives Activities of Banks. In line with the policy of the BSP to support the development of the Philippine financial market by providing banks and their clients with expanded opportunities for financial risk management and investment diversification through the prudent use of derivatives, Circular No. 594 was issued by the BSP in January 8, 2008 amending the existing regulations governing the derivatives activities of banks and trust entities. The Bank expects increased competition in the swaps and other derivative transactions allowed under the new regulations.

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 Amendments to UITFs Regulations. In September 3, 2004, the BSP issued Circular No. 447 (as amended by BSP Circular No. 675 dated December 22, 2009) which provided guidelines for the launching and offering of new products to be known as unit investment trust funds (UITFs), and was intended to completely phase out common trust funds or convert them into UITFs within two years from the date of the circular. UITFs are open-ended pooled trust funds denominated in Pesos or any acceptable currency that are to be operated and administered by trust entities and made available by participation. Eligible assets of UITFs include bank deposits, securities issued by or guaranteed by the Government or the BSP, tradable securities issued by the government of a foreign country, exchange listed securities, marketable instruments that are traded in an organized exchange, loans traded in an organized market and such other tradable instruments as the BSP may allow. These assets are subject to mark-to-market valuation on a daily basis. The stated objective of the BSP is to align the operation of pooled funds with international best practices and enhance the credibility of pooled funds to investors. In January 2008, the BSP issued Circular No. 593 to improve risk disclosure on investing in UITFs, to require banks to conduct a client suitability assessment to profile the risk-return orientation and suitability of the client to the specific type of UITF that he wants to participate in, and to update clients profile at least every three years. In December 2009, the BSP issued Circular No. 676 allowing cross-currency investment for Peso trust, other fiduciary and investment management accounts, including Peso unit investment trust funds. Ceiling on Loans to Subsidiaries and Affiliates. A circular issued by the BSP in May 2009 amended the ceiling on loans to subsidiaries and affiliates. This allowed a banks subsidiaries and affiliates, engaged in energy and power generation, to a separate individual limit of 25.0% of the banks net worth while the unsecured amount to not exceed 12.5% of the said net worth. Subsequently, the BSP issued Circular No. 712 (2011) adopting the amendments of the Monetary Board increasing the ceiling on loans by an additional 10-25% of the net worth of the bank provided that certain types and levels of securities are provided or in case the funds will be used for undertaking infrastructure and/or development projects under the Public-Private Partnership Program of the Government duly certified by the Secretary of Socio-Economic Planning. Amendment to Regulations on Single Borrowers Limit. On February 9, 2011, the BSP issued an amendment to the Regulations on Single Borrowers Limit. The amendment allowed for increases (on top of the 20.0% as already mentioned) on the amount of loans, credit accommodations and guarantees that a bank may issue out to a borrower. The following are the increases given certain conditions: (a) an additional 10.0% of the net worth of the bank as long as the additional liabilities are secured by shipping documents, trust or warehouse receipts or other similar documents which cover marketable, nonperishable goods which must be fully covered by insurance, (b) an additional 25.0% of the net worth of the bank provided that: (i) the additional loans, credit accommodations and guarantees are used to finance the infrastructure and/or development projects under the Philippine Governments Public-Private Partnership Program; (ii) these additional liabilities should not exceed 25.0% of the net worth of the bank; and (iii) the additional 25% shall only be allowed for a period of three years from December 6, 2010, and (c) an additional 15.0% of the net worth of the bank provided that the additional loans, credit accommodations and guarantees are used to finance oil importation of oil companies which are not subsidiaries or affiliates of the lending bank which is also engaged in energy and power generation. Limit on Real Estate Loans of Universal Banks. In February 4, 2008, the BSP issued Circular No. 600 removing interbank loans from the total loan base to be used in computing the aggregate limit on real estate loans, and amending the inclusions and exclusions to be observed in the computation. Exemption of Paired ROP Warrants from Capital Charge for Market Risk. In connection with the Governments Paired Warrants Program, the BSP issued Circular No. 605 in March 5, 2008 exempting warrants paired with ROP Global Bonds from capital charge for market risk to the extent of a banks holdings of bonds paired with warrants equivalent to not more than 50.0% of total qualifying capital. Guidelines on Securities Borrowing and Lending Transactions. Guidelines by the PSE involving foreign entities of PSE-listed shares from local investors and lenders. In May 2008, the BSP Monetary Board authorized to issue BSP Registration documents to cover the PSE-listed shares of stock borrowed by foreign entities from local investors and lenders. This will allow foreign borrowers to purchase foreign exchange from the banking system for remittance abroad using the Peso sales proceeds of the borrowed shares including the related income from securities borrowing and lending transactions, i.e. rebates or shares in the income earned on the reinvestment of the cash collateral, interest and dividends earned on the Peso-denominated government securities and PSE-listed shares used as collateral. Reclassification of Financial Assets between Categories. The BSP issued Circular No. 628 dated October 31, 2008, amending Circular No. 626 dated October 23, 2008 and Resolution of the Monetary 143

Board No. 1423 dated October 30, 2008, which approved the guidelines governing the reclassification of financial assets between categories. Financial Institutions shall be allowed to reclassify all or a portion of their financial assets from held for trading or available for sale categories to the held to maturity or unquoted debt securities classified as loans categories effective July 1, 2008 but only until December 31, 2011. Taxes. In addition, the Bank is subject to certain tax rules specific to financial institutions. In November 2005, the Government increased the gross receipts tax, which is applied to the Banks non- interest income, from 5.0% to 7.0%. Any changes in the regulatory or tax environment as pertaining to the Philippine banking industry could have a material impact on the Banks results of operations and financial condition. Supervisory System for AMLA. BSP Memorandum No. M2012-017 (April 2012) requires all covered banking institutions to comply with the Anti-Money Laundering Risk Rating System (ARRS), a supervisory system that aims to ensure that mechanisms to prevent money laundering and terrorist funding are in place and effectively implemented in banking institutions. Under the ARRS, each institution is rated based on the following factors: (a) efficient Board of Directors and senior management oversight; (b) sound AML policies and procedures embodied in a money laundering and terrorist financing prevention program duly approved by the Board of Directors; (c) robust internal controls and audit; and (d) effective implementation. Basel III Regulations. On January 5, 2012, the Monetary Board approved the BSPs implementation plans for the adoption of Basel III standards. BSP Memorandum No. M2012-002 outlines the central banks proposed new minimum ratios and conservation buffers. The revised risk-based capital adequacy framework (which will also cover risk measurement enhancement and provisions concerning the use of third party credit assessment agencies) is set to be adopted in full starting January 1, 2014. In March 2012, the BSP also circulated a discussion paper providing draft guidelines for Basel III implementation in the Philippines starting January 1, 2014. Philippine banks were invited to comment on the discussion paper until June 2012, after which the BSP finalized the guidelines for Basel III in the country. Notable provisions include: (i) new categorization of the capital base with Tier 1 being composed of Common Equity Tier 1 (CET1) capital and Additional Tier 1 (AT1) capital and elimination of the subcategories of Tier 2 capital; (ii) revised eligibility criteria for the different categories of regulatory capital; (iii) regulatory adjustments to be deducted from CET1 in a full deduction approach; (iv) higher minimum capital requirements; (v) loss absorbency of regulatory capital at the point of non-viability; (vi) introduction of a framework to promote the conservation of capital and the build-up of adequate buffers above the minimum that can be drawn down in times of periods of stress; and (vii) additional disclosure requirements. Further to the above, on September 21, 2012, BSP Circular No. 768 was issued, which provides, among others, that Hybrid Tier 1 and Lower Tier 2 capital must have loss absorption features, namely, that the instrument would be written off or converted into common equity upon the occurrence of a trigger event determined by the BSP.

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BANKING REGULATION AND SUPERVISION Banking Regulation and Supervision The General Banking Law provides that the operations and activities of banks are subject to the supervision of the BSP. Likewise, Republic Act No. 7653 (the New Central Bank Act) which creates the BSP provides that the BSP shall have supervision over the operations of banks and exercise such regulatory powers over the operations of finance companies and non-bank financial institutions performing quasi-banking functions. The BSP exercises its powers through the Monetary Board. The supervisory power of the BSP under the New Central Bank Act extends to the subsidiaries and affiliates of banks and quasi-banking institutions engaged in allied activities. A subsidiary is defined as a corporation with more than 50% of its voting stock is owned by a bank or quasi-bank. An affiliate is defined as a corporation whose voting stock, to the extent of 50% or less is owned by a bank or quasi- bank or which is related or linked or such other factors as determined by the Monetary Board. The power of supervision of the BSP under the General Banking Law includes the issuance of rules of conduct or standards of operation for uniform application, conduct examination to determine compliance with laws and regulations, to oversee compliance with such rules and regulations and inquire into the solvency and liquidity of the covered entities. Section 7 of the General Banking Law provides that the BSP in examining a bank shall have the authority to examine an enterprise which is owned or majority-owned or controlled by a bank. As a general rule, no restraining order or injunction may be issued by a court to enjoin the BSP from exercising its powers to examine any institution subject to its supervision. The refusal of any officer, owner, agent, manager or officer-in-charge of an institution subject to the supervision or examination of the BSP to make a report or a permit examination is criminally liable under Section 34 of the New Central Bank Act. In addition to the general laws such as the General Banking Law and Republic Act No. 9160, as amended (the Anti-Money Laundering Act of 2001 or the AMLA), among others, banks must likewise comply with letters, circulars and memoranda issued by the BSP some of which are contained in the BSP Manual of Regulations for Banks (the BSP Manual). The BSP Manual is the principal source of rules and regulations to be complied with and observed by banks in the Philippines. The BSP Manual contains regulations that include those relating to the organization, management and administration, deposit and borrowing operations, loans, investments and special financing program, and trust and other fiduciary functions of the relevant bank. Supplementing the BSP Manual are rules and regulations promulgated in various circulars, memoranda, letters and other directives issued by the Monetary Board. All regulations pertaining to banks are then implemented by the Supervision and Examination Sector of the BSP. The Supervision and Examination Sector is responsible for ensuring the observance of applicable laws and rules and regulations by banking institutions operating in the Philippines (including Government credit institutions, their subsidiaries and affiliates, non-bank financial intermediaries, and subsidiaries and affiliates of non-bank financial intermediaries performing quasi-banking functions, non- bank financial intermediaries performing trust and other fiduciary activities under the General Banking Law, non-stock and savings loans associations under Republic Act No. 3779, and pawnshops under Presidential Decree No. 114). Regulation relating to Capital Structure Pursuant to the General Banking Law, no entity may operate as a bank without the permit of the BSP through the Monetary Board. The PSEC will not register the incorporation documents of any bank or any amendments thereto without a Certificate of Authority issued by the Monetary Board. A bank can only issue par value stocks and it must comply with the minimum capital requirements prescribed by the Monetary Board. A bank cannot purchase or acquire its own capital stock or accept the same as security for a loan, except when authorized by the Monetary Board. All treasury shares must be sold within six months from the time of purchase or acquisition thereof. Under the BSP Manual, universal banks are required to have capital accounts of at least P5.4 billion. Commercial banks are required to have capital accounts of at least P2.8 billion. Thrift banks with a head office 145

in Metro Manila are required to have capital accounts of at least P400.0 million. These minimum levels of capitalization may be changed by the Monetary Board from time to time. Currently, the BSP requires only minimum capital accounts of P4.95 billion for universal banks, P2.4 billion for commercial banks, and P1.0 billion for thrift banks with a head office in Metro Manila. For purposes of these requirements, the BSP Manual states that the term capital shall be synonymous to unimpaired capital and surplus, combined capital accounts and net worth and shall refer to the total of the unimpaired paid-in capital, surplus and undivided profits, less: (a) Unbooked valuation reserves and other capital adjustments as may be required by the BSP; (b) Total outstanding unsecured credit accommodations, both direct and indirect, to DOSRI granted by the bank; (c) Unsecured loans, other credit accommodations and guarantees granted to subsidiaries and affiliates; (d) Deferred income tax; (e) Appraisal increment reserve (revaluation reserve) as a result of appreciation or an increase in the book value of bank assets; (f) Equity investment of a bank in another bank or enterprise, whether foreign or domestic, if the other bank or enterprise has a reciprocal equity investment in the investing bank, in which case, the investment of the bank or the reciprocal investment of the other bank or enterprises, whichever is lower; and

(g) In the case of rural banks, the government counterpart equity, except those arising from conversion of arrearages under the BSP rehabilitation program. Foreign individuals and non-bank corporations may own or control up to 40% of the voting stock of a domestic bank. The percentage of foreign-owned voting stock in a bank shall be determined by the citizenship of the individual stockholders in that bank. The citizenship of the corporation which is a stockholder in a bank shall follow the citizenship of the controlling stockholders of the corporation, irrespective of the place of incorporation. However, under the Foreign Bank Liberalization Act, a foreign bank may with prior approval of the Monetary Board operate in the Philippines through any one of the following modes: (a) By acquiring, purchasing or owning up to 60% of the voting stock of an existing domestic bank (including banks under receivership or liquidation, provided no final court liquidation order has been issued); (b) By investing in up to 60% of the voting stock of a new banking subsidiary incorporated under the laws of the Philippines; or (c) By establishing branches with full banking authority. Section 73 of the General Banking Law provides that within seven years from the effective date of such law and subject to guidelines issued pursuant to the Foreign Banks Liberalization Act, the Monetary Board may authorize a foreign bank to acquire up to 100% of the voting stock of only one bank organized under the laws of the Republic of the Philippines. Within the same period, the Monetary Board may authorize any foreign bank, which prior to the effective date of such law availed itself of the privilege to acquire up to 60% of the voting stock of a bank under the Foreign Banks Liberalization Act and the Thrift Banks Act, to further acquire voting shares of such bank to the extent necessary for it to own 100% of the voting stock thereof. In the exercise of this authority, the Monetary Board shall adopt measures as may be necessary to ensure that at all times the control of 70% of the resources or assets of the entire banking system is held by banks which are at least majority-owned by Filipinos. The stockholders of individuals related to each other within the fourth degree of consanguinity or affinity, legitimate or common-law, shall be considered family groups or related interests and must be fully disclosed in all transactions by such an individual with the bank. Moreover, two or more corporations owned or controlled by the same family group or same group of persons shall be considered related interests, which must be fully disclosed in all transactions with the bank. A bank cannot declare dividends greater than its accumulated net profits then on hand deducting therefrom its losses and bad debts. A bank cannot also declare dividends if at the time of declaration: (a) its clearing account with the BSP is overdrawn; (b) it is deficient in the required liquidity floor for government deposits for five or more consecutive days; 146

(c) it does not comply with the minimum capitalization requirement and risk-based capital ratio; (d) it does not comply with the liquidity standards/ratio prescribed by the BSP for purposes of determining funds available for dividend declaration; (e) it has past due loans or accommodations with the BSP or other institutions; (f) it has net loss from operations in any one of the two fiscal years immediately preceding the date of any dividend declaration; or

(g) it has committed a major violation as determined by the BSP. Regulations with respect to Management of Banks The board of directors of a bank must have at least five and a maximum of 15 members, two of whom shall be independent directors. In case of merged or consolidated banks, the number of directors shall not exceed 21. An independent director is a person who is not an officer or employee of a bank, its subsidiaries or affiliate or related interests. Foreigners are allowed to have board seats to the extent of the foreign equity in the bank. The Monetary Board shall issue shall regulations that provides for the qualifications and disqualifications to become a director or officers of a bank. After due notice to the board of directors of a bank, the Monetary Board may disqualify, suspend or remove any bank director or officer who commits or omits act which renders him unfit for the position. The Monetary Board may regulate the payment by the bank of compensation, allowances, bonus, fees, stock options and fringe benefits to the bank officers and directors only in exceptional cases such as when a bank is under conservatorship, or is found by the Monetary Board to be conducting business in an unsafe or unsound manner or when the Monetary Board deems it to be in unsatisfactory condition. Except in cases allowed under the Rural Bank Act, no appointive or elective public official, whether full time or part time, may serve as officer of any private bank, except if the service is incidental to financial assistance provided by government or government owned and controlled corporation or when allowed by law. Regulations with respect to Bank Operations A universal bank, such as the Bank, may open branches or offices within or outside the Philippine subject to the prior approval by the BSP. A bank and its branches and offices shall be treated as one unit. A bank, with prior approval of the BSP, may likewise use any of its branches and as outlets for presentation and/ sale of financial products of its allied undertakings or investment house units. The Monetary Board shall prescribe the minimum ratio which the net worth of a bank must bear to its total risk assets which may include contingent accounts. In connection thereto, the Monetary Board may require that the ratio be determined on the basis of the net worth and risk assets of a bank, its subsidiaries, financial or otherwise and prescribe the composition and the manner of determining the net worth and total risk assets of bank and their subsidiaries. To ensure compliance with the set minimum ratio, the Monetary Board may limit or prohibit the distribution of net profits by such bank and require that such net profit be used to increase the capital accounts of the bank until the minimum requirement has been met. It may also restrict or prohibit acquisition of major assets and the making of new investments by the bank. A universal bank has the authority to exercise and perform (i) activities allowed for commercial banks, (ii) powers of an investment house, and (iii) investment in non-allied enterprises. Capital Adequacy Requirements and Reserve Requirements The Philippines adopted capital requirements based on the Basel Capital Accord in July 2001 and adopted capital adequacy requirements based on the Basel II Capital Accord in July 2007, through the issuance of BSP Circular 538. Circular No. 538 is the implementing guidelines of the revised International Convergence of Capital Measurement and Capital Standards known as Basel II, the international capital standards set by the Basel 147

Committee on Banking Supervision. It aimed to replace Basel I, which was issued in 1988 and amended in 1996, to make the risk-based capital framework more risk-sensitive. On January 6, 2012, the BSP announced that universal and commercial banks will be required to adopt the capital adequacy standards under Basel III starting January 1, 2014. On January 15, 2013, the BSP issued Circular No. 781, which prescribes the new capital adequacy standards in accordance with Basel III. This circular will take effect on January 1, 2014. Under the New Central Bank Act, the BSP requires banks to maintain cash reserves and liquid assets in proportion to deposits in prescribed ratios. If a bank fails to meet this reserve during a particular week on an average basis, it must pay a penalty to the BSP on the amount of any deficiency. On March 29, 2012, the BSP issued Circular No. 753 mandating the unification of the statutory/legal and liquidity reserves requirements on Peso deposits and Peso deposit substitutes. As such, effective the week of April 6, 2012, non-foreign currency deposit unit deposit liabilities, including Peso demand, savings and time deposits, negotiable orders of withdrawal of accounts and deposit substitutes, are subject to required reserves equivalent of 18%. Likewise, a universal bank is required to set up reserves of 18% against peso-denominated common trust funds and such other managed funds and reserves of 15% against Peso-denominated Trust and Other Fiduciary Accounts (TOFA)Others. Limitations on Operations The Single Borrowers Limit Except as prescribed by Monetary Board for reasons of national interest, the total amount of loan, credit accommodations and guarantees (determined on the total credit commitment) that may be extended by a bank to any person or entity shall at no time exceed 20% of the net worth of the bank (or 30.0% of the net worth of the bank in the event that certain types and levels of security are provided). This ceiling may be adjusted by the Monetary Board from time to time. As of December 31, 2011, the ceiling applicable to the Bank was 25.0%. The limitations shall not apply to secured obligations of the BSP or the Republic of the Philippines, those covered by assignment of deposits maintained in the lending bank and held in the Philippines, those under letters of credit to the extent covered by margin deposits and those which the Monetary Bank may from time to time prescribe as non-risk items. Limitation on DOSRI Transactions No director or officer of any bank shall directly or indirectly, for himself or as the representative or agent of others, borrow from such bank nor shall he become a guarantor, endorser or surety for loans from such bank to others, or in the manner be an obligor or incur any contractual liability to the bank except with the written approval of the majority of all the directors of the bank, excluding the director concerned. After due notice to the board of directors of the bank, the office of any officer or director who violates the DOSRI limitation may be declared vacant and such erring officer or director shall be subject to the penal provisions of the New Central Bank Act. The DOSRI account shall be limited to an amount equivalent to their respective unencumbered deposits and book value of their paid-in capital contribution in the bank. The limitation excludes loans, credit accommodations and guarantees secured by assets which the Monetary Board considers as non-risk. As a general rule, loan and other credit accommodation against real estate shall not exceed 60% of the appraised value of the real estate security plus appraised value of the insured improvements, except for (i) residential loans not exceeding P3.5 million to finance the acquisition or improvement of residential units; and (ii) housing loans extended by or guaranteed under the Governments National Shelter Program, such as the Expanded Housing Loans Program of the Home Development Mutual Fund and the mortgage and guaranty and credit insurance program of the Home Insurance and Guaranty Corporation. Prior to lending on an unsecured basis, a bank must investigate the borrowers financial position and ability to service the debt and must obtain certain documentation from the borrower, such as financial statements and tax returns. Any unsecured lending should be only for a time period essential for completion of the operations to be financed. Likewise, loans against chattels and intangible properties shall not exceed 75% of the appraised value of the security and such loan may be made to the title- holder of the chattels and intangible properties or his assignee. Limitation on Investments The total investment of a universal bank in equities of allied and non-allied enterprises shall not exceed 50% of the net worth of the said universal bank. Moreover, the equity investment in any one enterprise whether allied 148

or non-allied, shall not exceed 25% of the net worth of the universal bank. Net worth for this purpose is defined as the total unimpaired paid-in capital including paid-in surplus, retained earnings and undivided profit, net of valuation reserves and other adjustments as may be required by the BSP. The Monetary Board must approve such acquisition of equities. A universal bank can own up to 100% of the equity in a thrift bank, a rural bank or a financial or nonfinancial allied enterprise. A publicly listed universal bank, such as the Bank, may own up to 100% of the voting stock of only one other universal or commercial bank. However, with respect to non-allied enterprise, the equity investment in such enterprise by a universal bank shall not exceed 35% of the total equity in the enterprise nor shall it exceed 35% of the voting stock in that enterprise. A banks total investment in real estate and improvement including bank equipment shall not exceed 50% of the combined capital accounts. Further, the banks investment in another corporation engaged primarily in real estate shall be considered as part of the banks total investment in real estate, unless otherwise provided by the Monetary Board. The limitation stated above shall not apply with respect to real estate acquired by way of satisfaction of claims. However, all these properties must be disposed of the bank within a period of five years or as may be prescribed by the Monetary Board. Prohibition to act as Insurer A bank is prohibited from directly engaging in insurance business as the insurer. Permitted Services In addition to the operations incidental to its banking functions, a bank may perform the following services: (a) receive in custody funds, documents and valuable objects; (b) act as financial agent and buy and sell, by order of and for the account of their customers, shares evidences of indebtedness and all types of securities; (c) upon prior approval of the Monetary Board, act as the managing agent, adviser, consultant or administrator of investment management/advisory/consultancy accounts; and (d) rent out safety deposit boxes. Anti-Money Laundering Act 2001 The AMLA requires covered institutions such as banks including its subsidiaries and affiliates, to provide for customer identification, record keeping and reporting of covered and suspicious transactions. While the Philippines enacted the AMLA to introduce more stringent anti-money laundering regulations, these regulations did not initially comply with the standards set by the FATF. However, following pressure from the FATF, an amendment to the Anti-Money Laundering Act became effective on March 23, 2003. In January 2005, the Philippines was removed from the list of Non-Cooperative Countries and Territories (NCCTs) and the anti-money laundering systems (including strict customer identification, suspicious transaction reporting, bank examinations, and legal capacities to investigate and prosecute money laundering) were all identified to be of a satisfactory nature. Currently, the Philippines is on the grey list, as the FATF, in news reports, noted a high-level political commitment from local authorities to address noted deficiencies in its anti-money laundering regime. Republic Act No. 10168 enacted on June 18, 2012 expanded the AMLA to include the crime of financing terrorism. The FATF has welcomed the Philippines significant progress in improving its anti-money laundering and combating the financing of terrorism (AML/CFT) regime and noted that the Philippines has established the legal and regulatory framework to meet its commitments in its action plan regarding the strategic deficiencies that the FATF had identified in October 2010. The Philippines is therefore no longer subject to FATFs monitoring process under its on-going global AML/CFT compliance process. The Philippines will work with the Asia Pacific Group on Money Laundering as it continues to address the full range of AML/CFT issues identified in its Mutual Evaluation Report, in particular, regulating the casino sector in the Philippines for AML/CFT purposes and making it subject to AML/CFT requirements. A more recent amendment to the anti-money laundering regime, Republic Act No. 10365, was approved on February 15, 2013. This amendment expanded the coverage of the AMLA, which now talks about covered 149

persons, natural or juridical. Additions to the enumeration of covered persons include jewellery dealers for transactions in excess of P1,000,000.00; company service providers, or those who form companies for third parties, hold positions as directors or corporate secretaries for third parties, provide business addresses or engage in correspondence or act as nominee shareholder for others. Likewise, the following persons were added to the list: persons (a) who manage their clients money, security or other assets, or (b) who manage bank or securities accounts, or (c) who organize funds for the creation, operation or management of companies, or (d) who create, operate or manage entities or relationships, or (e) buy and sell business entities. Under the AMLA, banks, as covered persons, are required to report to the AMLC all covered transactions and suspicious transactions within a period of five working days from occurrence thereof, unless the AMLC prescribes a different period not exceeding 15 working days. The Court of Appeals, upon verified ex-parte application by the AMLC and after determination that probable cause exists that any monetary instrument or property is in any way related to an unlawful activity as defined in the AMLA, has the authority to issue a freeze order which shall be effective immediately, and which shall not exceed six months depending upon the circumstances of the case. BSP Circular No. 495 (2005), as amended by BSP Circular 527 (2006), required all universal and commercial banks to adopt an electronic money laundering transaction monitoring system by October 14, 2007. The said system should, at the minimum, be able to detect and raise to the banks attention, transactions and/or accounts that qualify either as covered transactions or suspicious transactions as defined under the AMLA. BSP Memorandum No. M2012-017 (April 2012) likewise requires all covered banking institutions to comply with the Anti-Money Laundering Risk Rating System (ARRS), a supervisory system that aims to ensure that mechanisms to prevent money laundering and terrorist funding are in place and effectively implemented in banking institutions. Under the ARRS, each institution is rated based on the following factors: (a) efficient board of directors and senior management oversight; (b) sound anti-money laundering policies and procedures embodied in a money laundering and terrorist financing prevention program duly approved by the board of directors; (c) robust internal controls and audit; and (d) effective implementation. Institutions that are subject to the AMLA are also required to establish and record the identities of their clients based on official documents. In addition, all records of transactions are required to be maintained and stored for a minimum of ten years from the date of a transaction. Records of closed accounts must also be kept for five years after their closure. Covered transactions are single transactions in cash or other equivalent monetary instrument involving a total amount in excess of P500,000.00 within one Banking Day. Suspicious transactions are transactions with covered institutions such as a bank, regardless of the amount involved, where any of the following circumstances exists: (a) there is no underlying legal or trade obligation, purpose or economic justification; (b) the customer or client is not properly identified; (c) the amount involved is not commensurate with the business or financial capacity of the client; (d) the transaction is structured to avoid being the subject of reporting requirements under the AMLA; (e) there is a deviation from the clients profile or past transaction; (f) the transaction is related to an unlawful activity or offense under the AMLA;

(g) similar or analogous transactions to the above. Failure by any responsible official or employee of a bank to maintain and safely store all records of all transactions of the bank, including closed accounts, for five years from date of transaction/closure of account shall be subject to a penalty of six months to one year imprisonment and/or fine of P500,000.00 Malicious reporting of a completely unwarranted or false information relative to money laundering transaction against any person is punishable by six months to four years imprisonment and a fine of not less than P100,000.00 and not more than P500,000.00. In compliance with the law, banks, their officers and employees are prohibited from communicating directly or indirectly to any person or entity the fact that a report was made to the Anti-Money Laundering Council and any information relating to such report. A violation of this rule is deemed a criminal act. 150

Money laundering is committed by any person who, knowing that any monetary instrument or property represents, involves or relates to the proceeds of any unlawful activity defined under the law: (a) transacts said monetary instrument or property; (b) converts, transfers, disposes of, moves, acquires, possesses or uses said monetary instrument or property; (c) conceals or disguises the true nature, source, location, disposition, movement or ownership or of rights with respect to said monetary instrument or property; (d) attempts or conspires to commit money laundering offenses referred to in paragraphs (a), (b), or (c); (e) aids, abets, assists in or counsels the commission of the money laundering offenses referred to in paragraphs (a), (b) or (c); (f) performs or fails to perform any act as a result of which he facilitates the offense of money laundering referred to in (a), (b) or (c); and

(g) knowingly fails to disclose and file with AMLC any monetary instrument or property required to be disclosed and filed. TAXATION FOR BANKS Banks are subject to regular corporate income tax, based on their taxable income at a tax rate of 30%. Taxable net income refers to items of income specified under Section 32 (A) of Republic Act No. 8424, otherwise known as the Tax Reform Act of 1997, as amended (the Tax Code) less the items of allowable deductions under Section 34 of the Tax Code or those allowed under special laws. A minimum corporate income tax (MCIT) of 2% of the gross income of a bank is payable beginning on the fourth year of operations of the bank only if the MCIT is greater than the regular income tax of 30% computed on net taxable income. Any excess MCIT paid over the computed regular tax can be carried forward as tax credit for the three immediately succeeding years. For purposes of MCIT, gross income means: (a) gross receipts less sales returns, allowances, discounts and cost of services, including interest expense; and (b) income derived from other businesses except income exempt from income tax and income subject to final withholding tax. An Improperly Accumulated Earning Tax (IAET) equivalent to 10% of improperly accumulated taxable income of a corporation is not applicable to banks. Since banks are in the regular business of lending, interest income derived by banks which is generally considered passive income by non-banks, is considered an ordinary income of banks subject to 30% corporate income tax. Banks may also claim interest expense as tax deduction if such expense complies with the requirements as laid down in Revenue Regulation No. 13-00. However, the amount of interest expense which banks may claim as tax deduction shall be reduced by an amount equal to 33% of the interest income that is subject to final tax. The Tax Code does not allow the deduction of interest expense arising from transactions with related parties wherein: (a) the borrower is an individual directly or indirectly owing more than 50% in value of the outstanding capital stock of the bank; (b) more than 50% in value of the outstanding stock of both the borrower and the bank is owned directly or indirectly, by or for the same individual, if the borrower is a personal holding company or a foreign personal holding company. Similarly, section 36 (B) of the Tax Code disallows the deduction of bad debts in the case of related party transactions as mentioned in the case of interest expense. Pursuant to Revenue Regulation 05-99, as amended by Revenue Regulation 25-02, in order for a bank to be able to claim bad debts as an allowable deduction, it must secure a certification from the BSP that the accounts are worthless and can be written off subject to the final determination by the BIR that bad debts being claimed by the banks are worthless and uncollectible. However, its passive income such an interest income earned on its bank deposits is subject to final withholding tax. 151

Banks are subject to Gross Receipts Tax, which is a tax levied on the gross receipts of financial institutions. An exception to the rule that those not habitually engaged in real estate business shall be subject to final tax on the sale of capital asset, is a sale of real property of banks which is considered as an ordinary asset, the income from the sale of which is subject to regular corporate income tax of 30%. Thus, the gain in the sale of land and/or building is subject to creditable withholding tax of 6% based on the zonal value or selling price, which shall be withheld by the buyer and can be used as a credit against the banks taxable income in the year that the gain is realized. The Tax Code provides for a final tax at fixed rates for the amount of interest, yield or benefit derived from deposit substitutes which shall be withheld and remitted by the payor of the said interest, yield or benefit. This rule does not apply to gains derived from trading, retirement or redemption of the debt instrument which is subject to regular income tax rates, except those instruments with maturity of more than five years. To be considered as a deposit substitute, the debt instrument must have been issued or endorsed to 20 or more individuals at any one time at the time of the original issuance in the primary market or at the issuance of each tranche in the case of instruments sold or issued in tranche. Interbank call loans with a maturity period of not more than five days and used to cover deficiency in reserves against deposit liabilities are not considered deposit substitutes. The interbank call loans are not subject to documentary stamp tax except if they have a maturity of more than seven days.

152

ASSETS AND LIABILITIES The tables below and accompanying discussions provide selected financial highlights regarding the Banks assets and liabilities. The following information should be read together with the Banks financial statements included in this Prospectus as well as Capitalization, Managements Discussion and Analysis of Financial Condition and Results of Operations, Risk Management and Business. Funding Sources of funding Deposit liabilities, bills and acceptances payable, subordinated debt and capital funds, which consist of capital stock and capital paid in excess of par value are the main sources of funding for the Bank. The Banks deposit liabilities consist of demand, savings and time deposits. Majority of the deposits consisted of savings accounts. As of September 30, 2013, customer deposit accounted for 82.8% of total funding sources. The Bank traditionally has most of its deposit liabilities in the form of deposits under short-term savings accounts, reflecting the relative strength of the Bank in the retail segment of the banking market. Although the majority of the Banks customer deposits are short-term, the Banks depositors typically roll over their deposits at maturity, effectively providing the Bank with a source of longer term funding. As of December 31, 2012 and September 30, 2013, the Bank had total deposit liabilities amounting to P240.9 billion, and P454.0 billion, respectively. As of December 31, 2012 and September 30, 2013, the Bank had total bills and acceptances payables amounting to P13.1 billion and P14.5 billion, respectively. As of December 31, 2012, the Bank had 662,245,916 outstanding common shares with a par value of P40 each. As of December 31, 2012, the Bank also had 195,175,444 convertible preferred shares. The conversion of these preferred shares into common shares was approved by the PSEC on January 17, 2013. As of September 30, 2013, the bank had 1,086,208,416 outstanding common shares with a par value of P40 each. The preferred shares were converted into common shares upon the merger with ABC on February 9, 2013. As of December 31, 2012 and September 30, 2013, the Bank had total equity (including non-controlling interest) of P39.7 billion and P83.9 billion, respectively. For the years ended December 31, 2011 and 2012, the Banks average cost of funding for deposits was 1.7% and 1.4%, respectively. For the nine months ended September 30, 2013, average cost of funding was 1.3%.

153

The following table sets forth an analysis of the Banks main sources of funding and the average cost of each funding source:
2010 Average Cost of Actual Funding(1) As of December 31, As of September 30, 2011 2012 2013 Average Average Average Cost of Cost of Cost of Actual Funding(1) Actual Funding(1) Actual Funding(1) (Q millions, except percentages)

Deposits by type: Demand. . . . . . . . . . . . . . . . . . . . . . Savings . . . . . . . . . . . . . . . . . . . . . . Time . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . .

27,964 171,283 27,189 226,436

0.6% 29,896 1.6% 184,676 2.2% 22,962 1.6% 237,534 187,472 50,062 237,534 121,389 47,697 68,447 237,534 927 7,531 8,458 6,452 26,490 2,037 28,527 280,971

0.5% 28,152 1.8% 192,793 2.3% 19,909 1.7% 240,854 191,715 49,139 240,854 117,786 29,705 93,363 240,854 3,879 9,198 13,077 9,939 26,490 2,037 28,527 292,397

0.3% 119,622 1.4% 285,221 2.3% 49,135 1.4% 453,978 418,977 35,001 453,978 289,381 75,343 89,254 453,978 438 14,029 14,467 9,950 43,448 26,500 69,948 548,343

0.2% 1.3% 2.6% 1.3%

Deposits by currency: Peso . . . . . . . . . . . . . . . . . . . . . . . . . 171,710 Foreign . . . . . . . . . . . . . . . . . . . . . . 54,726 Total . . . . . . . . . . . . . . . . . . . . . . . . 226,436 Deposits by classification: Low Cost . . . . . . . . . . . . . . . . . . . . . . . . . High Cost . . . . . . . . . . . . . . . . . . . . . . . . Term. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . 114,471 42,096 69,870 226,436

Bills and Acceptances Payable Peso . . . . . . . . . . . . . . . . . . . . . . . . . 595 Foreign . . . . . . . . . . . . . . . . . . . . . . 11,409 Total . . . . . . . . . . . . . . . . . . . . . . . . 12,004 Unsecured Subordinated Debt(2) . . . Capital Funds Capital stock . . . . . . . . . . . . . . . . . Capital paid in excess of par value . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . 5,487 26,490 2,037 28,527

TOTAL . . . . . . . . . . . . . . . . . . . . . . . . . . 272,454

Notes: (1) Average cost of funding represents total interest expense for the year, divided by the average daily liability for the respective period, expressed as a percentage. (2) Unsecured subordinated debt includes subordinated debt designated by the Bank as Financial Liabilities at Fair Value through Profit or Loss Deposits Deposits continue to be the Banks main funding source. Demand and savings deposits can be withdrawn on request and without any prior notice from the customer. As such, they represent funding of the shortest term available to the Bank. Time deposits, on the other hand, can be withdrawn, together with interest earned on said deposits, by the customer after the expiry of the time deposit period, typically between six months and three years. Customers may demand the withdrawal of their time deposits prior to maturity upon the giving of a short notice, but they will forfeit the interest payable on such deposits. As of December 31, 2011 and 2012 and September 30, 2013, the Bank had total deposits amounting to P237.5 billion, P240.9 billion and P454.0 billion, respectively. As a proportion of the Banks total main sources of funding, deposits accounted for 84.5%, 82.4% and 82.8% as of December 31, 2011 and 2012 and September 30, 2013, respectively. In terms of currency, the Banks deposits are primarily denominated in Pesos, reflecting the general profile of its customer base. As of December 31, 2011 and 2012 and September 30, 2013, 78.9% and 79.6% and 92.3%, respectively, of the Banks deposits were denominated in Pesos. 154

According to type of deposits, on the other hand, approximately 90.3% and 91.7% and 89.2% of the Banks outstanding deposits as of December 31, 2011 and 2012 and September 30, 2013, respectively, comprised of demand and savings deposits. The following table presents a more detailed maturity analysis of the deposit base of the Bank as of the dates indicated:
2010 As of December 31, As of September 30, 2011 2012 2013 (in Q millions)

Deposit by Type Demand. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30-90 days . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91-180 days. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 181 days and longer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bills and acceptances payable

27,964 171,283 27,189 21,363 1,352 4,474 226,436

29,896 184,676 22,962 13,908 1,505 7,549 237,534

28,152 192,793 19,909 10,595 1,221 8,093 240,854

119,622 285,221 49,135 23,642 3,653 21,840 453,978

As of December 31, 2011 and 2012 and September 30, 2013, bills and acceptances payables amounted to P8.5 billion, P13.1 billion and P14.5 billion, respectively. As of December 31, 2011 and 2012 and September 30, 2013, approximately 11.0%, 29.7% and 3.0%, respectively, of the Banks bills and acceptances payables were denominated in Pesos. The following table sets forth an analysis of the maturities of the bills and acceptances payable by contractual maturity dates of the Bank, as of the specified dates:
2010 As of December 31, As of September 30, 2011 2012 2013 (in Q millions)

Bills Payables Due within one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due beyond one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Bills Payables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acceptances Outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital funds

10,335 1,652 11,987 17 12,004

6,995 1,329 8,324 134 8,458

12,734 309 13,043 34 13,077

11,046 2,598 13,644 822 14,466

As of December 31, 2012, the Banks capital stock of P26.5 billion, consisted of 662.2 million common shares with par value of P40.00 each. As of September 30, 2013, capital stock stood at P43.4 billion which consisted of 1,086.2 million common shares with par value of P40.00 each. Liquidity The Banks liquidity management initiatives seek to ensure that the Bank has available funds to meet its present and future financial obligations and to capitalize on business opportunities as they arise. Financial obligations arise from withdrawals of deposits, extensions of loans or other forms of credit, repayments on maturity of borrowed funds and operational needs. The Bank seeks to ensure sufficient liquidity through a combination of active management of liabilities, a liquid asset portfolio composed substantially of deposits in primary and secondary reserves, the securing of ample money market lines and the maintenance of repurchase facilities to pre-empt any unexpected liquidity situations. The Bank regularly monitors the maturity mismatch between assets and funding sources to ensure that it is kept at manageable levels. Under relevant Philippines laws, Peso deposits and deposit substitute liabilities are subject to a unified, 18.0% statutory, legal and liquidity reserve requirement. Peso government deposits are subject to 50.0% liquidity floor requirement, inclusive of the 18.0% unified reserve requirement. The Bank has complied with the legal and liquidity reserves set by the BSP for both the Peso and foreign currency books. As of December 31, 2011 and 2012, the Banks liquid assets amounted to P144.6 billion and 155

P147.6 billion respectively, representing 46.3% and 44.6% of the Banks total assets as of those dates. For the nine months ended September 30, 2013, the Banks unified reserves on the Peso book stood at 18.0% of total Peso liabilities while the Banks liquid asset cover stood at 62.2% of total FCDU liabilities. Liquid assets include cash and other cash items, amounts due from the BSP, amounts due from other banks, interbank loans receivables, securities held under agreements to resell, financial assets at fair value through profit or loss and available-for-sale investments. The following table sets forth information with respect to the Banks liquidity position as of the dates indicated:
2010 As of December 31, As of September 30, 2011 2012 2013 (Q millions, except percentages)

Liquid Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash and Other Cash Items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due from BSP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due from Other Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interbank Loans Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities Held Under Agreements to Resell. . . . . . . . . . . . . . Financial Assets Designated at Fair Value Through P/L (FAFVPL) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Available-for-Sale Investments . . . . . . . . . . . . . . . . . . . . . . . . . Financial Ratios: Liquid Assets to Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . Liquid Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Liquid Assets to Total Deposit Liabilities . . . . . . . . . . . . . . . . Liquid Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Deposit Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Loans to Total Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . Total Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loan Portfolio Overview

104,889 5,457 24,286 5,142 12,692 6,800 15,981 34,531 35.3% 104,889 297,120 46.3% 104,889 226,436 42.0% 95,067 226,436

144,579 5,404 38,153 6,424 17,098 18,300 6,876 52,324 46.3% 144,579 312,067 60.9% 144,579 237,534 48.6% 115,550 237,534

147,637 5,599 37,175 4,043 11,499 18,300 4,023 66,998 44.6% 147,637 331,007 61.3% 147,637 240,854 55.3% 133,109 240,854

282,469 8,835 129,183 15,769 12,090 25,000 11,568 80,024 46.6% 282,469 606,102 62.2% 282,469 453,978 53.5% 243,020 453,978

As of December 31, 2011 and 2012 and September 30, 2013, the Banks gross loan portfolio (receivable from customers, unquoted debt securities, other receivables, interbank loans and securities under agreements to re-sell) amounted to P176.1 billion, P189.7 billion and P310.5 billion, respectively, representing 56.4%, 57.3% and 51.2% of total assets as of those dates. The Bank has implemented different lending limits to be complied with by its credit committees to provide greater control in the Banks lending operations. Depending on the credit size, credit applications exceeding certain limits must be approved by the Executive Committee and/or the Board of Directors of the Bank for credit approvals. The Bank has also adopted a strategy of selective lending by focusing on industries such as power and other infrastructure, rice/corn trading, and food processing, in which the Bank believes growth prospects remain stable and in which the ratio of NPLs is relatively low. At the same time, the Bank is reducing its exposure to industries with high NPL ratios.

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Industry concentration The following table sets forth an analysis of the Banks receivable from customers by economic activity, as defined and categorized by the BSP:
As of December 31, 2011 2012 Amount % Amount % (Q millions, except percentages) As of September 30, 2013 Amount %

2010 Amount %

Financial intermediaries. . . . . . . . . . . . . . Manufacturing (various) . . . . . . . . . . . . . Real estate, renting business activities . . . . . . . . . . . . . . . . . . . . . . . . . Wholesale and retail trade . . . . . . . . . . . . Public administration and defense . . . . . Electricity, gas and water. . . . . . . . . . . . . Transport, storage and communication . . . . . . . . . . . . . . . . . . . Agriculture, fishing and forestry . . . . . . Construction. . . . . . . . . . . . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3,986 10,146 7,155 23,819 7,951 12,991 11,397 3,194 786 13,642 95,067

4.2 10.7 7.5 25.0 8.4 13.7 12.0 3.4 0.8 14.3 100.0

5,550 13,215 8,014 21,370 21,617 14,604 16,696 2,688 1,159 10,637 115,550

4.8 11.5 6.9 18.5 18.7 12.6 14.5 2.3 1.0 9.2 100.0

10,207 13,317 11,434 21,496 22,766 18,180 17,051 2,899 2,349 13,410 133,109

7.6 10.0 8.6 16.1 17.1 13.7 12.8 2.2 1.8 10.1 100.0

20,088 31,014 30,995 42,111 24,725 36,736 20,913 3,697 5,762 26,979 243,020

8.3 12.8 12.7 17.3 10.2 15.1 8.6 1.5 2.4 11.1 100.0

The wholesale and retail trade, electricity, gas and water, manufacturing and real estate/ business represent the largest sectors of the Banks loan portfolio. As of September 30, 2013, these sectors represented 17.3%, 15.1%, 12.8%, and 12.7% respectively, of the Banks receivable from customers. Under guidelines established by the BSP, the BSP considers that loan concentration exists when the total loan exposure to a particular industry exceeds 30.0% of the total loan portfolio. The Bank maintains a flexible policy toward its exposure to the Philippine economy, in principle avoiding exposure of more than 10.0% to a particular industrial sub-sector of the economy. The distribution of the Banks loan portfolio by industry is also subject to seasonal fluctuations. In addition, the Bank monitors its exposure to specific sectors of the economy to ensure compliance with specific pre-determined lending requirements imposed by law on all Philippine banks. The Bank must comply with legal requirements to make loans available to the agricultural sector and to SMEs. Mandatory credit allocation laws require all Philippine banks to make available 25.0% of their loanable funds to the agricultural sector in general, with 10.0% of such funds being made available exclusively to agrarian reform beneficiaries, and to allocate 6.0% of their loan portfolios to small-sized, and 2.0% to medium-sized, enterprises. Maturity The following table sets forth an analysis of the Banks receivable from customers by maturity:
2010 Amount % As of December 31, 2011 2012 Amount % Amount % (Q millions, except percentages) As of September 30, 2013 Amount %

Due within one year. . . . . . . . . . . . . . . . . Due over one year . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

41,534 53,533 95,067

43.7 56.3 100.0

40,973 74,577 115,550

35.5 64.5 100.0

45,315 87,794 133,109

34.0 86,142 66.0 156,878 100.0 243,020

35.4 64.6 100.0

Loans due within one year primarily consist of loans to corporations for working capital and loans to consumers for general use. Loans with a maturity of between one and five years consist primarily of term loans to corporations and businesses. Loans with a maturity of over five years consist primarily of mortgage loan for property purchases.

157

Currency The following table shows an analysis of the Banks receivable from customers by currency:
2010 Amount % As of 31 December 2011 Amount % 2012 Amount As of September 30, 2013 Amount %

(Q millions, except percentages)

Philippine Peso . . . . . . . . . . . . . . . . . . . . . Foreign currency . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

87,113 7,954 95,067

91.6 8.4 100.0

103,185 12,365 115,550

89.3 10.7 100.0

120,154 12,955 133,109

90.3 229,459 9.7 13,561 100.0 243,020

94.4 5.6 100.0

As of September 30, 2013, 94.4% of the Banks receivable from customers was denominated in Pesos with 5.6% being denominated in foreign currency, most of which consisted of U.S. dollars. The Bank adopted a policy with respect to foreign currency lending pursuant to which foreign currencydenominated loans can only be granted to companies with at least 50.0% of revenues in foreign currency and to importers who have authorization from the BSP to purchase foreign currency to service their foreign currencydenominated obligations. Interest rates Interest rates on loans are generally set on the basis of the Banks average or marginal cost of funds which in turn is largely determined by the interest rate on PDST-F (Philippine Dealing System TreasuryFixing) plus a spread. The PDST-F reflects the secondary trading levels of the benchmark government securities, which are partially affected by the monetary policies of the BSP. As of December 31, 2012, P121.0 billion or 90.9% of the Banks receivable from customers of P133.1 billion was subject to re-pricing. A majority of the Banks rate-sensitive assets and liabilities re-price every 30 to 90 days which limits the Banks exposure to fluctuations in domestic interest rates. Size and concentration of loans The following table sets forth a breakdown of Banks receivable from customers by principal amount as September 30, 2013:
Principal Amount Percentage

Less than 1,000,000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000,000 to 2,500,000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,500,000 to 5,000,000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000,000 to 10,000,000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000,000 to 50,000,000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000,000 to 100,000,000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . More than 100,000,000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Note: Parent Bank only.

3.2% 4.3% 3.3% 2.8% 10.3% 6.3% 69.8% 100.0%

The BSP currently imposes a limit on the size of the Banks financial exposure to any single person or entity or group of connected persons or entities to 25.0% of the Banks net worth. As of December 31, 2012, the Bank has complied with the single borrowers limit for all of its loans. As of September 30, 2013, the Banks single largest corporate borrower was a GOCC accounting for P14.7 billion, or 6.3% of the Banks outstanding receivable from customers. As of September 30, 2013, the Banks 10 largest borrowers in the aggregate accounted for P80.5 billion, or 34.4%, of the Banks outstanding receivable from customers.

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Secured and unsecured loans The following table sets forth the Banks secured and unsecured loans according to type of collateral:
2010 Amount % As of December 31, 2011 2012 Amount % Amount % (Q millions, except percentages) As of September 30, 2013 Amount %

Secured Real estate mortgage. . . . . . . . . . . . Bank deposit hold-out . . . . . . . . . . Shares of Stock . . . . . . . . . . . . . . . . Chattels . . . . . . . . . . . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . Unsecured . . . . . . . . . . . . . . . . . . . . . . . . . Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

13,584 2,381 494 2,223 9,146 67,239 95,067

14.3 2.5 0.5 2.4 9.6 70.7 100.0

20,363 2,640 359 3,147 11,111 77,930 115,550

17.7 2.3 0.3 2.7 9.6 67.4 100.0

21,457 1,615 358 4,337 21,661 83,681 133,109

16.1 1.2 0.3 3.2 16.3 62.9 100.0

57,725 3,386 8,446 32,219 141,244 243,020

23.7 1.4 3.5 13.3 58.1 100.0

The Bank principally focuses on cash flows in assessing the creditworthiness of borrowers. However, it will seek to minimize credit risk in support of a loan by requiring borrowers to pledge or mortgage collateral to secure the payment of loans. As of December 31, 2012, 37.1% of receivable from customers were extended on a secured basis, of which 43.4% were backed by real estate mortgages. As of September 30, 2013, 41.9% of total loans were extended on a secured basis, of which 56.7% are backed by real estate mortgages. The Banks general policy in the acceptance of support or security arrangements for loans provides for the guidelines on acceptable and unacceptable forms of collateral. The Banks maximum loan value for real estate collateral is 60.0% of its appraised value, except for housing loans which have a maximum loan value of up to 80.0% of a homes appraised value. Loan Loss Management and Provisioning Overview The Bank has successfully managed to reduce its NPL ratio from 50.0% in 2002 to 4.5% in 2010 and further to 2.4% as of December 31, 2012. The Banks NPLs, as defined by BSP Circular No. 772 dated October 16, 2012, amounted to P3.8 billion as of December 31, 2012 as compared to P4.6 billion as of December 31, 2011. Average net NPL ratios for local banks in the Philippine banking system were 0.3% and 0.5% as of December 31, 2012 and September 30, 2013, respectively, according to the data from the BSP. For the year ended December 31, 2011, the Banks provision for credit losses for loans and receivables was P0.8 billion, representing 6.2% of the Banks gross interest income for the same period. For the year ended December 31, 2012, the Banks provision for credit losses was P0.6 billion, which represented 4.8% of the Banks gross interest income for the same period. For the nine months ended September 30, 2013, the Banks provision for credit losses was P0.6 billion, which represented 4.3% of the Banks gross interest income for the same period. Loan loss coverage for NPLs stood as 78.4% and 83.4% as of December 31, 2011 and 2012, respectively, as reflected in the audited financial statements and 94.0% as of September 30, 2013 as reported to the BSP. Volatile economic conditions may adversely affect the ability of the Banks borrowers to repay their indebtedness and, as a result, the Bank may experience an increase in NPLs and provisions for probable losses. Remedial Management Group The Remedial Management Group is focused on reducing the level of the Banks NPLs. The Non-Performing Assets Committee (NPAC), headed by the President also oversees the Banks NPL portfolio and the strategies formulated to resolve the NPL portfolio as a whole. Loan loss classification For the purpose of regulatory reporting in the Philippines, current BSP regulations require that Philippine banks classify NPLs based on four different categories corresponding to levels of risk: loans especially mentioned, substandard, doubtful and loss. This classification depends on managements evaluation of 159

the collectability of the loan, after consideration of prevailing and anticipated economic conditions, collection and credit experience with the specific account, fair market value of collateral, financial capabilities of any guarantors and the present value of future cash collections. Based on these considerations, loans are classified and mandated levels of provisions are taken based on such classifications. For the purpose of preparing its financial statements in accordance with PFRS, the introduction of new accounting standards in the Philippines has required the Bank to introduce new methodologies for calculating loan loss provisions and asset impairment which has resulted in it recognizing higher levels of impairment losses in respect of its loans and other receivables. PAS 39, which applies to the Bank from January 1, 2005, requires the Bank to evaluate allowances for loan loss based principally on the discounted cash flows to be derived from loans and other receivables. This has resulted, and may in the future result, in the Bank recognizing higher provisions for loan loss as a result of lower future discounted cash flows to be received in respect of NPLs. BSP classification At the date of this Prospectus, for the purpose of reporting to the BSP, the Bank classifies its borrowers and assesses its asset quality based on its self-assessment procedures developed in accordance with current guidelines published by the BSP. Unless otherwise stated, the presentation of the Banks classification of its loan portfolio and related ratios in this section, including impairment losses and allowance for probable losses, for the years ended December 31, 2010, 2011 and 2012 are on the basis of BSP guidelines and do not reflect the new accounting standards referred to above. The Bank performs self-assessment at least annually. The self-assessment process involves classifying borrowers based on their financial condition and then categorizing claims against borrowers in order of collection risk. Based on these classifications, the Bank establishes allowances and discloses its problem loans using criteria required under BSP regulations and these allowances are subject to BSP review and confirmation. In categorizing its loan portfolio, the Bank follows the BSPs categorization of risk assets according to their risk profile. All risk assets, in particular the Banks loan portfolio, are either classified or unclassified. Those loans which do not have a greater than normal risk, and for which no loss on ultimate collection is anticipated, are unclassified. All other loan accounts, comprising those loan accounts which have a greater than normal risk, are classified as especially mentioned, substandard, doubtful or loss assets, and the appropriate loan loss allowance (in accordance with BSP guidelines) is made as follows:
BSP Risk Classification Loan loss allowance % of principal amount of loan

Especially mentioned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Substandard (secured) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Substandard (unsecured). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Doubtful (unsecured). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss (unsecured) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5 10 25 50 100

The Bank adopts a qualitative analysis of its loan portfolio for the purposes of this risk classification, which is not solely dependent on the number of days the relevant loan is overdue. The Banks review of its risk assets is conducted quarterly in accordance with the Banks prescribed policy guidelines based on BSP categorization. The Banks guidelines classify especially mentioned assets as those assets which have demonstrated minor deficiencies in credit quality but in respect of which repayments on the asset are up to date. The Banks guidelines classify substandard assets as those which the Bank believes represent a substantial and unreasonable degree of risk to the Bank. Especially mentioned and substandard classifications may apply to current loans in accordance with BSP regulations. Doubtful assets are those in respect of which the Bank believes that collection in full, either according to their terms or through liquidation, is highly improbable and that substantial loss is probable. Assets which are considered impossible to collect or worthless are characterized as loss assets. Once a loan is classified in a particular category, the Bank records a loan loss allowance against such loan.

160

The following is a summary of the risk classification of the receivable from customers (as a percentage of total outstanding loans) and allowance for credit losses of the Bank as of the dates indicated below:
2010 Amount % As of December 31, 2011 2012 Amount % Amount % (P millions, except percentages) As of September 30, 2013 Amount %

Risk Classifications Especially Mentioned . . . . . . . . . . . . . . . Substandard Secured . . . . . . . . . . . . . . . . . . . . . . . Unsecured. . . . . . . . . . . . . . . . . . . . . Doubtful. . . . . . . . . . . . . . . . . . . . . . . . . . . Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Classified . . . . . . . . . . . . . . . . . . . . Unclassified . . . . . . . . . . . . . . . . . . . . . . . Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allowance for credit losses . . . . . . . . .

2,372 3,617 539 1,678 2,888 11,094 83,973 95,067 5,149

2.5

287

0.2

1,239

0.9

8,676

3.6 1.5 0.2 0.5 0.9 6.6 93.4 100.0

3.8 2,982 0.6 272 1.8 1,471 3.0 2,707 11.7 7,719 88.3 107,831 100.0 115,550 5,420

2.6 2,760 0.2 5,09 1.3 1,130 2.3 2,763 6.7 8,401 93.3 124,708 100.0 133,109 5,408

2.1 3,735 0.4 394 0.8 1,172 2.1 2,150 6.3 16,128 93.7 226,893 100.0 243,020 5,598

Loans classified as loss assets are generally written off by the Bank. The write-offs are done in accordance with BSP guidelines. The guidelines allow banks, upon approval by their board of directors, to write off loans, other credit accommodations, advances and other assets, regardless of amount, against allowance for impairment losses (valuation reserves) or current operations as soon as they are satisfied that such loans, other credit accommodations, advances and other assets are of no value. However, prior approval of the Monetary Board is required to write off loans and advances to DOSRI. In addition to making specific allowances for impairment losses based on the risk classification of its loan portfolio, the Banks allowances for impairment losses also included general allowances and the substantial majority of classified loans are also recognized as NPLs by the Bank. As of December 31, 2012 and September 30, 2013, the Banks allowance for credit losses on loans on a consolidated basis was P5.4 billion and P5.6 billion, respectively. As a percentage of the Banks NPL portfolio, such allowance for credit losses was 83.4% as of December 31, 2012 as reflected in the audited financial statements and 94.0% as of September 30, 2013 as reported to the BSP. Non-performing loans Unless otherwise stated, the presentation of the Banks classification of its loan portfolio and related ratios in this section, including impairment losses and allowance for probable losses are on the basis of BSP guidelines. Under BSP guidelines, loans are classified as non-accruing (or past due) if (i) any repayment of principal at maturity or any scheduled payment of principal or interest due quarterly (or longer) is not made when due and (ii) in the case of any principal or interest due monthly, if the amount due is not paid and has remained outstanding for three months. In the case of (i), such loans are treated as non-performing if the payment is not made within a further 30 days. In the case of (ii), such loans are treated as non-performing upon the occurrence of the default in payment. Loans which have been foreclosed or have been transferred to the Banks ROPA account are not classified as non-performing loans.

161

The table below sets forth details of the NPLs, non-accruing loans, ROPA, NPAs (as described below), restructured loans and write-offs for loan losses as of the three years ended December 31, 2010, 2011 and 2012 and the nine months ended September 30, 2013:
As of As of December 31, September 30, 2010 2011 2012 2013 (Q millions, except percentages)

Non-performing loans (NPLs), gross(1) . . . . . . . . . . . . . . . . . . . . . . . Non-performing loans (NPLs), net(2) . . . . . . . . . . . . . . . . . . . . . . . . . Adjusted loan portfolio(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total non-performing loans to adjusted loan portfolio(4) . . . . . . . . Non-accruing loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Receivable from customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-accruing loans to receivable from customers . . . . . . . . . . . . . . ROPA, Gross. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ROPA, Net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-performing assets (NPAs) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . NPAs to total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allowance for impairment and credit losses (total) . . . . . . . . . . . . . Allowance for credit losses (loans) . . . . . . . . . . . . . . . . . . . . . . . . . . . Allowance for impairment losses (ROPA) . . . . . . . . . . . . . . . . . . . . Allowance for credit losses (loans) to total non-performing loans, gross(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allowance for impairment and credit losses (total) to total nonperforming assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total restructured loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restructured loans to receivable from customers. . . . . . . . . . . . . . . Loanswritten off. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

7,666 4,909 109,940 4.5% 8,033 95,067 8.5% 26,307 17,913 297,120 33,973 7.7% 20,615 5,149 5,335 67.2% 30.9% 2,926 3.1% 10

6,912 4,571 145,980 3.1% 6,911 115,550 6.0% 22,749 16,100 312,067 29,661 6.6% 20,617 5,420 4,003 78.4% 31.8% 3,316 2.9% 110

6,487 3,769 157,671 2.4% 6,804 133,109 5.1% 20,044 14,478 331,007 26,531 5.5% 20,322 5,408 3,453 83.4% 33.4% 2,550 1.9% 4

8,255 2,656 268,636 1.1% 8,627 243,020 3.5% 23,818 18,717 606,102 32,073 3.5% 18,732 5,598 2,985 67.8% 26.8% 2,081 0.9% 604

Notes: (1) For the figures as of September 30, 2013, the NPL gross is based on GAAP under the Purchase Method. (2) Net of NPLs fully covered by allowance for credit losses. For the figures as of September 30, 2013, the NPL is based on GAAP under the Purchase Method. (3) Including Interbank Loans Receivable and Securities Held Under Agreements to Resell, net of NPLs fully covered by allowance for credit losses and transferred account. As of December 31, 2010, 2011 and 2012, ratios were computed based on the balances on the audited financial statements. As of September 30, 2013, the ratios were computed based on figures reported to the BSP. (4) Based on BSP computation (5) If based on BSP computation, the Banks loan loss coverage as of September 30, 2013 is 94.0%. In order to manage its loan portfolio and reduce its exposure to NPLs, the Banks practice is to restructure those classified loans which it considers suitable for restructuring. The Bank restructures loans on a case-by-case basis. Restructuring methods used by the Bank have included extending the maturity of loans beyond their original maturity date and providing for rescheduled payments of principal consistent with the expected cash flows on the borrower in question. The Bank will also consider, in certain circumstances, receiving partial repayments of principal in respect of restructured loans. The Bank has also agreed to debt-for-equity swaps but it rarely uses this as a restructuring solution. In accordance with BSP guidelines, in general, NPLs which are successfully restructured are considered current and no longer non-performing following three consecutive payments of the required amortization of principal and/or interest. For restructured loans with capitalized interest and which are not fully secured, six consecutive payments are required for the loan to be considered performing. As of September 30, 2013, the Bank had approximately P0.9 billion of restructured loans which were treated as current. In accordance with BSP guidelines, loans and other assets in litigation are classified as NPAs. The Banks NPAs principally comprise ROPA and NPLs. The Bank has established the Special Asset Management Group to actively manage and, where appropriate, sell its ROPA. The Bank has sold approximately P3.5 billion and P1.8 billion of ROPA for the years ended December 31, 2011 and 2012, respectively. These ROPAs were resolved through direct sales and joint ventures. 162

Sectoral analysis of non-performing loans The following table sets forth, as of the dates indicated, the Banks gross NPLs by the respective borrowers industry or economic activity and as a percentage of the Banks gross NPLs:
As of December 31, 2011 2012 Amount % Amount % (Q millions, except percentages) As of September 30, 2013 Amount %

2010 Amount %

Manufacturing (various) . . . . . . . . . . . . . . . . Real estate, renting and business activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . Wholesale and retail trade . . . . . . . . . . . . . . . Community, social and personal activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . Agriculture, fishing, and forestry . . . . . . . . . Transport, storage and communication . . . . Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial Intermediaries . . . . . . . . . . . . . . . . Construction. . . . . . . . . . . . . . . . . . . . . . . . . . . Public administration and defense . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2,041 903 1,624 61 268 166 2 9 25 310 2,257 7,666

26.6 11.8 21.2 0.8 3.5 2.2 0.0 0.1 0.3 4.1 29.4 100.0

2,083 869 1,394 17 203 32 1 11 12 291 1,999 6,912

30.1 12.6 20.2 0.2 2.9 0.5 0.0 0.2 0.2 4.2 28.9 100.0

1,993 2,734 1,286 17 157 28 0 0 28 198 46 6,487

30.7 42.1 19.8 0.3 2.4 0.4 0.0 0.0 0.4 3.0 0.9 100.0

1,683 3,009 2,057 294 349 37 0 12 76 73 665 8,255

20.4 36.5 24.9 3.6 4.2 0.4 0.0 0.0 0.9 0.9 8.1 100.0

Top 10 non-performing loans As of September 30, 2013, the Banks exposure from its 10 largest NPLs range from P130.0 million to P1,830.0 million, and amounted to approximately P6.4 billion in aggregate. These 10 largest NPLs accounted for 2.7% of the Banks total gross loans and 61.5% of its gross NPLs to customers. Sale of non-performing loans As a result of the Asian financial crisis in the late 1990s to the early 2000s, in 2002, the Government enacted Republic Act. No. 9182, known as the Special Purpose Vehicle (SPV) Act of 2002 (the SPV Act) for various distressed Philippine companies to transfer assets to special purpose entities with tax benefits. In 2004, 2005, 2006 and 2007, the Bank sold NPLs with an outstanding balance of P5.6 billion, P4.7 billion, P11.7 billion and P7.5 billion, respectively. The Bank availed of the regulatory relief provided by the SPV Act and as such did not recognize the losses on the NPAs sold to SPVs. Under the SPV Act, losses on the sale of NPLs to special purpose vehicle companies may be amortized over a 10-year period in accordance with the regulatory accounting policies prescribed by the BSP on the following schedule:
End of period from date of transaction Cumulative write-down of deferred charges

Year 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Year 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Year 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Year 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Year 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Year 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Year 7 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Year 8 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Year 9 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Year 10 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5% 10% 15% 25% 35% 45% 55% 70% 85% 100%

The above-mentioned sales are part of the Banks strategy of reducing its exposure to NPLs. As of December 31, 2011 and 2012, the ratio of NPLs to adjusted gross loan portfolio was 3.1% and 2.4%, respectively. The Bank intends to reduce the ratio of NPLs to total gross loans and be within industry average. However, the Banks amortization of these sales to its SPVs, although in compliance with the accounting policies of the BSP on the matter, were not compliant in certain respects with the prescribed treatment of PFRS for these sales. 163

In 2012, the Bank restated its 2011 and 2010 financial statements to recognize the losses from the sale of NPAs to SPVs in the years the NPAs were sold as required by PFRs. Special Assets Management Group The Special Assets Management Group (SAMG) is responsible for the overall supervision of the Banks ROPA. In addition, SAMG aligns its directions with the Banks overall plans and strategies in the utilization of financial and operational resources. The main objective of the SAMG is to manage and dispose of approximately 9,800 ROPAs of the Bank as of September 30, 2013, amounting to approximately P29.8 billion in appraised value. Of this total number of ROPA, 11.0% are classified as commercial, 69.0% residential, 17.0% agricultural and 3.0% others. In terms of the total value, 46.0% of the P29.8 billion are commercial and 33.0% are residential. For the three years, the Bank generated average annual of P2.7 billion each year on ROPA, which have yielded a weighted average of 21.5% premiums to book value. In the nine months ended September 30, 2013, ROPA sales amounted to P0.8 billion. In order to align resources and improve focus on the disposal of the Banks ROPA, the Banks ROPA has been classified into 6 asset pools, namely: Asset Pool 1 for traditional channels such as negotiated sales, auction, private and public sealed bidding and cross selling; Asset Pool 2 for amnesty programs; Asset Pool 3 for joint ventures; and Asset Pool 4 for special purpose vehicles and compromise settlements; Asset Pool 5, for agriculture (covering properties that are eligible for inclusion in the Comprehensive Agrarian Reform Program); and Asset Pool 6, covering properties that need special handling. The Banks ROPA selling strategy for 2013 and onwards shall continue to rely on portfolio selling approach but focusing on mid-market segments that will provide for better growth opportunities, and in re-orienting the ROPA sales organization towards a selling focus. The key selling strategies are: 1. 2. 3. 4. 5. Focus on mid-value market segment; Reorganize Special Assets Management Group to focus solely on its selling/disposal functions; Reduce to operating level the accounts payable items; Create marketing initiatives that will be more pro-active and aggressive; which will go beyond mere information dissemination; and Evaluate and execute other forms of wholesale disposal approaches.

164

CORPORATE STRUCTURE Operational and Management Support The Bank provides operational support to all of its subsidiaries. The support provided includes information technology, controllership, legal, operations and human resource services. Employees and Labor Relations Management believes that the Banks current relationship with their employees is generally good. The Bank currently has 8,662 employees, with over 3,622 employees as part of its management. The Bank has two unions. However, the Bank has not been involved in any material disputes or employee related lawsuits that may adversely affect the Bank and its operations. The following table provides total employee headcount, divided by function, as of September 30, 2013:
Employees of the Bank and its subsidiaries

Executives: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . President and CEO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Executive Vice President . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Senior Vice President to First Senior Vice President . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vice President to First Vice President. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Assistant Vice President to Senior Assistant Vice President. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Managers: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Senior Managers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Managers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Assistant Managers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . General Staff . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Headcount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

355 1 3 42 86 223 3,267 202 648 2,417 5,040 8,662

The Banks retirement plan has a normal retirement age of 60 years. Normal retirement benefit consists of a lump sum benefit equivalent to 116% of the basic monthly salary of the employee at the time of his retirement for each year of service. For more information on the Banks retirement plan, see Note 17 to the Banks audited consolidated financial statements included in this Prospectus. Consistent with the Banks goal of being one of the Philippines preferred employers, the Bank has adopted a compensation policy that it believes is competitive with industry standards in the Philippines. Salaries and benefits are reviewed periodically and adjusted to retain current employees and attract new talent. Tied to this is a competency-based performance management system that calls for the alignment of individual key results, competencies, and development plans with the Banks overall business targets and strategy. Performance is reviewed annually and employees are rewarded based on the attainment of pre-defined objectives. Corporate Social Responsibility The Bank manifests and demonstrates its responsibility to society in various ways. In aspiring to be a worldclass company, impact to society and the environment is an important element in the way the Bank conducts its business. Investor Relations The Banks Investor Relations Office strives to ensure that the market prices of the Banks securities accurately reflect the values of the assets and expectations of future earnings. It also provides the Banks management critical information on relevant developments in the financial markets that may be utilized by the Bank in formulating its long-and short-term plans. It also oversees all corporate communication with analysts, investors, and stockholders. The Investor Relations Office of the Bank may be reached at (632) 526-3131 local 2084 and 2120 or centenoec@pnb.com.ph and iru@pnb.com.ph.

165

Corporate Governance The Bank believes that compliance with the principles of good corporate governance begins with the Board of Directors. The Board of Directors is primarily responsible for approving and overseeing the implementation of the banks strategic objectives, risk management strategy, corporate governance and corporate values. Compliance with the highest standards in corporate governance principally starts with the Board of Directors which has the responsibility to foster the long-term success of the Bank and secure its sustained competitiveness and profitability in accordance with its fiduciary responsibility. In the same manner, every employee of the entire organization is expected to embrace the same degree of commitment to the desired level of corporate standards. The Banks Board of Directors is composed of individuals of proven competence, integrity, and probity. These individuals determine the Banks purposes, vision and mission, and strategies to carry out its objectives, ensure compliance with all relevant laws, regulations and codes of best business practices, adopt a system of internal checks and balances, and install a process of selection to ensure a mix of competent directors and officers. To ensure the Banks compliance with the principles of good corporate governance, the board members have been selected as members of the standing committees constituted pursuant to the corporations Code on Corporate Governance. These are the Board Audit and Compliance Committee and the Corporate Governance/ Nominations Committee. In addition, the Philippine Securities Regulation Code requires the Bank to have at least two independent directors or such number of independent directors as is equal to 20% of the Board, whichever is the lower number. Florencia G. Tarriela, Felix Enrico R. Alfiler and Deogracias N. Vistan currently serve as the Banks three independent directors. The Corporate Governance/Nominations Committee ensures the boards effectiveness and adherence to corporate governance principles and guidelines and the selection of members of the Board and senior executives of the bank as well as in the appointment in the respective Board committees. The Board Audit and Compliance Audit Committee has oversight responsibility relating to the integrity of the Banks financial statements, internal controls and compliance with legal and regulatory requirements. Recognizing the importance of the role of independent directors, the Board has elected the independent directors to act as Chairman of the Board, the Executive Committee, the Corporate Governance/Nomination Committee, the Board ICAAP Steering Committee, the Board Overseas Oversight Committee, Board Audit and Compliance Committee and the Trust Committee. The independent directors are also members of the Risk Oversight Committee wherein the Chairman is a non-executive director and the former president of a government bank with universal banking license. In these Board Committees, the three independent directors play an active role in the formulation of the business strategies and priorities of the Bank as stipulated in the Board approved Five Year Strategic Business Plan of the Bank, subsidiaries and its affiliates. The Board and the Committees continue to review and strengthen the corporate governance policies to adopt consistency in the corporate governance framework in the Bank, its subsidiaries, and affiliates. The Bank actively promotes the safety and soundness of its operations through a compliance system that fully adheres to banking laws, rules and regulations and to maintain an environment that is governed by high standards and best practices of good corporate governance. This is achieved primarily through the formulation of policies and procedures, an organizational structure and an effective compliance program that will support the banks compliance system. To further strengthen good corporate governance, the Board of Directors appointed the Chief Compliance Officer as the Corporate Governance Executive tasked to assist the Board and the Corporate Governance Committee in the discharge of their corporate governance oversight functions. Employee Insurance The Bank provides its employees with group accident insurance, term life insurance and medical hospitalization insurance coverage in line with good business practice and in accordance with Philippine standards. The Bank has also obtained insurance policies for all of its employees. Insurance premium payments for these policies are paid entirely by the Bank.

166

MANAGEMENT Board of Directors The overall management and supervision of the Bank is undertaken by its Board of Directors. The Board of Directors is empowered to direct, manage and supervise, under its collective responsibility, the affairs of the Bank. The Executive Officers, subject to control and supervision of the Board, have direct charge of the business activities of the Bank. They are responsible for the implementation of the policies set by the Board in their respective business units. Under the Banks Amended By-Laws, the Board of Directors consists of fifteen members. There should be at least two Independent Directors or such number of directors that constitutes twenty per cent of the members of the Board, whichever is higher, but in no case less than two. The table below sets out the members of the Board of Directors as of September 30, 2013:
Name Position Date Elected to the Board Citizenship Age

Florencia G. Tarriela . . . . . . . . . . Chairman/Independent Director Felix Enrico R. Alfiler . . . . . . . . Vice Chairman/Independent Director Omar Byron T. Mier . . . . . . . . . . Director/President & CEO Florido P. Casuela . . . . . . . . . . . . Director Leonilo G. Coronel . . . . . . . . . . . Director Reynaldo A. Maclang . . . . . . . . . Director Estelito P. Mendoza. . . . . . . . . . . Director Christopher J. Nelson . . . . . . . . . Director Washington Z. SyCip . . . . . . . . . Director Harry C. Tan . . . . . . . . . . . . . . . . . Director Lucio C. Tan . . . . . . . . . . . . . . . . . Director Lucio K. Tan, Jr. . . . . . . . . . . . . . Director Michael G. Tan. . . . . . . . . . . . . . . Director Deogracias N. Vistan. . . . . . . . . . Independent Director Board appointees: William T. Lim. . . . . . . . . . . . . . . Board Advisor Doris S. Te . . . . . . . . . . . . . . . . . . Corporate Secretary

May 29, 2001 January 1, 2012 May 25, 2005 May 30, 2006 May 28, 2013 February 9, 2013 January 1, 2009 March 21, 2013 May 20, 2000 February 9, 2013 December 8, 1999 September 28, 2007 February 9, 2013 August 1, 2011 January 25, 2013 January 20, 2012

Filipino Filipino Filipino Filipino Filipino Filipino Filipino British American Filipino Filipino Filipino Filipino Filipino Filipino Filipino

66 63 67 72 67 75 83 54 92 67 79 47 47 69 72 32

The following is a brief description of the business experience of each of the Directors: Florencia G. Tarriela, 66, Filipino, first elected as a Director on May 29, 2001, has been serving as Chairman of the Board of the Bank since May 24, 2005, and as an Independent Director since May 30, 2006. She also serves as an Independent Director of PNB Capital and Investment Corporation, Director of PNB Life Insurance, Inc., and LTG. She is a Director of PNB overseas subsidiariesPNB RCI Holdings Co., Ltd. and PNB (Europe) Plc. She obtained her Bachelor of Science in Business Administration degree, Major in Economics, from the University of the Philippines and her Masters in Economics degree, from the University of California, Los Angeles, where she topped the Masters Comprehensive Examination. Ms. Tarriela is currently a columnist for Business Options of the Manila Bulletin. She is a Life Sustaining Member of the Bankers Institute of the Philippines (BAIPHIL), a Trustee of FINEX Foundation, TSPI Development Corporation, and the Summer Institute of Linguistics (SIL). She was formerly an Independent Director of the Philippine Depository and Trust Corporation, the Philippine Dealing and Exchange Corporation and the Philippine Dealing System Holding Corporation. Ms. Tarriela was also former Undersecretary of Finance, and an alternate Member of the Monetary Board of the Bangko Sentral ng Pilipinas (BSP), Land Bank of the Philippines (LBP) and the Philippine Deposit Insurance Corporation (PDIC). She was formerly Deputy Country Head, Managing Partner and the first Filipino lady Vice President of Citibank N. A., Philippine Branch. Ms. Tarriela is a co-author of several inspirational books- Coincidence or Miracle? Books I, II, III (Blessings in Disguise), and IV (Against All Odds), and gardening books- OopsDont Throw Those Weeds Away! and The Secret is in the Soil. She is an environmentalist and practices natural ways of gardening. Felix Enrico R. Alfiler, 63, Filipino, was elected as Independent Director of the Bank effective January 1, 2012 and as the Vice Chairman of the Board of Directors effective on May 28, 2013. Mr. Alfiler completed his undergraduate and graduate studies in Statistics at the University of the Philippines in 1973 and 1976, respectively. He undertook various continuing education programs, including financial analysis and policy, at the 167

IMF Institute of Washington, D.C. in 1981 and on the restructured electricity industry of the UK in London in 1996. He has published articles relating to, among others, the globalization of the Philippine financial market, policy responses to surges in capital inflows and the Philippine debt crisis of 1985. Among the various positions he held were: Philippine Representative to the World Bank Group Executive Board in Washington, D.C., Special Assistant to the Philippine Secretary of Finance for International Operations and Privatization, Director of the Bangko Sentral ng Pilipinas, Assistant to the Governor of the Central Bank of the Philippines, Advisor to the Executive Director at the International Monetary Fund, Associate Director at the Central Bank and Head of the Technical Group of the CB Open Market Committee. Mr. Alfiler was also the Monetary Policy Expert in the Economics Sub-Committee of the 1985-1986 Philippine Debt Negotiating Team which negotiated with over 400 private international creditors for the rescheduling of the Philippines medium- and long-term foreign debts. In the private sector, Mr. Alfiler was an Advisor at Lazaro Tiu and Associates, Inc., President of Pilgrims (Asia Pacific) Advisors, Ltd., President of the Cement Manufacturers Association of the Philippines (CeMAP), Board Member of the Federation of Philippine Industries (FPI), Vice President of the Philippine Product Safety and Quality Foundation, Inc. and Governor for Fair Trade Alliance. Omar Byron T. Mier, 67, Filipino, was appointed as the Banks President and Chief Executive Officer (CEO) on February 9, 2013 after serving as Acting President since July 17, 2012. He has been serving as Director of the Bank since May 25, 2005 and was formerly President and CEO of the Bank until May 24, 2010. Mr. Mier, a Certified Public Accountant, obtained his degrees in Bachelor of Science in Business Administration, Major in Accounting, and Bachelor of Arts in Economics from the University of the Philippines. He is currently Chair of PNB Capital and Investment Corporation, Japan-PNB Leasing and Finance Corporation, Japan-PNB Equipment Rentals Corporation, Bulawan Mining Corporation, PNB Italy SpA, PNB (Europe) Plc and PNB RCI Holdings Co., Ltd. He is also a Director of PNB Forex, Inc., PNB Holdings Corporation, PNB General Insurers Co., Inc., PNB Securities, Inc., Management Development Corporation, and PNB Global Remittance and Financial Co., HK, Ltd. He was formerly the Chairman of Victorias Milling Company, Inc. and a Director of Citra Metro Manila Tollways Corporation and Credit Information Corporation. Prior to his election as a member of the Board of the Bank, he served as Executive Vice President and Chief Credit Officer from August 16, 2002 to April 10, 2005 then was appointed as Acting President on 11 April 2005. He also worked with Citibank N.A. (Manila and Malaysia) for 24 years where he held the positions of Country Risk Manager/Senior Credit Officer and Head of the Risk Management Group and World Corporation Group. Before joining the Bank in 2002, he served as Deputy General Manager & Corporate Banking Department Head of Deutsche Bank, Manila from 1995 to 2001. Florido P. Casuela, 72, Filipino, has been serving as Director of the Bank since May 30, 2006. A Certified Public Accountant, he obtained his degree in Bachelor of Science in Business Administration, Major in Accounting, and his Masters in Business Administration from the University of the Philippines. He took the Advanced Management Program for Overseas Bankers conducted by the Philadelphia National Bank in conjunction with the Wharton School of the University of Pennsylvania. Mr. Casuela was one of the ten (10) awardees of the 2001 Distinguished Alumni Award of the UP College of Business Administration. He is currently a Director of PNB Holdings Corporation, PNB Securities, Inc., PNB Remittance Centers, Inc., and PNB RCI Holdings Co., Inc. He is also a Director of Surigao Micro Credit Corporation and a Senior Adviser of the Rural Bank of Makati, Inc. He is a Director of Sagittarius Mines, Inc. as well as its subsidiaries namely: Tampakan Mineral Resources Corporation, Pacific Rim Land Realty Corporation and Hillcrest, Inc., where he is also the President. He is a Trustee of the LBP Countryside Development Foundation, Inc. He was formerly the President of Maybank Philippines, Inc. from February 1992 to July 1993, Land Bank of the Philippines from July 1998 to August 2000, and Surigao Micro Credit Corporation from June 2001 to November 2004. He was formerly a BSP Consultant/Senior Adviser for the Philippine National Bank. Mr. Casuela was also formerly the Chairman of the National Livelihood Support Fund, LBP Countryside Development Foundation, Inc., LBP Insurance Brokerage, Inc., LBP Leasing Corporation, LBP Realty Development Corporation, Masaganang Sakahan, Inc., LBP Financial Services SPA, and Republic Planters Bank Venture Capital. He was Vice Chairman of the Land Bank of the Philippines, Peoples Credit Finance Corporation and Westmont Forex. Mr. Casuela was also a Member of the Board of Directors of the Cotton Development Authority, National Food Authority, Philippine Crop Insurance Corporation, Asean Finance Corporation, Ltd. (Singapore), Manila Electric Company, All Asia Capital and Trust Corporation, Petrochemical Corporation of Asia Pacific, Pacific Cement Corporation, EBECOM Holdings, and Westmont Securities, Inc. Leonilo G. Coronel, 67, Filipino, obtained his Bachelor of Arts, Major in Economics degree from the Ateneo de Manila University in 1967 and finished the Advance Management Program of the University of Hawaii in 1977. He became a Fellow of the Australian Institute of Company Directors in 2002. Presently, he is the Managing Director of the Bankers Association of the Philippines (BAP)Credit Bureau, Inc., an 168

Independent Director of Megawide Construction Corporation and DBP-Aiwa Securities SMBC Phils. Inc., a Director of Software Ventures Intl., and an Executive Director of Rafael Buenaventura Micro Finance Foundation. Prior to his present positions, Mr. Coronel was a Consultant of BAP, Land Bank of the Philippines, Arthur Young/U.S. AID and Economic Development Foundation. He also previously served as the Treasurer of PDS Holdings, a Director of the Philippine Clearing House Corporation, the Philippine Dealing System and the Philippine Depository & Trust Corporation, a Trustee/Treasurer and member of the Capital Market Development Council Institute, a member of the Executive Committee of the Philippine Business for Social Progress and the President of Cebu Bankers Association. He also worked with Citibank, Manila for twenty (20) years, occupying various positions. Reynaldo A. Maclang, 75, Filipino, was elected as a Director of the Bank on February 9, 2013. He holds a Bachelor of Laws degree from the Ateneo de Manila University. He was a Director of Allied Bank since August 15, 2001. He is also a Director of Allied Leasing and Finance Corporation and Allied Savings Bank. He was formerly the President of Allied Savings Bank from 1986 to 2001, and became President of Allied Banking Corporation in 2001 up to 2009. He has been with the Bank since 1977. Previous to that, he had been connected with other commercial banks and practiced law. Estelito P. Mendoza, 83, Filipino, was elected as a Director of the Bank effective January 1, 2009. He obtained his Bachelor of Laws degree from the University of the Philippines and Master of Laws degree from the Harvard Law School. A practicing lawyer for more than sixty years, he has been consistently listed for several years as a Leading Individual in Dispute Resolution among lawyers in the Philippines in the following directories/journals: The Asia Legal 500, Chambers of Asia and Which Lawyer? yearbooks. He has also been a Professional Lecturer of law at the University of the Philippines, and served as Solicitor General, Minister of Justice, Member of the Batasang Pambansa and Provincial Governor of Pampanga. He was the Chairman of the Sixth (Legal) Committee, 31st Session of the UN General Assembly and the Special Committee on the Charter of the United Nations and the Strengthening of the Role of the Organization. He currently serves as a member of the Board of Directors of Philippine Airlines, Inc., San Miguel Corporation, Meralco, and Petron Corporation. Christopher J. Nelson, 54, British, was elected as an Independent Director of the Bank on March 21, 2013, subject to regulatory approval. He holds a Bachelor of Arts degree in History and Masters of Arts degree in History both from the Emmanuel College, Cambridge University. He is the President of Philip Morris Fortune Tobacco Corporation, Inc. (PMFTC, Inc.) up to April 30, 2013 and concurrently serves as the Managing Director of Philip Morris Philippines Manufacturing, Inc. He has an extensive 31 years of experience in the tobacco business, 25 years of which were with Philip Morris International holding various positions including Philip Morris Area Director for Saudi Arabia, Kuwait, Gulf Cooperation Council, Yemen, and Horn of Africa. Mr. Nelson is also involved in various business and non-profit organizations that work for the social and economic upliftment of communities. He is a Director of the American Chamber of Commerce, the Philippine Band of Mercy and the Federation of Philippine Industries. He is also Vice President of the American Chamber of Commerce Foundation and the Tan Yan Kee Foundation. Washington Z. Sycip, 92, American, has been serving as a Director of the Bank since May 30, 2000. He is the founder of SGV Group, the Philippines largest professional services firm. He is also one of the founders and Chairman Emeritus of the Asian Institute of Management; member of the Board of Overseers of the Graduate School of Business at Columbia University; Honorary Chairman of the Euro-Asia Centre of INSEAD in Fontainebleau, France; and Honorary Life Trustee of The Asia Society. He is presently an Independent Director of Belle Corporation, Lopez Holdings, Commonwealth Foods, Inc., First Philippine Holdings Corp., Highlands Prime, Inc., Philippine Equity Management, Inc., Philippine Hotelier, Inc., Philamlife, Realty Investment, Inc., the PHINMA Group, Stateland, Inc. and Century Properties, Inc. He is the Chair of Cityland Development Corporation, Lufthansa Technik Philippines, Inc., MacroAsia Corporation, STEAG State Power, Inc. and State Properties Corporation. He is a member of the Board of Directors of a number of other major corporations in the Philippines and other parts of the world. Mr. SyCip served as President of the International Federation of Accountants from 1982 to 1985, member of the International Advisory Board of the Council on Foreign Relations from 1995 to 2010, Vice Chairman of the Board of Trustees of The Conference Board from 2000 to 2004), and Chairman of the Asia Pacific Advisory Committee of the New York Stock Exchange from 1997 to 2004). He also served on the International Boards of the American International Group, AT&T, Australia & New Zealand Bank, Caterpillar, Chase Manhattan Bank, Owens-Illinois, Pacific Dunlop and United Technologies Corporation, among others. He was a member of the Board of Trustees of Ramon Magsaysay Award Foundation (2005-2008) and Eisenhower Exchange Fellowship from 1999 to 2010). Among his awards are the Order of Lakandula, Rank of Grand Cross, conferred by Philippine President Benigno S. Aquino, III on 30 June 2011; 169

Lifetime Achievement Award given by Columbia Business School in 2010 and Asia Society in 2012; Ramon Magsaysay Award for International Understanding in 1992; the Management Man of the Year given by the Management Association of the Philippines in 1967; the Officers Cross of the Order of Merit given by the Federal Republic of Germany in 2006; Star of the Order of Merit Conferred by the Republic of Australia in 1976; and the Officer First Class of the Royal Order of the Polar Star awarded by H.M. the King of Sweden in 1987. Harry C. Tan, 67, Filipino, has been serving as a Director of Allied Banking Corporation since November 1999. He holds a Bachelor of Science degree in Chemical Engineering from Mapua Institute of Technology. Mr. Tan is the President of Century Park Hotel, Landcom Realty Corporation and Oceanic Holdings BVI Ltd. He is also the Vice Chair of Lucky Travel Corp., LT Group, Inc., Tanduay Distillers, Inc., Eton Properties Philippines, Inc., Eton City Inc., Belton Communities, Inc. and First Homes, Inc. He is the Managing Director/Vice Chair of Charter House Inc. and is a member of the Board of Directors of various private firms which include Asia Brewery, Inc., Dominium Realty and Construction Corp., Shareholdings Inc., Himmel Industries, Inc., Tobacco Recyclers Corporation, PMFTC Inc., Fortune Tobacco Intl. Corp., Basic Holdings Corporation, Pan Asia Securities Inc., Absolut Distillers, Inc., Allied Bankers Insurance Corporation, Asian Alcohol Corp., REM Development Corporation, Tanduay Brands International Inc., Foremost Farms, Inc., Grandspan Development Corp., Manufacturing Services and Trade Corporation, Progressive Farms, Inc., PAL Holdings, Inc. and Oceanic Bank. He is also a Director/Chair for Tobacco Board of Fortune Tobacco Corporation. Lucio C. Tan, 79, Filipino, has been serving as a Director of the Bank since December 8, 1999. He studied at Far Eastern University and later obtained his Chemical Engineering degree from the University of Santo Tomas (UST). In 2003, he earned the degree of Doctor of Philosophy, Major in Commerce, from UST. From humble origins, Dr. Tan became the Chairman of Allied Banking Corporation from 1977 to 1999. He is presently the Chairman and CEO of Philippine Airlines, Inc., Eton Properties Philippines, Inc., Lucky Travel Corporation, PAL Holdings, Inc., LT Group, Inc. and Tanduay Distillers, Inc. He is also the Chairman of Asia Brewery, Inc., Basic Holdings Corporation, Himmel Industries, Inc., Fortune Tobacco Corporation and PMFTC Inc. Dr. Tan is the President of Grandspan Development Corporation and a Director of PNB Life Insurance, Inc. Despite Dr. Tans various business pursuits, he continues to share his time and resources with the community. In 1986, he founded the Tan Yan Kee Foundation, Inc., of which he is Chairman and President. He is likewise Chairman Emeritus of the Federation of Filipino-Chinese Chambers of Commerce and Industry, Inc. (FFCCCII). He is also the founder and Vice Chairman of the Foundation for Upgrading the Standard of Education, Inc. (FUSE). He is the Adviser/Benefactor of the medical scholarship program of Asia Brewery, Inc. and Benefactor/Honorary Adviser of other professional and socio-civic groups. For his outstanding achievements and leadership, Dr. Tan received the following honorary degrees: Doctor of Humane Letters, University of Guam (Guam, USA); Doctor of Applied Agriculture, Central Luzon State University (Muoz, Nueva Ecija); Doctor of Technology Management, Western Visayas College of Science and Technology (La Paz, Iloilo), Doctor of Science in International Business and Entrepreneurship, Cavite State University (Cavite); Doctor of Humanities, Western Mindanao State University (Zamboanga); Doctor of Business Management, St. Paul University Philippines (Tuguegarao, Cagayan); Doctor of Institutional Development and Management, Isabela State University (Cauayan, Isabela); Doctor of Humanities, University of Mindanao (Davao City); Doctor of Business and Industrial Management Engineering, Central Philippine University (Iloilo City); Doctor of Humanities in Business and Entrepreneurship, Lyceum-Northwestern University (Dagupan City, Pangasinan); and Doctor of Humanities, San Beda College (Manila). He was chosen as a Lifetime Achievement Awardee by the Dr. Jose P. Rizal Awards for Excellence, adopted to the Ancient Order of the Chamorri and designated Ambassador-at-Large of the U.S. Island-territory of Guam, and conferred the Diploma of Merit by the Socialist Republic of Vietnam, one of the highest honors conferred by the Vietnamese Government on foreign nationals. Dr. Tan was named Outstanding Manilan for the year 2000 by the City Government of Manila and conferred the UST Medal of Excellence in 1999, the highest award given by the Pontifical and Royal University of Santo Tomas. Aside from being named Most Distinguished Bicolano Business Icon in 2005, Dr. Tan was also conferred the following awards: 2003 Most Outstanding Member Award by the Philippine Chamber of Commerce and Industry (PCCI) in recognition of his altruism and philanthropy, business acumen, hard work and perseverance in his numerous business ventures, Award of Distinction by the Cebu Chamber of Commerce and Industry, Award for Exemplary Civilian Service of the Philippine Medical Association, Honorary Mayor and Adopted Son of Bacolod City and Adopted Son of Cauayan City, Isabela. He was named Entrepreneurial Son of Zamboanga, awarded as distinguished fellow during the 25th Conference of the ASEAN Federation of Engineering Association, and conferred the 2008 achievement award for service to the chemistry profession during the 10th Eurasia Conference on Chemical Sciences. In recognition of his achievements, the City of San Francisco, U.S.A. declared May 11 of each year as Dr. Lucio Tans Day in the Bay area. The island-territory of Guam also celebrates Lucio Tan Day on November 2 of each year. 170

Lucio K. Tan, Jr., 47, Filipino, has been serving as a Director of the Bank since September 28, 2007. He obtained his degree in Bachelor of Science in Civil Engineering (Minors in classical Chinese Mandarin and Mathematics) from the University of California Davis in 1991. He completed the academic requirements for his MBA at the J.L. Kellogg School of Management of Northwestern University and the School of Business and Management of the Hong Kong University of Science and Technology in 2006. He also attended courses in Basic and Intermediate Japanese Language. He works with MacroAsia Corporation, where he held the rank of President and Chief Executive Officer for 7 years. Mr. Tan is currently the President of Tanduay Distillers, Inc. He is a member of the Board of Directors of Phillip Morris Fortune Tobacco Corporation (PMFTC), Inc., Bulawan Mining Corporation, PNB Capital and Investment Corporation, PNB (Europe) Plc, PNB Italy SpA, Philippine Airlines, Inc., PAL Holdings, Inc., Air Philippines Corporation, MacroAsia Corporation, LT Group, Inc., Allied Bankers Insurance Corporation and Eton Properties Phils., Inc. He is also Executive Director of Dynamic Holdings Limited, and Executive Vice President (EVP) of Fortune Tobacco Corporation. Michael G. Tan, 47, Filipino, was elected as a Director of the Bank on February 9, 2013. He is President/ Director of LT Group, Inc., the holding firm of the Tan Companies. He also served as a Director of Allied Banking Corporation since January 30, 2008 until the ABCs merger with PNB on 9 February 2013. He is also the Director/Chief Operating Officer of Asia Brewery, Inc. and a member of the Board of Directors of the following companies: Abacus Distribution Systems Phils., Inc., Allied Commercial Bank, Allied Bankers Insurance Corp., Absolut Distillers, Inc., Air Philippines Corporation, Philippine Airlines, Inc., PAL Foundation, Inc., PAL Holdings, Inc., Lucky Travel Corporation, Eton Properties Philippines, Inc., Eton City, Inc., PMFTC Inc., Shareholdings, Inc., and Victorias Milling Company, Inc. He holds a Bachelor of Applied Science in Civil Engineering degree from the University of British Columbia, Canada. Deogracias N. Vistan, 69, Filipino, was appointed as an Independent Director of the Bank on August 1, 2011. He obtained his AB and BSBA degrees from the De La Salle University and earned his MBA from Wharton Graduate School. Mr. Vistans extensive banking experience includes being Chair of United Coconut Planters Bank from 2003 to 2004, Vice Chair of Metropolitan Bank and Trust Company from 2000 to 2001, and President of Equitable-PCI Bank from 2001 to 2002, Solidbank Corporation from 1992 to 2000 and Land Bank of the Philippines from 1986 to 1992. He also served as President of FNCB Finance from 1979 to 1980. Mr. Vistan likewise held various management positions in Citibank Manila, Cebu and New York from 1968 to 1986). He is a former Presidential Consultant on Housing from 2002 to 2003 and President of the Bankers Association of the Philippines from 1997 to 1999. He is currently a member of the Board of PNB Capital and Investment Corporation, PNB Italy SpA, PDS Holdings Corporation, Lorenzo Shipping Corporation and U-bix Corporation. He also serves as Board Advisor of PNB Remittance Centers, Inc. and as Chairman of Creamline Dairy Corporation. The Board appointees are: William T. Lim, 72, Filipino, was appointed as Advisor of the Bank on January 25, 2013. Previous to that, he served as Consultant of Allied Banking Corporation since 1995. He holds a Bachelor of Science in Chemical Engineering degree from the Adamson University. From 1985 to 1994, he was a Director of Corporate Apparel, Inc., Concept Clothing, and Freeman Management and Development Corporation, President of Jas Lordan, Inc. and an importer/distributor of Chinese, Australian and New Zealand apples. He also worked with Equitable Banking Corporation, rising from the ranks to becoming a Vice President of the Foreign Department. Doris S. Te, 32, Filipino, was appointed as Corporate Secretary of the Bank on January 20, 2012. She obtained her degree in Bachelor of Science in Business Management in 2001 and earned her Juris Doctor in 2005 at the Ateneo de Manila University. She began her law career as a Junior Associate in Zambrano & Gruba Law Offices and in Quiason Makalintal Barot Torres Ibarra & Sison Law Offices. She joined the Bank in 2009. Prior to her appointment, she was Assistant Corporate Secretary and later Acting Corporate Secretary of the Bank. Presently, she also serves as a Director and Corporate Secretary of Valuehub, Inc., a family-owned distribution company.

171

The following is a list of the Banks Executive Officers as of September 30, 2013:
Position Name Age Citizenship

President & Chief Executive Officer . . . . . . . . . . . Executive Vice President & Head, Treasury Group. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Executive Vice President, Chief Security Officer & Head, Corporate Security Group . . . Executive Vice President & Head, Retail Banking Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . First Senior Vice President & Head, Commercial Banking Group . . . . . . . . . . . . . . . . . . . . . . . . . . . First Senior Vice President & Head, Corporate Banking Group & Government Banking Group. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . First Senior Vice President, Chief Financial Officer & Head, Financial Management and Controllership Group . . . . . . . . . . . . . . . . . . . . . . First Senior Vice President, Chief Credit Officer & Head, Remedial and Credit Management Group . . . . . . . . . . . . . . . . . . . . . . . First Senior Vice President (seconded as President & CEO of PNB Securities, Inc.) . . . . First Senior Vice President (seconded as President & CEO of Japan-PNB Leasing and Finance Corporation) . . . . . . . . . . . . . . . . . . . . . . First Senior Vice President & Head, Global Filipino Banking Group . . . . . . . . . . . . . . . . . . . . First Senior Vice President & Head, Special Assets Management Group . . . . . . . . . . . . . . . . . First Senior Vice President & OIC, Consumer Finance Group and Consumer Credit and Collection Division. . . . . . . . . . . . . . . . . . . . . . . . First Senior Vice President & Head, Branch Banking Group . . . . . . . . . . . . . . . . . . . . . . . . . . . Senior Vice President & Head, Corporate Planning and Research Division. . . . . . . . . . . . . Senior Vice President, Chief Compliance Officer & Head, Global Compliance Group. . . Senior Vice President & Head, Human Resource Group. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Senior Vice President & Treasurer. . . . . . . . . . . . . Senior Vice President & Head, Global Operations Group . . . . . . . . . . . . . . . . . . . . . . . . . Senior Vice President & Head, Remedial Management Division . . . . . . . . . . . . . . . . . . . . . Senior Vice President, Chief Risk Officer & Head, Risk Management Group . . . . . . . . . . . . . Senior Vice President, Chief Marketing Officer & Head, Marketing Group. . . . . . . . . . . . . . . . . .

Omar Byron T. Mier Horacio E. Cebrero III Christopher J. Dobles Jovencio D. Hernandez Yolanda M. Albano

67 51 69 60 62

Filipino Filipino Filipino Filipino Filipino

Cenon C. Audencial, Jr.

55

Filipino

Zacarias E. Gallardo, Jr.

64

Filipino

Miguel Angel G. Gonzalez Ramon L. Lim

54 62

Filipino Filipino

Edgardo T. Nallas Benjamin J. Oliva Emmanuel German V. Plan II

56 60 61

Filipino Filipino Filipino

Elfren Antonio S. Sarte Rafael Z. Sison, Jr. Emeline C. Centeno Alice Z. Cordero Socorro D. Corpus Maria Paz D. Lim John Howard D. Medina Aida M. Padilla Carmela A. Pama Emmanuel A. Tuazon 172

53 57 54 56 61 52 44 64 57 49

Filipino Filipino Filipino Filipino Filipino Filipino Filipino Filipino Filipino Filipino

Position

Name

Age

Citizenship

Senior Vice President & Chief Audit Executive . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . First Vice President & OIC, Legal Group. . . . . . . First Vice President & OIC, Trust Banking Group. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vice President & Head, Information Technology Group. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Dioscoro Teodorico L. Lim Manuel C. Bahena, Jr. Atty. Josephine E. Jolejole Constantino T. Yap

58 52 52 50

Filipino Filipino Filipino Filipino

The following is a brief description of the business experience of each of the Executive Officers: Horacio E. Cebrero III, 51, Filipino, Executive Vice President, is Head of the Treasury Group. He obtained his Bachelor of Science in Commerce degree, Major in Marketing, from the De La Salle University. Prior to joining PNB, he was an Executive Vice President and the Treasurer of EastWest Banking Corporation. He also held the post of Senior Vice President and Deputy Treasurer of Rizal Commercial Banking Corporation, Vice President Head of the Foreign Exchange Desk of Citibank Manila and Vice President/Chief Dealer of the Treasury Group of Asian Bank Corporation. He brings with him 29 years of experience in the banking industry starting from Loans and Credit, Branch Banking, Fixed Income Sales, Trust Banking, Foreign Exchange and Fixed Income Trading, Portfolio Management and other Treasury-related activities. Christopher C. Dobles, 69, Filipino, Executive Vice President, is Head of the Banks Corporate Security Group and concurrently the Bank Security Officer of Allied Savings Bank. He served as the Chairman of the Investigation Committee, the Business Continuity Committee and the Labor Management Relations Committee. He was formerly the Head of Allied Banks Credit Investigation and Appraisal Department. He was also appointed as the Internal Affairs Officer of the Anti-Fraud Committee. He was a member of the Allied Banks Senior Management Committee and the Personnel Committee. Before joining PNB, he was with Allied Bank since 1977. He holds a Bachelor of Arts degree from the University of Sto. Tomas and took up units in Masters in Business from the Ateneo Graduate School. He is also a commissioned officer with the rank of Major in the Philippine Constabulary Reserve Force. Prior to becoming the Bank Security Officer, he has held key positions with the Allied Banking Corporation including Head of the Corporate Affairs. He was also a former President of the Bank Security Management Association (BSMA) and was consistently elected as a member of the Associations Board of Directors up to present. Jovencio B. Hernandez, 60, Filipino, Executive Vice President, is Head of the Retail Banking Group. A Certified Public Accountant, he obtained his Bachelor of Science in Commerce degree, Major in Accounting, from the De La Salle College. Prior to joining PNB, he was a Senior Vice President and the Head of the Consumer Banking Group of Security Bank and was also the Senior Vice President for Retail Banking of Union Bank of the Philippines in 2004, Commercial Director of Colgate Palmolive in 1996, Senior Country Operations Officer of Citibank in 1995, and Group Product Manager of CFC Corporation and Unilever in 1982 and 1980, respectively. He was formerly the President of Security Finance in 2004 and First Union Plans in 2003. He was also a Director of SB Forex and SecurityPhil Am. He was a Treasurer, Director and Executive Committee Member of Bancnet in 2004. Yolanda M. Albano, 62, Filipino, First Senior Vice President (FSVP), is Head of the Banks Commercial Banking Group. She was previously the FSVP and Head of Allied Banks Institutional Banking Group, comprising the Account Management Division and the Merchant Banking Division. She joined Allied Bank in 1977, starting off as an Account Officer at the Business Development Division and moving on as Head of the Credit and Research Department, concurrent Head of the Corporate Affairs Department, Head of the Account Management Division, and Head of the Institutional Banking Division. At present, she is a member of the Financial Executives Institute of the Philippines (FINEX) and the Makati Business Club. She is a past President of the Bank Marketing Association of the Philippines (BMAP) and the Credit Management Association of the Philippines (CMAP). Ms. Albano completed her AB-Economics degree in three years with a Deans Award for Academic Excellence from the University of the Philippines. Cenon C. Audencial, Jr., 55, Filipino, First Senior Vice President, is Head of the Corporate Banking Group and the Government Banking Group. Before joining the Bank in 2009, he headed the Institutional and Corporate Bank of ANZ, prior to which he was a Senior Relationship Manager of Corporate Banking and Unit Head of Global Relationship Banking for Citibank N.A. He previously served as Vice President and Unit Head of Standard Chartered Banks Relationship Management Group, and was a Relationship Manager in Citytrust 173

Banking Corporation. Before his 20-year stint as a Relationship Manager, he was a Credit Analyst for Saudi French Bank and AEA Development Corporation. Mr. Audencial obtained his Bachelor of Arts in Economics degree from the Ateneo de Manila University. Zacarias E. Gallardo, Jr., 64, Filipino, First Senior Vice President, was appointed as Chief Financial Officer and Head of the Financial Management and Controllership Group of the Bank on October 1, 2012. Mr. Gallardo, a Certified Public Accountant, obtained his degree of Bachelor of Science in Commerce (Summa Cum Laude) from the Far Eastern University in 1969. He has earned units for his Masters in Business Administration degree at De La Salle College, Bacolod City. He had served the Central Bank of the Philippines for 24 years where he was extensively exposed to all phases of banking. He worked with consultancy firms and published a reference book on Regulations on Trust and Fiduciary Business and Investment Management Activities. He joined Allied Bank in 1996 and served as the banks Controller from 2001 until he joined PNB in 2012. He also headed the Allied Banks ICAAP Core Team and Business Continuity unit. Miguel Angel G. Gonzalez, 54, Filipino, First Senior Vice President, is the Chief Credit Officer and Head of the Remedial and Credit Management Group. He entered the bank in March 2010 as Senior Vice President for Commercial Banking Group. He obtained his Bachelor of Science in Industrial Engineering degree from the University of the Philippines and Masters in Business Management degree from Asian Institute of Management. He started his banking career with Citibank NA in 1984. He then headed the Branch Banking Group of Land Bank of the Philippines in 1989 then joined Union Bank of the Philippines in 1994 where he was Senior Vice President and head of Credit and Market Risk Group. In 2007, he became the Country Manager for Genpact Services LLC. Ramon L. Lim, 62, Filipino, First Senior Vice President, is the President and CEO of PNB Securities, Inc., a wholly-owned subsidiary of the Bank. He obtained his Bachelor of Science in Commerce degree, Major in Accounting (Magna Cum Laude), from the University of San Carlos in April 1971 and is a Certified Public Accountant. He completed his Masters in Business Management at the Asian Institute of Management (AIM) in 1980 as a full scholar under the Post-Graduate Scholarship Program of Citibank Manila where he worked from 1975 to 1993. He began his overseas postings at Citibanks Head Office in New York in 1984; next, at its Taipei Branch as Vice President and Deputy Treasurer; and finally, at its Hong Kong Regional Office as Senior Trader and Currency Fund Manager. He then moved to become the Managing Director of Solid Pacific Finance Ltd., Hong Kong from 1993 to 1995, and Investment Manager of MHK Properties and Investment Ltd, HK from 1996 to 1997. He was Treasurer, then Business Manager and Trust Officer of Union Bank of the Philippines from 1997 to 2002. He joined the Bank in November 2002 as Deputy Head of the Treasury Group. He was designated as Head of International and Branch Offices Sector in 2005 and 2006. He was re-assigned back to the Treasury Group as its Head in January 2007 until July 2010. He was designated the Chief of Staff of the PNB President from May 2010 until July 2011, at that time, in concurrent capacity as President and CEO of PNB Securities, Inc. He has been a Fellow of the Institute of Corporate Directors since May 2011. Edgardo T. Nallas, 56, Filipino, is First Senior Vice President of the Human Resource Group. He obtained his degree in AB Economics (Accelerated) from the De La Salle University in 1977 and has earned units in Masters in Business Administration (MBA) from said school. He started his career in Human Resource in 1977 with PhilBanking Corporation. Prior to PNB, he held various HR positions at SolidBank Corporation (1992-1995), BA Savings Bank (1997) and Philippine Bank of Communications (1998-2005). Benjamin J. Oliva, 60, Filipino, First Senior Vice President, is Head of the Global Filipino Banking Group (GFBG) which manages PNBs overseas network of branches and remittance subsidiaries in Asia, Europe, the Middle East, and North America. Mr. Oliva obtained his Bachelor of Science in Commerce degree, Major in Accounting (Cum Laude) from the De La Salle University. He started his career with FNCB Finance, Inc. where he held various junior managerial positions from 1973-1978. He moved to Jardine Manila Finance in 1978 as Vice President of the Metro Manila Auto Finance. In 1980, Mr. Oliva started his career as a banker at the State Investment Bank where he was Head of Corporate Sales Lending Division. In 1981, he moved to PCI Bank and handled the Corporate Banking. He joined Citibank, NA in 1988, where he exhibited his expertise in sales and headed different sales divisions (Corporate Banking, Loans, Cards and Citiphone Banking). He became a Director for various divisions such as Country Sales, Credit Cards Business, Business Development and Personal Loans from November 1999 to January 2006. On January 2006, he was hired by Citibank Savings, Inc. as its President. From June 2009 to July 2011, he held concurrent positions as Commercial Banking Director of Citibank NA and Board Member of Citibank Savings, Inc. Since September 2011, he has been a designate Consultant for Consumer Banking of United Coconut Planters Bank. Mr. Oliva joined PNB on September 10, 2012. 174

Emmanuel German V. Plan II, 61, Filipino, First Senior Vice President, is Head of the Special Assets Management Group. He holds a Bachelor of Science Degree in Commerce, Major in Accounting, from the University of Santo Tomas and took up Masteral Studies at the Letran College. Prior to joining the Bank, he was the Senior Vice President of the Special Assets Group of Allied Banking Corporation. He concurrently held the position of Senior Vice President of State Investment Trust and State Properties Corporation. He also acted as Managing Director of Bear Stearns State Asia and Northeast Land Development Corporation. He has exposure in investment banking, account management, credit and collection. He has been involved in acquired assets management and in real estate development since 1997. Mr. Plan is also into social, religious and charitable undertakings through his active involvement in different educational and religious foundations like Sambayan Educ. Foundation, Inc., LSQC Scholarship Foundation, UST-EHSGAA and Magis Deo, to name a few. Elfren Antonio S. Sarte, 53, Filipino, First Senior Vice President, is Head of the Consumer Finance Group and Consumer Credit and Collection Division. He obtained his Bachelor of Science in Industrial Management Engineering degree, Minor in Mechanical Engineering, from the De La Salle University. From 1995 to 2010, he was connected with the Union bank of the Philippines, holding various positions the latest of which was First Vice President and Head of Retail Risk Management Division responsible for the management and approval of consumer loan products. He was also concurrent Head of Retail Collections (2008-2009). Previous to that, from 1983 to 1995, he was the Business Unit Manager of Credit Information Bureau, Inc. (CIBI). He was also a Rating Analyst with the Credit Rating Division of CIBI. Rafael Z. Sison, Jr., 57, Filipino, holds a Bachelor of Science in Business Administration degree, Major in Management, from the Ateneo de Davao University. He was appointed as the First Senior Vice President and Head of the Branch Banking Group on February 9, 2013. Prior to his appointment, he served as Head of Allied Banking Corporations Retail Banking Group since February 2010. In May 2011, he accepted the offer to join Planters Development Bank as their Branch Banking Group Head with the rank of Senior Vice President. After a short stint, he returned to Allied Bank. He has an extensive experience in both Branch Banking sales and operations. He started his career in the Bank of the Philippine Islands in 1978 and went up the corporate ladder in various banks with stints at Citytrust Banking Corporation (1987-1994), Solid Bank (1994-2000), United Overseas Bank (2000), Rizal Commercial Banking Corporation (2000-2002), Chinatrust Commercial Bank Corporation (2002-2006), and Philippine National Bank (2006-2010). Emeline C. Centeno, 54, Filipino, Senior Vice President, is Head of the Corporate Planning and Research Division. She obtained her Bachelor of Science in Statistics degree (Deans Lister) and completed the coursework in Master of Arts in Economics (on scholarship) from the University of the Philippines. She joined PNB in 1983, rose from the ranks and held various positions at the Department of Economics and Research, Product Development, Monitoring and Implementation Division and the Corporate Planning Division before assuming her present position as Head of the merged Corporate Planning and Research Division. Ms. Centeno was awarded as one of the Ten Outstanding Employees of the Bank in 1987. Alice Z. Cordero, 56, Filipino, Senior Vice President, was appointed Chief Compliance Officer of the Bank on June 16, 2010 with oversight on the Parent Bank including all subsidiaries, affiliates and foreign branches. She is concurrently the Corporate Governance Executive of the Bank. She obtained her degree of Bachelor of Science in Business Economics from the University of the PhilippinesDiliman, Q.C. She has earned units in Masters in Business Administration at the Ateneo Graduate School of Business. Prior to joining the Bank, she was the Chief Compliance Officer of Allied Banking Corporation (2007-2010). She worked with Citibank N.AManila Branch (1988-2007) for nineteen (19) years and held various senior positions in the Consumer Banking Group, including Compliance and Control Director (2000-2005) and concurrent Regional Compliance and Control Director for Philippines and Guam (2004). Her 31 years of banking experience include working for Allied Banking Corporation (1979-1983; 2007-2010), First National Bank of ChicagoManila Branch (1983-1986), Far East Bank and Trust Company (1986-1988) and Citibank N.A.Manila Branch (1988-2007), holding department head positions in Credit Policy, Credit & Research Management, Financial Control, Corporate Regulatory Reporting, Asset Strategy, Business Development, Risk Management and Compliance. Socorro D. Corpus, 61, Filipino, Senior Vice President, is Head of the Human Resource Group. A graduate of the Assumption College with a Bachelor of Arts degree, Major in Psychology as well as an Associate in Commercial Science degree, she has been an HR practitioner for almost 40 years. She started her career with China Banking Corporation in 1973 as an HR specialist prior to joining the Allied Banking Corporation in 1977 as an Assistant Manager. Her professional affiliations include the following: founding member and a Board Member of the Organization Development Professional Network (ODPN), past President and member of the Bankers Council for People Management, member of the Personnel Management Association of the Philippines, and the regular Bank representative to the Banking Industry Tripartite Council. 175

Maria Paz D. Lim, 52, Filipino, Senior Vice President, is the Corporate Treasurer. She obtained her Bachelor of Science in Business Administration degree, Major in Finance and Marketing, from the University of the Philippines and Master in Business Administration from the Ateneo de Manila University. She joined PNB on June 23, 1981, rose from the ranks and occupied various officer positions at the Department of Economics & Research, Budget Office and Corporate Disbursing Office prior to her present position. John Howard D. Medina, 44, Filipino, Senior Vice President, is Head of the Global Operations Group. He has a Bachelor of Science in Industrial Engineering degree from the University of the Philippines and an MBA from the Shidler College of Business at the University of Hawaii at Manoa. He was an East-West Center Degree Fellow and the recipient of a full scholarship while at the University of Hawaii. He also attended the Handelshojskolen I Arhus (The Aarhus School of Business), Pacific Asian Management Institute and the European Summer School for Advanced Management for additional graduate studies. He started his banking career as a management consultant to Citibank-Asia Pacific for several years. Mr. Medina later worked with Union Bank of the Philippines where he conceptualized and implemented electronic banking products and services. Prior to heading the Global Operations Group, he was Head of the Business Systems Support Group at PNB where he facilitated the policy, process and technology retooling of the Bank culminating in the replacement of its core banking systems in the Philippines, US, UK, Japan, Singapore and Hong Kong. Aside from his banking career in the Philippines, Mr. Medina was a process consultant to US banks. He founded LibSal, a private consultancy firm based in Delaware that specialized in designing and reengineering processes for financial institutions and electronic commerce firms. Aida M. Padilla, 64, Filipino, Senior Vice President, is Head of the Remedial Management Division. She is chief strategist as regards problem and distressed accounts. A seasoned professional, she rose from the branch banking ranks at the Philippine Banking Corporation to become Vice President for Marketing at the Corporate Banking Group. She obtained her Bachelor of Science in Commerce degree, Major in Accounting, from St. Theresas College. Carmela A. Pama, 57, Filipino, Senior Vice President, is the Banks Chief Risk Officer. A Certified Public Accountant, she obtained her Bachelor of Science in Business Administration and Accountancy degree from the University of the Philippines and Masters in Business Administration degree from the Stern School of Business, New York University. She started her banking career with Citibank N.A. (Phils.) where she held various positions in the areas of Treasury Trading and Marketing, and Operations and Quality Development. She left Citibank with the rank of Vice President and moved to Banco Santander to open its operations in the Philippines. She moved back to Citibank, N.A. (Phils.) in 1996 to head various operation units. Prior to joining PNB on October 9, 2006, she was a Consulting Services Practice Manager at Oracle Corporation (Phils.) from 1999 to 2005. Further to her role as CRO, she also coordinates the ICAAP implementation of the PNB Group. The ICAAP is the enterprise-wide program to ensure the group continually reviews its level of risk and ensures the adequacy of capital commensurate to its risk taking abilities. She has been involved in the merger/integration team since its inception and is member of the Integration Management Office. Her more than 6 years with PNB has continually improved her proficiency in all facets of banking operations. Emmanuel A. Tuazon, 49, Filipino, Senior Vice President, is the Banks Chief Marketing Officer and Head of the Marketing Group. He obtained his Bachelor of Science degree, Major in Mathematics, from the University of the Philippines. He started his banking career in 1984 and held various positions in marketing, branch banking and consumer banking at Citibank, Bank of the Philippine Islands, Solid Bank, PBCOM, Jardine Pacific Finance, ABN AMRO Savings Bank, and Robinsons Bank. Prior to joining PNB, he was Vice President for Marketing of Security Bank. Dioscoro Teodorico L. Lim, 58, Filipino, Senior Vice President, is Chief Audit Executive (CAE) of the Bank. He is also a Director of the Rosehills Management Development Corporation. A Certified Public Accountant, he holds a Bachelor of Science in Commerce degree, Major in Accounting, from the University of San CarlosCebu. He started his career in 1976 with SGV as a Staff Auditor, and after a year was Field in Charge until 1978 before joining Allied Banking Corporation in 1979 as a Junior Auditor. He rose from the ranks to become an Audit Officer in 1986, and in 2000, was designated as Head of the Internal Audit Division of Allied Banking Corporation until his appointment as CAE of PNB on February 9, 2013. He also served as Compliance Officer of Allied Savings Bank (seconded officer) from August 2001 to August 2006. He is a member of the Institute of Internal Auditors (IIA) Philippines, Association of Certified Fraud Examiners (ACFE)Philippines and Philippine Institute of Certified Public Accountants. Manuel C. Bahena, Jr., 52, Filipino, First Vice President, is the Officer-in-Charge of the Legal Group. He joined PNB in 2003 and was appointed as Head of Documentation and Research Division of the Legal Group in 176

2009. Before joining PNB, he was the Corporate Secretary and Vice President of the Legal Department of Multinational Investment Bancorporation. He also formerly served as Corporate Secretary and Legal Counsel of various corporations, among which are: the Corporate Partnership for Management in Business, Inc., Orioxy Investment Corporation, Philippine Islands Corporation for Tourism and Development, Cencorp (Trade, Travel and Tours), Inc., and Central Bancorporation General Merchants, Inc. He obtained his Bachelor of Science in Business Administration degree from Lyceum of the Philippines in 1981 and his Bachelor of Laws degree from Arellano University in 1987. Atty. Josephine E. Jolejole, 52, Filipino, First Vice President is the Officer-in Charge of the Trust Banking Group. She joined PNB in 2007 as Head of Trust Legal Unit. She was subsequently appointed as Head of Fiduciary Services Division of the Trust Banking Group in 2011. Before joining PNB, she was the Trust Officer of the Union Bank of the Philippines. She is a member of the Board of Trustees of the Trust Institute Foundation of the Philippines, Inc. She obtained her Bachelor of Science in Business Economics from the University of the Philippines and her Bachelor of Laws also from University of the Philippines College of Law. Constantino T. Yap, 50, Filipino, Vice President, Head of the Information Technology Group. He obtained a degree of Bachelor of Engineering in Electrical from Pratt Institute, Brooklyn, New York, USA in 1984 and earned his Master of Science in Electrical Engineering at Purdue University, West Lafayette, Indiana, USA in 1986. He was hired by Allied Banking Corporation on October 1, 2007 as Assistant Vice President for the Special Projects Section of the IT Division. Prior to that, he was the Dean of the College of Engineering and College of Computer Studies and Systems at the University of the East from May 2005 up to May 2007, and as Assistant Dean of the College of Computer Studies at Lyceum of the Philippines from May 2004 to May 2005. He also worked as an IT Consultant for various call centers and B2B firms from August 2002 up to May 2004. He was employed by the Manila Jockey Club and Philippine Racing Club for their computerization upgrade and migration project of the horse racing operations from 1996 to 2000. From 1994 to 1996, he helped managed their familys construction business. While in the US, he was a computer telephony programmer and systems analyst for Phoneworks, Inc. and American Network Exchange Inc. that provides promotions and marketing services running on IVRS (interactive voice response systems) from 1988 to 1994. Compensation of Directors and Executive Officers Information as to the aggregate compensation during the last two fiscal years and to be paid in the ensuing fiscal year 2013 to the Banks Chief Executive Officer and four other most highly compensated executive officers and all other officers and directors as a group are as follows: Chief Executive Officer and four other most highly compensated executive officers (in million Pesos):
Executive Compensation Bonuses Total

2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . All officers and directors as a group unnamed:

28.6(*) 24.9 24.9

9.2(*) 8.0 8.7

37.8(*) 32.9 33.6

Executive Compensation

Bonuses

Total

2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (*) estimated amount

913.3(*) 794.2 750.5

312.3(*) 271.6 248.2

1,225.6(*) 1,065.8 998.7

The directors receive fees, bonuses and allowances that are already included in the amounts stated above. Aside from the said amounts, they have no other compensation plan or arrangement with the Bank. The executive officers receive salaries, bonuses and other usual bank benefits that are included in the amounts stated above. Aside from the said amounts, they have no other compensation plan or arrangement with the Bank.

177

Involvement of the Bank, the Directors and Executive Officers in Certain Legal Proceedings The Bank and some of its subsidiaries are parties to various legal proceedings which arose in the ordinary course of their operations. None of such legal proceedings, either individually or in the aggregate, are expected to have a material adverse effect on the Bank and its subsidiaries or their financial condition. Neither the Directors nor any of the Executive Officers have, for a period covering the past five years, reported: (i) any petition for bankruptcy filed by or against a business to which they are related as a general partner or executive officer; (ii) any criminal conviction by final judgment or being subject to a pending criminal proceeding, domestic or foreign, other than cases which arose in the ordinary course of business in which they may have been impleaded in their official capacity; (iii) being subject to any order, judgment, or decree, of a competent court, domestic or foreign, permanently or temporarily enjoining, barring, suspending or limiting their involvement in any type of business, securities, commodities or banking activities; and (iv) being found by a domestic or foreign court of competent jurisdiction (in a civil action), the Commission or comparable foreign body, or a domestic or foreign Exchange or other organized trading market or self regulatory organization, to have violated a securities or commodities law or regulation, and the judgment has not been reversed, suspended, or vacated. Board Committees Specific responsibilities of the Board are delegated to its sub-committees: the Executive Committee, the Board Audit and Compliance Committee, the Board Oversees Oversight Committee, the Risk Oversight Committee, the Corporate Governance/Nomination Committee, the Board/ICAAP Steering Committee and the Trust Committee. A brief description of the functions and responsibilities of the key committees are set out below: Executive Committee The Executive Committee was created to perform the functions and duties as the Board may confer upon it in accordance with law and the By-Laws of PNB. Board Audit and Compliance Committee The Board Audit and Compliance Committee has oversight responsibility relating to the integrity of the Banks financial statements, internal controls and compliance with legal and regulatory requirements. Board Overseas Oversight Committee The Board Overseas Oversight Committee was created in June 2012 to provide oversight on the international operations and to preserve the long-term viability consistent with the banks strategic goals. Risk Oversight Committee The Risk Oversight Committee has the primary task to assist the Board in the management of the risks the bank is exposed to and development of risk management strategies to prevent losses and minimize financial impact of losses. Corporate Governance/Nomination Committee The Corporate Governance/Nomination Committee ensures the boards effectiveness and adherence to corporate governance principles and guidelines and the selection of members of the Board and senior executives of the bank as well as in the appointment in the respective Board committees. Board/ICAAP Steering Committee The Board ICAAP Steering Committee was created to perform periodic evaluation and approval of the Banks capital planning, risk assessment policies and procedures and provide active oversight on the consistent adoption of the Banks ICAAP Program. Trust Committee The Trust Committee provides direction for the trust business and management of trust assets, fiduciary accounts, investments and trust services. 178

Compliance with Corporate Governance Practices The Bank actively promotes the safety and soundness of its operations through a compliance system that fully adheres to banking laws, rules and regulations and to maintain an environment that is governed by high standards and best practices of good corporate governance. This is achieved primarily through the formulation of policies and procedures, an organizational structure and an effective compliance program that will support the banks compliance system. The Global Compliance Group, which reports directly to the Board Audit and Compliance Committee, is primarily responsible for promoting compliance with the laws and regulations of the different jurisdictions, corporate policies and procedures and international best practices. The Chief Compliance Officer has direct responsibility for the effective implementation and management of the enterprise compliance system covering the Bank domestic and foreign branches, offices, subsidiaries and affiliates. To further strengthen good corporate governance, the Board of Directors appointed the Chief Compliance Officer as the Corporate Governance Executive tasked to assist the Board and the Corporate Governance Committee in the discharge of their corporate governance oversight functions. The Global Compliance Group continue to evolve to reinforce the banks Compliance System with the creation of the Global Compliance Testing Review Division to institutionalize compliance testing reviews among the bank units, branches and business vehicles. This is to complement the other three major divisions namely: Global AML Compliance Division, Regulatory Compliance Division, Business Vehicle Compliance Division. Moreover, a Corporate Governance Monitoring Unit was established to provide support to the Chairman of the Board, thru the Chief Compliance Officer as the designated Corporate Governance Executive. The Banks existing Compliance Program defines the seven key elements of an effective compliance framework. With a proactive Board and executive level oversight, effective compliance organizational structure, standardized policies and procedures across all businesses, periodic monitoring and assessment, robust MIS and compliance reporting, comprehensive compliance and AML awareness training and independent compliance testing reviews. The Compliance Program also incorporates the new policies, laws and regulations and enhancements to corporate standards of which Philippine National Bank, as the Parent Bank, its local and foreign branches, subsidiaries and affiliates are required to be fully aware of. The Compliance Program has been implemented consistently in the various bank units, branches and business vehicle entities. The Banks AML/CFT Policy Guidelines and Money Laundering and Terrorist Financing Prevention Manual are two major manuals approved by the Board in November 2012. The bank is fully committed to adhere to existing and new AML laws, regulations, rules and implementing guidelines issued by both local and foreign regulators. The bank has policies and procedures embracing the compliance framework, the corporate governance guidelines and the AML Risk Rating System issued by Bangko Sentral ng Pilipinas and foreign regulators on AML/CFT laws and regulations. With a comprehensive compliance system effectively implemented enterprisewide, there has been no material deviation noted by the Chief Compliance Officer.

179

RELATED PARTY TRANSACTIONS In the ordinary course of business, the Bank has loans and other transactions with its subsidiaries and affiliates, and with certain Directors, Officers, Stockholders and Related Interests (DOSRI). Under the Banks policy, these loans and other transactions are made substantially on the same terms as other individuals and businesses of comparable risk. Under BSP Circular 423, the amount of direct credit accommodations to each of the Banks DOSRI, 70% of which must be secured, should not exceed the amount of their respective deposits and book value of their respective investments in the Bank. In the aggregate, DOSRI loans generally should not exceed the Banks net worth or 15% of the Banks total loan portfolio, whichever is lower. As of September 30, 2013 and December 31, 2012, the Bank was in compliance with such BSP regulations. Information related to transactions with related parties and with certain directors, officers, stockholders and related interests (DOSRI) is shown under Note 31 of the audited financial statements of the Bank included in this Prospectus. DOSRI Loans and Deposits The following table sets out certain information relating to the Banks DOSRI loans as of the dates indicated:
As of As of December 31, September 30, 2010 2011 2012 2013 (Q billions, except percentages)

Total outstanding DOSRI loans:. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Percentage of DOSRI loans to total loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . Percentage of unsecured DOSRI loans to total DOSRI loans . . . . . . . . . . .

P 2.2 P 4.9 P2.7 2.4% 4.3% 2.0% 24.0% 14.6% 3.3%

P 4.3 1.8% 10.7%

On January 31, 2007, the BSP issued Circular No. 560, imposing lower ceilings on loans, other credit accommodations and guarantees granted to subsidiaries and affiliates of banks and quasi-banks. See Certain Relationships and Related Transactions Certain Relationships and Related Transactions In the ordinary course of business, the Bank has loan transactions with a subsidiary, and with certain DOSRI. Under the Banks policies, these loans are made substantially on the same terms as loans to other individuals and businesses of comparable risks. On January 31, 2007, BSP Circular No. 560 was issued providing the rules and regulations that shall govern loans, other credit accommodations and guarantees granted to subsidiaries and affiliates of banks and quasibanks. Under the said circular, the total outstanding loans, credit accommodations and guarantees to each of the banks subsidiaries and affiliates shall not exceed 10.0% of banks net worth, and the unsecured portion shall not exceed 5.0% of such net worth. Further, the total outstanding exposures shall not exceed 20.0% of the net worth of the lending bank. The said Circular became effective February 15, 2007 and the Bank is in compliance with such regulations. BSP Circular No. 423, dated March 15, 2004 amended the definition of DOSRI accounts. Further, BSP issued Circular No. 464 dated January 4, 2005 clarifying the definition of stockholders. The following table shows information relating to DOSRI accounts of the Bank:
2010 2011 2012

Total outstanding DOSRI accounts (in billions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Percent of DOSRI accounts granted prior to effectivity of BSP Circular No. 423 to total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Percent of DOSRI accounts granted after effectivity of BSP Circular No. 423 to total loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Percent of DOSRI accounts to total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Percent of unsecured DOSRI accounts to total DOSRI loans . . . . . . . . . . . . . . . . . . . . . . . . Percent of past due DOSRI accounts to total DOSRI loans. . . . . . . . . . . . . . . . . . . . . . . . . . Percent of nonperforming DOSRI accounts to total DOSRI loans. . . . . . . . . . . . . . . . . . . . 180

P 2.2 2.4%

P 4.9 4.3%

P2.7 2.0% 2.0% 2.0% 3.3% 0.0% 0.0%

2.4% 4.3% 2.4% 4.3% 24.0% 14.6% 0.0% 0.0% 0.0% 0.0%

The year-end balances as of December 31, 2011 and 2012 in respect of subsidiaries included in the Banks financial statements are as follows (amounts in millions):
2011 2012

Loans and receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deposit liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P629.6 P671.5 946.4 552.3

The income and expenses for the years ended December 31, 2011 and 2012 in respect of subsidiaries included in the Banks financial statements are as follows (amounts in millions):
2011 2012

Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P17.9 P28.3 18.6 12.8

The effects of the foregoing transactions are shown under the appropriate accounts in the Banks financial statements. The significant inter-company transactions and outstanding balances of the Bank with its subsidiaries were eliminated in consolidation. The Bank is not a subsidiary of any corporation and had no transactions with promoters.

181

PRINCIPAL SHAREHOLDERS The following table sets out the 20 largest shareholders of the Bank as of September 30, 2013. Shareholder information in this section is presented as of September 30, 2013.
As of September 30, 2013 (actual) No. Name of Shareholder Number of Shares Percentage of Holdings

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

PCD Nominee Corporation (Filipino) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Key Landmark Investments, Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PCD Nominee Corporation (Non-Filipino) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . True Success Profits Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Caravan Holdings Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Solar Holdings Corporation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prima Equities & Investments Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Leadway Holdings, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Infinity Equities, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pioneer Holdings Equities, Inc.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Multiple Star Holdings Corporation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Donfar Management Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Uttermost Success, Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mavelstone Intl Ltd. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Kenrock Holdings Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fil-Care Holdings, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fairlink Holdings Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purple Crystal Holdings, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Kentron Holdings & Equities Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fragile Touch Investment, Ltd.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

98,840,521 94,883,360 76,098,504 58,389,760 58,389,760 58,389,760 51,091,040 46,495,880 43,792,320 24,386,295 21,925,853 21,890,077 21,523,715 21,055,186 18,522,961 18,119,076 17,945,960 17,374,238 17,343,270 16,157,859 802,615,395

9.10 8.74 7.01 5.38 5.38 5.38 4.70 4.28 4.03 2.25 2.02 2.02 1.98 1.94 1.71 1.67 1.65 1.60 1.60 1.49 73.93%

As of September 30, 2013, the Bank had approximately 30,524 shareholders of record and 1,086,208,416 Common shares outstanding. As of September 30, 2013, LTG held indirect ownership over 45.51% of the Banks shares through various subsidiaries. Security Ownership of Certain Beneficial Owners and Management Security Ownership of Record and Beneficial Owners As of September 30, 2013, the shareholders below collectively held 527,628,036 shares, or 48.61% of the Banks voting securities, 45.51% of which is owned by LTG.
Title of Class Name/Address of Record Owner and Relationship with Issuer Name of Beneficial Owner and Relationship with Record Owner Number of Shares Held

Citizenship

Percentage

Common

Allmark Holdings Corporation Quezon CityShareholder Caravan Holdings Corporation Marikina CityShareholder Donfar Management Ltd. Makati CityShareholder Dunmore Development Corp. (X-496) Makati CityShareholder

Majority owned and Controlled by LT Group, Inc. Majority owned and Controlled by LT Group, Inc.

Filipino

14,754,256

1.36%

Common

Filipino

58,389,760

5.38%

Common Common

Owned and Controlled by British LT Group, Inc. Majority owned and Controlled by LT Group, Inc. Filipino

21,890,077 10,779,000

2.02% 0.99%

182

Title of Class

Name/Address of Record Owner and Relationship with Issuer

Name of Beneficial Owner and Relationship with Record Owner

Citizenship

Number of Shares Held

Percentage

Common

Fast Return Enterprises, Ltd. Makati CityShareholder Fragile Touch Investment Ltd. Makati CityShareholder Ivory Holdings, Inc. Makati CityShareholder Kenrock Holdings Corporation Quezon CityShareholder Key Landmark Investments, Ltd. British Virgin Islands Shareholder Leadway Holdings, Inc. Quezon CityShareholder Mavelstone International Ltd. Makati CityShareholder Merit Holdings and Equities Corporation Quezon CityShareholder Multiple Star Holdings Corporation Quezon CityShareholder Pioneer Holdings Equities, Inc. Pasig CityShareholder Solar Holdings Corporation Pasig CityShareholder True Success Profits, Ltd. British Virgin Islands Shareholder Uttermost Success, Ltd. Makati CityShareholder

Owned and Controlled by LT Group, Inc. Owned and Controlled by LT Group, Inc. Majority owned and Controlled by LT Group, Inc. Majority owned and Controlled by LT Group, Inc. Owned and Controlled by LT Group, Inc. Majority owned and Controlled by LT Group, Inc. Owned and Controlled by LT Group, Inc. Majority owned and Controlled by LT Group, Inc. Owned and Controlled by LT Group, Inc. Majority owned and Controlled by LT Group, Inc. Majority owned and Controlled by LT Group, Inc. Owned and Controlled by LT Group, Inc. Owned and Controlled by LT Group, Inc.

British

12,926,481

1.19%

Common

British

16,157,859

1.49%

Common

Filipino

14,780,714

1.36%

Common

Filipino

18,522,961

1.71%

Common

British

94,883,360

8.74%

Common

Filipino

46,495,880

4.28%

Common

British

21,055,186

1.94%

Common

Filipino

12,377,119

1.14%

Common

Filipino

21,925,853

2.02%

Common

Filipino

24,386,295

2.25%

Common

Filipino

58,389,760

5.38%

Common

British

58,389,760

5.38%

Common

British

21,523,715

1.98%

The following shareholders collectively held 338,765,375 shares, or 31.19% of the Banks voting securities as of September 30, 2013. The records in the possession of the Bank show that the beneficial ownership of the following companies or individuals belongs to the shareholders of record of said companies or to the individual himself, as the case may be. The Bank has not been advised otherwise.
Title of Class Name/Address of Record Owner/Beneficial Owner and Relationship with Issuer Citizenship Number of Shares Held Percentage

Common Common Common

All Seasons Realty CorporationMakati CityShareholder Dreyfuss Mutual Investments, Inc.Pasay CityShareholder Dynaworld Holdings, Inc.Pasig CityShareholder

Filipino Filipino Filipino

7,123,387 7,833,794 8,107,051

0.66% 0.72% 0.75%

183

Title of Class

Name/Address of Record Owner/Beneficial Owner and Relationship with Issuer

Citizenship

Number of Shares Held

Percentage

Common Common Common Common Common Common Common Common Common Common Common Common Common Common Common Common Common Common Common Common Common Common Common Common Common Common

Fairlink Holdings CorporationMakati CityShareholder Fil-Care Holdings, Inc.Quezon CityShareholder Integrion Investments, Inc.Pasay CityShareholder Kentron Holdings and Equities Corp.Pasig City Shareholder Kentwood Development CorporationPasig CityShareholder La Vida Development CorporationQuezon City Shareholder La Vida Development Corporation A/C#2423Quezon CityShareholder Local Trade and Development CorporationMakati CityShareholder Luys Securities Co., Inc.Makati CityShareholder Mandarin Securities CorporationMakati CityShareholder Opulent Land-Owners, Inc.Quezon CityShareholder Power Realty Development CorporationQuezon CityShareholder Profound Holdings, Inc.Mandaluyong CityShareholder Purple Crystal Holdings, Inc.Mandaluyong CityShareholder Safeway Holdings & Equities, Inc.Quezon CityShareholder Society Holdings CorporationQuezon CityShareholder Total Holdings CorporationPasig CityShareholder Witter Webber & Schwab Investment, Inc.Pasay CityShareholder Zebra Holdings, Inc.Marikina CityShareholder Prima Equities and Investments Corp.Quezon CityShareholder Infinity Equities, Inc.Quezon CityShareholder Jewel Holdings, Inc.Marikina CityShareholder Virgo Holdings & Development Corp.Makati CityShareholder Iris Holdings & Development Corp.Makati CityShareholder Kings Investment & Development Corp.Manila Shareholder Others

Filipino Filipino Filipino Filipino Filipino Filipino Filipino Filipino Filipino Filipino Filipino Filipino Filipino Filipino Filipino Filipino Filipino Filipino Filipino Filipino Filipino Filipino Filipino Filipino Filipino Filipino

17,945,960 18,119,076 7,833,794 17,343,270 12,271,396 3,587,300 10,371,574 5,836,153 17,898 13,281 4,105,313 589,268 12,987,043 17,374,238 8,577,826 12,315,399 11,387,186 7,833,795 6,432,773 51,091,040 43,792,320 10,010,650 7,409,285 6,670,885 3,844,230 17,940,190

1.65% 1.67% 0.72% 1.60% 1.13% 0.33% 0.95% 0.54% 0.00% 0.00% 0.38% 0.05% 1.20% 1.60% 0.79% 1.13% 1.05% 0.72% 0.59% 4.70% 4.03% 0.92% 0.68% 0.61% 0.35% 1.65%

PCD Nominee Corporation, now known as Philippine Depository & Trust Corporation (PDTC) is the registered owner of the shares in the books of the Banks transfer agent, Stock Transfer Service, Inc. The beneficial owners of such shares are PCDs participants, who hold the shares on their behalf or on behalf of their clients. The participants have the power to decide how the PCD shares are to be voted.

184

Security Ownership of Management The following table sets out the shareholding interests of the Banks directors as of September 30, 2013:
No. of Shares Held and Nature of Beneficial Ownership(1)

Title of Class of Securities

Name of Holder

Citizenship

% of Ownership

Common

Florencia G. Tarriela Chairman Independent Director Felix Enrico R. Alfiler Independent Director Omar Byron T. Mier President and Chief Executive Officer Florido P. Casuela Director Leonilo G. Coronel Director Reynaldo A. Maclang Director Estelito P. Mendoza Director Christopher J. Nelson Independent Director Washington Z. SyCip Director Harry C. Tan Director Lucio C. Tan Director

2 shares P80.00 (R) 100 shares P4,000.00 (R) 120,200 shares P4,808,000.00 (R) 100 shares P4,000.00 (R) 1 share P40.00 (R) 135 shares P5,400.00 (R) 1,000 shares P40,000.00 (R) 100 shares P4,000.00 (R) 34,010 shares P1,360,400.00 (R) 230 shares P9,200.00 (R)

Filipino

0.0000001841

Common

Filipino

0.0000092063

Common

Filipino

0.0110660163

Common

Filipino

0.0000092063

Common

Filipino

0.0000000921

Common

Filipino

0.0000124286

Common

Filipino

0.0000920634

Common

British

0.0000092063

Common

American

0.0031310750

Common

Filipino

0.0000211746

Common

12,907,060 Filipino shares P516,282,400.00 (R) 2,000 shares P80,000.00 (R) 15,350 shares P614,000.00 (R) 100 shares P4,000.00 (R) 13,080,388 P523,215,520.00 (R) Filipino

1.1882673537

Common

Lucio K. Tan, Jr. Director Michael G. Tan Director Deogracias N. Vistan Independent Director Sub-total

0.0001841267

Common

Filipino

0.0014131726

Common

Filipino

0.0000092063

1.2042245123

(1) Ownership is either record (R) or beneficial (B). 185

The aggregate number of shares owned of record by all or key officers and directors as a group as of September 30, 2013 is 13,136,672 shares or approximately 1.21% of the Banks outstanding capital stock. Voting Trust Holders of 5% or More Except as disclosed in this Prospectus, the Bank is not aware of shareholders holding any Voting Trust Agreement of 5.0% or more or any such similar agreement. Change in Control of the Registrant since beginning of last Fiscal Year There has been no change in the control of the Bank since the beginning of its last fiscal year.

186

RISK MANAGEMENT Risk Organization The Board directs the Banks over-all risk management strategy and performs an oversight function on the implementation of its risk policies through the various committees that it has created, as follows: The Board Audit and Compliance Committee, which has oversight responsibility relating to the integrity of the Banks financial statements, internal controls and compliance with legal and regulatory requirements; The Risk Oversight Committee, which has the primary task to assist the Board in the management of the risks the bank is exposed to and development of risk management strategies to prevent losses and minimize financial impact of losses.; and The Asset and Liability Committee (ALCO), chaired by the President of the Bank, which meets every week to review existing policies (and, where appropriate, recommends amendments to existing policies) on asset and liability management, to formulate strategies on resource allocation and to study the pricing of the Banks products and services. ALCOs mandate is to formulate a risk management policy directed towards managing exposure to foreign exchange and interest rate and maturity (or liquidity) risks on its assets and liabilities within limits determined by the Bank to be acceptable. Maturity (liquidity) risk management The Banks policy is to manage its operations with the objective of ensuring that funds available are adequate to meet credit demands of its customers and to enable deposits to be repaid on maturity. To provide flexibility in meeting these liquidity needs, the Bank maintains diversified liquidity sources. The primary source of liquidity is deposits of retail clients, denominated in both Pesos and U.S. Dollars, generated by the Banks network of domestic branches. The deposit base of the Bank is short-term in nature which is comparable to the nature of the business in the Philippines banking industry. The bank differentiates itself by having a strong deposit base in terms of the number of depositor base which reflects that the majority of the deposits are widely held by retail and middle market accounts which are not sensitive to interest rate movements. Further, due to the profile of the deposit account base and its structure for the past years, the bank has confidently classified majority of the deposit as core deposits, i.e. type of funds that remains and is said to remain in the bank for the long-term. As of September 30, 2013, 2.8%, or approximately P12.8 billion, of outstanding deposits of the Parent Company had a maturity period of one month or less. Other sources of funds include short-term borrowings in the interbank market in the Philippines and abroad, borrowings through the Banks FCDU to fund its foreign currency-denominated assets, funds from maturing assets and profits from operations. The Banks policy is to maintain what it believes is an adequate portion of its asset portfolio in short-term assets. As of September 30, 2013, of the loans and receivables from customers of the Bank, 42.2% was represented by loans with remaining maturities of less than one year and the receivables from customers represented 55.9% of the total financial assets. In addition to maintaining a significant portion of its asset portfolio in loans, the Banks trading and investment account includes securities issued by sovereign issuers (mostly Government Treasury Bills, Floating Rate Treasury Notes and Fixed Rate Treasury Notes). Of the Banks P91.6 billion portfolio of gross trading and investment securities as of September 30, 2013, P15.8 billion, or 17.2%, was invested in securities with remaining maturities of one year or less. The gross trading and investment securities account amounted to 16.5% of the Banks total financial assets at that time. Assets of the Bank include funds due from BSP and other banks and interbank loans receivables, which (on a net basis) accounted for 26.1% and 2.2%, respectively, of the Banks total financial assets as of September 30, 2013. Deposits with banks are made on a short-term basis, 100% of which is available on demand or within one month as of September 30, 2013. Loans to banks with remaining maturities of a month or less accounted for 100% of the Banks total lending to banks as of September 30, 2013. The Banks Liquidity Management Plan involves maintaining sufficient and diverse funding capacity to accommodate fluctuations in asset and liability levels due to changes in the Banks business operations or unanticipated events created by customer behavior or capital market conditions. The Bank seeks to ensure 187

sufficient liquidity through a combination of active management of liabilities, a liquid asset portfolio substantially comprising deposits in primary and secondary reserves, the securing of money market lines and the maintenance of repurchase facilities to pre-empt any unexpected liquidity situations. Although the Bank adopts what it believes to be a prudent policy on managing liquidity risks, a maturity gap exists between the Banks Long term assets and short term liabilities. This is attributable to the Banks policy of taking advantage of higher yields of long term assets which is being financed by the lower yields of short term liabilities. Such strategy generally leads to the average maturity of its financial assets exceeding that of its liabilities. This liquidity risk arising from the mismatch is monitored and controlled by a gap analysis of maturities of relevant assets and liabilities reflected in the maximum cumulative outflow report (MCO) which is reported monthly to the Risk Oversight Committee (ROC). The interest rate risk arising from the volatilities of the maturing / amortizing interest rate gaps are reflected in the Earnings at Risk (EAR) report, which is likewise discussed in both ALCO and the ROC. Further, regular stress tests exercises and simulation of the Liquidity Contingency Plan are conducted, results of which are subsequently reported to the ROC to determine the impact of scenarios on the Banks liquidity profile. Interest rate risk management The Banks policy on managing its assets and liabilities is to ensure that exposure to fluctuations in interest rates are kept within acceptable limits. In its lending activities, the Bank, as much as possible, tries to match the terms and interest rate of its loans and investments with those of its fund sources. A large portion of the Banks funds is in the form of short-term deposit instruments on which it pays rates prevailing in the market. These funds are predominantly short-term in view of the relatively high volatility of domestic interest rates. This volatility is due largely to the fact that Government debt security issues are used extensively by the BSP, particularly in recent years, as instruments of monetary policy. While domestic interest rates have been deregulated since the early 1980s, the BSP policy still influences the interest rate commercial banks charges for Peso-denominated borrowings. Peso Treasury Bills auctioned every other week by the Bureau of Treasury set the trend in domestic interest rates. Peso time deposits offered by commercial banks are usually priced at par or up to two percentage points below the Treasury Bills of the same term. As of September 30, 2013, 33.6% of the Banks receivable from customers was for a term of less than one year, and 66.4% was for its medium- and long-term portfolio. A majority of the interest rates in the floating rate loan portfolio is reset at 90-day intervals. Interest rates on loans are usually set on the basis of the Banks average or marginal costs of funds which in turn, are largely determined by the movement in the rates of Treasury Bills plus a spread. A majority of the Banks rate sensitive assets and liabilities is on a 30 to 90-day interest rate resetting which minimizes exposure to fluctuations in domestic interest rates. The Bank measures the sensitivity of its assets and liabilities to interest rate fluctuations by way of a repricing gap analysis using the re-pricing characteristics of its statement of financial position and approved assumptions. To evaluate earnings exposure, interest rate sensitive liabilities in each time band are subtracted from the corresponding interest rate assets to produce a repricing gap for that time band. The difference in the amount of assets and liabilities maturing or being re-priced over a one year period would then give the Bank an indication of the extent to which it is exposed to the risk of potential changes in net interest income. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. Accordingly, during a period of rising interest rates, a company with a positive gap would be better positioned than one with a negative gap to invest in higher yielding assets more quickly than it would need to refinance its interest-bearing liabilities. During a period of falling interest rates, a company with a positive gap would tend to see its assets re-pricing at a faster rate than one with a negative gap, which may restrain the growth of its net income or result in a decline in net interest income. For risk management purposes, the re-pricing gap covering the one-year period is multiplied by an assumed change in interest rates to yield an approximation of the change in net interest income that would result from such an interest rate movement. The Banks Board of Directors sets a limit on the level of EAR exposure acceptable to the Bank. Compliance with the EAR limit is monitored monthly by the Risk Management Group. For risk management purposes, the re-pricing gap covering the one-year period is multiplied by an assumed change in interest rates to yield an approximation of the change in net interest income that would result from 188

such an interest rate movement. The Banks Board of Directors sets a limit on the level of earnings at risk (EAR) exposure acceptable to the Bank. Compliance with the EAR limit is monitored monthly by the Risk Management Group. The following table sets forth the Banks repricing gap position as of September 30, 2013 (in P millions):
As of September 30, 2013 Up to 1 month 1 to 3 months 3 to 6 months 6 to 12 months Beyond 1 year Total

Financial Assets COCI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due from BSP and other banks . . . . . . . . . . Interbank loans receivable . . . . . . . . . . . . . . Securities held under agreements to resell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial assets at FVPL: Held-for-trading: Government securities. . . . . . . . . Derivative assets . . . . . . . . . . . . . Equity securities . . . . . . . . . . . . . . Private debt securities . . . . . . . . . Designated at FVPL: Segregated fund assets . . . . . . . . Private debt securities . . . . . . . . . Receivable from customers and other receivablesgross(1) . . . . . . . . . . . . . . . . . Unquoted debt securitiesgross . . . . . . . . AFS investments . . . . . . . . . . . . . . . . . . . . . . Miscellaneous COCI . . . . . . . . . . . . . . . . . . . Financial Liabilities Deposit liabilities: Demand. . . . . . . . . . . . . . . . . . . . . . . . . . Savings . . . . . . . . . . . . . . . . . . . . . . . . . . Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial liabilities at FVPL . . . . . . . . . . . . Bills and acceptances payable . . . . . . . . . . . Subordinated debt . . . . . . . . . . . . . . . . . . . . . Accrued interest payable and other liabilities(2) . . . . . . . . . . . . . . . . . . . . . . . . . Repricing gap . . . . . . . . . . . . . . . . . . . . . . . . . Cumulative gap . . . . . . . . . . . . . . . . . . . . . . .

89,504.69 11,957.80 25,000.00

132.35

8,834.91 8,834.91 55,447.74 144,952.43 12,090.15 25,000.00

3,520.69 469.95 192.90 219.57 7,164.94

3,520.69 469.95 192.90 219.57 7,164.94

75,988.61 47,664.58 8,132.77 15,842.28 114,456.98 262,085.21 197.06 96.67 2,741.77 0.83 8,309.06 11,345.39 625.00 410.52 819.36 2,519.48 76,578.18 80,952.55 0.09 0.09

Total financial assets. . . . . . . . . . . . . . . . . . . 203,273.16 48,304.12 11,693.90 18,362.60 275,195.00 556,228.78

953.51 92,463.55 26,219.93 19,526.61 12,722.72 10,573.90 1,391.92 79,756 79,756 7,970 87,725

118,667.74 119,621.25 7,598.53 5,258.50 156,680.70 285,221.22 5,947.43 5,235.56 5,702.82 49,135.15 7,363.70 7,363.70 810.01 1,228.47 462.26 14,466.57 9,949.83 9,949.83 (2,662) 85,063 6,640 91,703 22,422.30 (43,054) 48,649 22,422.30 48,649

Total financial liabilities. . . . . . . . . . . . . . . . 123,517.57 40,334.57 14,355.98 11,722.54 318,249.35 508,180.01

Notes: Non-interest bearing financial assets and liabilities are lumped in greater than 1 year bucket. (1) Receivable from customers excludes residual value of leased assets. (2) Accrued interest and other financial liabilities include Accrued interest payable, Accounts payable, Insurance contract liabilities, Bills purchasedcontra, Due to other Banks, Managers checks and demand drafts outstanding, Payment order payable, Deposit on lease contracts, Due to Treasurer of the Philippines, Margin deposits and cash letters of credit, Due to BSP and other financial liabilities.

189

Another measure of the Banks non-consolidated exposure to fluctuations in interest rates examines the impact of interest rate movements of various magnitudes on its net income. The following table sets forth, as of and for the period indicated, the impact of changes in interest rates on the Banks non-consolidated net interest income:
As of December 31, 2011 2012 Statement of Income Equity Statement of Income Equity (Q millions) As of September 30, 2013 Statement of Income Equity

+50bps. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -50bps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . +100bps. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -100bps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

234 (234) 468 (468)

234 (234) 468 (468)

104 (104) 209 (209)

104 (104) 209 (209)

409 (409) 818 (818)

409 (409) 818 (818)

Given the re-pricing position of the assets and liabilities of the Bank as of September 30, 2013, if interest rates increased by 100 basis points, the Bank would expect annualized non-consolidated net interest income to increase by P818 million. If interest rates decreased by 100 basis points, the annualized non-consolidated net interest income would decrease by P818 million. The EAR computation is accomplished monthly, with a quarterly stress test. Finally, the Bank monitors its exposure to interest rate changes in its trading book by measuring its Valueat-Risk with respect to interest rate fluctuations. The Bank uses back testing to verify the results of the daily Value-at-Risk calculation. The Bank performs stress tests on its trading portfolios to determine the effects of extreme market developments on the value of market risk sensitive exposures. Foreign currency risk management Foreign currency liabilities generally consist of foreign currency-denominated deposits made in the Philippines (or which are generated from remittances to the Philippines by expatriates and contract workers who retain for their own benefit, or for the benefit of a third party, foreign currency deposit accounts with the Bank) and foreign currency-denominated borrowings of the Bank. Foreign currency-denominated liabilities are generally used to fund the Banks foreign currency-denominated loan portfolio. The Bank is currently a net holder of foreign currency, as foreign currency-denominated assets exceed foreign currency-denominated liabilities. The Banks policy is to maintain foreign currency exposure within exposure limits approved by the Banks BOD and within existing regulatory guidelines. Trading and investment securities The Bank engages in fixed income securities trading. As of September 30, 2013, the Banks gross trading and investment securities (which consist of financial assets at fair value through profit or loss and available-forsale investments) amounted to P91.6 billion or 16.5% of total financial assets. As of the same period, 68.8% of trading and investment portfolio are in Government securities while the balance is in privately issued securities. As of September 30, 2013, financial assets at FVPL amounted to P11.6 billion or 1.9% of the Banks total assets. Derivatives The Bank trades in financial instruments where it either takes positions in traded and over-the-counter instruments, including derivatives, to take advantage of short-term market movements in equities and bonds and in currency and interest rate or for hedging open risk positions. The Bank places trading limits on the exposure that can be taken at any point in time. The Bank engages in derivatives for hedging and proprietary trades. Under BSP Circular 594, the Bank is authorized, as an end-user, to enter into Generally Authorized Derivatives Activities which covers FX forwards, FX swaps, Currency Swaps, IRS & FRAs, FX Options, Structured Products (SPs) and CLNs. These derivatives transactions are covered by Bank policies on trading limits on the exposure that can be taken in relation to at any point in time.

190

MARKET PRICE OF THE BANKS STOCK AND RELATED STOCKHOLDER MATTERS Market Information The Banks Common Shares are traded on the PSE under the symbol PNB. The following table sets out, for the periods indicated, the high and low sales price for the Banks Common Shares as reported on the PSE:
High Low

2010 1st quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2nd quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3rd quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4th quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2011 1st quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2nd quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3rd quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4th quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2012 1st quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2nd quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3rd quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4th quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2013 1st quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2nd quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3rd quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4th quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24.50 33.50 71.00 73.80 63.80 67.50 63.70 57.00 75.00 77.40 76.00 93.55 107.00 116.30 89.00 96.35 23.00 21.00 29.00 55.85 43.50 57.75 41.00 44.60 56.90 67.40 69.00 70.50 88.05 77.50 67.00 77.80

On September 30, 2013, the closing price of the Banks Common Shares on the PSE was P87.40 per Common Share. On December 11, 2013 the PSE approved the listing of the Rights Shares on the PSE subject to the fulfillment of certain conditions.

191

THE PHILIPPINE STOCK MARKET The information presented in this section has been extracted from publicly available documents which have not been prepared or independently verified by the Company, the Selling Shareholder, the Joint Lead Managers or any of their respective subsidiaries, affiliates or advisors in connection with sale of the Rights Shares. BRIEF HISTORY The Philippines initially had two stock exchanges, the Manila Stock Exchange, which was organized in 1927, and the Makati Stock Exchange, which began operations in 1963. Each exchange was self-regulating, governed by its respective board of governors elected annually by its members. Several steps initiated by the Philippine government have resulted in the unification of the two bourses into the PSE. The PSE was incorporated in 1992 by officers of both the Makati and the Manila Stock Exchanges. In March 1994, the licenses of the two exchanges were revoked. While the PSE maintains two trading floors, one in Makati City and the other in Pasig City, these floors are linked by an automated trading system, which integrates all bid and ask quotations from the bourses. In June 1998, the PSEC granted the Self-Regulatory Organization status to the PSE, allowing it to impose rules as well as implement penalties on erring trading participants and listed companies. On August 8, 2001, the PSE completed its demutualization, converting from a non-stock member-governed institution into a stock corporation in compliance with the requirements of the SRC. The PSE has an authorized capital stock of 97.8 million shares, of which 61.058 million shares are subscribed and fully paid-up. Each of the 184 member-brokers was granted 50,000 common shares of the new PSE at a par value of P1.00 per share. In addition, a trading right evidenced by a Trading Participant Certificate was immediately conferred on each member broker allowing the use of the PSEs trading facilities. As a result of the demutualization, the composition of the board of directors of the PSE was changed, requiring the inclusion of seven brokers and eight non-brokers, one of whom is the President. On December 15, 2003, the PSE listed its shares by way of introduction at its own bourse as part of a series of reforms aimed at strengthening the Philippine securities industry. Classified into financial, industrial, holding firms, property, services, and mining and oil sectors, companies are listed either on the PSEs Main Board or the Small and Medium Enterprises Board. Previously, PSE allowed listing on the First Board, Second Board or the Small and Medium Enterprises Board. With the issuance by the PSE of Memorandum No. CN-No. 2013-0023 dated June 6, 2013, revisions to the PSE Listing Rules were made, among which changes are the removal of the Second Board listing and the requirement that lock-up rules be embodied in the articles of incorporation of the issuer. Each index represents the numerical average of the prices of component stocks. The PSE has an index, referred to as the PHISIX, which as at the date thereof reflects the price movements of selected stocks listed on the PSE, based on traded prices of stocks from the various sectors. The PSE shifted from full market capitalization to free float market capitalization effective April 3, 2006 simultaneous with the migration to the free float index and the renaming of the PHISIX to PSEi. The PSEi is composed of stocks of 30 selected stocks listed on the PSE. On July 26, 2010, the PSE launched its current trading system, PSE Trade. With the increasing calls for good corporate governance, the PSE has adopted an online daily disclosure system to improve the transparency of listed companies and to protect the investing public. The PSE also launched its Corporate Governance Guidebook in November 2010 as another initiative of the PSE to promote good governance among listed companies. It is composed of 10 main guidelines embodying principles of good business practice and based on internationally recognized corporate governance codes and best practices.

192

The table below sets out movements in the composite index as of the last business day of each calendar year from 1995 to 2012 and shows the number of listed companies, market capitalization, and value of shares traded for the same period:
Composite Index at Closing Number of Listed Companies Aggregate Market Capitalization (in Q billions) Combined Value of Turnover (in Q billions)

Year

1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . As of September 30, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . Source: PSE TRADING

2,594.2 3,170.6 1,869.2 1,968.8 2,142.9 1,494.5 1,168.1 1,018.4 1,442.4 1,822.8 2,096.0 2,982.5 3,621.6 1,872.9 3,052.7 4,201.1 4,372.0 5,812.7 6,191.8

205 216 221 222 225 229 231 234 236 235 237 239 244 246 248 253 245 254 253

1,545.7 2,121.1 1,251.3 1,373.7 1,936.5 2,576.5 2,141.4 2,083.2 2,973.8 4,766.3 5,948.4 7,173.2 7,977.6 4,069.2 6,029.1 8,866.1 8,697.0 10,952.7 11,632.9

379.0 668.8 586.2 408.7 781.0 357.7 159.6 159.7 145.4 206.6 383.5 572.6 1,338.3 763.9 994.2 1,207.4 1,422.6 1,771.7 1,991.9

The PSE is a double auction market. Buyers and sellers are each represented by stockbrokers. To trade, bid or ask prices are posted on the PSEs electronic trading system. A buy (or sell) order that matches the lowest asked (or highest bid) price is automatically executed. Buy and sell orders received by one broker at the same price are crossed at the PSE at the indicated price. Payment of purchases of listed securities must be made by the buyer on or before the third Trading Day (the settlement date) after the trade. Trading on the PSE commences at 9:30 a.m. and pauses for a one-and-a-half hour lunch break at 12:00 p.m. In the afternoon, trading resumes at 1:30 p.m. and ends at 3:30 p.m., with a 10-minute extension during which transactions may be conducted, provided that they are executed at the last traded price and are only for the purpose of completing unfinished orders. Trading Days are Monday to Friday, except legal holidays and days when the BSP clearing house is closed. Minimum trading lots range from 5 to 1,000,000 shares depending on the price range and nature of the security traded. The minimum trading lot for the Companys shares is 100 shares. Odd-sized lots are traded by brokers on a board specifically designed for odd-lot trading. To maintain stability in the stock market, daily price swings are monitored and regulated. Under current PSE regulations, whenever an order will result in a breach of the trading threshold of a security within a Trading Day, the trading of that security will be frozen. Orders cannot be posted, modified or cancelled for a security that is frozen. In cases where an order has been partially matched, only the portion of the order that will result in a breach of the trading threshold will be frozen. Where the order results in a breach of the trading threshold, the following procedures shall apply: (i) In case the static threshold is breached, the PSE will accept the order, provided the price is within the allowable percentage price difference under the implementing guidelines of the revised trading rules (i.e., 50.0% of the previous days reference or closing price, or the last adjusted closing price); otherwise, such order will be rejected. In cases where the order is accepted, the PSE will adjust the static threshold to 60.0%. All orders breaching the 60.0% static threshold will be rejected by the PSE. 193

(ii) In case the dynamic threshold is breached, the PSE will accept the order if the price is within the allowable percentage price difference under the existing regulations (i.e., 20.0% for Security Cluster A and newly-listed securities; 15.0% for Security Cluster B; and 10.0% for Security Cluster C); otherwise, such order will be rejected by the PSE. NON-RESIDENT TRANSACTIONS When the purchase or sale of Philippine shares of stock involves a non-resident, whether the transaction is effected in the domestic or foreign market, it will be the responsibility of the securities dealer or broker to register the transaction with the BSP. The local securities dealer or broker shall file with the BSP, within three business days from the transaction date, an application in the prescribed registration form. After compliance with other required undertakings, the BSP shall issue a certificate of registration. Under BSP rules, all registered foreign investments in Philippine securities including profits and dividends, net of taxes and charges, may be repatriated. SETTLEMENT The Securities Clearing Corporation of the Philippines (the SCCP) is a wholly-owned subsidiary of the PSE, and was organized primarily as a clearance and settlement agency for SCCP-eligible trades executed through the facilities of the PSE. SCCP received its permanent license to operate on January 17, 2002. The SCCP is responsible for (a) delivery-versus-payment trade settlement; (b) management and administration of the Clearing and Trade Guaranty Fund and (c) risk monitoring and management. SCCP assumes the role of guarantor for transactions by trading participants of the PSE, and maintains and administers a trade guarantee fund called the Clearing and Trade Guaranty Fund. SCCP settles PSE trades on a three-day rolling settlement environment, which means that settlement of trades takes place three Trading Days after transaction date (T+3). The deadline for settlement of trades is 12:00 noon of T+3. Securities sold should be in scripless form and lodged under the book-entry system of the PDTC. Each trading participant maintains a cash settlement account with one of the two existing settlement banks of SCCP, which are Banco de Oro Unibank, Inc. and Rizal Commercial Banking Corporation. Payment for securities bought should be in good, cleared funds and should be final and irrevocable. Settlement is presently on a broker level. SCCP implemented its Central Clearing and Central Settlement (the CCCS) system on May 29, 2006. CCCS employs multilateral netting, whereby the system automatically offsets buy and sell transactions on a per issue and a per flag basis to arrive at a net receipt or a net delivery security position for each clearing member. All cash debits and credits are also netted into a single net cash position for each Clearing Member. Novation of the original PSE trade contracts occurs, and SCCP stands between the original trading parties and becomes the central counterparty to each PSE-eligible trade cleared through it. Under this system, the current securities infrastructure in the Philippines is composed of a depositary and a registry system wherein listed shares are traded and settled as book-entry shares. The difference between the depositary and the registry would be on the recording of ownership of the shares in the issuing corporations books. In the depository set-up, shares are simply immobilized, wherein customers certificates are cancelled and a new jumbo certificate is issued in the name of PCD Nominee Corporation (PCD Nominee), a corporation wholly-owned by the PDTC, whose sole purpose is to act as nominee and legal title holder of all shares of stock lodged in the PDTC. Transfers among/between broker and/or custodian accounts, as the case may be, will only be made within the book-entry system of PDTC. However, as far as the issuing corporation is concerned, the underlying certificates are in the nominees name. In the registry set-up, settlement and recording of ownership of traded securities will already be directly made in the corresponding issuing companys transfer agents books or system. Likewise, recording will already be at the beneficiary level (whether it be a client or a registered custodian holding securities for its clients), thereby removing from the broker its current de facto custodianship role. SCRIPLESS TRADING In 1995, the PDTC (formerly the Philippine Central Depository, Inc.), was organized to establish a central depository in the Philippines and introduce scripless or book-entry trading in the Philippines. On December 16, 1996, the PDTC was granted a provisional license by the PSEC to act as a central securities depository and live operations commenced on January 10, 1997. 194

All listed securities at the PSE have been converted into book-entry settlement in the PDTC. The depository service of the PDTC provides the infrastructure for lodgment (deposit) and upliftment (withdrawal) of securities, pledge of securities, securities lending and borrowing and corporate actions including shareholders meetings, dividend declarations and rights offerings. The PDTC also provides depository and settlement services for non-PSE trades of listed equity securities. For transactions on the PSE, the security element of the trade will be settled through the book-entry system, while the cash element will be settled through the current settlement banks, Rizal Commercial Banking Corporation and Banco de Oro Unibank, Inc. In order to benefit from the book-entry system, securities must be immobilized into the PDTC system through a process called lodgment. Lodgment is the process by which shareholders transfer legal title (but not beneficial title) over their shares of stock in favor of the PCD Nominee. Immobilization is the process by which the warrant or share certificates of lodging holders are canceled by the transfer agent and the corresponding transfer of beneficial ownership of the immobilized shares in the account of the PCD Nominee through the PDTC participant will be recorded in the issuing corporations registry. This trust arrangement between the participants and PDTC through the PCD Nominee is established by and explained in the PDTC Rules and Operating Procedures approved by the PSEC. No consideration is paid for the transfer of legal title to the PCD Nominee. Once lodged, transfers of beneficial title of the securities are accomplished via book-entry settlement. Under the current PDTC system, only participants (e.g. brokers and custodians) will be recognized by the PDTC as the beneficial owners of the lodged equity securities. Thus, each beneficial owner of shares, through his participant, will be the beneficial owner to the extent of the number of shares held by such participant in the records of the PCD Nominee. All lodgments, trades and uplifts on these shares will have to be coursed through a participant. Ownership and transfers of beneficial interests in the shares will be reflected, with respect to the participants aggregate holdings, in the PDTC system, and with respect to each beneficial owners holdings, in the records of the participants. Beneficial owners are thus advised that in order to exercise their rights as beneficial owners of the lodged shares, they must rely on their participant-brokers and/or participant-custodians. Any beneficial owner of shares who wishes to trade his interests in the shares must course the trade through a participant. The participant can execute PSE trades and non-PSE trades of lodged equity securities through the PDTC system. All matched transactions in the PSE trading system will be fed through the SCCP, and into the PDTC system. Once it is determined on the settlement date (T+3) that there are adequate securities in the securities settlement account of the participant-seller and adequate cleared funds in the settlement bank account of the participant- buyer, the PSE trades are automatically settled in the SCCP CCCS system, in accordance with the SCCP and PDTC Rules and Operating Procedures. Once settled, the beneficial ownership of the securities is transferred from the participant-seller to the participant-buyer without the physical transfer of stock certificates covering the traded securities. On or after the listing of the shares with the PSE, any beneficial owner of the shares may apply with PDTC through his broker or custodian-participant for a withdrawal from the book-entry system and return to the conventional paper-based settlement. If a shareholder wishes to withdraw his stockholdings from the PDTC system, the PDTC has a procedure of upliftment under which PCD Nominee will transfer back to the shareholder the legal title to the shares lodged. The uplifting shareholder shall follow the Rules and Operating Procedures of the PDTC for the upliftment of the shares lodged under the name of the PCD Nominee. The transfer agent shall prepare and send a Registry Confirmation Advice to the PDTC covering the new number of shares lodged under the PCD Nominee. The expenses for upliftment are for the account of the uplifting shareholder. Upon the issuance of stock certificates for the shares in the name of the person applying for upliftment, such shares shall be deemed to be withdrawn from the PDTC book-entry settlement system, and trading on such shares will follow the normal process for settlement of certificated securities. The expenses for upliftment of the shares into certificated securities will be charged to the person applying for upliftment. Pending completion of the upliftment process, the beneficial interest in the shares covered by the application for upliftment is frozen and no trading and book-entry settlement will be permitted until the relevant stock certificates in the name of the person applying for upliftment shall have been issued by the relevant companys transfer agent. The difference between the depository and the registry would be on the recording of ownership of the shares in the issuing corporations books. In the depository set-up, shares are simply immobilized, wherein customers certificates are canceled and a confirmation advice is issued in the name of PCD Nominee to confirm new balances of the shares lodged with the PDTC. Transfers among/between broker and/or custodian accounts, as the case may be, will only be made within the book-entry system of the PDTC. However, as far as the issuing 195

corporation is concerned, the underlying certificates are in the PCD Nominees name. In the registry set-up, settlement and recording of ownership of traded securities will already be directly made in the corresponding issuing companys transfer agents books or system. Likewise, recording will already be at the beneficiary level (whether it be a client or a registered custodian holding securities for its clients), thereby removing from the broker its current de facto custodianship role. AMENDED RULE ON LODGMENT OF SECURITIES On June 24, 2009, the PSE apprised all listed companies and market participants through Memorandum No. 2009-0320 that commencing on July 1, 2009, as a condition for the listing and trading of the securities of an applicant company, the applicant company shall electronically lodge its registered securities with the PDTC or any other entity duly authorized by the PSEC, without any jumbo or mother certificate in compliance with the requirements of Section 43 of the SRC. In compliance with the foregoing requirement, actual listing and trading of securities on the scheduled listing date shall take effect only after submission by the applicant company of the documentary requirements stated in Article III Part A of the PSE Revised Listing Rules. Further, the PSE apprised all listed companies and market participants on May 21, 2010 through Memorandum No. 2010-0246 that the Amended Rule on Lodgement of Securities under Section 16 of Article III, Part A of the Revised Listing Rules of the PSE shall apply to all securities that are lodged with the PDTC or any other entity duly authorized by the PSEC. For listing applications, the amended rule on lodgment of securities is applicable to: The offer shares/securities of the applicant company in the case of an initial public offering; The shares/securities that are lodged with the PDTC, or any other entity duly authorized by the PSEC in the case of a listing by way of introduction; New securities to be offered and applied for listing by an existing listed company; and Additional listing of securities of an existing listed company. Pursuant to the said amendment, the PDTC issued an implementing procedure in support thereof to wit: For a new company to be listed at the PSE as of July 1, 2009, the usual procedure will be observed but the transfer agent of the company shall no longer issue a certificate to PCD Nominee but shall issue a Registry Confirmation Advice, which shall be the basis for the PDTC to credit the holdings of the depository participants on listing date. On the other hand, for an existing listed company, the PDTC shall wait for the advice of the transfer agent that it is ready to accept surrender of PCD Nominee jumbo certificates and upon such advice the PDTC shall surrender all PCD Nominee jumbo certificates to the transfer agent for cancellation. The transfer agent shall issue a Registry Confirmation Advice to PDTC evidencing the total number of shares registered in the name of PCD Nominee in the listed companys registry as of confirmation date.

196

PHILIPPINE FOREIGN EXCHANGE AND FOREIGN OWNERSHIP CONTROLS REGISTRATION OF FOREIGN INVESTMENTS AND EXCHANGE CONTROLS Under current BSP regulations, an investment in Philippine securities (such as the Shares) must be registered with the BSP if the foreign exchange needed to service the repatriation of capital and/or the remittance of dividends, profits and earnings derived from such shares is to be sourced from the Philippine banking system. If the foreign exchange required to service capital repatriation or dividend remittance will be sourced outside the Philippine banking system, registration is not required. BSP Circular No. 471 (series of 2005) subjects foreign exchange dealers and money changers to RA No. 9160 (the Anti-Money Laundering Act of 2001, as amended) and requires these non-bank sources of foreign exchange to require foreign exchange buyers to submit, among others, the original BSP registration document in connection with their application to purchase foreign exchange exceeding U.S.$5,000 for purposes of capital repatriation and remittance of dividends. Registration of Philippine securities listed in the PSE may be done directly with the BSP or through a custodian bank duly designated by the foreign investor. A custodian bank may be a universal or commercial bank or an offshore banking unit registered with the BSP to act as such and appointed by the investor to register the investment, hold shares for the investor, and represent the investor in all necessary actions in connection with his investments in the Philippines. Applications for registration must be accompanied by: (i) purchase invoice, subscription agreement and proof of listing on the PSE (either or both); (ii) credit advice or bank certificate showing the amount of foreign currency inwardly remitted and (iii) transfer instructions from the stockbroker or dealer, as the case may be. The foregoing is subject to the power of BSP through the Monetary Board, with the approval of the President of the Philippines, to restrict the availability of foreign exchange during an exchange crisis, when an exchange crisis is imminent, or in times of national emergency. The registration with the BSP of all foreign investments in the Rights Shares shall be the responsibility of the foreign investor. FOREIGN OWNERSHIP CONTROLS The Philippine Constitution and related statutes set forth restrictions on foreign ownership of companies engaged in certain activities, among them the ownership of private land. In connection with the ownership of private land, Article XII, Section 7 of the Philippine Constitution, in relation to Article XII, Section 2 of the Philippine Constitution and Chapter 4 of Commonwealth Act No. 141, states that no private land shall be transferred or conveyed except to citizens of the Philippines or to corporations or associations organized under the laws of the Philippines at least 60% of whose capital is owned by such citizens. RA 7042, as amended, otherwise known as the Foreign Investments Act of 1991 and the Negative List issued pursuant thereto, reserves to Philippine Nationals all areas of investment in which foreign ownership is limited by mandate of the Constitution and specific laws. Section 3(a) of RA 7042 defines a Philippine National as: a citizen of the Philippines; a domestic partnership or association wholly-owned by citizens of the Philippines; a trustee of funds for pension or other employee retirement or separation benefits where the trustee is a Philippine National and at least 60% of the fund will accrue to the benefit of the Philippine Nationals; a corporation organized under the laws of the Philippines of which at least 60.0% of the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines; and a corporation organized abroad and registered as doing business in the Philippines under the Corporation Code of which 100.0% of the capital stock outstanding and entitled to vote is wholly-owned by Filipinos. However, the Foreign Investments Act of 1991 states that where a corporation (and its non-Filipino shareholders) owns stock in a PSEC-registered enterprise, at least 60.0% of the capital stock outstanding and entitled to vote of both the investing corporation and the investee corporation must be owned and held by citizens of the Philippines. Further, at least 60.0% of the members of the board of directors of both the investing corporation and the investee corporation must be Philippine citizens in order for the investee corporation to be considered a Philippine National. 197

DESCRIPTION OF THE SECURITIES The following is general information relating to the Banks capital stock but does not purport to be complete or to give full effect to the provisions of law and is in all respects qualified by reference to the applicable provisions of the Banks amended articles of incorporation and amended by-laws. Share Capital As of the date of this Prospectus, the Bank has an authorized capital stock of P50.0 billion divided into 1,250,000,001 Common Shares with a par value of P40.00 per share, of which 1,086,208,416 Common Shares are outstanding. The Bank has no Common Shares held in treasury. In meetings held on February 9, 2013 and May 28, 2013, respectively, the Board and shareholders of the Bank each approved an increase in the authorized capital stock of the Bank to P70.0 billion divided into 1,750,000,001 shares. The Bank will apply for approval of this increase in capital stock immediately after the conclusion of the Offer. Upon the completion of the Offer, the Bank will have 1,249,139,678 outstanding shares. Voting Rights of Common Shares Each Common Share entitles the holder to one vote. At each meeting of the shareholders, every stockholder entitled to vote on a particular question or matter involved shall be entitled to one vote for each share of stock standing in his name in the books of the Bank at the time of the closing of the transfer books for such meeting. In accordance with Section 24 of the Corporation Code, at each election of directors, every stockholder entitled to vote at such election shall have the right to vote, in person or by proxy, the number of shares owned by him as of the relevant record date for as many persons as there are directors to be elected and for whose election he has a right to vote, or to cumulate his votes by giving one candidate the number of votes equal to the number of directors to be elected multiplied by the number his shares shall equal or by distributing such votes on the same principle among any number of candidates as the stockholder shall see fit. Dividend Rights of Common Shares The Bank is allowed to declare dividends out of its unrestricted retained earnings at such times and in such percentages based on the recommendation of the Board of Directors. Such recommendation will take into consideration factors such as debt service requirements, the implementation of business plans, operating expenses, budgets, funding for new investments, appropriate reserves and working capital, among other things. The Banks Board of Directors is authorized to declare dividends. A cash dividend declaration does not require any further approval from the shareholders. A stock dividend declaration requires the further approval of shareholders holding or representing not less than two-thirds of the Banks outstanding capital stock. The Corporation Code defines the term outstanding capital stock to mean the total shares of stock issued to subscribers or stockholders, whether or not fully or partially paid (as long as there is a binding subscription agreement), except treasury shares. Such shareholders approval may be given at a general or special meeting duly called for such purpose. See Dividend Policy. Rights of Common Shares to Assets of the Bank Each holder of a Common Share is entitled to a pro rata share in the assets of the Bank available for distribution to the shareholders in the event of dissolution, liquidation and winding up. Other Features and Characteristics of Common Shares The Common Shares are neither convertible nor subject to redemption. All of the Banks issued Common Shares are fully paid and non-assessable and are free and clear of all liens, claims and encumbrances. All documentary stamp taxes due on the issuance of all issued Common Shares have been fully paid. Restrictions on Transfer of Shares The Bank may not allow the issuance or the transfer of Shares to persons other than Philippine Nationals and cannot record transfers in its books if such issuance or transfer would result in the Bank ceasing to be a Philippine National for purposes of complying with the restrictions under the General Banking Law. See discussions on Risk Factors and Description of the SecuritiesRestriction on Foreign Ownership. 198

Pre-emptive Rights The Corporation Code confers pre-emptive rights on shareholders of a Philippine corporation, which entitle them to subscribe to all issues or other disposition of shares of any class by the corporation in proportion to their respective shareholdings, subject to certain exceptions. A Philippine corporation may provide for the exclusion of these pre-emptive rights in its articles of incorporation. On October 17, 2007, the PSEC approved the amendment of the Banks articles of incorporation to provide for the denial of pre-emptive rights of shareholders. Due to an inadvertent omission, however, the amended articles of incorporation of the Bank do not currently reflect the said denial of pre-emptive rights of shareholders. The Bank intends to rectify the omission and reinstate the provision on denial of pre-emptive rights of shareholders concurrent with the amendment of its articles of incorporation to increase its authorized share capital. Purchasers of the Rights Shares should be advised that ownership of the Right Shares will not entitle holders to any pre-emptive rights. Appraisal Rights Under Philippine law, shareholders dissenting from the following corporate actions may demand payment of the fair value of their shares in certain circumstances: in case any amendment to the corporations articles of incorporation has the effect of changing and restricting the rights of any stockholder or class of shares, or of authorizing preferences in any respect superior to those of outstanding shares of any class; in case of any sale, lease, exchange, transfer, mortgage or other disposition of all or substantially all of the corporate property or assets; in case of merger or consolidation; in case the corporation decides to invest its funds in another corporation or business or for any purpose other than the primary purpose; and in case of extension or shortening of the term of corporate existence. Treasury Shares As of the date of this Prospectus, the Bank has no treasury Common Shares. Restriction on Foreign Ownership Under the General Banking Law (R.A. No. 8791) (the General Banking Law), as clarified by BSP Circular No. 256, the aggregate voting stock in a domestic bank held by foreign individuals and non-bank corporations must not exceed 40% of the outstanding voting stock of such bank. Although the aggregate ceiling on the equity ownership in a domestic bank does not apply to Filipinos and domestic non-bank corporations, their individual ownership is limited to only up to 40% of the voting stock. The percentage of foreign-owned voting stocks in a bank shall be determined by the citizenship of the individual stockholders in that bank. The citizenship of the corporation which is a stockholder in a bank shall follow the citizenship of the controlling stockholders of the corporation, irrespective of the place of incorporation. Since the aggregate foreign ownership in the Bank is limited to a maximum of 40.0% of its issued and outstanding capital stock, the Bank cannot allow the issuance or the transfer of Shares to persons other than Philippine Nationals and cannot record transfers in its books if such issuance or transfer would result in the Bank ceasing to be a Philippine National for purposes of complying with the restrictions under the General Banking Law. This restriction may adversely affect the liquidity and market price of the Shares to the extent that international investors are not permitted to purchase Shares in normal secondary transactions. Stock Transfer Agent The Banks share register is maintained at the principal office of the Banks share transfer agent, Philippine National BankTrust Banking Group, Allied Bank Center, 6754 Ayala Avenue cor. Legaspi St., Makati City. Change in Control There are no existing provisions in the amended articles of incorporation or the amended by-laws of the Bank which will delay, defer or in any manner prevent a change in control of the Bank. 199

PHILIPPINE TAXATION The following is a general description of certain Philippine tax aspects of the investment in the Bank. The following discussion is based upon laws, regulations, rulings, income tax treaties, administrative practices and judicial decisions in effect at the date of this Prospectus and is subject to any changes occurring after such date. Subsequent legislative, judicial or administrative changes or interpretations may be retroactive and could affect the tax consequences to the prospective investor. The tax treatment of a prospective investor may vary depending on such investors particular situation and certain investors may be subject to special rules not discussed below. This summary does not purport to be a comprehensive description of all of the tax considerations that may be relevant to a decision to invest in the shares and does not purport to deal with the tax consequences applicable to all categories of investors, some of which (such as dealers in securities) may be subject to special rates. This discussion does not provide information regarding the tax aspects of acquiring, owning, holding or disposing of the shares under applicable tax laws of other applicable jurisdictions and the specific Philippine tax consequence in light of particular situations of acquiring, owning, holding and disposing of the shares in such other jurisdictions. EACH PROSPECTIVE INVESTOR SHOULD CONSULT ITS OWN TAX ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF THE SHARES, INCLUDING THE APPLICABILITY AND EFFECT OF LOCAL AND NATIONAL TAX LAWS As used herein, the term resident alien refers to an individual whose residence is within the Philippines and who is not a citizen thereof. A non-resident alien is an individual whose residence is not within the Philippines and who is not a citizen thereof. A non-resident alien who is actually within the Philippines for an aggregate period of more than 180 days during any calendar year is considered a non-resident alien engaged in trade or business in the Philippines; otherwise, such non-resident alien who is actually within the Philippines for an aggregate period of 180 days or less during any calendar year is considered a non-resident alien not engaged in trade or business in the Philippines. A domestic corporation is created or organized under the laws of the Philippines; a resident foreign corporation is a non-Philippine corporation engaged in trade or business in the Philippines; and a non-resident foreign corporation is a non-Philippine corporation not engaged in trade or business in the Philippines. Corporate Income Tax A domestic corporation is subject to a tax of 30% of its taxable income (gross income less allowable deductions) from all sources within and outside the Philippines except, among other things, (a) gross interest income from Philippine currency bank deposits and yield from deposit substitutes, trust funds and similar arrangements as well as royalties from sources within the Philippines which are generally taxed at the lower final withholding tax rate of 20% of the gross amount of such income; and (b) interest income from a depository bank under the expanded foreign currency deposit system which is subject to a final tax at the rate of 7.5% of such income. A minimum corporate income tax of 2% of the gross income as of the end of the taxable year is imposed on a domestic corporation beginning on the fourth taxable year immediately following the year in which such corporation commenced its business operations, when the minimum corporate income tax is greater than the ordinary corporate income tax. Nevertheless, any excess of the minimum corporate income tax over the ordinary corporate income tax shall be carried forward and credited against the latter for the three immediately succeeding taxable years. Furthermore, subject to certain conditions, the minimum corporate income tax may be suspended with respect to a corporation, which suffers losses on account of a prolonged labour dispute, or because of force majeure, or because of legitimate business reverses. Tax on Dividends Cash and property dividends received from a domestic corporation by individual shareholders who are either citizens or residents of the Philippines are subject to a final withholding tax at the rate of 10%. Cash and property dividends received by non-resident alien individuals engaged in trade or business in the Philippines are subject to a final withholding tax at 20% of the gross amount, while cash and property dividends received by 200

non-resident alien individuals not engaged in trade or business in the Philippines are subject to a final withholding tax at 25% of the gross amount, subject, however, to the applicable preferential tax rates under tax treaties executed between the Philippines and the country of residence or domicile of such non-resident foreign individuals. Cash and property dividends received from a domestic corporation by another domestic corporation or by resident foreign corporations are not subject to tax while those received by non-resident foreign corporations are subject to withholding tax at the rate of 30%. The 30% final withholding tax rate for inter-corporate cash and/or property dividends paid by a domestic corporation to a non-resident foreign corporation may be reduced depending on the country of domicile of the non-resident foreign corporation if it has an existing tax treaty with the Philippines. A country with a tax treaty may have a reduced preferential tax rate, generally 25% depending on the provisions of the corresponding tax treaties. On the other hand, a country without a tax treaty may be reduced to 15% if (i) the country in which the non-resident foreign corporation is domiciled imposes no tax on foreign-sourced dividends or (ii) if the country of domicile of the non-resident foreign corporation allows a credit equivalent to 15% for taxes deemed to have been paid in the Philippines. Stock dividends distributed pro rata to any holder of shares of stock are not subject to Philippine income tax. However, if the proportionate interests of the stockholders are changed, dividends received are taxable as ordinary income in the year paid or accrued. The sale, exchange or disposition of shares received as stock dividends by the holder is subject to either the capital gains or stock transaction tax. Philippine tax authorities have prescribed certain procedures, through an administrative issuance, for availment of tax treaty relief. The Bank shall withhold taxes at a reduced rate on dividends to be paid to a nonresident holder, if such non-resident holder provides the Bank with the tax exemption certificate, ruling or opinion issued by the Philippine BIR confirming the tax treaty relief or preferential rate, consularized proof of the non-resident holders legal domicile or residence in the relevant treaty state, individual or corporate status (if applicable), and such other supporting documents as may be required by the Bank. Proof of legal domicile or residence for an individual consists of certification from his embassy, consulate, or other equivalent certifications issued by the proper government authority, or any other official document proving residence. If the regular tax rate is withheld by the Bank instead of the reduced rates applicable under a treaty, the non-resident holder of the shares may file a claim for refund from the BIR. However, because the refund process in the Philippines requires the filing of an administrative claim and the submission of supporting information, and may also involve the filing of a judicial appeal, it may be impractical to pursue such a refund. Sale, Exchange or Disposition of Shares Capital Gains Tax Net capital gains realized by a resident or non-resident other than a dealer in securities during each taxable year from the sale, exchange or disposition of shares of stock in a Philippine corporation listed at and effected outside of the facilities of the local stock exchange, are subject to tax as follows: 5% on gains not exceeding P100,000 and 10% on gains over P100,000. Gains from the sale or disposition of shares in a Philippine corporation may be exempt from capital gains tax or subject to a preferential rate under a tax treaty. An application for tax treaty relief must be filed (and approved) by the Philippine tax authorities in order to obtain such exemption under a tax treaty. A prospective investor should consult its own tax advisor with respect to the applicable rates under the relevant tax treaty. The transfer of shares shall not be recorded in the books of the Bank unless the BIR certifies that the capital gains and documentary stamp taxes relating to the sale or transfer have been paid or, where applicable, tax treaty relief has been confirmed by the International Tax Affairs Division of the BIR in respect of the capital gains tax or other conditions have been met. Taxes on Transfer of Shares Listed and Traded at the local stock exchange A sale, barter, exchange or other disposition of shares of stock listed at and effected through the facilities of the PSE by a resident or a non-resident holder, other than a dealer in securities, is subject to a stock transaction tax at the rate of 0.5% of the gross selling price or gross value in cash of the shares of stock sold, bartered, 201

exchanged or otherwise disposed, unless an applicable treaty exempts such sale from the said tax. The stock transaction tax is classified as a percentage tax and is paid in lieu of capital gains tax. In addition, a value added tax of 12% is imposed on the commission earned by the PSE-registered broker who facilitated the sale, barter, exchange or disposition through the PSE, and is generally passed on to the client. Documentary Stamp Tax The original issue of shares is subject to documentary stamp tax of P1.00 for each P200.00, or a fractional part thereof, of the par value of the shares issued. The transfer of shares is subject to a documentary stamp tax of P0.75 for each P200.00, or a fractional part thereof of the par value of the shares transferred. However, the sale, barter or exchange of shares of stock listed and traded through the local stock exchange shall not be subject to documentary stamp tax for a period of five (5) years from the effectiveness of Republic Act No. 9243 dated February 17, 2004. Please note that the said exemption expired on March 20, 2009. However, on June 30, 2009, former President Gloria Macapagal-Arroyo signed Republic Act 9648, which permanently exempts the sale, barter or exchange of shares of stock listed and traded through the local stock exchange from the documentary stamp tax and was made retroactive to March 20, 2009. Estate and Gift Taxes The transfer of shares of stock upon the death of an individual holder to his heirs by way of succession, whether such holder was a citizen of the Philippines or an alien and regardless of residence, is subject to Philippine taxes at progressive rates ranging from 5% to 20% (if the net estate is over P200,000). Individual, whether or not citizens or residents of the Philippines, who transfer shares of stock by way of gift or donation are liable to pay Philippine donors tax on such a transfer of shares ranging from 2% to 15% of the total net gifts during the calendar year exceeding P100,000. The rate of tax with respect to net gifts made to a stranger (i.e., one who is not a brother, sister, spouse, ancestor, lineal descendant or relative by consanguinity within the fourth degree of relationship) is a fixed rate of 30%. Corporate holders are liable for donors tax at the rate of 30% of the net gifts made by such corporate holders. Estate and donors taxes, however, shall not be collected in respect of intangible personal property, such as shares of stock: (a) if the deceased at the time of his death or the donor at the time of his donation was a citizen and resident of a foreign country which at the time of his death or donation did not impose a transfer tax of any character, in respect of intangible personal property of citizens of the Philippines not residing in that foreign country, or (b) if the laws of the foreign country of which the deceased or donor was a citizen and resident at the time of his death or donation allows a similar exemption from transfer or death taxes of every character or description in respect of intangible personal property owned by citizens of the Philippines not residing in that foreign country. Taxation outside the Philippines Shares of stock in a domestic corporation are considered under Philippine law as situated in the Philippines and the gain derived from their sale is entirely from Philippine sources; hence such gain is subject to Philippine income tax and capital gains tax and the transfer of such shares by gift (donation) or succession is subject to the donors or estate taxes, each as described above. The tax treatment of a non-resident holder of shares of stock in jurisdictions outside the Philippines may vary depending on the tax laws applicable to such holder by reason of domicile or business activities and such holders particular situation. This Prospectus does not discuss the tax consideration on non-resident holders of shares of stock under laws other than those of the Philippine.

202

LEGAL MATTERS Certain Philippine legal matters relating to the Offer will be passed upon for the Bank by Roxas De Los Reyes Laurel Rosario & Leagogo, legal counsel to the Bank, and for the Joint Global Coordinators and Bookrunners by Picazo Buyco Tan Fider & Santos. Certain legal matters as to United States federal and New York law will be passed upon for the Bank by Milbank, Tweed, Hadley & McCloy, United States legal counsel to the Bank, and for the Joint International Lead Managers and International Underwriters by Sidley Austin, United States legal counsel to the Joint International Lead Managers and International Underwriters. The aforesaid counsels have no shareholdings in the Bank, or any right, whether legally enforceable or not, to nominate persons or to subscribe to the securities of the Bank, in accordance with the standards or independence required in the Code of Professional Responsibility and as prescribed by the Supreme Court of the Philippines. The aforesaid legal counsels have not acted and will not act as promoter, underwriter, voting trustee, officer or employee of the Bank.

203

INDEPENDENT AUDITORS The consolidated financial statements of the Bank and of Allied Banking Corporation as of January 1, 2011 and December 31, 2011 and 2012 and for the years ended December 31, 2010, 2011 and 2012 were audited by SyCip, Gorres, Velayo & Co. (SGV), independent auditors, as stated in their report appearing herein. The unaudited interim condensed consolidated financial statements of the Bank as of September 30, 2013 and for the nine-month periods ended September 30, 2012 and 2013 have been reviewed by SGV, independent auditors, as stated in their report appearing herein. A review is substantially less in scope than an audit conducted in accordance with Philippine Standards on Auditing. Consequently, it does not enable SGV to obtain assurance that they would become aware of all significant matters that might be identified in an audit. Accordingly, SGV do not express an audit opinion on the unaudited interim condensed consolidated financial statements. The pro forma consolidated financial information as of and for the year ended December 31, 2012 was derived from the unaudited pro forma condensed consolidated financial information of the Bank prepared in accordance with Paragraph 8 of the Rule 68 of the PSECs Implementing Rules and Regulations of the Securities Regulation Code, as amended.

204

INDEX TO FINANCIAL STATEMENTS CONSOLIDATED FINANCIAL STATEMENTS OF THE BANK AS OF DECEMBER 31, 2012 AND 2011 AND JANUARY 1, 2011 AND FOR THE YEARS ENDED DECEMBER 31, 2012, 2011 AND 2010 Independent Auditors Report. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Statements of Financial Position . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Statements of Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Statements of Comprehensive Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Statements of Changes in Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF THE BANK AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012 Report on Review of Interim Condensed Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . Interim Consolidated Statements of Financial Position . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interim Consolidated Statements of Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interim Consolidated Statements of Comprehensive Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interim Consolidated Statements of Changes in Equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interim Consolidated Statements of Cash Flows. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Notes to Interim Condensed Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION OF THE BANK AS OF AND FOR THE YEAR ENDED DECEMBER 31, 2012 Report on Review of Pro Forma Condensed Consolidated Financial Information . . . . . . . . . . . . . . . . . . . . . . Pro Forma Consolidated Statement of Financial Position . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pro Forma Consolidated Statement of Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pro Forma Consolidated Statement of Comprehensive Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pro Forma Consolidated Statement of Changes in Equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pro Forma Consolidated Statement of Cash Flows. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Notes to Pro Forma Condensed Consolidated Financial Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . FINANCIAL STATEMENTS OF ALLIED BANK AS OF DECEMBER 31, 2012 AND 2011 AND JANUARY 1, 2011 AND FOR THE YEARS ENDED DECEMBER 31, 2012, 2011 AND 2010 Independent Auditors Report. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Statements of Financial Position . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Statements of Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Statements of Comprehensive Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Statements of Changes in Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-210 F-212 F-214 F-215 F-216 F-218 F-220 F-195 F-197 F-198 F-199 F-200 F-201 F-203 F-145 F-146 F-147 F-148 F-149 F-150 F-152 F-2 F-4 F-6 F-7 F-8 F-12 F-14

F-1

SyCip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Philippines Phone: (632) 891 0307 Fax: (632) 819 0872 www.sgv.com.ph BOA/PRC Reg. No. 0001, December 28, 2012, valid until December 31, 2015 SEC Accreditation No. 0012-FR-3 (Group A), November 15, 2012, valid until November 16, 2015

INDEPENDENT AUDITORS REPORT The Stockholders and the Board of Directors Philippine National Bank PNB Financial Center President Diosdado Macapagal Boulevard Pasay City Report on the Financial Statements We have audited the accompanying consolidated financial statements of Philippine National Bank and Subsidiaries (the Group) and the parent company financial statements of Philippine National Bank (the Parent Company), which comprise the statements of financial position as at December 31, 2012 and 2011 and January 1, 2011, and the statements of income, statements of comprehensive income, statements of changes in equity and statements of cash flows for each of the three years in the period ended December 31, 2012 and a summary of significant accounting policies and other explanatory information. Managements Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with Philippine Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Philippine Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entitys preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entitys internal controls. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements present fairly, in all material respects, the financial position of the Group and of the Parent Company as at December 31, 2012 and 2011 and January 1, 2011 and their financial performance and their cash flows for each of the three years in the period ended December 31, 2012 in accordance with Philippine Financial Reporting Standards. F-2

Other Matter In our auditors report dated March 6, 2012, our opinion on the 2011 and 2010 financial statements prepared in accordance with accounting principles generally accepted in the Philippines for banks (Philippine GAAP for banks) was qualified because: (1) losses on non-performing assets (NPAs) sold to special purpose vehicles (SPVs) were recognized as deferred charges and amortized over a ten-year period instead of being charged in full against operations in the year the NPAs were sold as required by Philippine GAAP for banks and (2) the NPAs sold to an SPV in 2007 and 2006 were derecognized instead of consolidating the accounts of the SPV company that acquired the NPAs of the Parent Company in 2007 and 2006 into the Groups accounts in accordance with Philippine GAAP for banks. As explained in Note 2 to the financial statements, the 2011 and 2010 financial statements previously prepared in accordance with Philippine GAAP for banks have been prepared in accordance with Philippine Financial Reporting Standards. The deferred losses were charged against operations in the years the NPAs were sold and the accounts of the SPV company that acquired the NPAs in 2007 and 2006 were consolidated into the Groups accounts in accordance with Philippine Financial Reporting Standards. Accordingly, our opinion on the 2011 and 2010 financial statements, as presented herein, is no longer qualified.

Report on the Supplementary Information Required Under Revenue Regulations 19-2011 and 15-2010 Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplementary information required under Revenue Regulations 19-2011 and 15-2010 in Note 37 to the financial statements is presented for purposes of filing with the Bureau of Internal Revenue and is not a required part of the basic financial statements. Such information is the responsibility of the management of Philippine National Bank. The information has been subjected to the auditing procedures applied in our audit of the basic financial statements. In our opinion, the information is fairly stated in all material respects in relation to the basic financial statements taken as a whole. SYCIP GORRES VELAYO & CO.

Janeth T. Nuez Partner CPA Certificate No. 111092 SEC Accreditation No. A-560-A (Group A), Valid until May 31, 2013 Tax Identification No. 900-322-673 BIR Accreditation No. 08-001998-69-2012, April 11, 2012, valid until April 10, 2015 PTR No. 3670006, January 2, 2013, Makati City February 22, 2013 F-3

PHILIPPINE NATIONAL BANK AND SUBSIDIARIES STATEMENTS OF FINANCIAL POSITION (In Thousands)
Consolidated December 31 January 1 2011 2011 (As Restated (As Restated 2012 Note 2) Note 2) ASSETS Cash and Other Cash Items (Note 16) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Q 5,599,088 P 5,404,110 Due from Bangko Sentral ng Pilipinas (Notes 16 and 33) . . . . . . . . . . . . . . . . . . . 37,175,399 38,152,795 Due from Other Banks . . . . . . . . . . . . . . . 4,042,769 6,423,981 Interbank Loans Receivable . . . . . . . . . . 11,498,756 17,097,648 Securities Held Under Agreements to Resell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,300,000 18,300,000 Financial Assets at Fair Value Through Profit or Loss (Notes 2 and 7). . . . . . . . 4,023,065 6,875,665 Available-for-Sale Investments (Notes 10 and 16) . . . . . . . . . . . . . . . . . . . 66,997,479 52,323,808 Loans and Receivables (Note 8). . . . . . . . 144,707,509 126,249,035 Receivable from Special Purpose Vehicle (Note 9) . . . . . . . . . . . . . . . . . . . . Held-to-Maturity Investments (Notes 2 and 10) . . . . . . . . . . . . . . . . . . . . Property and Equipment (Note 11) . . . . At cost . . . . . . . . . . . . . . . . . . . . . . . . . . 937,075 866,013 At appraised value . . . . . . . . . . . . . . . . 15,566,650 15,698,514 Investments in Subsidiaries and an Associate (Note 12) . . . . . . . . . . . . . . . . . . . . . . . . . . 2,905,294 2,901,780 Investment Properties (Notes 13 and 32) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,478,348 16,100,113 Deferred Tax Assets (Note 28) . . . . . . . . . 1,780,682 1,775,789 Other Assets (Notes 2 and 14). . . . . . . . . . 2,994,425 3,897,388 TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . Q331,006,539 P312,066,639 LIABILITIES AND EQUITY LIABILITIES Deposit Liabilities (Notes 16 and 31). . . . Demand. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Q 28,152,296 P 29,896,120 Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192,793,260 184,676,120 Time. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,908,821 22,961,698 240,854,377 Financial Liabilities at Fair Value . . . . . Through Profit or Loss (Note 17) . . . . . . Bills and Acceptances Payable (Note 18) . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued Taxes, Interest and Other Expenses (Note 19) . . . . . . . . . . . . . . . . . Subordinated Debt (Note 20) . . . . . . . . . . Other Liabilities (Notes 2 and 21) . . . . . . TOTAL LIABILITIES . . . . . . . . . . . . . . . 6,479,821 13,076,901 4,063,340 9,938,816 16,846,393 291,259,648 237,533,938 6,650,183 8,458,425 3,981,218 6,452,473 14,015,965 277,092,202 Parent Company December 31 January 1 2011 2011 (As Restated (As Restated 2012 Note 2) Note 2)

5,457,186 Q 24,285,986 5,141,549 12,691,967 6,800,000 15,980,647 34,531,256 110,315,478 38,228,191 815,497 15,816,443

5,548,325 P 36,531,047 3,293,782 11,498,756 18,300,000 3,965,098 64,764,041 140,136,848 757,364 15,566,650

5,303,112 37,492,594 4,906,698 17,097,648 18,300,000 6,873,208 50,428,977 122,652,951 676,405 15,698,514

5,309,611 24,273,986 3,945,632 12,245,259 6,800,000 15,966,898 32,939,341 106,541,735 624,450 38,140,088 658,865 15,816,443

2,832,073 17,913,198 1,829,430 4,481,127

6,776,872 14,411,199 1,673,718 1,859,983

7,305,644 16,030,203 1,696,698 2,977,626

7,325,446 17,841,232 1,738,583 2,915,078 P293,082,647

P297,120,028 Q325,083,683 P307,440,278

P 27,964,372 Q 28,417,452 P 30,042,425 171,282,454 192,824,803 184,692,779 27,189,058 20,164,420 23,726,483 226,435,884 6,574,596 12,004,138 4,324,963 5,486,735 13,922,126 268,748,442 241,406,675 6,479,821 12,718,811 3,868,681 9,938,816 12,962,336 287,375,140 238,461,687 6,650,183 7,318,358 3,782,934 6,452,473 11,471,621 274,137,256

P 28,163,081 171,173,893 27,550,759 226,887,733 6,574,596 12,856,661 4,108,230 5,486,735 10,526,803 266,440,758

(Forward) F-4

Consolidated December 31 January 1 2011 2011 (As Restated (As Restated 2012 Note 2) Note 2)

Parent Company December 31 January 1 2011 2011 (As Restated (As Restated 2012 Note 2) Note 2)

EQUITY ATTRIBUTABLE TO EQUITY HOLDERS OF THE PARENT COMPANY

Capital Stock (Note 24) . . . . . . . . . . . . . . . Q 26,489,837 P 26,489,837 P 26,489,837 Q 26,489,837 P 26,489,837 Capital Paid in Excess of Par Value (Notes 12 and 24) . . . . . . . . . . . . . . . . . . . 2,037,272 2,037,272 2,037,272 2,037,272 2,037,272 Surplus Reserves (Note 30) . . . . . . . . . . . . 569,887 560,216 551,947 569,887 560,216 Surplus (Deficit) (Notes 2 and 24) . . . . . . 6,888,348 2,246,213 (2,414,870) 4,951,651 406,474 Revaluation Increment on Land and Buildings (Note 11) . . . . . . . . . . . . . . . . . 2,816,962 2,816,962 2,816,962 2,816,962 2,816,962 Accumulated Translation Adjustment (Note 12) . . . . . . . . . . . . . . . . . . . . . . . . . . (992,620) (451,708) (471,975) (61,752) 334,005 Net Unrealized Gain (Loss) on Available-for-Sale Investments (Note 10) . . . . . . . . . . . . . . . . . . . . . . . . . . 1,037,252 742,343 (1,199,252) 904,686 658,256 Equity in Net Unrealized Gain on Available-for-Sale Investment of an Associate (Note 12) . . . . . . . . . . . . . . . . . 6,795 6,043 Parent Company Shares Held by a Subsidiary (Note 24). . . . . . . . . . . . . . . . (4,740) (4,740) (4,740) 38,842,198 NON-CONTROLLING INTERESTS (Note 2). . . . . . . . . . . . . . . . . . . . . . . . . . . . TOTAL EQUITY . . . . . . . . . . . . . . . . . . . . 904,693 39,746,891 34,443,190 531,247 34,974,437 27,811,224 560,362 28,371,586 37,708,543 37,708,543 33,303,022 33,303,022 P 26,489,837 2,037,272 551,947 (4,300,344) 2,816,962 300,676

(1,254,461)

26,641,889 26,641,889 P293,082,647

TOTAL LIABILITIES AND EQUITY . . . . . . . . . . . . . . . . . . . . . . . . . . Q331,006,539 P312,066,639

P297,120,028 Q325,083,683 P307,440,278

See accompanying Notes to Financial Statements. F-5

PHILIPPINE NATIONAL BANK AND SUBSIDIARIES STATEMENTS OF INCOME (In Thousands, Except Earnings Per Share)
Parent Company Years Ended December 31 2011 2010 2011 2010 (As Restated (As Restated (As Restated (As Restated Note 2) Note 2) 2012 Note 2) Note 2) P7,521,529 4,260,736 659,210 30,685 12,472,160 4,011,455 1,257,249 5,268,704 7,203,456 2,343,990 207,387 2,136,603 P6,973,301 4,439,399 887,340 31,013 12,331,053 3,441,833 1,329,743 4,771,576 7,559,477 2,447,970 323,468 2,124,502 Q7,313,933 3,140,385 633,710 14,207 11,102,235 3,112,516 1,227,690 4,340,206 6,762,029 1,596,950 146,341 1,450,609 P7,402,800 4,174,992 637,112 30,684 12,245,588 4,010,841 1,215,128 5,225,969 7,019,619 1,682,802 127,188 1,555,614 P6,927,565 4,348,152 870,439 31,013 12,177,169 3,453,880 1,280,781 4,734,661 7,442,508 1,754,461 205,135 1,549,326 Consolidated

2012 INTEREST INCOME ON Loans and receivables (Notes 8 and 31). . . . . . . . . . Q7,451,351 Trading and investment securities (Notes 7 and 10). . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,235,754 Deposits with banks and others (Note 31) . . . . . . . . 659,295 Interbank loans receivable . . . . . . . . . . . . . . . . . . . . . 14,207 11,360,607 INTEREST EXPENSE ON Deposit liabilities (Notes 16 and 31). . . . . . . . . . . . . Bills payable and other borrowings (Notes 18 and 20). . . . . . . . . . . . . . . . . . . . . . . . . . . NET INTEREST INCOME . . . . . . . . . . . . . . . . . . Service fees and commission income (Note 25). . . Service fees and commission expense (Note 31) . . NET SERVICE FEES AND COMMISSION INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . OTHER INCOME Trading and investment securities gainsnet (Notes 2, 7 and 10) . . . . . . . . . . . . . . . . . . . . . . . . . Foreign exchange gainsnet. . . . . . . . . . . . . . . . . . . Net gain on sale or exchange of assets (Note 25) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Miscellaneous (Notes 2, 25 and 27) . . . . . . . . . . . . . OPERATING EXPENSES Compensation and fringe benefits (Notes 26 and 31). . . . . . . . . . . . . . . . . . . . . . . . . . . Taxes and licenses (Note 28) . . . . . . . . . . . . . . . . . . . Provision for impairment, credit and other losses (Note 15) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Occupancy and equipment-related costs (Note 27) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization (Note 11). . . . . . . . . Miscellaneous (Notes 2 and 25). . . . . . . . . . . . . . . . . INCOME BEFORE INCOME TAX . . . . . . . . . . PROVISION FOR INCOME TAX (Note 28) . . 3,099,782 1,285,120 4,384,902 6,975,705 2,130,664 254,447 1,876,217

5,133,527 1,405,105 359,915 1,842,185

3,573,057 1,216,328 1,350,403 1,910,933 17,390,780

3,080,916 906,846 2,109,542 1,595,448 17,376,731

5,041,935 1,209,836 359,915 405,445 15,229,769

3,543,435 910,719 1,350,403 791,960 15,171,750

2,983,536 587,461 2,109,644 610,377 15,282,852

TOTAL OPERATING INCOME . . . . . . . . . . . . . 17,592,654

3,720,882 1,134,272 933,701 1,004,321 713,235 4,133,807 5,952,436 924,734

3,815,170 1,319,114 1,552,400 1,015,429 656,404 3,397,219 11,755,736 5,635,044 879,352 P4,755,692

3,384,003 1,176,401 2,399,772 915,794 837,604 3,706,652 12,420,226 4,956,505 924,218 P4,032,287

3,224,217 1,098,754 795,106 801,106 642,553 3,241,961 9,803,697 5,426,072 871,224 Q4,554,848

3,211,899 1,280,586 980,452 769,420 593,940 2,811,978 9,648,275 5,523,475 808,388 P4,715,087

2,749,795 1,128,921 2,408,818 726,971 781,491 3,135,264 10,931,260 4,351,592 692,270 P3,659,322

TOTAL OPERATING EXPENSES . . . . . . . . . . . 11,640,218

NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Q5,027,702 ATTRIBUTABLE TO: Equity Holders of the Parent Company (Note 29) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Q4,651,806 Non-controlling Interests . . . . . . . . . . . . . . . . . . . . . 375,896 Q5,027,702 Basic/Diluted Earnings Per Share Attributable to Equity Holders of the Parent Company (Note 29) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Q

P4,669,352 86,340 P4,755,692

P3,565,719 466,568 P4,032,287

7.02

7.05

5.38

See accompanying Notes to Financial Statements. F-6

PHILIPPINE NATIONAL BANK AND SUBSIDIARIES STATEMENTS OF COMPREHENSIVE INCOME (In Thousands)
Consolidated 2011 (As Restated Note 2) P4,755,692 Years Ended December 31 2010 (As Restated Note 2) 2012 P4,032,287 Q4,554,848 Parent Company 2011 (As Restated Note 2) P4,715,087 2010 (As Restated Note 2) P3,659,322

2012 NET INCOME . . . . . . . . . . . . . . OTHER COMPREHENSIVE INCOME (LOSS) Accumulated translation adjustment. . . . . . . . . . . . . . . . . Net unrealized gain (loss) on available-for-sale investments (Note 10) . . . . . . . . . . . . . . . . . . Share in equity adjustments of an associate (Note 12). . . . . . . Revaluation increment on land and buildings (Note 11) . . . . . OTHER COMPREHENSIVE INCOME (LOSS) FOR THE YEAR, NET OF TAX . . . . . . . . . . . . . . . . . . . . . . TOTAL COMPREHENSIVE INCOME FOR THE YEAR . . . . . . . . . . . . . . . . . . . . ATTRIBUTABLE TO: Equity holders of the Parent Company . . . . . . . . . . . . . . . . . . Non-controlling Interests . . . . . . Q5,027,702

(540,912)

20,267

12,844

(395,757)

33,329

210,191

294,909 (6,795)

1,941,595 752

(315,099) 6,043 87,815

246,430

1,912,717

(326,044) 87,815

(252,798)

1,962,614

(208,397)

(149,327)

1,946,046

(28,038)

Q4,774,904

P6,718,306

P3,823,890

Q4,405,521

P6,661,133

P3,631,284

Q4,399,008 375,896 Q4,774,904

P6,631,966 86,340 P6,718,306

P3,357,322 466,568 P3,823,890

See accompanying Notes to Financial Statements. F-7

PHILIPPINE NATIONAL BANK AND SUBSIDIARIES STATEMENTS OF CHANGES IN EQUITY (In Thousands)
Consolidated Attributable to Equity Holders of the Parent Company Revaluation Capital Paid Surplus Increment Accumulated in Excess of Surplus (Deficit) on Land and Translation Capital Stock Par Value Reserves (As Restated Buildings Adjustment (Note 24) (Note 12) (Note 30) Notes 2 and 24) (Note 11) (Note 12)

Balance at January 1, 2012, as previously reported . . . . . . . . . . . . . Q26,489,837 Q2,037,272 Q560,216 Q6,947,384 Q2,816,962 (Q451,708) Adoption of Philippine Financial Reporting Standards and prior period adjustments (Note 2). . . . . . . (4,701,171) Balance at January 1, 2012, as restated . . . . . . . . . . . . . . . . . . . . . . . . . Total comprehensive income (loss) for the year . . . . . . . . . . . . . . . . . . . . . Declaration of dividends . . . . . . . . . . . . Transfer to surplus reserves (Note 30) . . . . . . . . . . . . . . . . . . . . . . . 26,489,837 2,037,272 560,216 9,671 2,246,213 4,651,806 (9,671) 2,816,962 (451,708) (540,912)

Balance at December 31, 2012 . . . . . Q26,489,837 Q2,037,272 Q569,887 Q6,888,348 Q2,816,962 (Q992,620) Balance at January 1, 2011, as previously reported . . . . . . . . . . . . . . P26,489,837 P2,037,272 P551,947 P3,091,554 P2,816,962 (P471,975) Adoption of Philippine Financial Reporting Standards and prior period adjustments (Note 2). . . . . . . (5,506,424) Balance at January 1, 2011, as restated . . . . . . . . . . . . . . . . . . . . . . . . . Total comprehensive income for the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . Transfer to surplus reserves (Note 30) . . . . . . . . . . . . . . . . . . . . . . . Acquisition of non-controlling interest (Note 12) . . . . . . . . . . . . . . . . 26,489,837 2,037,272 551,947 8,269 (2,414,870) 2,816,962 4,669,352 (8,269) (471,975) 20,267

Balance at December 31, 2011 . . . . . . P26,489,837 P2,037,272 P560,216 P2,246,213 P2,816,962 (P451,708) Balance at January 1, 2010, as previously reported . . . . . . . . . . . . . . P26,489,837 P2,037,272 P546,797 P 425,365 P2,729,147 (P484,819) Adoption of Philippine Financial Reporting Standards and prior period adjustments (Note 2). . . . . . . (6,400,804) Balance at January 1, 2010, as restated. . . . . . . . . . . . . . . . . . . . . . . . . Total comprehensive income (loss) for the year . . . . . . . . . . . . . . . . . . . . . Transfer to surplus reserves (Note 30) . . . . . . . . . . . . . . . . . . . . . . . 26,489,837 2,037,272 546,797 5,150 (5,975,439) 2,729,147 3,565,719 (5,150) 87,815 (484,819) 12,844

Balance at December 31, 2010 . . . . . . P26,489,837 P2,037,272 P551,947 (P2,414,870) P2,816,962 (P471,975)

See accompanying Notes to Financial Statements. F-8

Consolidated Attributable to Equity Holders of the Parent Company Net Unrealized Gain (Loss) on Parent AvailableShare in Company for-Sale Equity Shares Investments Adjustment of Held by a (As Restated an Associate Subsidiary Notes 2 and 10) (Note 12) (Note 24)

Total

Noncontrolling Interest (As Restated Note 2)

Total Equity

Balance at January 1, 2012, as previously reported . . . . . . . . . . . Q 772,822 Q6,795 Adoption of Philippine Financial Reporting Standards and prior period adjustments (Note 2) . . . . . (30,479) Balance at January 1, 2012, as restated . . . . . . . . . . . . . . . . . . . . . . . Total comprehensive income (loss) for the year. . . . . . . . . . . . . . . . . . . . Declaration of dividends . . . . . . . . . . Transfer to surplus reserves (Note 30) . . . . . . . . . . . . . . . . . . . . . . . . . . . 742,343 294,909 6,795 (6,795) Q

(Q4,740) Q39,174,840 Q 46,886 Q39,221,726

(4,731,650)

484,361 531,247 375,896 (2,450)

(4,247,289) 34,974,437 4,774,904 (2,450)

(4,740) 34,443,190 4,399,008

Balance at December 31, 2012 . . . . Q1,037,252

(Q4,740) Q38,842,198 Q904,693 Q39,746,891 (P4,740) P33,317,648 P153,888 P33,471,536

Balance at January 1, 2011, as previously reported. . . . . . . . . . . . . (P1,199,252) P6,043 Adoption of Philippine Financial Reporting Standards and prior period adjustments (Note 2) . . . . . Balance at January 1, 2011, as restated . . . . . . . . . . . . . . . . . . . . . . . Total comprehensive income for the year . . . . . . . . . . . . . . . . . . . . . . . . . . Transfer to surplus reserves (Note 30) . . . . . . . . . . . . . . . . . . . . . . . . . . . Acquisition of non-controlling interest (Note 12) . . . . . . . . . . . . . . (1,199,252) 1,941,595 6,043 752 P6,795

(5,506,424)

406,474 560,362 86,340 (115,455)

(5,099,950) 28,371,586 6,718,306 (115,455)

(4,740) 27,811,224 6,631,966

Balance at December 31, 2011 . . . . . P 742,343

(P4,740) P34,443,190 P531,247 P34,974,437 (P4,740) P30,854,706 P133,499 P30,988,205

Balance at January 1, 2010, as previously reported. . . . . . . . . . . . . (P 884,153) P Adoption of Philippine Financial Reporting Standards and prior period adjustments (Note 2) . . . . . Balance at January 1, 2010, as restated . . . . . . . . . . . . . . . . . . . . . . . Total comprehensive income (loss) for the year. . . . . . . . . . . . . . . . . . . . Transfer to surplus reserves (Note 30) . . . . . . . . . . . . . . . . . . . . . . . . . . . (884,153) (315,099) 6,043

(6,400,804)

(39,705) 93,794 466,568

(6,440,509) 24,547,696 3,823,890

(4,740) 24,453,902 3,357,322

Balance at December 31, 2010 . . . . . (P1,199,252) P6,043

(P4,740) P27,811,224 P560,362 P28,371,586

See accompanying Notes to Financial Statements. F-9

Parent Company Capital Paid in Excess of Surplus Capital Par Value Reserves Stock (Note 24) (Note 12) (Note 30)

Surplus (Deficit) (As Restated Notes 2 and 24)

Balance at January 1, 2012, as previously reported . . . . . Q26,489,837 Q2,037,272 Q560,216 Q5,107,645 Adoption of Philippine Financial Reporting Standards and prior period adjustments (Note 2) . . . . . . . . . . . . . . . . . . . . . (4,701,171) Balance at January 1, 2012, as restated . . . . . . . . . . . . . . . . . . . Total comprehensive income (loss) for the year . . . . . . . . . . . Transfer to surplus reserves (Note 30). . . . . . . . . . . . . . . . . . . . 26,489,837 2,037,272 560,216 9,671 406,474 4,554,848 (9,671)

Balance at December 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . Q26,489,837 Q2,037,272 Q569,887 Q4,951,651 Balance at January 1, 2011, as previously reported. . . . . . . . . P26,489,837 P2,037,272 P551,947 P1,206,080 Adoption of Philippine Financial Reporting Standards and prior period adjustments (Note 2) . . . . . . . . . . . . . . . . . . . . . (5,506,424) Balance at January 1, 2011, as restated . . . . . . . . . . . . . . . . . . . Total comprehensive income for the year . . . . . . . . . . . . . . . . . Transfer to surplus reserves (Note 30). . . . . . . . . . . . . . . . . . . . 26,489,837 2,037,272 551,947 8,269 (4,300,344) 4,715,087 (8,269) P406,474

Balance at December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . P26,489,837 P2,037,272 P560,216

Balance at January 1, 2010, as previously reported. . . . . . . . . P26,489,837 P2,037,272 P546,797 (P1,553,712) Adoption of Philippine Financial Reporting Standards and prior period adjustments (Note 2) . . . . . . . . . . . . . . . . . . . . . (6,400,804) Balance at January 1, 2010, as restated . . . . . . . . . . . . . . . . . . . Total comprehensive income (loss) for the year . . . . . . . . . . . Transfer to surplus reserves (Note 30). . . . . . . . . . . . . . . . . . . . 26,489,837 2,037,272 546,797 5,150 (7,954,516) 3,659,322 (5,150)

Balance at December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . P26,489,837 P2,037,272 P551,947 (P4,300,344)

See accompanying Notes to Financial Statements. F-10

Parent Company Net Unrealized Revaluation Gain (Loss) Increment Accumulated on AFS on Land and Translation Investments Buildings Adjustment (As Restated (Note 11) (Note 12) Notes 2 and 10)

Total Equity

Balance at January 1, 2012, as previously reported . . . . Q2,816,962 Q334,005 Q Adoption of Philippine Financial Reporting Standards and prior period adjustments (Note 2) . . . . . . . . . . . . . . . . . . . . Balance at January 1, 2012, as restated . . . . . . . . . . . . . . . . . . Total comprehensive income (loss) for the year . . . . . . . . . . Transfer to surplus reserves (Note 30) . . . . . . . . . . . . . . . . . . 2,816,962 334,005 (395,757)

688,735 Q38,034,672 (30,479) 658,256 246,430 (4,731,650) 33,303,022 4,405,521

Balance at December 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . . Q2,816,962 (Q 61,752) Q

904,686 Q37,708,543

Balance at January 1, 2011, as previously reported . . . . . . . P2,816,962 P300,676 (P 1,254,461) P32,148,313 Adoption of Philippine Financial Reporting Standards and prior period adjustments (Note 2) . . . . . . . . . . . . . . . . . . . . (5,506,424) Balance at January 1, 2011, as restated . . . . . . . . . . . . . . . . . . Total comprehensive income for the year. . . . . . . . . . . . . . . . Transfer to surplus reserves (Note 30) . . . . . . . . . . . . . . . . . . 2,816,962 300,676 33,329 (1,254,461) 26,641,889 1,912,717 6,661,133 658,256 P33,303,022 928,417) P29,411,409 (6,400,804)

Balance at December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . P2,816,962 P334,005 P Balance at January 1, 2010, as previously reported . . . . . . . P2,729,147 P 90,485 (P Adoption of Philippine Financial Reporting Standards and prior period adjustments (Note 2) . . . . . . . . . . . . . . . . . . . . Balance at January 1, 2010, as restated . . . . . . . . . . . . . . . . . . Total comprehensive income (loss) for the year . . . . . . . . . . Transfer to surplus reserves (Note 30) . . . . . . . . . . . . . . . . . . 2,729,147 87,815 90,485 210,191

(928,417) 23,010,605 (326,044) 3,631,284

Balance at December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . P2,816,962 P300,676 (P1,254,461) P26,641,889

See accompanying Notes to Financial Statements. F-11

PHILIPPINE NATIONAL BANK AND SUBSIDIARIES STATEMENTS OF CASH FLOWS (In Thousands)
Consolidated Years Ended December 31 2011 2010 (As Restated (As Restated Note 2) Note 2) 2011 2010 (As Restated (As Restated Note 2) Note 2) Parent Company

2012

2012

CASH FLOWS FROM OPERATING ACTIVITIES Income before income tax . . . . . . . . . . . . . . . . . . Q5,952,436 P 5,635,044 Adjustments for: Realized trading gain on available-forsale (AFS) investments (Note 10) . . . . . (4,287,934) (3,596,089) Provision for impairment, credit and other losses (Note 15) . . . . . . . . . . . . . . . . . . . . 933,701 1,552,400 Amortization of premium (discount). . . . . (717,699) 47,419 Depreciation and amortization (Note 11) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 713,235 656,404 Net gain on sale or exchange of assets (Note 25) . . . . . . . . . . . . . . . . . . . . . . . . . . (359,915) (1,350,403) Loss (gain) on mark-to-market of financial liability designated at fair value through profit or loss (FVPL) (Note 10) . . . . . . . . . . . . . . . . . . . . . . . . . . (283,099) (37,575) Amortization of software costs (Note 14) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153,550 162,167 Loss (gain) on mark-to-market of derivatives (Note 10) . . . . . . . . . . . . . . . . (81,510) 34,339 Amortization of transaction costs (Notes 16 and 20) . . . . . . . . . . . . . . . . . . . 21,733 32,561 Share in net income of an associate (Note 12) . . . . . . . . . . . . . . . . . . . . . . . . . . (10,309) (68,955) Dividend income. . . . . . . . . . . . . . . . . . . . . . (2,418) (1,680) Realized trading gain on sale of held-tomaturity (HTM) investments (Note 10) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (141,274) Changes in operating assets and liabilities: Decrease (increase) in amounts of: Financial assets at FVPL . . . . . . 3,046,847 9,183,807 Loans and receivables . . . . . . . . (19,929,523) (17,865,535) Other assets . . . . . . . . . . . . . . . . . 765,107 (334,095) Increase in amounts of: Deposit liabilities . . . . . . . . . . . . 3,310,937 11,083,477 Accrued taxes, interest and other expenses. . . . . . . . . . . . . (147,858) (1,082,297) Other liabilities . . . . . . . . . . . . . . 2,267,658 804,009 Net cash generated from (used in) operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . Dividends received . . . . . . . . . . . . . . . . . . . . . . . . Net cash provided by (used in) operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8,655,061) (974,179) 2,418 (9,626,822) 4,713,724 (856,916) 1,680 3,858,488

P 4,956,505

Q5,426,072

P 5,523,475

P 4,351,592

(1,185,384) 2,399,772 164,586 837,604 (2,109,542)

(4,205,426) 795,106 (714,460) 642,553 (359,915)

(3,566,589) 980,452 59,323 593,940 (1,350,403)

(1,088,004) 2,408,818 164,585 781,491 (2,109,644)

206,921 156,708 (1,157,934) 24,555 (45,065) (2,515)

(283,099) 151,126 (81,510) 21,733 (25,219)

(37,575) 158,528 34,337 32,561 (231,576)

206,921 153,774 (1,157,934) 24,555 (216,824)

(141,274)

(4,672,482) 3,102,357 9,130,070 (10,360,863) (18,931,030) (17,115,760) 475,745 1,110,302 (172,018) 12,113,895 (734,664) (402,044) 665,798 (882,553) 2,515 2,935,486 159,300 656,456 (9,600,168) (900,935) 25,219 11,559,377 (901,780) 1,462,355 6,017,443 (743,275) 231,576 5,505,744

(4,255,745) (11,634,727) (302,559) 11,987,991 (750,286) (208,930) (1,644,926) (627,352) 216,824 (2,055,454)

(214,240) (10,475,884)

CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of: AFS investments. . . . . . . . . . . . . . . . . . . . . . 244,636,344 Investment properties. . . . . . . . . . . . . . . . . . 2,669,604 Property and equipment. . . . . . . . . . . . . . . . Q300,107 Proceeds from maturity of held-to-maturity (HTM) investments. . . . . . . . . . . . . . . . . . . . . . Proceeds from sale of HTM investments . . . . . Collection of receivables from SPV . . . . . . . . . . Proceeds from redemption of placements with the Bangko Sentral ng Pilipinas (BSP) (Note 33). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,200,000

185,507,498 3,909,976 Q121,959 2,611,603 2,586,113 9,800,000

91,758,000 2,118,101 Q60,874 3,527,895

239,720,794 2,727,503 Q285,389 575,000 20,200,000

185,348,678 3,505,960 Q95,542 2,611,603 2,586,113 9,800,000

88,102,092 2,127,958 Q3,793 3,522,783

(Forward)

F-12

2012

Parent Company Years Ended December 31 2011 2010 2011 2010 (As Restated (As Restated (As Restated (As Restated Note 2) Note 2) 2012 Note 2) Note 2) P(9,800,000) Q (108,772,041) (461,962) (129,563) (21,698,696) P(20,200,000) P(9,800,000) (105,111,187) (312,036) (124,941) (125,749) (21,717,287)

Consolidated

Placements with the BSP (Note 33) . . . . . Q P(20,200,000) Acquisition of: AFS investments . . . . . . . . . . . . . . . . . (254,009,801) (164,299,207) Property and equipment (Note 11) . . (704,327) (512,048) Software cost (Note 14) . . . . . . . . . . . (120,215) (69,122) Additional investments in subsidiaries/ associate (Note 12) . . . . . . . . . . . . . . . . . Closure of subsidiaries . . . . . . . . . . . . . . . . Net cash provided by (used in) investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from bills and acceptances payable . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from issuance of subordinated debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Settlement of bills and acceptances payable . . . . . . . . . . . . . . . . . . . . . . . . . . . Redemption of subordinated debt (Note 20) . . . . . . . . . . . . . . . . . . . . . . . . . . Acquisition of non-controlling interest . . Net cash provided by (used in) financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . . . . . CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR Cash and other cash items . . . . . . . . . . . . . Due from BSP. . . . . . . . . . . . . . . . . . . . . . . . Due from other banks . . . . . . . . . . . . . . . . . Interbank loans receivable . . . . . . . . . . . . . Securities held under agreements to resell. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CASH AND CASH EQUIVALENTS AT END OF YEAR Cash and other cash items . . . . . . . . . . . . . Due from BSP (Note 33) . . . . . . . . . . . . . . Due from other banks . . . . . . . . . . . . . . . . . Interbank loans receivable . . . . . . . . . . . . . Securities held under agreements to resell. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,971,712 19,456,772

(248,911,324) (164,006,652) (636,651) (413,451) (119,576) (66,416) 32,042 13,873,177 (115,455) 64,447 19,210,369

48,061,417 3,474,112 (43,442,941) 8,092,588

40,190,569 6,447,754 (43,736,282) (5,500,000) (115,455) (2,713,414)

35,938,506 (31,737,511) 4,200,995

47,023,325 3,474,112 (41,622,872) 8,874,565

36,695,559 6,447,754 (42,233,862) (5,500,000) (4,590,549)

34,276,511 (28,281,013) 5,995,498

11,437,478

20,601,846

(17,711,941)

12,271,858

20,125,564

(17,777,243)

5,404,110 17,952,795 6,423,981 17,097,648 18,300,000 65,178,534

5,457,186 14,485,986 5,141,549 12,691,967 6,800,000 44,576,688

6,054,474 20,927,133 5,403,845 24,303,177 5,600,000 62,288,629

5,303,112 17,292,594 4,906,698 17,097,648 18,300,000 62,900,052

5,309,611 14,473,986 3,945,632 12,245,259 6,800,000 42,774,488

5,950,914 20,927,133 4,256,603 23,817,081 5,600,000 60,551,731

5,599,088 37,175,399 4,042,769 11,498,756 18,300,000 Q 76,616,012

5,404,110 17,952,795 6,423,981 17,097,648 18,300,000 P65,178,534

5,457,186 14,485,986 5,141,549 12,691,967 6,800,000

5,548,325 36,531,047 3,293,782 11,498,756 18,300,000

5,303,112 17,292,594 4,906,698 17,097,648 18,300,000 P62,900,052

5,309,611 14,473,986 3,945,632 12,245,259 6,800,000 P 42,774,488

P44,576,688 Q 75,171,910

OPERATIONAL CASH FLOWS FROM INTEREST AND DIVIDENDS Interest paid. . . . . . . . . . . . . . . . . . . . . . . . . . Q 4,381,425 Interest received . . . . . . . . . . . . . . . . . . . . . . 12,232,534 Dividends received . . . . . . . . . . . . . . . . . . . 2,418

P 5,416,185 12,938,408 1,680

P 4,631,613 Q 4,332,906 12,754,383 11,978,131 2,515 25,219

P 5,373,255 12,712,686 231,576

P 4,592,781 12,249,169 216,824

See accompanying Notes to Financial Statements. F-13

PHILIPPINE NATIONAL BANK AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (Amounts in Thousand Pesos Except When Otherwise Indicated) 1. Corporate Information

Philippine National Bank (the Parent Company) was established in the Philippines in 1916 and started commercial operations that same year. On May 27, 1996, the Philippine Securities and Exchange Commission (SEC) approved the Parent Companys application to extend its corporate term for another 50 years. Its principal place of business is at PNB Financial Center, President Diosdado Macapagal Boulevard, Pasay City. As of December 31, 2012, the companies and persons affiliated/associated with the Lucio Tan Group (LTG) remain the majority shareholder of the Parent Company at 68.85% and the remaining 31.15% is held by the public. As of December 31, 2011, the companies and persons affiliated/associated with the Lucio Tan Group (LTG) remain the majority shareholder of the Parent Company at 67.20% and the remaining 32.80% is held by the public, respectively. The Parent Company provides a full range of banking and other financial services to corporate, middlemarket and retail customers, the National Government (NG), local government units (LGUs) and governmentowned and controlled corporations (GOCCs) and various government agencies. The Parent Companys principal commercial banking activities include deposit-taking, lending, bills discounting, foreign exchange dealing, investment banking, fund transfers/remittance servicing and a full range of retail banking and trust services through its 339 domestic and 13 overseas branches and offices as of December 31, 2012 and 331 domestic and 13 overseas branches and offices as of December 31, 2011. The Parent Companys international subsidiaries have a network of 65 offices as of December 31, 2012 and 70 offices as of December 31, 2011 in key cities of the United States of America (USA), Canada, Western Europe, Middle East and Asia. The subsidiaries are engaged in a number of diversified financial and related businesses such as remittance, non-life insurance, merchant banking, leasing, stock brokerage, foreign exchange trading and/or related services, while an associate is engaged in the banking business. The Parent Company previously operated under a rehabilitation program pursuant to the memorandum of agreement signed by the Republic of the Philippines, the Philippine Deposit Insurance Corporation and the LTG on May 3, 2002. In May 2007, the Parent Company concluded its 5-year Rehabilitation Plan as approved by the Bangko Sentral ng Pilipinas (BSP). Merger with Allied Banking Corporation On March 6, 2012, the Parent Company held a Special Stockholders Meeting approving the amended terms of the Plan of Merger of the Parent Company with Allied Banking Corporation (ABC). The original plan of the merger was approved in 2008 and will be effected via a share-for- share exchange. Under the approved amended terms, the Parent Company will be the surviving entity. It will issue to ABC shareholders 130 Parent Company shares for every ABC common share and 22.763 Parent Company shares for every ABC preferred share. On February 9, 2013, the Parent Company concluded its planned merger with ABC as approved and confirmed by the Board of Directors of the Parent Company and of ABC on January 22 and 23, 2013, respectively. Refer to Note 35 (Events after reporting date) for the details. 2. Summary of Significant Accounting Policies

Basis of Preparation The accompanying financial statements have been prepared on a historical cost basis except for financial assets and liabilities at fair value through profit or loss (FVPL) and available-for-sale (AFS) investments that are measured at fair value, and land and building that are measured at appraised value. The financial statements of the Parent Company reflect the accounts maintained in the Regular Banking Unit (RBU) and Foreign Currency Deposit Unit (FCDU). The functional currency of RBU and FCDU is Philippine pesos (Php) and United States Dollar (USD), respectively. For financial reporting purposes, FCDU accounts and foreign currency- denominated accounts in the RBU are translated into their equivalents in Philippine pesos (see accounting policy on Foreign Currency Translation). The financial statements individually prepared for these units are combined and inter-unit accounts and transactions are eliminated. F-14

Each entity in the Group determines its own functional currency and items included in the financial statements of each entity are measured using that functional currency. The respective functional currencies of the subsidiaries are presented under Basis of Consolidation. Amounts are presented to the nearest thousand pesos (P000) unless otherwise stated. Statement of Compliance The financial statements have been prepared in accordance with Philippine Financial Reporting Standards (PFRS). First-Time Adoption of PFRS These financial statements, for the year ended December 31, 2012 are the first the Group has prepared in accordance with PFRS. For periods up to and including the year ended December 31, 2011, the Group prepared its financial statements in accordance with accounting principles generally accepted in the Philippines for banks (Philippine GAAP for banks). Accordingly, the Group has prepared financial statements which comply with PFRS applicable for periods ending on or after December 31, 2012, together with the comparative periods as of and for the years ended December 31, 2011 and 2010, as described in the summary of significant accounting policies. The Group applied PFRS 1, First-Time Adoption of PFRS, in preparing the accompanying financial statements. In preparing these financial statements, the Groups opening statement of financial position was prepared as of January 1, 2010, the Groups date of transition to PFRS. Philippine GAAP for banks mainly differs from PFRS on the reclassification as permitted by the BSP for prudential regulation and the SEC for financial reporting purposes in October 2008, of certain investments in Republic of the Philippines (ROP) credit-linked notes that were permitted to be reclassified out of Financial Assets at FVPL or AFS investments to Loans and Receivable or HTM investments without bifurcating the embedded derivatives from the host instrument. Prior to the adoption of PFRS, HTM investments of the Group includes investments in ROP credit- linked notes where the related embedded derivatives have not been bifurcated. Upon the adoption of PFRS, the Group bifurcated the credit derivatives embedded in ROP credit-linked notes classified as HTM Investments as required by Philippine Accounting Standards (PAS) 39, Financial Instruments: Recognition and Measurement. The effect of this adjustment resulted in the recognition of a derivative asset (included in Financial Assets at FVPL) amounting to P64.0 million and derivative liability (included in Financial Liability at FVPL) amounting to, P16.2 million, decrease in HTM investments and increase in Surplus amounting to P12.5 million and P35.4 million, respectively, as of January 1, 2010. In 2011, the Parent Company bifurcated the credit derivatives when it reclassified the HTM investments to AFS investments. Had the Parent Company bifurcated the embedded derivatives prior to the reclassification date of the HTM investments to AFS investments, net unrealized gain on AFS investments in 2011 should have been reduced by P30.5 million. The transition from Philippine GAAP for banks to PFRS has not had a material impact on the statements of cash flows. Estimates under PFRS at transition date The estimates as at January 1, 2010 are consistent with those made for the same dates in accordance with Philippine GAAP for banks. Exemptions from other IFRSs Under PFRS 1, an entity may elect to use one or more exemptions contained in PFRS 1 which are meant to ease the burden of first-time adoption that might otherwise occur when applying all PFRSs fully retrospectively. The following exemptions were applicable to the Group: Employee benefits PFRS 1 permits entities to recognise all actuarial gains and losses at the date of transition to PFRS in opening statement of financial position retained earnings. This election is available regardless of which policy the entity chooses for recognition of actuarial gains and losses after first-time adoption (use of a corridor approach). However, past service costs are not covered by this exemption. F-15

At transition date, the Group has not applied this exemption. Cumulative translation difference There is an exemption from calculating the cumulative translation differences on the translation of the net assets of foreign subsidiaries at the date of transition. If elected, the cumulative translation differences for all foreign operations are deemed to be zero at the transition date. At transition date, the Group has not applied this exemption. Prior Period Adjustments Sale of NPAs to SPV companies To take advantage of incentives under Republic Act (RA) No. 9182, The Special Purpose Vehicle Act of 2002, and at the same time improve its chances of recovering from its non-performing assets (NPAs), the Parent Company sold certain NPAs to special purpose vehicle (SPV) companies. In accordance with regulatory accounting policies (RAP) prescribed by the BSP for banks and financial institutions availing of the provisions of RA No. 9182, the losses from the sale of the NPAs to the SPV companies were deferred and are being amortized over a ten-year period. As of January 1, 2012, 2011 and 2010, the deferred losses from the sale of NPAs to SPV companies amounted to P2.6 billion, P3.1 billion and P3.7 billion, respectively. In 2006 and 2007, the Parent Company sold Opal Portfolio Investments (SPV-AMC), Inc. (OPII) and certain NPAs, under a transaction that qualified and was approved by the BSP, as a legal true sale. The losses from the sale of the NPAs were again deferred by the Parent Company. As of January 1, 2012, 2011 and 2010, the deferred losses from the sale of the NPAs to OPII amounted to Q2.1 billion, Q2.5 billion and Q2.8 billion, respectively. In 2012, the Parent Company restated its 2011 and 2010 financial statements to recognize the losses from the sale of NPAs to SPVs in the years the NPAs were sold as required by PFRS. Consolidation of OPII As discussed above, the Parent Company sold OPII and certain NPAs, under a transaction that qualified and was approved by the BSP, as a legal true sale. OPII holds the NPAs sold by the Parent Company. Under Standing Interpretations Committee (SIC) No. 12, Consolidation of Special Purpose Entity (SPE), control over a SPE may exist even in cases where an entity owns little or none of the SPEs equity, such as when an entity retains majority of the residual risks related to the SPE on its assets in order to obtain benefits from its activities. In accordance with SIC 12, the accounts of OPII should have been consolidated into the Groups accounts. Prior to 2012, the accounts of OPII were not consolidated. In 2012, the Group restated its 2011 and 2010 financial statements to consolidate the accounts of OPII. The consolidation of the accounts of OPII into the Group accounts resulted in an increase in other assets, other liabilities and non-controlling interests by P514.0 million, P29.6 million and P484.4 million as of January 1, 2012; P493.1 million, P86.6 million and P406.5 million as of January 1, 2011; and P1.3 billion, P1.3 billion and (P39.7 million) as of January 1, 2010, respectively. Other income, other expense, provision for income tax and income attributable to non-controlling interests increased by P762.8 million, P109.2 million, P33.0 million and P77.9 million in 2011 and P942.3 million, P95.5 million, P157.6 million and P446.2 million in 2010, respectively.

F-16

The following summarizes the specific impact of PFRS adoption and the prior period adjustments.
Other Financial Statement Item Affected January 1 2011

Surplus (Deficit)Consolidated

2012

2010

As previously reported. . . . . . . . . . . . . . . To recognize fair value changes of credit derivatives embedded in credit linked notes . . . . . . . . . . . . . . . . . . . . . . To reverse gain from reclassification of credit linked notes from HTM investments to AFS investments . . . . As restated but before prior period adjustments . . . . . . . . . . . . . . . . . . . . . . To write-off deferred losses on NPAs sold to OPII . . . . . . . . . . . . . . . . . . . . . . To write-off deferred losses on NPAs sold to other SPV companies . . . . . . .

P6,947,384

P3,091,554

P 425,365

Financial Assets at FVPL

85,621

35,353

Unrealized gain on AFS

30,476 6,977,860

3,177,175 (2,466,434) (3,125,611)

460,718 (2,774,663) (3,661,494)

Other Assets Deferred Charges Other Assets Deferred Charges

(2,141,919) (2,589,728) P2,246,213

(P2,414,870) (P5,975,439)
January 1 2011

Surplus (Deficit)Parent Company

Other Financial Statement Item Affected

2012

2010

As previously reported . . . . . . . . . . . . . . . To recognize fair value changes of credit derivatives embedded in credit linked notes . . . . . . . . . . . . . . . . . . . . . . To reverse gain from reclassification of credit linked notes from HTM investments to AFS investments . . . . As restated but before prior period adjustments. . . . . . . . . . . . . . . . . . . . . . . To write-off deferred losses on NPAs sold to OPII . . . . . . . . . . . . . . . . . . . . . . To write-off deferred losses on NPAs sold to other SPV companies . . . . . . .

P 5,107,645 Financial Assets at FVPL Unrealized gain on AFS

1,206,080

(P1,553,712) 35,353

85,621

30,476 5,138,121

1,291,701

(1,518,359)

Other AssetsDeferred Charges Other AssetsDeferred Charges P

Consolidated

(2,141,919)

(2,466,434)

(2,774,663)

(2,589,728) 406,474

(3,125,611) (P4,300,344)

(3,661,494) (P7,954,516)

Net Income

2011

2010

Parent Company 2011 2010

As previously reported . . . . . . . . . . . . . . . To recognize fair value changes of credit derivatives embedded in credit linked notes . . . . . . . . . . . . . . . . . . . . . . As restated but before prior period adjustments. . . . . . . . . . . . . . . . . . . . . . . To reverse amortization of deferred losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . To recognize net income of SPV companies. . . . . . . . . . . . . . . . . . . . . . . . As restated . . . . . . . . . . . . . . . . . . . . . . . . .

P3,872,552 (55,145) 3,817,407 860,398 77,887 P4,755,692

P 2,691,728 50,268 2,741,996 844,112 446,179 P 4,032,287 P

3,909,834

2,764,942

(55,145) 3,854,689 860,398 4,715,087 P

50,268 2,815,210 844,112 3,659,322

F-17

Basis of Consolidation The consolidated financial statements include the financial statements of the Parent Company and the following wholly owned and majority-owned subsidiaries:
Effective Percentage of Ownership Subsidiaries Nature of Business Country of Incorporation Direct Indirect Functional Currency

PNB Capital and Investment Corporation (PNB Capital) . . . . PNB Forex, Inc.. . . . . . . . . . . . . . . . PNB Holdings Corporation (PNB Holdings) . . . . . . . . . . . . . PNB General Insurers, Inc. (PNB Gen)(a) . . . . . . . . . . . . . . . . PNB Securities, Inc. (PNB Securities) . . . . . . . . . . . . . PNB CorporationGuam . . . . . . . PNB International Investments Corporation (PNB IIC) . . . . . . . PNB Remittance Centers, Inc.(b) . . . . . . . . . . . . . . . PNB RCI Holding Co. Ltd.(b) . . . . PNB Remittance Co. (Canada)(c) . . . . . . . . . . . . . . PNB Europe PLC . . . . . . . . . . . . . . PNB Global Remittance & Financial Co. (HK) Ltd. (PNB GRF) . . . . . . . . PNB Italy SpA. . . . . . . . . . . . . . . . . Tanzanite Investments (SPVAMC), Inc.. . . . . . . . . . . Tau Portfolio Investments (SPVAMC), Inc.. . . . . . . . . . . Omicron Asset Portfolio (SPVAMC), Inc.. . . . . . . . . . . JapanPNB Leasing and Finance Corporation (JapanPNB Leasing)* . . . . . . JapanPNB Equipment Rentals Corporation(d) . . . . . . . . . . . . . . . (a) (b) (c) (d) *

Investment FX trading Investment Insurance Securities Brokerage Remittance Investment Remittance Holding Company of PNB RCC Remittance Banking

Philippines do do do do USA do do do Canada United Kingdom

100.00 100.00 100.00 100.00 100.00 100.00 100.00

100.00 100.00 100.00 100.00

Php Php Php Php Php USD USD USD USD CAD Great Britain Pounds (GBP) Hong Kong Dollar (HKD) Euro Php Php Php

Remittance Remittance Others do do

Hong Kong Italy Philippines do do

100.00 100.00 100.00 100.00 100.00

Leasing/Financing Rental

do do

90.00

90.00

Php Php

Owned through PNB Holdings Owned through PNB IIC Owned through PNB RCI Holding Co. Ltd. Owned through JapanPNB Leasing In 2011, the Group acquired additional 30% interest in JapanPNB Leasing (see Note 12). The Groups ownership interest in JapanPNB Leasing in 2010 is 60%.

The financial statements of the subsidiaries are prepared for the same reporting period as the Parent Company using consistent accounting policies. All significant intra-group balances, transactions, income and expenses and profits and losses resulting from intra-group transactions are eliminated in full in the consolidation. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. Control is achieved where the Group has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. Consolidation of subsidiaries ceases when control is transferred out of the Group or Parent Company. The results of subsidiaries acquired or disposed of during the period are included in the consolidated statement of income from the date of acquisition or up to the date of disposal, as appropriate.

F-18

In 2006, the Parent Company sold Opal Portfolio Investments (SPV-AMC), Inc. (OPII) and certain NPAs, under a transaction that qualified and was approved by the BSP, as a legal true sale (see Note 9). OPII holds the NPAs sold by the Parent Company. Under Standing Interpretations Committee (SIC) No. 12, Consolidation of Special Purpose Entity (SPE), control over a SPE may exist even in cases where an entity owns little or none of the SPEs equity, such as when an entity retains majority of the residual risks related to the SPE on its assets in order to obtain benefits from its activities. In accordance with SIC 12, the consolidated financial statements should include the accounts of OPII. The assets, liabilities and equity of the SPV were recognized under Other Assets, Other Liabilities and Non-controlling Interests, respectively, in the consolidated statement of financial position. Income, expenses and net income of the SPV were recognized under miscellaneous income, miscellaneous expenses and non-controlling interest, respectively, in the statement of income. Non-controlling Interests Non-controlling interests represent the portion of profit or loss and the net assets not held by the Group and are presented separately in the consolidated statement of income, consolidated statement of comprehensive income and within equity in the consolidated statement of financial position, separately from equity attributable to the Parent Company. Acquisitions of non-controlling interests are accounted for as equity transactions, whereby the difference between the consideration paid and the share in the net assets acquired is recognized in equity. Significant Accounting Policies Foreign Currency Translation Transactions and balances The books of accounts of the RBU are maintained in Philippine pesos, while those of the FCDU are maintained in USD. As at reporting date, foreign currency-denominated monetary assets and liabilities in the RBU are translated in Philippine peso based on the Philippine Dealing System (PDS) closing rate prevailing at end of the year and for foreign currency-denominated income and expenses, at the exchange rates prevailing at transaction dates. Foreign exchange differences arising from restatements of foreign currency-denominated assets and liabilities of the RBU are credited to or charged against operations in the year in which the rates change. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions. FCDU and Overseas subsidiaries As at the reporting date, the assets and liabilities of the FCDU and overseas subsidiaries are translated into the Parent Companys presentation currency (the Philippine peso) at the closing rate prevailing at the reporting date, and their income and expenses are translated at the average exchange rate for the year. Exchange differences arising on translation are taken directly to other comprehensive income (OCI) under Accumulated translation adjustment. On disposal of a foreign entity or upon actual remittance of FCDU profits to RBU, the deferred cumulative amount recognized in OCI relating to the particular foreign operation is recognized in the statement of income. Financial InstrumentsInitial Recognition and Subsequent Measurement Date of recognition Purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or convention in the marketplace are recognized on settlement date. Derivatives are recognized on trade date basis (i.e., the date that the Group commits to purchase or sell). Deposits, amounts due to banks and customers and loans are recognized when cash is received by the Group or advanced to the borrowers. Initial recognition of financial instruments All financial instruments are initially recognized at fair value. Except for financial instruments at FVPL, the initial measurement of financial instruments includes transaction costs. The Group classifies its financial assets in the following categories: financial assets at FVPL, HTM investments, AFS investments, and loans and F-19

receivables. The classification depends on the purpose for which the investments were acquired and whether they are quoted in an active market. Management determines the classification of its investments at initial recognition and, where allowed and appropriate, re-evaluates such designation at every reporting date. Financial liabilities are classified into financial liabilities at FVPL and other financial liabilities at amortized cost. Reclassification of financial assets The Group may choose to reclassify a non-derivative trading financial asset out of the held-for-trading (HFT) category if the financial asset is no longer held for purposes of selling it in the near term and only in rare circumstances arising from a single event that is unusual and highly unlikely to recur in the near term. In addition, the Group may choose to reclassify financial assets that would meet the definition of loans and receivables out of the HFT or AFS investments categories if the Group has the intention and ability to hold these financial assets for the foreseeable future or until maturity at the date of reclassification. The Group may also reclassify certain AFS investments to HTM investments when there is a change of intention and the Group has the ability to hold the financial instruments to maturity. Reclassifications are made at fair value as of the reclassification date. Fair value becomes the new cost or amortized cost as applicable, and no reversals of fair value gains or losses recorded before reclassification date are subsequently made. Effective interest rates (EIR) for financial assets reclassified to loans and receivables and HTM categories are determined at the reclassification date. Further increases in estimates of cash flows adjust the EIR prospectively. Determination of fair value The fair value for financial instruments traded in active markets at the reporting date is based on their quoted market price or dealer price quotations (bid price for long positions and ask price for short positions), without any deduction for transaction costs. When current bid and ask prices are not available, the price of the most recent transaction provides evidence of the current fair value as long as there has not been a significant change in economic circumstances since the time of the transaction. For all other financial instruments not listed in an active market, the fair value is determined by using appropriate valuation methodologies. Valuation methodologies include net present value techniques, comparison to similar instruments for which market observable prices exist, option pricing models, and other relevant valuation models. Day 1 difference Where the transaction price in a non-active market is different from the fair value from other observable current market transactions in the same instrument or based on a valuation technique whose variables include only data from observable market, the Group recognizes the difference between the transaction price and fair value (a Day 1 difference) in the statement of income in Trading and investment securities gainsnet unless it qualifies for recognition as some other type of asset. In cases where data is not observable, the difference between the transaction price and model value is only recognized in the statement of income when the inputs become observable or when the instrument is derecognized. For each transaction, the Group determines the appropriate method of recognizing the Day 1 difference amount. Derivatives recorded at FVPL The Parent Company and some of its subsidiaries are counterparties to derivative contracts, such as currency forwards, currency swaps, interest rate swaps and warrants. These derivatives are entered into as a service to customers and as a means of reducing or managing their respective foreign exchange and interest rate exposures, as well as for trading purposes. Such derivative financial instruments are initially recorded at fair value on the date at which the derivative contract is entered into and are subsequently remeasured at fair value. Any gains or losses arising from changes in fair values of derivatives are taken directly to the statement of income and are included in Trading and investment securities gainsnet. Derivatives are carried as assets when the fair value is positive and as liabilities when the fair value is negative. Embedded derivatives The Group has certain derivatives that are embedded in host financial (such as structured notes, debt investments, and loans receivables) and non-financial (such as purchase orders and service agreements) contracts. These embedded derivatives include credit default swaps (which are linked either to a single reference F-20

entity or a basket of reference entities); conversion options in loans receivables; call options in certain long-term debt, and foreign-currency derivatives in debt instruments, purchase orders and service agreements. Embedded derivatives are bifurcated from their host contracts and carried at fair value with fair value changes being reported through profit or loss, when the entire hybrid contracts (composed of both the host contract and the embedded derivative) are not accounted for as financial assets at FVPL, when their economic risks and characteristics are not closely related to those of their respective host contracts, and when a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative. The Group assesses whether embedded derivatives are required to be separated from the host contracts when the Group first becomes a party to the contract. Reassessment of embedded derivatives is only done when there are changes in the contract that significantly modifies the contractual cash flows. Other financial assets or financial liabilities held-for-trading Other financial assets or financial liabilities held for trading (classified as Financial assets at FVPL or Financial liabilities at FVPL) are recorded in the statement of financial position at fair value. Changes in fair value relating to the held-for-trading positions are recognized in Trading and investment securities gainsnet. Interest earned or incurred is recorded in Interest income or Interest expense, respectively, while dividend income is recorded in Miscellaneous income when the right to receive payment has been established. Included in this classification are debt and equity securities which have been acquired principally for the purpose of selling or repurchasing in the near term. Designated financial assets or financial liabilities at FVPL Financial assets or financial liabilities classified in this category are designated by management on initial recognition when any of the following criteria are met: The designation eliminates or significantly reduces the inconsistent treatment that would otherwise arise from measuring the assets or liabilities or recognizing gains or losses on them on a different basis; or The assets and liabilities are part of a group of financial assets, financial liabilities or both which are managed and their performance evaluated on a fair value basis, in accordance with a documented risk management or investment strategy; or The financial instrument contains an embedded derivative, unless the embedded derivative does not significantly modify the cash flows or it is clear, with little or no analysis, that it would not be separately recorded. Designated financial assets and financial liabilities at FVPL are recorded in the statement of financial position at fair value. Changes in fair value are recorded in Trading and investment securities gainsnet. Interest earned or incurred is recorded in Interest income or Interest expense, respectively, while dividend income is recorded in Miscellaneous income according to the terms of the contract, or when the right of payment has been established. HTM investments HTM investments are quoted non-derivative financial assets with fixed or determinable payments and fixed maturities for which the Groups management has the positive intention and ability to hold to maturity. Where the Group sells other than an insignificant amount of HTM investments, the entire category would be tainted and would have to be reclassified as AFS investments. After initial measurement, these HTM investments are subsequently measured at amortized cost using the effective interest method, less impairment in value. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees that are an integral part of the EIR. The amortization is included in Interest income in the statement of income. The losses arising from impairment of such investments are recognized in the statement of income under Provision for impairment, credit and other losses. Loans and receivables Significant accounts falling under this category are loans and receivables, amounts due from BSP and other banks, interbank loans receivable, securities held under agreements to resell and receivable from SPV. These are financial assets with fixed or determinable payments and fixed maturities and are not quoted in an active market. They are not entered into with the intention of immediate or short-term resale and are not classified as financial assets at FVPL or designated as AFS investments. F-21

Loans and receivables also include receivables arising from transactions on credit cards issued directly by the Parent Company. Furthermore, Loans and receivables include the aggregate rental on finance lease transactions and notes receivables financed by JapanPNB Leasing. Unearned income on finance lease transactions is shown as a deduction from Loans and receivables (included in Unearned and other deferred income). After initial measurement, the Loans and receivables, Due from BSP, Due from other banks, Interbank loans receivable, Securities held under agreements to resell and Receivable from SPV are subsequently measured at amortized cost using the effective interest method, less allowance for credit losses. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees that are an integral part of the EIR. The amortization is included in Interest income in the statement of income. The losses arising from impairment are recognized in Provision for impairment and credit losses in the statement of income. AFS investments AFS investments are those which are designated as such or do not qualify to be classified as Financial assets at FVPL, HTM investments or Loans and receivables. They are purchased and held indefinitely, and may be sold in response to liquidity requirements or changes in market conditions. They include debt and equity instruments. After initial measurement, AFS investments are subsequently measured at fair value. The effective yield component of AFS debt securities, as well as the impact of restatement on foreign currency-denominated AFS debt securities, is reported in the statement of income. The unrealized gains and losses arising from the fair valuation of AFS investments are excluded, net of tax, from reported income and are reported as Net unrealized gain (loss) on AFS investments in the statement of other comprehensive income. When the security is disposed of, the cumulative gain or loss previously recognized in OCI is recognized as Trading and investment securities gainsnet in the statement of income. Interest earned on holding AFS debt investments are reported as Interest income using the EIR. Dividends earned on holding AFS equity investments are recognized in the statement of income as Miscellaneous income when the right of the payment has been established. The losses arising from impairment of such investments are recognized as Provision for impairment and credit losses in the statement of income. Other financial liabilities Issued financial instruments or their components, which are not designated at FVPL, are classified as deposit liabilities, bills and acceptances payable, subordinated debt and other appropriate financial liability accounts, where the substance of the contractual arrangement results in the Group having an obligation either to deliver cash or another financial asset to the holder, or to satisfy the obligation other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of own equity shares. The components of issued financial instruments that contain both liability and equity elements are accounted for separately, with the equity component being assigned the residual amount after deducting from the instrument as a whole the amount separately determined as the fair value of the liability component on the date of issue. After initial measurement, other financial liabilities not qualified as and not designated at FVPL are subsequently measured at amortized cost using the effective interest method. Amortized cost is calculated by taking into account any discount or premium on the issue and fees that are an integral part of the EIR. Derecognition of Financial Assets and Liabilities Financial asset A financial asset (or, where applicable a part of a financial asset or part of a group of financial assets) is derecognized when: the rights to receive cash flows from the asset have expired; the Group retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a pass-through arrangement; or the Group has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained the risk and rewards of the asset but has transferred control over the asset. F-22

Where the Group has transferred its rights to receive cash flows from an asset or has entered into a passthrough arrangement, and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control over the asset, the asset is recognized to the extent of the Groups continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of original carrying amount of the asset and the maximum amount of consideration that the Group could be required to repay. Financial liability A financial liability is derecognized when the obligation under the liability is discharged or cancelled or has expired. Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognized in the statement of income. Repurchase and Reverse Repurchase Agreements Securities sold under agreements to repurchase at a specified future date (repos) are not derecognized from the statement of financial position. The corresponding cash received, including accrued interest, is recognized in the statement of financial position as a loan to the Group, reflecting the economic substance of such transaction. Conversely, securities purchased under agreements to resell at a specified future date (reverse repos) are not recognized in the statement of financial position. The Group is not permitted to sell or repledge the securities in the absence of default by the owner of the collateral. The corresponding cash paid, including accrued interest, is recognized on the statement of financial position as Securities held under agreements to resell, and is considered a loan to the counterparty. The difference between the purchase price and resale price is treated as interest income and is accrued over the life of the agreement using the effective interest method. Reinsurance The Group cedes insurance risk in the normal course of business. Reinsurance assets represent balances due from reinsurance companies. Recoverable amounts are estimated in a manner consistent with the outstanding claims provision and are in accordance with the reinsurance contract. An impairment review is performed at each end of the reporting period or more frequently when an indication of impairment arises during the reporting year. Impairment occurs when objective evidence exists that the Group may not recover outstanding amounts under the terms of the contract and when the impact on the amounts that the Group will receive from the reinsurer can be measured reliably. The impairment loss is charged against the statement of income. Ceded reinsurance arrangements do not relieve the Group from its obligations to policyholders. The Group also assumes reinsurance risk in the normal course of business for insurance contracts. Premiums and claims on assumed reinsurance are recognized as income and expenses in the same manner as they would be if the reinsurance were considered direct business, taking into account the product classification of the reinsured business. Reinsurance liabilities represent balances due to ceding companies. Amounts payable are estimated in a manner consistent with the associated reinsurance contract. Premiums and claims are presented on a gross basis for both ceded and assumed reinsurance. Reinsurance assets or liabilities are derecognized when the contractual rights are extinguished or expired or when the contract is transferred to another party. Deferred Acquisition Cost (DAC) Commission and other acquisition costs incurred during the financial period that vary with and are related to securing new insurance contracts and/or renewing existing insurance contracts, but which relates to subsequent financial periods, are deferred to the extent that they are recoverable out of future revenue margins. All other acquisition costs are recognized as an expense when incurred. F-23

Subsequent to initial recognition, these costs are amortized using the 24th method except for marine cargo where the DAC pertains to the commissions for the last two months of the year. Amortization is charged to the statement of income. The unamortized acquisition costs are shown as Deferred acquisition costs in the assets section of the statement of financial position. An impairment review is performed at each end of the reporting period or more frequently when an indication of impairment arises. The carrying value is written down to the recoverable amount and the impairment loss is charged to the statement of income. The DAC is also considered in the liability adequacy test for each reporting period.

Impairment of Financial Assets The Group assesses at each reporting date whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset (an incurred loss event) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the borrower or a group of borrowers is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganization, and where observable data indicate that there is measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults.

Financial assets at amortized cost For financial assets carried at amortized costs such as loans and receivables, HTM investments, due from BSP and other banks, interbank loans receivable, securities held under agreements to resell and receivable from SPV, the Group first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, or collectively for financial assets that are not individually significant. If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the assets carrying amount and the present value of the estimated future cash flows (excluding future credit losses that have not been incurred). The present value of the estimated future cash flows is discounted at the financial assets original EIR. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current EIR, adjusted for the original credit risk premium. The calculation of the present value of the estimated future cash flows of a collateralized financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable. If the Group determines that no objective evidence of impairment exists for individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses for impairment. Those characteristics are relevant to the estimation of future cash flows for groups of such assets by being indicative of the debtors ability to pay all amounts due according to the contractual terms of the assets being evaluated. Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be, recognized are not included in a collective assessment for impairment. For the purpose of a collective evaluation of impairment, financial assets are grouped on the basis of such credit risk characteristics as industry, collateral type, past-due status and term. Future cash flows in a group of financial assets that are collectively evaluated for impairment are estimated on the basis of historical loss experience for assets with credit risk characteristics similar to those in the Group. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the period on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currently. Estimates of changes in future cash flows reflect, and are directionally consistent with changes in related observable data from period to period (such changes in property prices, payment status, or other factors that are indicative of incurred losses in the Group and their magnitude). The methodology and assumptions used for estimating future cash flows are reviewed regularly by the Group to reduce any differences between loss estimates and actual loss experience. F-24

The carrying amount of the asset is reduced through use of an allowance account and the amount of loss is charged to the statement of income. Interest income continues to be recognized based on the original EIR of the asset. Loans and receivables, together with the associated allowance accounts, are written off when there is no realistic prospect of future recovery and all collateral has been realized. If subsequently, the amount of the estimated impairment loss decreases because of an event occurring after the impairment was recognized, the previously recognized impairment loss is reduced by adjusting the allowance account. If a future write-off is later recovered, any amounts formerly charged are credited to the Provision for impairment and credit losses account. Restructured loans Where possible, the Group seeks to restructure loans rather than to take possession of collateral. This may involve extending the payment arrangements and the agreement of new loan conditions. Once the terms have been renegotiated, the loan is no longer considered past due. Management continuously reviews restructured loans to ensure that all criteria are met and that future payments are likely to occur. The loans continue to be subject to an individual or collective impairment assessment, calculated using the loans original EIR. The difference between the recorded value of the original loan and the present value of the restructured cash flows, discounted at the original EIR, is recognized in Provision for impairment, credit and other losses in the statement of income. AFS investments For AFS investments, the Group assesses at each reporting date whether there is objective evidence that a financial asset or group of financial assets is impaired. In case of equity investments classified as AFS investments, this would include a significant or prolonged decline in the fair value of the investments below its cost. Where there is evidence of impairment, the cumulative lossmeasured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognized in the statement of incomeis removed from equity and recognized in the statement of income. Impairment losses on equity investments are not reversed through the statement of income. Increases in fair value after impairment are recognized directly in OCI. In the case of debt instruments classified as AFS investments, impairment is assessed based on the same criteria as financial assets carried at amortized cost. Future interest income is based on the reduced carrying amount and is accrued based on the rate of interest used to discount future cash flows for the purpose of measuring impairment loss. Such accrual is recorded as part of Interest income in the statement of income. If subsequently, the fair value of a debt instrument increased and the increase can be objectively related to an event occurring after the impairment loss was recognized in the statement of income, the impairment loss is reversed through the statement of income. Offsetting Financial Instruments Financial instruments are offset and the net amount reported in the statement of financial position if, and only if, there is a currently enforceable legal right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the asset and settle the liability simultaneously. This is not generally the case with master netting agreements, and the related assets and liabilities are presented gross in the statement of financial position. Residual Value of Leased Assets and Deposits on Finance Leases The residual value of leased assets, which approximates the amount of guaranty deposit paid by the lessee at the inception of the lease, is the estimated proceeds from the sale of the leased asset at the end of the lease term. At the end of the lease term, the residual value of the leased asset is generally applied against the guaranty deposit of the lessee when the lessee decides to buy the leased asset. Financial Guarantees In the ordinary course of business, the Group gives financial guarantees consisting of letters of credit, letters of guarantees, and acceptances. Financial guarantees are initially recognized in the financial statements at fair value under Other liabilities. Subsequent to initial recognition, the Groups liabilities under such guarantees are each measured at the higher of the initial fair value less, when appropriate, cumulative amortization calculated to recognize the fee in the statement of income in Service fees and commission income, over the term of the guarantee, and the best estimate of the expenditure required to settle any financial obligation arising as a result of the guarantee. F-25

Any increase in the liability relating to financial guarantees is taken to the statement of income in Provision for impairment, credit and other losses. Any financial guarantee liability remaining is recognized in the statement of income in Service fees and commission income, when the guarantee is discharged, cancelled or has expired. Revenue Recognition Revenue is recognized to the extent that it is probable that economic benefits will flow to the Group and the revenue can be reliably measured. The Group assesses its revenue arrangements against specific criteria in order to determine if it is acting as principal or agent. The Group has concluded that it is acting as a principal in all of its revenue arrangements except for their brokerage transactions. The following specific recognition criteria must also be met before revenue is recognized: Interest income For all financial instruments measured at amortized cost and interest-bearing financial instruments classified as HFT and AFS investments, interest income is recorded at the EIR, which is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset or financial liability. The calculation takes into account all contractual terms of the financial instrument (for example, prepayment options), includes any fees or incremental costs that are directly attributable to the instrument and are an integral part of the EIR, but not future credit losses. The adjusted carrying amount is calculated based on the original EIR. The change in carrying amount is recorded as interest income. Once the recorded value of a financial asset or group of similar financial assets has been reduced due to an impairment loss, interest income continues to be recognized using the original EIR applied to the new carrying amount. Service fees and commission income The Group earns fee and commission income from diverse range of services it provides to its customers. Fee income can be divided into the following two categories: a) Fee income earned from services that are provided over a certain period of time Fees earned for the provision of services over a period of time are accrued over that period. These fees include investment fund fees, custodian fees, fiduciary fees, commission income, credit-related fees, trust fees, portfolio and other management fees, and advisory fees. However, loan commitment fees for loans that are likely to be drawn down are deferred (together with any incremental costs) and recognized as an adjustment to the EIR of the loan. b) Fee income from providing transaction services Fees arising from negotiating or participating in the negotiation of a transaction for a third party - such as the arrangement of the acquisition of shares or other securities or the purchase or sale of businesses are recognized on completion of the underlying transaction. Fees or components of fees that are linked to a certain performance are recognized after fulfilling the corresponding criteria. These fees include underwriting fees, corporate finance fees, remittance fees, brokerage fees, deposit-related and other credit-related fees. Loan syndication fees are recognized in the statement of income when the syndication has been completed and the Group retains no part of the loans for itself or retains part at the same EIR as for the other participants. Commissions earned on credit cards Commissions earned are taken up as income upon receipt from member establishments of charges arising from credit availments by credit cardholders. These commissions are computed based on certain agreed rates and are deducted from amounts remittable to member establishments. Purchases by the credit cardholders, collectible on installment basis, are recorded at the cost of the items purchased plus certain percentage of cost. The excess over cost is credited to Unearned and other deferred income account and is shown as a deduction from Loans and receivables in the statement of financial position. The unearned and other deferred income is taken up to income over the installment terms and is computed using the effective interest method. F-26

Commission earned on reinsurance Reinsurance commissions are recognized as revenue over the period of the contracts. The portion of the commissions that relates to the unexpired periods of the policies at the end of the reporting period is accounted for as Other liabilities in the statement of financial position. Dividend income Dividend income is recognized when the Groups right to receive payment is established. Trading and investment securities gainsnet Trading and investment securities gainsnet includes results arising from trading activities and all gains and losses from changes in fair value of financial assets and financial liabilities at FVPL and gains and losses from disposal of AFS investments. Rental income Rental income arising on leased properties is accounted for on a straight-line basis over the lease terms on ongoing leases and is recorded in the statement of income under Miscellaneous income. Income on direct financing leases and receivables financed Income of the Group on loans and receivables financed is recognized using the effective interest method. Unearned discounts included under Unearned and other deferred income which are amortized over the term of the note or lease using the effective interest method consist of: Transaction and finance fees on finance leases and loans and receivables financed with long-term maturities; and Excess of the aggregate lease rentals plus the estimated residual value of the leased equipment over its cost. Premiums Revenue Gross insurance written premiums comprise the total premiums receivable for the whole period cover provided by contracts entered into during the accounting period. Premiums include any adjustments arising in the accounting period for premiums receivable in respect of business written in prior periods. Premiums from shortduration insurance contracts are recognized as revenue over the period of the contracts using the 24th method except for the marine cargo where the provision for unearned premiums pertains to the premiums for the last two months of the year. The portion of the premiums written that relate to the unexpired periods of the policies at end of reporting period are accounted for as provision for unearned premiums and presented as part of Other liabilities in the statement of financial position. The related reinsurance premiums ceded that pertain to the unexpired periods at the end of the reporting periods are accounted for as deferred reinsurance premiums shown as part of Other assets in the statement of financial position. The net changes in these accounts between end of the reporting periods are credited to or charged against the statement of income for the year. Other income Income from sale of services is recognized upon rendition of the service. Income from sale of properties is recognized upon completion of the earning process and the collectibility of the sales price is reasonably assured. Expenses Expenses encompass losses as well as those expenses that arise in the course of the ordinary activities of the Group. Expenses are recognized when incurred. Cash and Cash Equivalents For purposes of reporting cash flows, cash and cash equivalents include cash and other cash items (COCI), amounts due from BSP and other banks, interbank loans receivable and securities held under agreements to resell that are convertible to known amounts of cash, with original maturities of three months or less from dates of placements and that are subject to an insignificant risk of changes in fair value. F-27

Investments in Subsidiaries and an Associate Investments in subsidiaries Subsidiaries pertain to entities over which the Group has the power to govern the financial and operating policies, generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity (see Basis of Consolidation). Investment in an associate Associate pertains to an entity over which the Group has significant influence but not control, generally accompanying a shareholding of between 20.00% and 50.00% of the voting rights. In the consolidated financial statements, investment in an associate is accounted for under the equity method of accounting. Under the equity method, investment in an associate is carried in the consolidated statement of financial position at cost plus post-acquisition changes in the Groups share of the net assets of the associate, less impairment in value, if any. The Groups share of its associates post-acquisition profits or losses is recognized in the consolidated statement of income, and its share of post-acquisition movements in the associates equity reserves or other adjustments is recognized directly in equity. When the Groups share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Group does not recognize further losses, unless it has incurred obligations or made payments on behalf of the associate. In the Parent Companys separate financial statements, investments in subsidiaries and an associate are carried at cost, less any impairment in value. Property and Equipment Depreciable properties such as leasehold improvements, and furniture, fixture and equipment are stated at cost less accumulated depreciation and amortization and any impairment in value. Land is stated at appraised values less any impairment in value while buildings are stated at appraised value less accumulated depreciation and any impairment in value. The appraised values were determined by professionally qualified, independent appraisers. The revaluation increment resulting from revaluation is credited to the Revaluation increment on land and buildings in the statement of comprehensive income, net of applicable deferred income tax. The Group has elected to transfer the revaluation increment to Surplus, in full, upon disposal of the asset. The initial cost of property and equipment consists of its purchase price, including import duties, taxes and any directly attributable costs of bringing the asset to its working condition and location for its intended use. Expenditures incurred after items of property and equipment have been put into operation, such as repairs and maintenance are normally charged against operations in the period in which the costs are incurred. In situations where it can be clearly demonstrated that the expenditures have resulted in an increase in the future economic benefits expected to be obtained from the use of an item of property and equipment beyond its originally assessed standard of performance, the expenditures are capitalized as an additional cost of property and equipment. Depreciation is computed using the straight-line method over the estimated useful lives of the respective assets. Leasehold improvements are amortized over the shorter of the terms of the covering leases and the estimated useful lives of the improvements. The estimated useful lives follow:
Years

Buildings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Furniture, fixtures and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

25 - 50 5 3 - 10

The useful life and the depreciation and amortization method are reviewed periodically to ensure that the period and the method of depreciation and amortization are consistent with the expected pattern of economic benefits from items of property and equipment. F-28

An item of property and equipment is derecognized upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising from derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the statement of income in the year the asset is derecognized. Investment Properties Investment properties are measured initially at cost, including transaction costs. An investment property acquired through an exchange transaction is measured at fair value of the asset acquired unless the fair value of such an asset cannot be measured in which case the investment property acquired is measured at the carrying amount of asset given up. Any gain or loss on exchange is recognized in the statement of income under Net gain on sale or exchange of assets. Foreclosed properties are classified under Investment properties upon: a. b. c. entry of judgment in case of judicial foreclosure; execution of the Sheriffs Certificate of Sale in case of extra-judicial foreclosure; or notarization of the Deed of Dacion in case of payment in kind (dacion en pago).

Subsequent to initial recognition, investment properties are carried at cost less accumulated depreciation (for depreciable investment properties) and impairment in value. Depreciation is calculated on a straight-line basis using the remaining useful lives from the time of acquisition of the depreciable investment properties ranging from 25 to 50 years. Investment properties are derecognized when they have either been disposed of or when the investment property is permanently withdrawn from use and no future benefit is expected from its disposal. Any gains or losses on the retirement or disposal of an investment property are recognized in the statement of income under Net gain on sale or exchange of assets in the period of retirement or disposal. Expenditures incurred after the investment properties have been put into operations, such as repairs and maintenance costs, are normally charged against income in the period in which the costs are incurred. Transfers are made to investment properties when, and only when, there is a change in use evidenced by ending of owner occupation, commencement of an operating lease to another party or ending of construction or development. Transfers are made from investment properties when, and only when, there is a change in use evidenced by commencement of owner occupation or commencement of development with a view to sale. Other Properties Acquired Other properties acquired include chattel mortgage properties acquired in settlement of loan receivables. These are carried at cost, which is the fair value at recognition date, less accumulated depreciation and any impairment in value. The Group applies the cost model in accounting for other properties acquired. Depreciation is computed on a straight-line basis over the estimated useful life of five years. The estimated useful life and the depreciation method are reviewed periodically to ensure that the period and the method of depreciation are consistent with the expected pattern of economic benefits from items of other properties acquired. The carrying values of other properties acquired are reviewed for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable. If any such indication exists and where the carrying values exceed the estimated recoverable amount, the assets are written down to their recoverable amounts (see accounting policy on Impairment of Nonfinancial Assets). Real Estate Under Joint Venture (JV) Agreement The Group is a party to jointly controlled operations whereby it contributed parcels of land for development into residential and commercial units. In respect of the Groups interest in the jointly controlled operations, the Group recognizes the following: (a) the assets that it controls and the liabilities that it incurs; and (b) the expenses that it incurs and its share of the income that it earns from the sale of goods and services by the JV. The assets contributed to the JV are measured at the lower of cost or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business less estimated costs necessary to make the sale. F-29

Intangible Assets Exchange trading right The exchange trading right, included in Other assets, was acquired, together with Philippine Stock Exchange (PSE) shares, in exchange for the exchange membership seat under the conversion program of the PSE. The exchange trading right is carried at the amount allocated from the original cost of the exchange membership seat (after a corresponding allocation for the value of the PSE shares) less allowance for impairment losses, if any. The Group does not intend to sell the exchange trading right in the near future. The exchange trading right is deemed to have an indefinite useful life as there is no foreseeable limit to the period over which the asset is expected to generate net cash inflows for the Group. It is tested annually for any impairment in realizable value. Any impairment loss is charged directly against the statement of income (see accounting policy on Nonfinancial Assets). Software costs Software costs, included in Other assets, are capitalized on the basis of the cost incurred to acquire and bring to use the specific software. These costs are amortized over five years on a straight-line basis. The estimated useful life and the amortization method are reviewed periodically to ensure that the period and the method of amortization are consistent with the expected pattern of economic benefits from the software. Costs associated with maintaining the computer software programs are recognized as expense when incurred. Impairment of Nonfinancial Assets Property and equipment, investment properties, other properties acquired, exchange trading right and software costs At each reporting date, the Group assesses whether there is any indication that its property and equipment, investment properties, other properties acquired and software costs with finite useful lives may be impaired. When an indicator of impairment exists or when an annual impairment testing for an asset is required, the Group makes a formal estimate of recoverable amount. Recoverable amount is the higher of an assets fair value less costs to sell and its value in use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets, in which case the recoverable amount is assessed as part of the cash generating unit to which it belongs. Where the carrying amount of an asset exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. An impairment loss is charged against operations in the period in which it arises, unless the asset is carried at a revalued amount, in which case the impairment loss is charged to the revaluation increment of the said asset. An assessment is made at each reporting date as to whether there is any indication that previously recognized impairment losses may no longer exist or may have decreased. If such indication exists, the recoverable amount is estimated. A previously recognized impairment loss is reversed only if there has been a change in the estimates used to determine the assets recoverable amount since the last impairment loss was recognized. If that is the case, the carrying amount of the asset is increased to its recoverable amount. That increased amount cannot exceed the carrying amount that would have been determined, net of depreciation and amortization, had no impairment loss been recognized for the asset in prior years. Such reversal is recognized in the statement of income unless the asset is carried at a revalued amount, in which case the reversal is treated as a revaluation increase. After such a reversal, the depreciation and amortization expense is adjusted in future period to allocate the assets revised carrying amount, less any residual value, on a systematic basis over its remaining life. Exchange trading right which has an indefinite useful life is tested for impairment annually irrespective of any impairment indicators at year end either individually or at the cash generating unit level, as appropriate. F-30

Investment in subsidiaries and associates The Parent Company assesses at each reporting date whether there is any indication that its investments in subsidiaries and associates may be impaired. If any indication exists, the Parent Company estimates the assets recoverable amount. An assets recoverable amount is the higher of an assets or cash generating units (CGU) fair value less costs to sell and its value in use. Where the carrying amount of an asset or CGU exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. Leases The determination of whether an arrangement is, or contains a lease is based on the substance of the arrangement and requires an assessment of whether the fulfillment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset. A reassessment is made after inception of the lease only if one of the following applies: (a) There is a change in contractual terms, other than a renewal or extension of the arrangement; (b) A renewal option is exercised or extension granted, unless that term of the renewal or extension was initially included in the lease term; (c) There is a change in the determination of whether fulfillment is dependent on a specified asset; or (d) There is a substantial change to the asset. Where a reassessment is made, lease accounting shall commence or cease from the date when the change in circumstances gave rise to the reassessment for scenarios (a), (c) or (d) above, and at the date of renewal or extension period for scenario (b). Group as lessee Finance leases, which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item, are capitalized at the inception of the lease at the fair value of the leased property or, if lower, at the present value of the minimum lease payments and included in Property and equipment account with the corresponding liability to the lessor included in Other liabilities account. Lease payments are apportioned between the finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly to Interest expense. Capitalized leased assets are depreciated over the shorter of the estimated useful lives of the assets or the respective lease terms, if there is no reasonable certainty that the Group will obtain ownership by the end of the lease term. Leases where the lessor retains substantially all the risks and benefits of ownership of the asset are classified as operating leases. Operating lease payments are recognized as an expense in the statement of income on a straight-line basis over the lease term. Group as lessor Finance leases, where the Group transfers substantially all the risks and benefits incidental to ownership of the leased item to the lessee, are included in the statement of financial position under Loans and receivables account. A lease receivable is recognized at an amount equivalent to the net investment (asset cost) in the lease. All income resulting from the receivable is included in Interest income in the statement of income. Leases where the Group does not transfer substantially all the risks and benefits of ownership of the assets are classified as operating leases. Lease payments received are recognized as an income in the statement of income on a straight line basis over the lease term. Initial direct costs incurred in negotiating operating leases are added to the carrying amount of the leased asset and recognized over the lease term on the same basis as the rental income. Contingent rents are recognized as revenue in the period in which they are earned. Insurance Contract Liabilities Provision for Unearned Premiums The proportion of written premiums, gross of commissions payable to intermediaries, attributable to subsequent periods or to risks that have not yet expired is deferred as provision for unearned premiums. F-31

Premiums from short-duration insurance contracts are recognized as revenue over the period of the contracts using the 24th method except for the marine cargo where the provision for unearned premiums pertains to the premiums for the last two months of the year. The portion of the premiums written that relate to the unexpired periods of the policies at the end of reporting period are accounted for as provision for unearned premiums and presented as part of Insurance contract liabilities in the liabilities section of the statement of financial position. The change in the provision for unearned premiums is taken to the statement of income in the order that revenue is recognized over the period of risk. Further provisions are made to cover claims under unexpired insurance contracts which may exceed the unearned premiums and the premiums due in respect of these contracts. Claims Provision and Incurred But Not Reported (IBNR) Losses Outstanding claims provisions are based on the estimated ultimate cost to all claims incurred but not settled at the end of the reporting period, whether reported or not, together with related claims handling costs and reduction for the expected value of salvage and other recoveries. Delays can be experienced in the notification and settlement of certain types of claims, therefore the ultimate cost of which cannot be known with certainty at the end of the reporting period. The liability is not discounted for the time value of money and includes provision for IBNR. No provision for equalization or catastrophic reserves is recognized. The liability is derecognized when the contract has expired, is discharged or cancelled. Liability Adequacy Test At each end of the reporting period, liability adequacy tests are performed, to ensure the adequacy of insurance contract liabilities, net of related (DAC) assets. In performing the test, current best estimates of future cash flows, claims handling and policy administration expenses, as well as investment income from assets backing such liabilities, are used. Changes in expected claims that have occurred, but which have not been settled, are reflected by adjusting the liability for claims and future benefits. Any inadequacy is immediately charged to the statement of income by establishing an unexpired risk provision for losses arising from the liability adequacy tests. The provision for unearned premiums is increased to the extent that the future claims and expenses in respect of current insurance contracts exceed future premiums plus the current provision for unearned premiums. Retirement Benefits The Group has a noncontributory defined benefit retirement plan. The retirement cost of the Parent Company and certain subsidiaries is determined using the projected unit credit method. Under this method, the current service cost is the present value of retirement benefits payable in the future with respect to services rendered in the current period. The liability recognized in the statement of financial position in respect of defined benefit retirement plans is the present value of the defined benefit obligation at the reporting date less the fair value of plan assets, together with adjustments for unrecognized actuarial gains or losses and past service costs. The defined benefit obligation is calculated annually by an independent actuary using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rate on government bonds that have terms to maturity approximating the terms of the related retirement liability. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are credited to or charged against income when the net cumulative unrecognized actuarial gains and losses at the end of the previous period exceeded 10% of the higher of the defined benefit obligation and the fair value of plan assets at that date. These excess gains or losses are recognized over the expected average remaining working lives of the employees participating in the plan. Past-service costs, if any, are recognized immediately in the statement of income, unless the changes to the pension plan are conditional on the employees remaining in service for a specified period of time (the vesting period). In this case, the past-service costs are amortized on a straight-line basis over the vesting period. The defined benefit asset or liability comprises the present value of the defined benefit obligation less past service costs not yet recognized and less the fair value of plan assets out of which the obligations are to be settled directly. The measurement of a defined benefit asset is limited to the present value of economic benefits available in the form of refunds from the plan or reductions in future contributions to the plan plus unrecognized gains and losses. The economic benefit available as a refund is measured as the amount of the surplus at the reporting date F-32

that the Parent Company and certain subsidiaries have a right to receive as a refund, less any associated costs. If there is no minimum funding requirement, the economic benefit available as a reduction in future contributions is measured as the lower of: a) b) the surplus in the plan; and the present value of the future service cost, i.e., excluding any part of the future cost that will be borne by employees, for each year over the shorter of the expected life of the plan and the expected life of the entity.

Under the terms of the Parent Companys and certain subsidiaries retirement plans, there are no minimum funding requirements. Provisions Provisions are recognized when the Group has a present obligation (legal or constructive) as a result of a past event and it is probable that an outflow of assets embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. When the Group expects some or all of a provision to be reimbursed, for example, under an insurance contract, the reimbursement is recognized as a separate asset but only when the reimbursement is virtually certain. The expense relating to any provision is presented in the statement of income, net of any reimbursement. If the effect of the time value of money is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. When discounting is used, the increase in the provision due to the passage of time is recognized as an interest expense. Contingent Liabilities and Contingent Assets Contingent liabilities are not recognized in the financial statements but are disclosed unless the possibility of an outflow of assets embodying economic benefits is remote. Contingent assets are not recognized but are disclosed in the financial statements when an inflow of economic benefits is probable. Income Taxes Income tax on profit and loss for the year comprises current and deferred tax. Income tax is determined in accordance with tax laws. Income tax is recognized in the statement of income, except to the extent that it relates to items directly recognized in the statement of comprehensive income. Current tax Current tax assets and liabilities for the current periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted at the reporting date. Deferred tax Deferred tax is provided, using the liability method, on all temporary differences at the reporting date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax liabilities are recognized for all taxable temporary differences, including asset revaluations. Deferred tax assets are recognized for all deductible temporary differences, carryforward of unused tax credits from the excess of minimum corporate income tax (MCIT) over the regular corporate income tax (RCIT), and unused net operating loss carryover (NOLCO), to the extent that it is probable that sufficient taxable income will be available against which the deductible temporary differences and carryforward of unused tax credits from MCIT and unused NOLCO can be utilized. Deferred tax, however, is not recognized on temporary differences that arise from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting income nor taxable income. Deferred tax liabilities are not provided on non-taxable temporary differences associated with investments in domestic subsidiaries and an associate. With respect to investments in foreign subsidiaries and associates, deferred tax liabilities are recognized except where the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future. F-33

The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient future taxable income will be available to allow all or part of the deferred income tax asset to be utilized. Unrecognized deferred tax assets are reassessed at each reporting date and are recognized to the extent that it has become probable that future taxable income will allow the deferred tax asset to be recovered. Deferred tax assets and liabilities are measured at the tax rates that are applicable to the period when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the reporting date. Current tax and deferred tax relating to items recognized directly in OCI are also recognized in OCI and not in the statement of income. In the consolidated financial statements, deferred tax assets and liabilities are offset if a legally enforceable right exists to set off current tax assets against current tax liabilities and deferred taxes related to the same taxable entity and the same taxation authority. Parent Company Shares Held by a Subsidiary Own equity instruments which are acquired by subsidiaries (treasury shares) are deducted from equity and accounted for at weighted average cost. No gain or loss is recognized in the statement of income on the purchase, sale, issue or cancellation of the Parent Companys own equity instruments. Earnings Per Share Basic earnings per share (EPS) is computed by dividing net income for the period attributable to common shareholders by the weighted average number of common shares outstanding during the period after giving retroactive effect to stock dividends declared and stock rights exercised during the period, if any. Diluted EPS is calculated by dividing the aggregate of net income attributable to common shareholders and convertible preferred shareholders by the weighted average number of common shares outstanding during the period adjusted for the effects of any dilutive convertible preferred shares. Dividends on Common Shares Dividends on common shares are recognized as a liability and deducted from equity when approved by the respective BOD of the Parent Company and subsidiaries. Dividends for the period that are approved after the reporting date are dealt with as an event after the reporting date. Debt Issue Costs Issuance, underwriting and other related expenses incurred in connection with the issuance of debt instruments (other than debt instruments designated at FVPL) are deferred and amortized over the terms of the instruments using the effective interest method. Unamortized debt issuance costs are included in the measurement of the related carrying value of the debt instruments in the statement of financial position. Borrowing Costs Borrowing costs are recognized as expense in the year in which these costs are incurred. Borrowing costs consists of interest expense calculated using the effective interest method calculated in accordance with PAS 39 that the Group incurs in connection with borrowing of funds. Events after the Reporting date Any post-year-end event that provides additional information about the Groups position at the reporting date (adjusting event) is reflected in the financial statements. Post-year-end events that are not adjusting events, if any, are disclosed when material to the financial statements. F-34

Segment Reporting The Groups operating businesses are organized and managed separately according to the nature of the products and services provided, with each segment representing a strategic business unit that offers different products and serves different markets. Refer to Note 6 for detailed disclosure on segment information. Fiduciary Activities Assets and income arising from fiduciary activities together with related undertakings to return such assets to customers are excluded from the financial statements where the Parent Company acts in a fiduciary capacity such as nominee, trustee or agent. Equity Capital stock is measured at par value for all shares issued and outstanding. When the shares are sold at a premium, the difference between the proceeds and the par value is credited to Capital paid-in excess of par value account. Direct costs incurred related to equity issuance, such as underwriting, accounting and legal fees, printing costs and taxes are chargeable to Capital paid-in excess of par value account. If the Capital paid-in excess of par value is not sufficient, the excess is charged against the Surplus. Surplus (Deficit) represents accumulated earnings (losses) of the Group less dividends declared. Equity Reserves The reserves recorded in equity in the statement of financial position include: Net unrealized gain (loss) on available-for-sale investments reserve which comprises changes in fair value of AFS investments. Accumulated translation adjustment which is used to record exchange differences arising from the translation of the FCDU accounts and foreign operations to peso. Revaluation increment on land and building which comprises changes in fair value of land and building. Future Changes in Accounting Policies The Group will adopt the standards and interpretations enumerated below when these become effective. Except as otherwise indicated, the Group does not expect the adoption of these new and amended PFRS, PAS and Philippine Interpretations to have significant impact on its financial statements. New Standards and Interpretations PFRS 7, Financial instruments: DisclosuresOffsetting Financial Assets and Financial Liabilities (Amendments) These amendments require an entity to disclose information about rights of set-off and related arrangements (such as collateral agreements). The new disclosures are required for all recognized financial instruments that are set off in accordance with PAS 32. These disclosures also apply to recognized financial instruments that are subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are setoff in accordance with PAS 32. The amendments require entities to disclose, in a tabular format unless another format is more appropriate, the following minimum quantitative information. This is presented separately for financial assets and financial liabilities recognized at the end of the reporting period: a) b) c) d) The gross amounts of those recognized financial assets and recognized financial liabilities; The amounts that are set off in accordance with the criteria in PAS 32 when determining the net amounts presented in the statement of financial position; The net amounts presented in the statement of financial position; The amounts subject to an enforceable master netting arrangement or similar agreement that are not otherwise included in (b) above, including: i. Amounts related to recognized financial instruments that do not meet some or all of the offsetting criteria in PAS 32; and F-35

ii. e)

Amounts related to financial collateral (including cash collateral); and

The net amount after deducting the amounts in (d) from the amounts in (c) above.

The amendments to PFRS 7 are to be retrospectively applied and are effective for annual periods beginning on or after January 1, 2013. The amendments affect disclosures only and have no impact on the Groups financial position or performance.

PFRS 10, Consolidated Financial Statements PFRS 10 replaces the portion of PAS 27, Consolidated and Separate Financial Statements, that addresses the accounting for consolidated financial statements. It also includes the issues raised in SIC 12, Consolidation Special Purpose Entities. PFRS 10 establishes a single control model that applies to all entities including special purpose entities. The changes introduced by PFRS 10 will require management to exercise significant judgment to determine which entities are controlled, and therefore, are required to be consolidated by a parent, compared with the requirements that were in PAS 27. The standard becomes effective for annual periods beginning on or after January 1, 2013.

PFRS 11, Joint Arrangements PFRS 11 replaces PAS 31, Interests in Joint Ventures, and SIC 13, Jointly Controlled EntitiesNonMonetary Contributions by Venturers. PFRS 11 removes the option to account for jointly controlled entities using proportionate consolidation. Instead, jointly controlled entities that meet the definition of a joint venture must be accounted for using the equity method. The standard becomes effective for annual periods beginning on or after January 1, 2013.

PFRS 12, Disclosure of Interests in Other Entities PFRS 12 includes all of the disclosures related to consolidated financial statements that were previously in PAS 27, as well as all the disclosures that were previously included in PAS 31 and PAS 28, Investments in Associates. These disclosures relate to an entitys interests in subsidiaries, joint arrangements, associates and structured entities. A number of new disclosures are also required. The standard becomes effective for annual periods beginning on or after January 1, 2013. The adoption of PFRS 12 will affect disclosures only and have no impact on the Groups financial position or performance.

PFRS 13, Fair Value Measurement PFRS 13 establishes a single source of guidance under PFRSs for all fair value measurements. PFRS 13 does not change when an entity is required to use fair value, but rather provides guidance on how to measure fair value under PFRS when fair value is required or permitted. This standard should be applied prospectively as of the beginning of the annual period in which it is initially applied. Its disclosure requirements need not be applied in comparative information provided for periods before initial application of PFRS 13. The standard becomes effective for annual periods beginning on or after January 1, 2013. The Group is currently assessing the impact of adopting this standard.

PAS 1, Presentation of Financial StatementsPresentation of Items of Other Comprehensive Income or OCI (Amendments) The amendments to PAS 1 change the grouping of items presented in OCI. Items that can be reclassified (or recycled) to profit or loss at a future point in time (for example, upon derecognition or settlement) will be presented separately from items that will never be recycled. The amendments affect presentation only and have no impact on the Groups financial position or performance. The amendment becomes effective for annual periods beginning on or after July 1, 2012. The amendments will be applied retrospectively and will result to the modification of the presentation of items of OCI. F-36

PAS 19, Employee Benefits (Revised) Amendments to PAS 19 range from fundamental changes such as removing the corridor mechanism and the concept of expected returns on plan assets to simple clarifications and rewording. The revised standard also requires new disclosures such as, among others, a sensitivity analysis for each significant actuarial assumption, information on asset-liability matching strategies, duration of the defined benefit obligation, and disaggregation of plan assets by nature and risk. The amendments become effective for annual periods beginning on or after January 1, 2013. Once effective, the Group has to apply the amendments retroactively to the earliest period presented. The Parent Company reviewed its existing employee benefits and determined that the amended standard has significant impact on its accounting for retirement benefits. The Parent Company obtained the services of an external actuary to compute the impact to the financial statements upon adoption of the standard. The effects are detailed below:
December 31 2012 2011 January 1, 2011

Increase (decrease) in the statement of financial position: Net retirement liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Surplus. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Increase (decrease) in the statement of income: Net retirement expense (included in Compensation and fringe benefits). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Basic earnings per share. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Increase (decrease) in the statement of other comprehensive income: Remeasurement of defined benefit obligation . . . . . . . . . . . . . . . . . . . . . . .

P 436,548 P 672,975 (P380,538) (773,837) (1,000,543) 337,289 327,569 380,538

(9,721) 9,721 0.01 0.01 (226,706)

52,970 (52,970) (0.06) (0.06) (1,000,543)

The Group is still in the process of quantifying the impact to consolidated financial statements upon the adoption of the standard which it expects will not be material. PAS 27, Separate Financial Statements (as revised in 2011) As a consequence of the issuance of the new PFRS 10, Consolidated Financial Statements, and PFRS 12, Disclosure of Interests in Other Entities, what remains of PAS 27 is limited to accounting for subsidiaries, jointly controlled entities, and associates in the separate financial statements. The adoption of the amended PAS 27 will not have a significant impact on the separate financial statements of the entities in the Group. The amendment becomes effective for annual periods beginning on or after January 1, 2013. PAS 28, Investments in Associates and Joint Ventures (as revised in 2011) As a consequence of the issuance of the new PFRS 11, Joint Arrangements, and PFRS 12, Disclosure of Interests in Other Entities, PAS 28 has been renamed PAS 28, Investments in Associates and Joint Ventures, and describes the application of the equity method to investments in joint ventures in addition to associates. The amendment becomes effective for annual periods beginning on or after January 1, 2013. Philippine Interpretation IFRIC 20, Stripping Costs in the Production Phase of a Surface Mine This interpretation applies to waste removal costs (stripping costs) that are incurred in surface mining activity during the production phase of the mine (production stripping costs). If the benefit from the stripping activity will be realized in the current period, an entity is required to account for the stripping activity costs as part of the cost of inventory. When the benefit is the improved access to ore, the entity should recognize these costs as a non-current asset, only if certain criteria are met (stripping activity asset). The stripping activity asset is accounted for as an addition to, or as an enhancement of, an existing asset. After initial recognition, the stripping activity asset is carried at its cost or revalued amount less depreciation or amortization and less impairment losses, in the same way as the existing asset of which it is a part. The Group expects that this interpretation will not have any impact on its financial position or performance. This interpretation becomes effective for annual periods beginning on or after January 1, 2013. F-37

PAS 32, Financial Instruments: PresentationOffsetting Financial Assets and Financial Liabilities (Amendments) The amendments clarify the meaning of currently has a legally enforceable right to set-off and also clarify the application of the PAS 32 offsetting criteria to settlement systems (such as central clearing house systems) which apply gross settlement mechanisms that are not simultaneous. The amendments affect presentation only and have no impact on the Groups financial position or performance. The amendments to PAS 32 are to be retrospectively applied for annual periods beginning on or after January 1, 2014. PFRS 9, Financial Instruments PFRS 9, as issued, reflects the first phase on the replacement of PAS 39 and applies to the classification and measurement of financial assets and liabilities as defined in PAS 39, Financial Instruments: Recognition and Measurement. Work on impairment of financial instruments and hedge accounting is still ongoing, with a view to replacing PAS 39 in its entirety. PFRS 9 requires all financial assets to be measured at fair value at initial recognition. A debt financial asset may, if the fair value option (FVO) is not invoked, be subsequently measured at amortized cost if it is held within a business model that has the objective to hold the assets to collect the contractual cash flows and its contractual terms give rise, on specified dates, to cash flows that are solely payments of principal and interest on the principal outstanding. All other debt instruments are subsequently measured at fair value through profit or loss. All equity financial assets are measured at fair value either through other comprehensive income (OCI) or profit or loss. Equity financial assets held for trading must be measured at fair value through profit or loss. For FVO liabilities, the amount of change in the fair value of a liability that is attributable to changes in credit risk must be presented in OCI. The remainder of the change in fair value is presented in profit or loss, unless presentation of the fair value change in respect of the liabilitys credit risk in OCI would create or enlarge an accounting mismatch in profit or loss. All other PAS 39 classification and measurement requirements for financial liabilities have been carried forward into PFRS 9, including the embedded derivative separation rules and the criteria for using the FVO. The adoption of the first phase of PFRS 9 will have an effect on the classification and measurement of the Groups financial assets, Group is still evaluating the effects of the adoption of PFRS 9. PFRS 9 is effective for annual periods beginning on or after January 1, 2015. Philippine Interpretation IFRIC 15, Agreements for the Construction of Real Estate This interpretation covers accounting for revenue and associated expenses by entities that undertake the construction of real estate directly or through subcontractors. The interpretation requires that revenue on construction of real estate be recognized only upon completion, except when such contract qualifies as construction contract to be accounted for under PAS 11 or involves rendering of services in which case revenue is recognized based on stage of completion. Contracts involving provision of services with the construction materials and where the risks and reward of ownership are transferred to the buyer on a continuous basis will also be accounted for based on stage of completion. The SEC and the Financial Reporting Standards Council (FRSC) have deferred the effectivity of this interpretation until the final Revenue standard is issued by the International Accounting Standards Board (IASB) and an evaluation of the requirements of the final Revenue standard against the practices of the Philippine real estate industry is completed. Annual Improvements to PFRSs (2009-2011 cycle) The Annual Improvements to PFRSs (2009-2011 cycle) contain non-urgent but necessary amendments to PFRSs. The amendments are effective for annual periods beginning on or after January 1, 2013 and are applied retrospectively. Earlier application is permitted. PFRS 1, First-time Adoption of PFRSBorrowing Costs The amendment clarifies that, upon adoption of PFRS, an entity that capitalized borrowing costs in accordance with its previous generally accepted accounting principles, may carry forward, without any adjustment, the amount previously capitalized in its opening statement of financial position at the date of transition. Subsequent to the adoption of PFRS, borrowing costs are recognized in accordance with PAS 23, Borrowing Costs. The amendment does not apply to the Group as it is not a first-time adopter of PFRS. PAS 1, Presentation of Financial StatementsClarification of the requirements for comparative information The amendments clarify the requirements for comparative information that are disclosed voluntarily and those that are mandatory due to retrospective application of an accounting policy, or retrospective restatement or F-38

reclassification of items in the financial statements. An entity must include comparative information in the related notes to the financial statements when it voluntarily provides comparative information beyond the minimum required comparative period. The additional comparative period does not need to contain a complete set of financial statements. On the other hand, supporting notes for the third balance sheet (mandatory when there is a retrospective application of an accounting policy, or retrospective restatement or reclassification of items in the financial statements) are not required. The amendments affect disclosures only and have no impact on the Groups financial position or performance. PAS 16, Property, Plant and EquipmentClassification of servicing equipment The amendment clarifies that spare parts, stand-by equipment and servicing equipment should be recognized as property, plant and equipment when they meet the definition of property, plant and equipment and should be recognized as inventory if otherwise. The amendment will not have any significant impact on the Groups financial position or performance. PAS 32, Financial Instruments: PresentationTax effect of distribution to holders of equity instruments The amendment clarifies that income taxes relating to distributions to equity holders and to transaction costs of an equity transaction are accounted for in accordance with PAS 12, Income Taxes. The Group expects that this amendment will not have any impact on its financial position or performance. PAS 34, Interim Financial ReportingInterim financial reporting and segment information for total assets and liabilities The amendment clarifies that the total assets and liabilities for a particular reportable segment need to be disclosed only when the amounts are regularly provided to the chief operating decision maker and there has been a material change from the amount disclosed in the entitys previous annual financial statements for that reportable segment. The amendment affects disclosures only and has no impact on the Groups financial position or performance. 3. Significant Accounting Judgments and Estimates

The preparation of the financial statements in compliance with PFRS requires the Group to make judgments and estimates that affect the reported amounts of assets, liabilities, income and expenses and disclosure of contingent assets and contingent liabilities. Future events may occur which will cause the assumptions used in arriving at the estimates to change. The effects of any change in estimates are reflected in the financial statements as they become reasonably determinable. Judgments and estimates are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Judgments (a) Leases Operating lease Group as lessor The Group has entered into commercial property leases on its investment properties and certain motor vehicles and items of machinery. The Group has determined, based on an evaluation of the terms and conditions of the lease agreements (i.e., the lease does not transfer ownership of the asset to the lessee by the end of the lease term, the lessee has no option to purchase the asset at a price that is expected to be sufficiently lower than the fair value at the date the option is exercisable and the lease term is not for the major part of the assets economic life), that it retains all the significant risks and rewards of ownership of these properties and so accounts for these leases as operating leases. Group as lessee The Group has entered into lease on premises it uses for its operations. The Group has determined, based on the evaluation of the terms and conditions of the lease agreement (i.e., the lease does not transfer ownership of the asset to the lessee by the end of the lease term and lease term is not for the major part of the assets economic life), that the lessor retains all the significant risks and rewards of ownership of these properties. F-39

Finance leases The Group has entered into lease arrangements on real estate, various machineries and other types of equipment. The Group has determined that it transfers all the significant risks and rewards of ownership of these properties and so accounts for these leases as finance lease. (b) Fair value of financial instruments Where the fair values of financial assets and financial liabilities recorded in the statement of financial position cannot be derived from active markets, they are determined using a variety of valuation techniques that include the use of mathematical models (see Note 5). The input to these models is taken from observable markets where possible, but where this is not feasible, a degree of judgment is required in establishing fair values. The judgments include considerations of liquidity and model inputs such as correlation and volatility for longer dated derivatives. (c) HTM investments The classification to HTM investment requires significant judgment. In making this judgment, the Group evaluates its intention and ability to hold such investments to maturity. If the Group fails to hold these investments to maturity other than in certain specific circumstancesfor example, selling an insignificant amount close to maturityit will be required to reclassify the entire portfolio as AFS investments. The investments would therefore be measured at fair value and not at amortized cost (see Note 10). (d) Financial assets not quoted in an active market The Group classifies financial assets by evaluating, among others, whether the asset is quoted or not in an active market. Included in the evaluation on whether a financial asset is quoted in an active market is the determination on whether quoted prices are readily and regularly available, and whether those prices represent actual and regularly occurring market transactions on an arms length basis. (e) Embedded derivatives Where a hybrid instrument is not classified as financial assets at FVPL, the Group evaluates whether the embedded derivative should be bifurcated and accounted for separately. This includes assessing whether the embedded derivative has a close economic relationship to the host contract. (f) Contingencies The Group is currently involved in legal proceedings. The estimate of the probable cost for the resolution of claims has been developed in consultation with the aid of the outside legal counsels handling the Groups defense in these matters and is based upon an analysis of potential results. Management does not believe that the outcome of these matters will affect the results of operations. It is probable, however, that future results of operations could be materially affected by changes in the estimates or in the effectiveness of the strategies relating to the proceedings (see Note 32). (g) Functional currency PAS 21 requires management to use its judgment to determine the entitys functional currency such that it most faithfully represents the economic effects of the underlying transactions, events and conditions that are relevant to the entity. In making this judgment, the Group considers the following: a) b) c) the currency that mainly influences prices for financial instruments and services (this will often be the currency in which prices for its financial instruments and services are denominated and settled); the currency in which funds from financing activities are generated; and the currency in which receipts from operating activities are usually retained.

F-40

Estimates (a) Credit losses on loans and receivables and receivables from SPV The Group reviews its impaired loans and receivables at each reporting date to assess whether additional provision for credit losses should be recorded in the statement of income. In particular, judgment by management is required in the estimation of the amount and timing of future cash flows when determining the level of required allowance. Such estimates are based on assumptions about a number of factors and actual results may differ, resulting in future changes to the allowance. In addition to specific allowance against individually significant loans and receivables, the Group also makes a collective impairment allowance against exposures which, although not specifically identified as requiring a specific allowance, have a greater risk of default than when originally granted. This collective allowance takes into consideration any deterioration in the loan or investment rating from the time the account was granted or amended, and such other factors as any deterioration in country risk, industry, and technological obsolescence, as well as identified structural weaknesses or deterioration in cash flows and underlying property prices, among others. Refer to Notes 8 and 9 for the carrying values of loans and receivables and receivable from SPVs, respectively. (b) Fair values of structured debt instruments and derivatives The fair values of structured debt instruments and derivatives that are not quoted in active markets are determined using valuation techniques. Where valuation techniques are used to determine fair values, they are validated and periodically reviewed by qualified personnel independent of the area that created them. All models are reviewed before they are used, and models are calibrated to ensure that outputs reflect actual data and comparative market prices. To the extent practicable, models use only observable data, however, areas such as credit risk (both own and counterparty), volatilities and correlations require management to make estimates. Changes in assumptions about these factors could affect reported fair value of financial instruments. Refer to Notes 5 and 22 for information on the fair values of these instruments. (c) Valuation of unquoted AFS equity investments The Groups investments in equity securities that do not have a quoted market price in an active market and whose fair value cannot be reliably measured are carried at cost. As of December 31, 2012 and 2011, unquoted AFS equity securities amounted to P78.6 million and P161.9 million, respectively, for the Group, and the Parent Company (see Note 10). (d) Impairment of AFS debt investments The Group reviews its debt investments classified as AFS investments at each reporting date to assess whether they are impaired. This requires similar judgment as applied to the individual assessment of loans and receivables. As of December 31, 2012 and 2011, no allowance for impairment losses was provided on AFS debt investments. Refer to Note 10 for the carrying value of AFS debt securities. (e) Impairment of AFS equity investments The Group treats AFS equity investments as impaired when there has been a significant or prolonged decline in the fair value below its cost or where other objective evidence of impairment exists. The determination of what is significant or prolonged requires judgment. The Group treats significant generally as 20.00% or more and prolonged greater than 12 months. In addition, the Group evaluates other factors, including normal volatility in share price for quoted equities and the future cash flows and the discount factors for unquoted equities. As of December 31, 2012 and 2011, allowance for impairment losses on AFS equity investments amounted to P928.4 million and P927.5 million, respectively, for the Group and the Parent Company. Refer to Note 10 for the information on the carrying amounts of these investments. (f) Recognition of deferred tax assets Deferred tax assets are recognized for all unused tax losses and temporary differences to the extent that it is probable that future taxable profit will be available against which the losses can be utilized. Significant F-41

management judgment is required to determine the amount of deferred tax assets that can be recognized, based upon the likely timing and level of future taxable income together with future tax planning strategies. The Groups estimates of future taxable income indicate that certain temporary differences will be realized in the future. As discussed in Note 28, recognized net deferred tax assets as of December 31, 2012 and 2011 amounted to P1.8 billion for the Group and P1.7 billion for the Parent Company. Refer to Note 28 for deferred tax assets not recognized since the Group believes that it is not probable that the related tax benefits will be realized in the future. (g) Present value of retirement obligation The cost of defined benefit pension plan and other post employment benefits is determined using actuarial valuations. The actuarial valuation involves making assumptions about discount rates, expected rates of return on assets, future salary increases, mortality rates and future pension increases. Due to the long term nature of these plans, such estimates are subject to significant uncertainty. As of December 31, 2012 and 2011, the present value of the defined benefit obligation of the Parent Company amounted to P3.1 billion and P2.8 billion, respectively (see Note 26). (h) Revaluation of property and equipment The Group measures the land and buildings under property and equipment at revalued amounts with changes in fair value being recognized in the statement of comprehensive income. The Group engaged independent valuation specialists to determine the fair value of land and buildings as of December 31, 2012. Refer to Note 11 for the carrying values of property and equipment. (i) Impairment of nonfinancial assets Property and equipment, investment in subsidiaries and associates, investment properties, other properties acquired, exchange trading right and software costs An impairment exists when the carrying value of an asset or CGU exceeds its recoverable amount, which is the higher of its fair value less costs to sell and its value in use. The fair value less costs to sell calculation is based on available data from binding sales transactions in an arms length transaction of similar assets or observable market prices less incremental costs for disposing of the asset. The value in use calculation is based on a discounted cash flow model. The Group assesses impairment on assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The factors that the Group considers important which could trigger an impairment review include the following: significant underperformance relative to expected historical or projected future operating results; significant changes in the manner of use of the acquired assets or the strategy for overall business; and significant negative industry or economic trends. The Group uses fair value less cost to sell in determining recoverable amount. Refer to Notes 11, 12, 13 and 14 for the carrying values and allowance for impairment loss of property and equipment, investment in subsidiaries and associates, investment properties, other properties acquired and software costs, respectively. (j) Estimated useful lives of property and equipment. investment properties and software cost The Group estimates the useful lives of its property and equipment, investment properties and software cost. This estimate is reviewed periodically to ensure that the period of depreciation and amortization are consistent with the expected pattern of economic benefits from the items of property and equipment, investment properties, other properties acquired and software cost. Refer to Note 2 for the estimated useful lives of property and equipment, investment properties, other properties acquired and software costs. Refer to Notes 11, 13 and 14 for the carrying values of property and equipment, investment properties, other properties acquired and software cost, respectively. F-42

4.

Financial Risk Management Objectives and Policies

Introduction The Groups activities are principally related to the development, delivery, servicing and use of financial instruments. Risk is inherent in these activities but it is managed through a process of ongoing identification, measurement and monitoring, subject to risk limits and other controls. This process of risk management is critical to the Groups continuing profitability. The Parent Company monitors its processes associated with the following overall risk categories: Credit Risk Market Risk Liquidity Risk Operational Risk Information Security and Technology Risk Further, the Parent Company is also cognizant of the need to address various other risks through the primary divisions presented above. The following are also taken into consideration as part of the overall Enterprise Risk Management (ERM) Framework: Counterparty Risk Business Risk Strategic Risk Compliance Risk Legal Risk Reputational Risk Concentration Risk Country Risk Risks arising from the Parent Companys shareholdings and equity interests Managing the level of these risks as provided for by the Parent Companys ERM framework is critical to its continuing profitability. The Risk Oversight Committee (ROC) of the Parent Companys BOD determines the risk policy and approves the principles of risk management, establishment of limits for all relevant risks, and the risk control procedures. The ROC of the Parent Company is also responsible for the risk management of the Group. The RMG provides the legwork for the ROC in its role of formulating the risk management strategy, the management of regulatory capital, the development and maintenance of the internal risk management framework, and the definition of the governing risk management principles. The mandate of the RMG involves: Implementing the risk management framework of identifying, measuring, controlling and monitoring the various risk taking activities of the Group, inherent in all financial institutions; Providing services to the risk-taking units and personnel in the implementation of risk mitigation strategies; and Establishing recommended limits based on the results of its analysis of exposures. Credit Risk Credit risk is the non-recovery of credit exposures (on-and-off balance sheet exposures). Managing credit risk also involves monitoring of migration risk, concentration risk, country risk and settlement risk. The Group manages its credit risk at various levels (i.e., strategic level, portfolio level down to individual transaction). The credit risk management of the entire loan portfolio is under the direct oversight of the ROC and Executive Committee. Credit risk assessment of individual borrower is performed by the business sector and remedial sector. Risk management is embedded in the entire credit process, i.e., from credit origination to remedial management (if needed). F-43

Among the tools used by the Parent Company in identifying, assessing and managing credit risk include: Documented credit policies and procedures: sound credit granting process, risk asset acceptance criteria, target market and approving authorities; System for administration and monitoring of exposure; Pre-approval review of loan proposals; Post approval review of implemented loans; Work out system for managing problem credits; Regular review of the sufficiency of valuation reserves; Monitoring of the adequacy of capital for credit risk via the Capital Adequacy Ratio (CAR) report; Monitoring of breaches in regulatory and internal limits; Credit Risk Management Dashboard; Diversification; Internal Risk Rating System for corporate accounts; Credit Scoring for retail accounts; and Active loan portfolio management undertaken to determine the quality of the loan portfolio and identify the following: a. b. c. d. e. f. portfolio growth movement of loan portfolio (cash releases and cash collection for the month) loss rate recovery rate trend of nonperforming loans (NPLs) concentration risk (per classified account, per industry, clean exposure, large exposure, contingent exposure, currency, security, facility, demographic, etc)

Continuous changes have been made in the policies, procedures, system and quality of people. The Parent Company has moved one step further by collecting data on risk rating of loan borrowers with an asset size of P15.0 million and above as initial requirement in the Parent Companys model for internal Probability of Default (PD) and Loss Given Default (LGD). Credit-related commitments The exposures represent guarantees, standby letters of credit (LCs) issued by the Parent Company and documentary/commercial LCs which are written undertakings by the Parent Company. To mitigate this risk the Parent Company requires hard collaterals, as discussed under Collateral and other credit enhancement, for standby LCs lines while commercial LCs are collateralized by the underlying shipments of goods to which they relate. Derivative financial instruments Credit risk arising from derivative financial instruments is, at any time, limited to those with positive fair values, as recorded in the statement of financial position. Collateral and other credit enhancement As a general rule, character is the single most important consideration in granting loans. However, collaterals are requested to mitigate risk. The loan value and type of collateral required depend on the assessment of the credit risk of the borrower or counterparty. The Group follows guidelines on the acceptability of types of collateral and valuation parameters. The main types of collateral obtained are as follows: For corporate accountscash, guarantees, securities, physical collaterals (e.g., real estate, chattels, inventory, etc.); as a general rule, commercial, industrial and residential lots are preferred For retail lendingmortgages on residential properties and vehicles financed F-44

The disposal of the foreclosed properties is handled by the Asset Management Sector which adheres to the general policy of disposing assets at the highest possible market value. Management regularly monitors the market value of the collateral and requests additional collateral in accordance with the underlying agreement. The existing market value of the collateral is considered during the review of the adequacy of the allowance for credit losses. Generally, collateral is not held over loans and advances to banks except for reverse repurchase agreements. The Group is not permitted to sell or repledge the collateral in the absence of default by the owner of the collateral. Credit risk exposures The table below shows the maximum exposure for loans and receivable to credit risk (amounts in millions):
Consolidated December 31, 2012 December 31, 2011 Maximum Exposure Maximum Exposure After Financial After Financial Effect of Effect of Collateral or Collateral or Before Credit Before Credit Collateral Enhancement Collateral Enhancement

Securities Held Under Agreements to Resell . . . . . . . . . . . Loans and receivables: Receivable from customers*: Business loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . GOCCs and National Government Agencies (NGAs). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . LGUs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consumers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fringe benefits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unquoted debt securities . . . . . . . . . . . . . . . . . . . . . . . . Other receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P 18,300

P 18,300

83,382 24,410 7,157 11,197 644 3,859 14,057 P163,006

55,577 17,179 6,288 4,757 169 1,118 10,927 P96,015

67,327 27,774 5,900 7,522 697 4,589 12,440 P144,549

42,824 27,753 4,794 2,356 178 1,662 9,288 P88,855

The Group follows the BOD approved policy on the generic classification of loans based on the type of borrowers and the purpose of the loan.
Parent Company December 31, 2012 December 31, 2011 Maximum Exposure Maximum Exposure After Financial After Financial Effect of Effect of Collateral or Collateral or Before Before Credit Credit Collateral Collateral Enhancement Enhancement

Securities Held Under Agreements to Resell . . . . . . . . . . . Loans and receivables: Receivable from customers*: Business loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . GOCCs and National Government Agencies (NGAs). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . LGUs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consumers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fringe benefits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unquoted debt securities . . . . . . . . . . . . . . . . . . . . . . . . Other receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P 18,300

P 18,300

80,968 24,410 7,157 11,102 630 3,859 12,009 P158,435

55,877 17,179 6,288 4,751 165 1,118 8,879 P94,257

65,641 27,774 5,900 7,418 687 4,589 10,643 P140,952

41,146 27,753 4,794 2,337 168 1,662 7,492 P85,352

The Group follows the BOD approved policy on the generic classification of loans based on the type of borrowers and the purpose of the loan.

F-45

As of December 31, 2012 and 2011, fair value of collateral held for loans and receivables amounted to P234.7 billion and P191.0 billion, respectively, for the Group and P231.9 billion and P190.7 billion, respectively, for the Parent Company. The maximum exposure to credit risks for the other financial assets is limited to the carrying value as of December 31, 2012 and 2011. Excessive risk concentration Credit risk concentrations can arise whenever a significant number of borrowers have similar characteristics. The Parent Company analyzes the credit risk concentration to an individual borrower, related group of accounts, industry, geographic, internal rating buckets, currency, term and security. For risk concentration monitoring purposes, the financial assets are broadly categorized into (1) loans and receivables and (2) trading and financial investment securities. To mitigate risk concentration, the Parent Company constantly checks for breaches in regulatory and internal limits. Clear escalation process and override procedures are in place, whereby any excess in limits are covered by appropriate approving authority to regularize and monitor breaches in limits. a. Limit per Client or Counterparty For loans and receivables, the Parent Company sets an internal limit for group exposures which is equivalent to 100.00% of the single borrowers limit (SBL) for loan accounts with credit risk rating (CRR) 1 to CRR 5 or 50.00% of SBL if rated below CRR 5. For trading and investment securities, the Group limits investments to government issues and securities issued by entities with high-quality investment ratings. b. Geographic Concentration The table below shows the credit risk exposures, before taking into account any collateral held or other credit enhancements, categorized by geographic location (in millions):
Consolidated December 31, 2012 December 31, 2011 January 1, 2011 (As Restated) December 31, 2012 Parent Company December 31, 2011 January 1, 2011 (As Restated)

Philippines. . . . . . . . . . . . . . . . USA and Canada . . . . . . . . . . Asia (excluding the Philippines). . . . . . . . . . . . . United Kingdom. . . . . . . . . . . Other European Union Countries . . . . . . . . . . . . . . . Middle East . . . . . . . . . . . . . . .

Q267,338 4,238 6,107 5,355 3,706 2 Q286,746

P246,095 13,430 4,124 2,972 829 6 P267,456

P213,795 15,224 3,862 8,919 8,647 1,360 Q251,807

Q261,071 2,976 5,653 5,113 3,676 2 Q278,491

P241,797 11,026 3,551 2,678 727 6 Q259,785

P210,619 12,875 3,386 7,924 8,522 1,360 Q244,686

F-46

c.

Concentration by Industry The tables below show the industry sector analysis of the Groups and Parent Companys financial assets at amounts before taking into account the fair value of the loan collateral held or other credit enhancements (amounts in millions).
Consolidated December 31, 2012 December 31, 2011 January 1, 2011 (As Restated) December 31, 2012 Parent Company December 31, 2011 January 1, 2011 (As Restated)

Loans and Receivables Receivable from customers: Primary target industry: Public administration and defense. . . . . . . . . . . . . . Wholesale and retail . . . . Transport, storage and communication . . . . . . Electricity, gas and water. . . . . . . . . . . . . . . . Manufacturing. . . . . . . . . . Financial intermediaries . . . . . . . . Agriculture, hunting and forestry. . . . . . . . . . . . . . Secondary target industry: Real estate, renting and business activities . . . . Construction . . . . . . . . . . . Others*. . . . . . . . . . . . . . . . Unquoted debt securities: Government . . . . . . . . . . . . . . . . Financial intermediaries. . . . . . Manufacturing . . . . . . . . . . . . . .

Q 22,623 20,682 16,335 18,104 11,637 10,172 2,774

P 21,526 20,490 16,574 14,504 11,153 5,550 2,564

7,951 23,368 11,397 12,991 10,613 3,986 3,194

Q 22,595 20,378 16,034 18,104 10,984 10,158 2,580

P 21,526 20,260 16,026 14,504 10,572 5,519 2,496

7,668 23,165 12,991 11,397 9,960 3,857 3,153

9,898 2,345 12,222 3,699 160 3,859

7,088 1,158 8,613 3,799 400 390 4,589 12,440 126,249

7,160 786 7,875 6,623 329 674 7,626 13,368 110,315

9,859 2,145 11,432 3,699 160 3,859 12,009 140,137

7,073 988 8,456 3,799 400 390 4,589 10,644 122,653

6,347 786 8,300 6,623 329 674 7,626 11,292 106,542

Other receivables . . . . . . . . . . . . . . . .

14,057 144,708

Trading and Financial Investment Securities Government . . . . . . . . . . . . . . . . . . . . Financial intermediaries . . . . . . . . . . Others. . . . . . . . . . . . . . . . . . . . . . . . . . Electricity, gas and water . . . . . . . . . Real estate, renting and business activities . . . . . . . . . . . . . . . . . . . . . Manufacturing . . . . . . . . . . . . . . . . . .

57,865 7,096 2,352 2,461 1,225 22 71,021

44,896 9,456 2,021 1,632 1,154 41 59,200 79,974 2,033 82,007 P267,456

69,907 17,006 1,742 26 59 88,740 32,421 20,331 52,752 P251,807

56,159 6,807 2,176 2,451 1,118 19 68,730 69,623 1 69,624 Q278,491

43,494 9,422 1,559 1,632 1,154 41 57,302 77,797 2,033 79,830 P259,785

68,708 16,944 1,312 26 56 87,046 35,322 15,776 51,098 P244,686

Other Financial Assets** Financial intermediaries . . . . . . . . . . Government . . . . . . . . . . . . . . . . . . . . Others. . . . . . . . . . . . . . . . . . . . . . . . . .

71,016 1 71,017 Q286,746

* **

Others include the following sectorsOther community, social and personal services, private household, hotel and restaurant, education, mining and quarrying, and health and social work. Other financial assets include the following financial assets: Due from BSP, Due from other bank, Interbank loans receivable, Securities held under agreements to resell, Receivable from SPV, Miscellaneous COCI and Commitments.

The internal limit of the Parent Company based on the Philippine Standard Industry Classification (PSIC) sub-industry is 12.00% for priority industry, 8.00% for regular industry and 30.00% for power industry, versus total loan portfolio.

F-47

Credit quality per class of financial assets The credit quality of financial assets is assessed and managed using external and internal ratings. For receivable from customers classified as business loans, the credit quality is generally monitored using the 14 grade Credit Risk Rating (CRR) System which is integrated in the credit process particularly in loan pricing and allocation of valuation reserves. The model on risk ratings is assessed and updated regularly. Validation of the individual internal risk rating is conducted by the Credit Management Division to maintain accurate and consistent risk ratings across the credit portfolio. The rating system has two parts, namely, the borrowers rating and the facility rating. It is supported by a variety of financial analytics, combined with an assessment of management and market information such as industry outlook and market competition to provide the main inputs for the measurement of credit or counterparty risk. The CRRs of the Parent Companys Receivables from customers classified as business loans are defined below: CRR 1Excellent Loans receivables rated as excellent include borrowers which are significant in size, with long and successful history of operations, an industry leader, with ready access to all equity and debt markets and have proven its strong debt service capacity. CRR 2Super Prime Loans receivables rated as super prime include borrowers whose ability to service all debt and meet financial obligations remains unquestioned. CRR 3Prime Under normal economic conditions, borrowers in this rating have good access to public market to raise funds and face no major uncertainties which could impair repayment. CRR 4Very Good Loans receivables rated as very good include borrowers whose ability to service all debts and meet financial obligations remain unquestioned, but current adverse economic conditions or changing circumstances have minimal impact on payment of obligations. CRR 5Good Loans receivables rated as good include borrowers with good operating history and solid management, but payment capacity could be vulnerable to adverse business, financial or economic conditions. CRR 6Satisfactory These are loans receivables to borrowers whose ability to service all debt and meet financial obligations remains unquestioned, but with somewhat lesser capacity than in CRR 5 accounts. CRR 7Average These are loans receivables to borrowers having ability to repay the loan in the normal course of business activity, although may not be strong enough to sustain a major setback. CRR 8Fair These are loans receivables to borrowers possessing the characteristics of borrowers rated as CRR7 with slightly lesser quality in financial strength, earnings, performance and/or outlook. CRR 9Marginal These are performing loans receivables from borrowers not qualified as CRRs 1-8. The borrower is able to withstand normal business cycles, although any prolonged unfavorable economic and/or market period would create an immediate deterioration beyond acceptable levels. F-48

CRR 10Watchlist This rating includes borrower where the credit exposure is not at risk of loss at the moment but the performance of the borrower has weakened and, unless present trends are reversed, could eventually lead to losses. CRR 11Special Mention These are loans that have potential weaknesses that deserve managements close attention. These potential weaknesses, if left uncorrected, may affect the repayment of the loan and thus increase credit risk to the Parent Company. CRR 12Substandard These are loans or portions thereof which appear to involve a substantial and unreasonable degree of risk to the Parent Company because of unfavorable record or unsatisfactory characteristics. CRR 13Doubtful These are loans or portions thereof which have the weaknesses inherent in those classified as CRR 12 with the added characteristics that existing facts, conditions and values make collection or liquidation in full highly improbable and in which substantial loss is probable. CRR 14Loss These are loans or portions thereof which are considered uncollectible or worthless. The Parent Company is using the Credit Scoring for evaluating borrowers with assets size below P15.0 million. Credit scoring details the financial capability of the borrower to pay for any future obligation. GOCCs and LGUs are rated using the means and purpose test whereby borrowers have to pass the two major parameters, namely: Means testthe borrower must have resources or revenues of its own sufficient to service its debt obligations. Purpose testthe loan must be obtained for a purpose consistent with the borrowers general business. LGU loans are backed-up by assignment of Internal Revenue Allotment. Consumer loans are covered by mortgages in residential properties and vehicles financed. Fringe benefit loans are repaid through automatic salary deductions and exposure is secured by mortgage on house or vehicles financed. The table below shows the Groups and Parent Companys receivable from customers, gross of allowance for credit losses and unearned and other deferred income, for each CRR as of December 31, 2012 and 2011 (in millions).
Consolidated December 31, 2012 Neither Past Due Past Due or nor Individually Individually Impaired Impaired

Total

Rated Receivable from Customers 1Excellent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2Super Prime . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3Prime . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4Very Good . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5Good . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6Satisfactory. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7Average . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8Fair. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9Marginal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10Watchlist. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11Special Mention. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12Substandard . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13Doubtful . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q 10,948 33,489 11,261 6,418 16,464 4,897 7,057 2,646 1,820 4,353 2,321 271 101,945

Q 2 19 1 5 6 9 764 2,449 2,665 5,920

Q 10,948 33,489 11,261 6,418 16,466 4,897 7,076 2,647 1,825 4,359 2,330 1,035 2,449 2,665 107,865

F-49

Consolidated December 31, 2012 Neither Past Due Past Due or nor Individually Individually Impaired Impaired

Total

Unrated Receivable from Customers Business Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . GOCCs and NGAs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . LGUs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consumers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fringe Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2,562 1,391 6,868 10,687 622 22,130 Q124,075

237 1,651 419 770 37 3,114 Q9,034

2,799 3,042 7,287 11,457 659 25,244 Q133,109

Consolidated December 31, 2011 Neither Past Due Past Due or nor Individually Individually Impaired Impaired

Total

Rated Receivable from Customers 1Excellent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2Super Prime . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3Prime . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4Very Good . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5Good . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6Satisfactory. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7Average . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8Fair. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9Marginal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10Watchlist. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11Special Mention. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12Substandard . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13Doubtful . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrated Receivable from Customers Business Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . GOCCs and NGAs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . LGUs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consumers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fringe Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

6,302 23,192 4,924 7,105 14,587 9,102 1,552 4,342 1,316 1,198 147 488 74,255 6,460 12,168 5,576 7,162 652 32,018

Q 73 4 15 14 20 7 45 448 2,495 2,788 5,909 349 1,763 398 798 60 3,368 Q9,277

6,302 23,192 4,924 7,105 14,660 9,106 1,567 4,356 1,336 1,205 192 936 2,495 2,788 80,164 6,809 13,931 5,974 7,960 712 35,386

Q106,273

Q115,550

F-50

Parent Company December 31, 2012 Neither Past Due Past Due or nor Individually Individually Impaired Impaired

Total

Rated Receivable from Customers 1Excellent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2Super Prime . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3Prime . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4Very Good . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5Good . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6Satisfactory. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7Average . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8Fair. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9Marginal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10Watchlist. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11Special Mention. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12Substandard . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13Doubtful . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrated Receivable from Customers Business Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . GOCCs and NGAs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . LGUs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consumers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fringe Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P 10,948 33,489 11,261 6,418 16,464 5,461 4,250 2,646 1,820 4,353 2,321 271 99,702 2,230 1,391 6,868 10,595 608 21,692 P121,394

P 2 19 1 5 6 9 578 2,449 2,658 5,727 237 1,651 419 752 37 3,096 P8,823

P 10,948 33,489 11,261 6,418 16,466 5,461 4,269 2,647 1,825 4,359 2,330 849 2,449 2,658 105,429 2,467 3,042 7,287 11,347 645 24,788 P130,217

Parent Company December 31, 2011 Neither Past Due Past Due or nor Individually Individually Impaired Impaired

Total

Rated Receivable from Customers 1Excellent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2Super Prime . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3Prime . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4Very Good . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5Good . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6Satisfactory. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7Average . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8Fair. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9Marginal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10Watchlist. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11Special Mention. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12Substandard . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13Doubtful . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrated Receivable from Customers Business Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . GOCCs and NGAs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . LGUs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consumers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fringe Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

6,302 23,192 4,924 7,704 14,587 9,102 1,552 4,342 1,316 1,199 147 488 74,855 3,768 12,168 5,576 7,053 642 29,207

P 73 4 15 14 20 7 45 381 2,495 2,780 5,834 349 1,763 398 739 60 3,309 P9,143

6,302 23,192 4,924 7,704 14,660 9,106 1,567 4,356 1,336 1,206 192 869 2,495 2,780 80,689 4,117 13,931 5,974 7,792 702 32,516

P104,062

P113,205

F-51

Under PFRS 7, a financial asset is past due when a counterparty has failed to make a payment when contractually due. The table below shows the aging analysis of past due but not impaired loans receivables per class (in millions).
Consolidated December 31, 2012 Less than 30 days 31 to 90 days 91 to 180 days Total

Consumers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Business loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . LGUs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . GOCCs and NGAs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fringe benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q 53 6 133 1 Q193

Q 57 39 1 Q 97

Q211 460 12 Q683

Q321 505 133 14 Q973

Consolidated December 31, 2011 Less than 30 days 31 to 90 days 91 to 180 days Total

Consumers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Business loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . LGUs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . GOCCs and NGAs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fringe benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4 77 85

P 14 58 P 72

P 358 753 10 2 15 P1,138

P 376 888 95 2 15 P1,376

P166

Parent Company December 31, 2012 Less than 30 days 31 to 90 days 91 to 180 days Total

Consumers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Business loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . LGUs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . GOCCs and NGAs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fringe benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q 51 6 133 1 Q191

Q 57 39 1 Q 97

Q211 267 12 Q490

Q319 312 133 14 Q778

Parent Company December 31, 2011 Less than 30 days 31 to 90 days 91 to 180 days Total

Consumers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Business loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . LGUs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . GOCCs and NGAs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fringe benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4 74 85

P 14 52 P 66

P 358 737 10 2 15 P1,122

P 376 863 95 2 15 P1,351

P163

F-52

Below are the financial assets of the Group and the Parent Company, excluding loans receivables, which are monitored using external ratings (in millions).
Consolidated December 31, 2012 Rated Aaa to Aa3 A1 to A3 Baa1 and below Subtotal Unrated(7) Total

Due from BSP(1) . . . . . . . . . . . . . . . . . . . . . . . . . . Due from other banks. . . . . . . . . . . . . . . . . . . . . . Interbank loans receivables . . . . . . . . . . . . . . . . . Securities held under agreements to resell(2) . . Financial assets at FVPL: Held-for-trading: Government securities . . . . . . . . . . . . Derivative assets(3) . . . . . . . . . . . . . . . Equity securities . . . . . . . . . . . . . . . . . Private debt securities. . . . . . . . . . . . . Designated at FVPL: Private debt securities. . . . . . . . . . . . . Loans and receivables: Unquoted debt securities(4) . . . . . . . . . . . . . Others(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . AFS investments: Government securities. . . . . . . . . . . . . . . . . Other debt securities . . . . . . . . . . . . . . . . . . Quoted equity securities . . . . . . . . . . . . . . . Unquoted equity securities . . . . . . . . . . . . . Miscellaneous COCI . . . . . . . . . . . . . . . . . . . . . .

Q 899 2,143 2 748 1,434 13

Q 1,316 6,730 274

Q Q37,175 Q37,175 973 3,188 855 4,043 1,847 10,720 779 11,499 18,300 18,300 907 114 31 44,771 3,255 134 907 390 31 45,519 4,689 147 1,064 65 250 99 1,248 3,828 14,057 10,039 6,231 293 79 1 1,971 455 250 99 1,248 3,859 14,057 55,558 10,920 440 79 1

Consolidated December 31, 2011 Rated Aaa to Aa3 A1 to A3 Baa1 and below Subtotal Unrated(7) Total

Due from .......................... Due from other banks. . . . . . . . . . . . . . . . . . . . . . Interbank loans receivables . . . . . . . . . . . . . . . . . Securities held under agreements to resell(2) . . . . Financial assets at FVPL: Held-for-trading: Government securities . . . . . . . . . . . . Derivative assets(3) . . . . . . . . . . . . . . . Equity securities . . . . . . . . . . . . . . . . . Private debt securities. . . . . . . . . . . . . Designated at FVPL: . . . . . . . . . . . . . . . . . . Private debt securities. . . . . . . . . . . . . Loans and receivables: . . . . . . . . . . . . . . . . . . . . . Unquoted debt securities(4) . . . . . . . . . . . . . Others(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . AFS investments: . . . . . . . . . . . . . . . . . . . . . . . . . Government securities. . . . . . . . . . . . . . . . . Other debt securities . . . . . . . . . . . . . . . . . . Quoted equity securities . . . . . . . . . . . . . . . Unquoted equity securities . . . . . . . . . . . . . Miscellaneous COCI . . . . . . . . . . . . . . . . . . . . . .

BSP(1)

P 2,086 1,631 84 1 1,169 1,233

P 2,830 1,498 196 4,051 350

P P38,153 P38,153 1,132 6,048 376 6,424 1,913 5,042 12,056 17,098 18,300 18,300 2,174 123 40,269 4,352 131 2,174 403 1 4,051 41,788 5,585 131 5 51 175 16 4,589 12,440 826 3,807 37 150 5 2,179 454 175 17 4,051 4,589 12,440 42,614 9,392 37 281 5

F-53

Aaa to Aa3

Consolidated January 1, 2011 (As Restated) Rated Baa1 A1 to A3 and below Subtotal Unrated(7)

Total

Due from BSP(1) . . . . . . . . . . . . . . . . . . . . . . . . . . Due from other banks. . . . . . . . . . . . . . . . . . . . . . Interbank loans receivables . . . . . . . . . . . . . . . . . Securities held under agreements to resell(2) . . Financial assets at FVPL: Held-for-trading: Government securities . . . . . . . . . . . . Derivative assets(3) . . . . . . . . . . . . . . . Equity securities . . . . . . . . . . . . . . . . . Designated at FVPL: Private debt securities. . . . . . . . . . . . . Loans and receivables: . . . . . . . . . . . . . . . . . . . . . Unquoted debt securities(4) . . . . . . . . . . . . . Others(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . AFS investments: Government securities. . . . . . . . . . . . . . . . . Other debt securities . . . . . . . . . . . . . . . . . . Unquoted equity securities . . . . . . . . . . . . . Quoted equity securities . . . . . . . . . . . . . . . HTM investments: Government securities. . . . . . . . . . . . . . . . . Other debt securities . . . . . . . . . . . . . . . . . . Miscellaneous COCI . . . . . . . . . . . . . . . . . . . . . .

P 540 9,394 1 62 75 2,143 446 1,211 602 2,249

P 1,995 2,430 39 682 435

P P24,286 P24,286 1,342 3,877 1,265 5,142 238 12,062 630 12,692 6,800 6,800 9,549 808 17 2,446 177 2,120 26,011 2,755 77 32,138 2,804 9,550 909 92 5,271 177 2,120 26,457 3,966 77 32,740 5,488 49 2 108 7,449 11,292 1,111 2,469 357 94 2 9,599 911 200 5,271 7,626 13,412 27,568 6,435 357 171 32,740 5,488 2

Parent Company December 31, 2012 Rated Aaa to Aa3 A1 to A3 Baa1 and below Subtotal Unrated(7) Total

Due from .......................... Due from other banks. . . . . . . . . . . . . . . . . . . . . . Interbank loans receivables . . . . . . . . . . . . . . . . . Securities held under agreements to resell(2) . . Financial assets at FVPL: Held-for-trading: Government securities . . . . . . . . . . . . Derivative assets(3) . . . . . . . . . . . . . . . Equity securities . . . . . . . . . . . . . . . . . Private debt securities. . . . . . . . . . . . . Designated at FVPL: Private debt securities. . . . . . . . . . . . . Loans and receivables: Unquoted debt securities(4) . . . . . . . . . . . . . Others(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . AFS investments: Government securities. . . . . . . . . . . . . . . . . Other debt securities . . . . . . . . . . . . . . . . . . Quoted equity securities . . . . . . . . . . . . . . . Unquoted equity securities . . . . . . . . . . . . . Miscellaneous COCI . . . . . . . . . . . . . . . . . . . . . .

BSP(1)

Q 774 2,143 2 219 1,087

Q 1,316 6,730 274

Q Q36,531 Q36,531 349 2,439 855 3,294 1,847 10,720 779 11,499 18,300 18,300 907 114 31 43,798 3,245 907 390 31 44,017 4,332 1,064 65 192 99 1,248 3,828 12,009 9,805 6,220 310 79 1 1,971 455 192 99 1,248 3,859 12,009 53,822 10,552 310 79 1

F-54

Parent Company December 31, 2011 Aaa to Aa3 A1 to A3 Rated Baa1 and below Subtotal Unrated(7) Total

Due from BSP(1) . . . . . . . . . . . . . . . . . . . . . . Due from other banks . . . . . . . . . . . . . . . . . Interbank loans receivables. . . . . . . . . . . . . Securities held under agreements to resell(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial assets at FVPL: Held-for-trading: Government securities . . . . . . . . Derivative assets(3) . . . . . . . . . . . Equity securities . . . . . . . . . . . . . Private debt securities . . . . . . . . Designated at FVPL: Private debt securities . . . . . . . . Loans and receivables: Unquoted debt securities(4) . . . . . . . . . Others(5) . . . . . . . . . . . . . . . . . . . . . . . . . AFS investments: Government securities . . . . . . . . . . . . Other debt securities . . . . . . . . . . . . . . Quoted equity securities . . . . . . . . . . . Unquoted equity securities. . . . . . . . . Miscellaneous COCI . . . . . . . . . . . . . . . . . .

P 1,387 1,631 84 1 1,081 1,107

P 2,830 1,498 196 4,050 350

314 1,913 2,174 123 39,787 4,110

P37,493 P37,493 4,531 376 4,907 5,042 12,056 17,098 2,174 403 1 4,050 41,218 5,217 18,300 5 51 173 16 4,589 10,644 3,795 37 263 5 18,300 2,179 454 173 17 4,050 4,589 10,644 41,218 9,012 37 263 5

Aaa to Aa3

Parent Company January 1, 2011 (As Restated) Rated A1 to A3 Baa1 and below Subtotal Unrated(7)

Total

Due from ...................... Due from other banks . . . . . . . . . . . . . . . . . Interbank loans receivables. . . . . . . . . . . . . Securities held under agreements to resell(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial assets at FVPL: Held-for-trading: Government securities . . . . . . . . Derivative assets(3) . . . . . . . . . . . Equity securities . . . . . . . . . . . . . Designated at FVPL: Private debt securities . . . . . . . . Loans and receivables: Unquoted debt securities(4) . . . . . . . . . Others(5) . . . . . . . . . . . . . . . . . . . . . . . . . Receivable from SPV(6) . . . . . . . . . . . . . . . . AFS investments: Government securities . . . . . . . . . . . . Other debt securities . . . . . . . . . . . . . . Unquoted equity securities. . . . . . . . . Quoted equity securities . . . . . . . . . . . HTM investments: Government securities . . . . . . . . . . . . Other debt securities . . . . . . . . . . . . . . Miscellaneous COCI . . . . . . . . . . . . . . . . . .

BSP(1)

P 469 9,394 1 85 75 2,143 446 1,085 514 2,171

P 1,994 2,192 27 682 435

204 29 9,549 798 17 2,446 177

P24,274 P24,274 2,667 1,279 3,946 11,615 630 12,245 9,550 910 92 5,271 177 6,800 49 1 95 7,449 11,292 624 2,522 357 54 2 6,800 9,599 911 187 5,271 7,626 11,292 624 26,457 6,071 357 54 32,652 5,489 2

26,011 2,464 32,138 2,883

26,457 3,549 32,652 5,489

(1) COCI are unsettled demand items delivered to the Philippine Clearing House Corporation and Due from BSP is composed of interest-earning short-term placements with the BSP and a demand deposit account to support the regular operations of the Parent Company. (2) Securities held under agreements to resell represent overnight lending to the BSP collateralized by securities. The interest rate applicable is fixed by the BSP through a memorandum. (3) Derivative assets represent the value of credit derivatives embedded in host contracts issued by financial intermediaries and the mark-to-market valuation of freestanding derivatives (see Note 22). F-55

(4) Unquoted debt securities represent investments in bonds and notes not quoted in the market issued by financial intermediaries, government and private entities. (5) Loans and receivablesOthers is composed of Accrued interest receivable, Accounts receivable, Sales contracts receivable and other miscellaneous receivables (see Note 8) (6) Receivable from SPV represent notes received from the sale of NPAs to SPV (see Note 9) (7) As of December 31, 2012 and 2011, and January 1, 2011, financial assets that are unrated are neither past due nor impaired. Impairment assessment The Group recognizes impairment/credit losses based on the results of specific (individual) and collective assessment of its credit exposures. Impairment has taken place when there are presence of known difficulties in the payment of obligation by counterparties, a significant credit rating downgrade takes place, infringement of the original terms of the contract has happened, or when there is an inability to pay principal or interest overdue beyond a certain threshold (e.g., 90 days). These and other factors, either singly or in tandem with other factors, constitute observable events and/or data that meet the definition of an objective evidence of impairment. The two methodologies applied by the Group in assessing and measuring impairment/credit losses include: a. Specific (individual) assessment The Group assesses each individually significant credit exposure or advances for any objective evidence of impairment. Among the items and factors considered by the Group when assessing and measuring specific impairment/ credit allowances are: the going concern of the borrowers business; the ability of the borrower to repay its obligations during financial crises; the projected receipts or expected cash flows; the availability of other sources of financial support; the existing realizable value of collateral; and the timing of the expected cash flows. The impairment/credit allowances, if any, are evaluated every quarter or as the need arises in view of favorable or unfavorable developments. b. Collective assessment Loans and advances that are not individually significant (e.g., credit cards, housing loans, car loans, development incentives loans, fringe benefit loans) and individually significant loans and advances where there is no apparent evidence of individual impairment are collectively assessed for impairment. A particular portfolio is reviewed every quarter to determine its corresponding appropriate allowances. Impairment losses are estimated by taking into consideration the following information: historical losses of the portfolio; current adverse economic conditions that have direct impact on the portfolio; losses which are likely to occur but has not yet occurred; and expected receipts and recoveries once impaired. See Note 15 for more detailed information on the allowance for credit losses on loans and receivables and other financial assets. Liquidity Risk and Funding Management Liquidity risk is generally defined as the current and prospective risk to earnings or capital arising from the Parent Companys inability to meet its obligations when they come due without incurring unacceptable losses or costs. F-56

The Parent Companys liquidity management involves maintaining funding capacity to accommodate fluctuations in asset and liability levels due to changes in the Parent Companys business operations or unanticipated events created by customer behavior or capital market conditions. The Parent Company seeks to ensure liquidity through a combination of active management of liabilities, a liquid asset portfolio composed substantially of deposits in primary and secondary reserves, and the securing of money market lines and the maintenance of repurchase facilities to address any unexpected liquidity situations. Liquidity risk is monitored and controlled primarily by a gap analysis of maturities of relevant assets and liabilities reflected in the maximum cumulative outflow (MCO) report, as well as an analysis of available liquid assets. The MCO focuses on a 12-month period wherein the 12-month cumulative outflow is compared to the acceptable MCO limit set by the BOD. Furthermore, an internal liquidity ratio has been set to determine sufficiency of liquid assets over deposit liabilities. Liquidity is monitored by the Parent Company on a daily basis through the Treasury Group. Likewise, the RMG monitors the static liquidity via the MCO under normal and stressed scenarios.

F-57

The table below shows the financial assets and financial liabilities liquidity information which includes coupon cash flows categorized based on the expected date on which the asset will be realized and the liability will be settled. For other assets, the analysis into maturity grouping is based on the remaining period from the end of the reporting period to the contractual maturity date or if earlier than the expected date the assets will be realized (in millions).
Consolidated December 31, 2012 Up to 1 month 1 to 3 months 3 to 6 months 6 to 12 months Beyond 1 year Total

Financial Assets COCI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due from BSP and other banks . . . . . . . . . . . Interbank loans receivable . . . . . . . . . . . . . . . Securities held under agreements to resell. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial assets at FVPL: Held-for-trading: Government securities. . . . . . . . . . Equity securities . . . . . . . . . . . . . . . Private debt securities . . . . . . . . . . Derivative assets Pay . . . . . . . . . . . . . . . . . . . . . . Receive . . . . . . . . . . . . . . . . . . Designated at FVPL: Private debt securities . . . . . . . . . . Loans receivablesgross. . . . . . . . . . . . . . . . Unquoted debt securitiesgross. . . . . . . . . . Other receivablesgross . . . . . . . . . . . . . . . . AFS investments . . . . . . . . . . . . . . . . . . . . . . . Miscellaneous COCI . . . . . . . . . . . . . . . . . . . . Total financial assets . . . . . . . . . . . . . . . . . . . . Financial Liabilities Deposit liabilities: Demand. . . . . . . . . . . . . . . . . . . . . . . . . . . Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial liability at FVPL. . . . . . . . . . . . . . . Derivative liabilities: Pay . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Receive . . . . . . . . . . . . . . . . . . . . . . . . . . . Bills and acceptances payable . . . . . . . . . . . . Subordinated debt . . . . . . . . . . . . . . . . . . . . . . Accrued interest payable and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total financial liabilities . . . . . . . . . . . . . . . . .

5,599 Q 39,692 11,129 18,304 1,978 251 100 6,056 6,079 23

Q 435 251 14 1 716 788 72

Q Q 1,101 119 19 1 22 24 2 36 3 67 153 86 2,125 17 1,487 Q4,855

677 29 52 222 170

5,599 41,228 11,499 18,304 2,724 251 134 6,913 7,266 353

4 24,188 3,962 18,934 557 1 Q124,722

8 13,517 44 2,643 Q16,985

1,255 5,862 9 2,773 Q10,040

125,258 3,950 100,702 Q230,786

1,267 170,950 7,982 18,934 108,162 1 Q387,388

Q 28,152 Q Q Q Q Q 28,152 151,002 17,838 7,979 4,892 12,636 194,347 7,524 2,821 1,481 1,784 6,325 19,935 43 85 6,311 6,439 9,798 9,677 121 7,753 54 10,828 Q205,477 1,162 1,123 39 4,182 107 390 Q25,462 476 452 24 806 161 1 Q16,763 608 518 90 40 322 374 Q7,502 213 52 161 309 11,742 3,486 Q 34,659 12,257 11,822 435 13,090 12,386 15,079 Q289,863

F-58

Up to 1 month

1 to 3 months

Consolidated December 31, 2011 3 to 6 6 to 12 months months

Beyond 1 year

Total

Financial Assets COCI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due from BSP and other banks . . . . . . . . . . Interbank loans receivable . . . . . . . . . . . . . . Securities held under agreements to resell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial assets at FVPL: Held-for-trading: Government securities. . . . . . . . . Equity securities . . . . . . . . . . . . . . Private debt securities . . . . . . . . . Derivative assets Pay . . . . . . . . . . . . . . . . . . . . . Receive . . . . . . . . . . . . . . . . . Designated at FVPL: Private debt securities . . . . . . . . . Loans receivablesgross. . . . . . . . . . . . . . . Unquoted debt securitiesgross . . . . . . . . Other receivablesgross . . . . . . . . . . . . . . . Receivable from SPVnet . . . . . . . . . . . . . AFS investments . . . . . . . . . . . . . . . . . . . . . . Miscellaneous COCI . . . . . . . . . . . . . . . . . . . Total financial assets. . . . . . . . . . . . . . . . . . . Financial Liabilities Deposit liabilities: Demand. . . . . . . . . . . . . . . . . . . . . . . . . . Savings . . . . . . . . . . . . . . . . . . . . . . . . . . Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial liability at FVPL. . . . . . . . . . . . . . Derivative liabilities: Pay. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Receive . . . . . . . . . . . . . . . . . . . . . . . . . . Bills and acceptances payable . . . . . . . . . . . Subordinated debt . . . . . . . . . . . . . . . . . . . . . Accrued interest payable and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . Total financial liabilities. . . . . . . . . . . . . . . .

5,338 31,825 17,098 18,305

P 66 P 13,108

P 1,114

5,404 46,049 17,098 18,305

2,187 175 17 11,186 11,266 80 11 22,957 3,965 16,789 234 5 P118,986

16 778 790 12 22 7,881 14 467 P21,586

24 1,082 1,096 14 34 8,733 418 700 P 9,923

49 304 307 3 70 1,675 29 3,037 P 5,977

730 8 4,118 110,750 4,321 72,489 P192,418

3,006 175 25 13,350 13,459 109 4,255 151,996 8,747 16,789 76,927 5 P348,890

1,536 P 1,744 P 2,616 P 5,232 P 18,920 P 30,048 5,337 10,061 15,045 30,099 126,161 186,703 1,134 1,177 1,709 3,416 18,435 25,871 37 73 110 219 8,025 8,464 13,076 13,024 52 2,761 43 8,677 2,152 2,139 13 4,371 85 577 P18,101 7 128 P19,615 1,415 1,401 14 6 255 258 P39,499 3,770 3,727 43 1,330 6,702 2,132 P181,748 20,413 20,291 122 8,475 7,213 11,644 P278,540

P 19,577

F-59

Up to 1 Month

1 to 3 Months

Consolidated January 1, 2011 (As Restated) 3 to 6 6 to 12 Beyond Months Months 1 year

Total

Financial Assets COCI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due from BSP and other banks . . . . . . . . . . . Interbank loans receivable . . . . . . . . . . . . . . . Securities held under agreements to resell. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial assets at FVPL: Held-for-trading: Government securities. . . . . . . . . . Equity securities . . . . . . . . . . . . . . . Derivative assets Pay . . . . . . . . . . . . . . . . . . . . . . . . . . Receive. . . . . . . . . . . . . . . . . . . . . . . Designated at FVPL: Private debt securities . . . . . . . . . . Loans receivablesgross. . . . . . . . . . . . . . . . Unquoted debt securitiesgross. . . . . . . . . . AFS investments . . . . . . . . . . . . . . . . . . . . . . . HTM investments . . . . . . . . . . . . . . . . . . . . . . Miscellaneous COCI . . . . . . . . . . . . . . . . . . . . Total financial assets . . . . . . . . . . . . . . . . . . . . Financial Liabilities Deposit liabilities: Demand. . . . . . . . . . . . . . . . . . . . . . . . . . . Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial liability at FVPL. . . . . . . . . . . . . . . Derivative liabilities: Pay . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Receive . . . . . . . . . . . . . . . . . . . . . . . . . . . Bills and acceptances payable . . . . . . . . . . . . Subordinated debt . . . . . . . . . . . . . . . . . . . . . . Accrued interest payable and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total financial liabilities . . . . . . . . . . . . . . . . .

P 5,457 P P 17,519 14,264 12,721 6,823

5,457 31,783 12,721 6,823

9,653 201 8,656 8,732 76 13 11,339 3 131 1,557 2 P65,495

107 108 176 68 27 18,427 8 328 1,850 P35,079

161 6,058 6,213 155 40 7,183 11 355 779 P 8,684

322 57 259 202 80 3,773 2,389 719 1,898 P 9,383

2,672 170 777 607 5,498 101,916 9,224 47,080 55,182 P222,179

12,915 201 15,049 16,157 1,108 5,658 142,638 11,635 48,613 61,266 2 P340,820

P 1,771 P 1,600 P 2,399 P 4,799 P 17,818 P 28,387 5,880 10,694 15,947 31,875 108,544 172,940 5,637 7,921 3,228 6,314 700 23,800 37 73 110 219 8,465 8,904 3,465 3,448 17 10,721 43 7,628 P31,734 624 613 11 202 85 521 P21,107 2,102 2,035 67 27 128 110 P22,016 5 3 2 33 255 2,035 P45,532 3,303 6,253 P145,083 6,196 6,099 97 14,286 6,764 10,294 P265,472

F-60

Up to 1 month

1 to 3 months

Parent Company December 31, 2012 3 to 6 6 to 12 months months

Beyond 1 year

Total

Financial Assets COCI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due from BSP and other banks. . . . . . . . . . Interbank loans receivable . . . . . . . . . . . . . . Securities held under agreements to resell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial assets at FVPL: Held-for-trading: Government securities . . . . . . . . Equity securities. . . . . . . . . . . . . . Private debt securities . . . . . . . . . Derivative assets Pay . . . . . . . . . . . . . . . . . . . . . Receive . . . . . . . . . . . . . . . . . Designated at FVPL: Private debt securities . . . . . . . . . Loans receivablesgross. . . . . . . . . . . . . . . Unquoted debt securitiesgross . . . . . . . . Other receivablesgross . . . . . . . . . . . . . . . Receivable from SPV AFS investments . . . . . . . . . . . . . . . . . . . . . . HTM investments . . . . . . . . . . . . . . . . . . . . . Miscellaneous COCI. . . . . . . . . . . . . . . . . . . Total financial assets. . . . . . . . . . . . . . . . . . . Financial Liabilities Deposit liabilities: Demand . . . . . . . . . . . . . . . . . . . . . . . . . Savings . . . . . . . . . . . . . . . . . . . . . . . . . . Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial liability at FVPL. . . . . . . . . . . . . . Derivative liabilities: Pay. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Receive . . . . . . . . . . . . . . . . . . . . . . . . . . Bills and acceptances payable . . . . . . . . . . . Subordinated debt . . . . . . . . . . . . . . . . . . . . . Accrued interest payable and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . Total financial liabilities. . . . . . . . . . . . . . . .

5,548 Q 39,825 11,129 18,304

Q 251

119

5,548 39,825 11,499 18,304

1,978 193 100 6,056 6,079 23 Q 4 24,572 3,962 16,076 541 1 Q122,257

14 1 716 788 72

19 1 22 24 2

36 3 67 153 86 Q 1,435 17 1,470 Q3,047 Q

677 29 52 222 170

2,724 193 134 6,913 7,266 353

Q 8 Q 1,255 12,919 5,447 44 9 2,630 Q15,939 2,767 Q 9,619

Q 1,267 123,205 167,578 3,950 7,982 16,076 97,479 104,887 1 Q376,371

Q225,510

Q 28,417 Q Q 151,034 17,838 7,979 7,779 2,821 1,481 43 85 6,311 9,798 9,677 121 7,725 54 8,234 Q203,407 1,162 1,123 39 4,176 107 390 Q25,456 476 452 24 805 161 1 Q16,762

Q 4,892 1,784 608 518 90 24 322 193 Q7,305

Q 28,417 12,636 194,379 6,325 20,190 6,439 213 52 161 2 11,742 3,222 12,257 11,822 435 12,732 12,386 12,040 Q287,018

Q 34,088

F-61

Up to 1 month

1 to 3 months

Parent Company December 31, 2011 3 to 6 6 to 12 months months

Beyond 1 year

Total

Financial Assets COCI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due from BSP and other banks . . . . . . . . . . Interbank loans receivable . . . . . . . . . . . . . . Securities held under agreements to resell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial assets at FVPL: Held-for-trading: Government securities. . . . . . . . . Equity securities . . . . . . . . . . . . . . Private debt securities . . . . . . . . . Derivative assets Pay . . . . . . . . . . . . . . . . . . . . . Receive . . . . . . . . . . . . . . . . . Designated at FVPL: Private debt securities . . . . . . . . . Loans receivablesgross. . . . . . . . . . . . . . . Unquoted debt securitiesgross . . . . . . . . Other receivablesgross . . . . . . . . . . . . . . . Receivable from SPV AFS investments . . . . . . . . . . . . . . . . . . . . . . HTM investments . . . . . . . . . . . . . . . . . . . . . Miscellaneous COCI . . . . . . . . . . . . . . . . . . . Total financial assets. . . . . . . . . . . . . . . . . . . Financial Liabilities Deposit liabilities: Demand. . . . . . . . . . . . . . . . . . . . . . . . . . Savings . . . . . . . . . . . . . . . . . . . . . . . . . . Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial liability at FVPL. . . . . . . . . . . . . . Derivative liabilities: Pay. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Receive . . . . . . . . . . . . . . . . . . . . . . . . . . Bills and acceptances payable . . . . . . . . . . . Subordinated debt . . . . . . . . . . . . . . . . . . . . . Accrued interest payable and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . Total financial liabilities. . . . . . . . . . . . . . . .

5,303 P P 30,499 11,900 17,098 18,305

5,303 42,399 17,098 18,305

2,187 173 17 11,186 11,266 80 11 22,824 3,965 14,867 233 5 P115,567

16 778 790 12 22 7,651 14 467 P20,082

24 1,082 1,096 14 34 8,366 418 700 P 9,556

49 1 304 307 3 68 1,069 29 3,037 P 4,256

730 8 4,118 109,741 4,320 70,595 P189,512

3,006 173 26 13,350 13,459 109 4,253 149,651 8,746 14,867 75,032 5 P338,973

1,531 P 1,744 P 2,616 P 5,232 P 18,920 P 30,043 5,324 10,061 15,045 30,099 126,161 186,690 1,134 1,177 1,709 3,416 18,435 25,871 37 73 110 219 8,025 8,464 13,076 13,024 52 1,250 43 7,280 2,152 2,139 13 4,361 85 595 P18,109 4 128 P19,612 1,415 1,401 14 255 258 P39,493 3,770 3,727 43 1,720 6,702 1,775 P181,781 20,413 20,291 122 7,335 7,213 9,908 P275,646

P 16,651

F-62

Up to 1 month

1 to 3 months

Parent Company January 1, 2011 (As Restated) 3 to 6 6 to 12 Beyond months months 1 year

Total

Financial Assets COCI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due from BSP and other banks . . . . . . . . . . . Interbank loans receivable . . . . . . . . . . . . . . . Securities held under agreements to resell. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial assets at FVPL: Held-for-trading: Government securities. . . . . . . . . . Equity securities . . . . . . . . . . . . . . . Derivative assets Pay . . . . . . . . . . . . . . . . . . . . . . Receive . . . . . . . . . . . . . . . . . . Designated at FVPL: Private debt securities . . . . . . . . . . Loans receivablesgross. . . . . . . . . . . . . . . . Unquoted debt securitiesgross. . . . . . . . . . Receivable from SPV . . . . . . . . . . . . . . . . . . . AFS investments . . . . . . . . . . . . . . . . . . . . . . . HTM investments . . . . . . . . . . . . . . . . . . . . . . Miscellaneous COCI . . . . . . . . . . . . . . . . . . . . Total financial assets . . . . . . . . . . . . . . . . . . . . Financial Liabilities Deposit liabilities: Demand. . . . . . . . . . . . . . . . . . . . . . . . . . . Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial liability at FVPL. . . . . . . . . . . . . . . Derivative liabilities: Pay . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Receive . . . . . . . . . . . . . . . . . . . . . . . . . . . Bills and acceptances payable . . . . . . . . . . . . Subordinated debt . . . . . . . . . . . . . . . . . . . . . . Accrued interest payable and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total financial liabilities . . . . . . . . . . . . . . . . .

P 5,310 P P 16,088 11,700 12,275 6,823

5,310 27,788 12,275 6,823

9,653 187 8,656 8,732 76 13 10,414 3 118 1,557 2 P62,519

107 108 176 68 27 18,249 8 328 1,850 P32,337

161 6,058 6,213 155 40 6,922 11 355 779 P 8,423

322 57 259 202 80 1,754 2,389 716 1,898 P 7,361

2,672 170 777 607 5,498 100,368 9,224 624 45,549 55,094 P219,636

12,915 187 15,049 16,157 1,108 5,658 137,707 11,635 624 47,066 61,178 2 P330,276

P 1,547 P 1,600 P 2,399 P 4,799 P 17,818 P 28,163 5,711 10,694 15,947 31,875 108,544 172,771 5,587 7,875 3,208 6,312 700 23,682 37 73 110 219 8,465 8,904 3,465 3,448 17 9,542 43 7,067 P29,551 624 613 11 171 85 404 P20,913 2,102 2,035 67 128 P21,859 5 3 2 255 425 P43,887 3,144 6,253 P144,924 6,196 6,099 97 12,857 6,764 7,896 P261,134

Market Risk Market risk is the risk to earnings or capital arising from adverse movements in factors that affect the market value of instruments, products, and transactions in an institutions overall portfolio. Market risk arises from market making, dealing, and position taking in interest rate, foreign exchange and equity markets. The succeeding sections provide discussion on the impact of market risk on the Parent Companys trading and structural portfolios.

Trading market risk Trading market risk exists in the Parent Company as the values of its trading positions are sensitive to changes in market rates such as interest rates, foreign exchange rates and equity prices. The Parent Company is F-63

exposed to trading market risk in the course of market making as well as from taking advantage of market opportunities. The Parent Company adopts the Parametric Value-at-Risk (VaR) methodology (with 99% confidence level, and one day holding period for FX and equity price risks VaR and ten day holding period for interest rate risk VaR) to measure the Parent Companys trading market risk. Volatilities are updated monthly and are based on historical data for a rolling 260-day period. The RMG reports the VaR utilization and breaches to limits to the risk taking personnel on a daily basis and to the ALCO and Executive Committee on a monthly basis. All risk reports discussed in the EXCOM meeting are noted by the BOD. The VaR figures are backtested to validate the robustness of the VaR model. Objectives and limitations of the VaR methodology The VaR models are designed to measure market risk in a normal market environment. The models assume that any changes occurring in the risk factors affecting the normal market environment will follow a normal distribution. The use of VaR has limitations because it is based on historical volatilities in market prices and assumes that future price movements will follow a statistical distribution. Due to the fact that VaR relies heavily on historical data to provide information and may not clearly predict the future changes and modifications of the risk factors, the probability of large market moves may be underestimated if changes in risk factors fail to align with the normal distribution assumption. VaR may also be under- or over- estimated due to the assumptions placed on risk factors and the relationship between such factors for specific instruments. Even though positions may change throughout the day, the VaR only represents the risk of the portfolios at the close of each business day, and it does not account for any losses that may occur beyond the 99.00% confidence level. VaR assumptions/parameters VaR estimates the potential loss on the current portfolio assuming a specified time horizon and level of confidence at 99.00%. The use of a 99.00% confidence level means that, within a one day horizon, losses exceeding the VaR figure should occur, on average, not more than once every one hundred days. VaR limits Since VaR is an integral part of the Parent Companys market risk management, VaR limits have been established annually for all financial trading activities and exposures. Calculated VaR compared against the VaR limits are monitored. Limits are based on the tolerable risk appetite of the Parent Company. VaR is computed on an undiversified basis; hence, the Parent Company does not consider the correlation effects of the three trading portfolios. There is no instance that the aggregate daily losses were greater than the total VaR (in millions).
Trading Portfolio Foreign Exchange* Interest Rate Equities Price Total VaR**

December 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average Daily . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Highest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lowest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Trading Portfolio

Q 4.84 6.61 16.85 0.40

Foreign Exchange*

Q 80.22 131.09 340.31 60.87

Interest Rate

Q 7.80 8.95 11.17 6.00

Equities Price

Q 92.86 146.64 354.65 77.86

Total VaR**

December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average Daily . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Highest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lowest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . * **

P 3.33 8.9 24.15 0.92

P113.24 177.18 312.35 73.30

P 9.54 9.8 13.14 6.11

P126.11 195.88 339.81 95.63

FX VaR is the bankwide foreign exchange risk The high and low for the total portfolio may not equal the sum of the individual components as the highs and lows of the individual trading portfolios may have occurred on different trading days The table below shows the interest rate VaR for AFS investments (in millions):
2012 2011

End of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average Daily . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Highest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lowest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-64

Q2,317.22 2,176.61 2,743.57 1,522.48

P1,922.71 1,597.70 2,047.64 927.67

Structural Market Risk Non-trading Market Risk Interest rate risk The Parent Company seeks to ensure that exposure to fluctuations in interest rates are kept within acceptable limits. Interest margins may increase as a result of such changes but may be reduced or may create losses in the event that unexpected movements arise. Repricing mismatches will expose the Parent Company to interest rate risk. The Parent Company measures the sensitivity of its assets and liabilities to interest rate fluctuations by way of a repricing gap analysis using the repricing characteristics of its statement of financial position positions tempered with approved assumptions. To evaluate earnings exposure, interest rate sensitive liabilities in each time band are subtracted from the corresponding interest rate assets to produce a repricing gap for that time band. The difference in the amount of assets and liabilities maturing or being repriced over a one year period would then give the Parent Company an indication of the extent to which it is exposed to the risk of potential changes in net interest income. A negative gap occurs when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. Vice versa, positive gap occurs when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. During a period of rising interest rates, a company with a positive gap is better positioned because the companys assets are refinanced at increasingly higher interest rates increasing the net interest margin of the company over time. During a period of falling interest rates, a company with a positive gap would show assets repricing at a faster rate than one with a negative gap, which may restrain the growth of its net income or result in a decline in net interest income. For risk management purposes, the repricing gap covering the one year period is multiplied by an assumed change in interest rates to yield an approximation of the change in net interest income that would result from such an interest rate movement. The Parent Companys BOD sets a limit on the level of earnings at risk (EaR) exposure tolerable to the Parent Company. Compliance to the EaR limit is monitored monthly by the RMG. This EaR computation is accomplished monthly, with a quarterly stress test.

F-65

The following table sets forth the repricing gap position of the Group and the Parent Company (in millions):
Consolidated December 31, 2012 3 to 6 6 to 12 Months months

Up to 1 Month

1 to 3 Months

Beyond 1 year

Total

Financial Assets COCI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due from BSP and other banks. . . . . . . . . . . Interbank loans receivable . . . . . . . . . . . . . . . Securities held under agreements to resell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial assets at FVPL: Held-for-trading: Government securities . . . . . . . . . Derivative assets . . . . . . . . . . . . . . Equity securities. . . . . . . . . . . . . . . Private debt securities . . . . . . . . . . Designated at FVPL: Private debt securities . . . . . . . . . . Receivable from customers . . . . . . . . . . . . . . Unquoted debt securitiesgross . . . . . . . . . AFS investments . . . . . . . . . . . . . . . . . . . . . . . Miscellaneous COCI. . . . . . . . . . . . . . . . . . . . Total financial assets. . . . . . . . . . . . . . . . . . . . Financial Liabilities Deposit liabilities: Demand . . . . . . . . . . . . . . . . . . . . . . . . . . Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial liabilities at FVPL . . . . . . . . . . . . . Bills and acceptances payable . . . . . . . . . . . . Subordinated debt . . . . . . . . . . . . . . . . . . . . . . Accrued interest and other financial liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total financial liabilities. . . . . . . . . . . . . . . . . Repricing gap . . . . . . . . . . . . . . . . . . . . . . . . . Cumulative gap . . . . . . . . . . . . . . . . . . . . . . .

Q 12,737 11,499 18,300

5,599 Q 5,599 28,481 41,218 11,499 18,300

55,186 217 676 P98,615

21,406 100 1,288

1,248 7,303 6,785

6,716 2 312 P 7,030

1,971 455 250 99 61,433 7,499 57,936 1 P 163,724

1,971 455 250 99 1,248 152,044 7,818 66,997 1 P307,499

P22,794 P15,336

Q Q Q Q 28,152 Q 28,152 63,839 14,859 4,517 3,156 106,422 192,793 8,289 3,807 851 866 6,096 19,909 6,196 284 6,480 8,565 2,050 894 404 1,164 13,077 9,939 9,939 Q 4,426 15,079 Q 167,136 15,079 Q285,429

Q80,693

Q20,716 Q12,458

Q17,922 Q 2,078 Q 2,878 Q 2,604 17,922 20,000 22,878 25,482

(Q3,412) Q 22,070 22,070

Note: Non-interest bearing financial assets and liabilities are lumped in greater than 1 year bucket.

F-66

Up to 1 Month

1 to 3 Months

Consolidated December 31, 2011 3 to 6 6 to 12 Months months

Beyond 1 year

Total

Financial Assets COCI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due from BSP and other banks . . . . . . . . Interbank loans receivable . . . . . . . . . . . . . Securities held under agreements to resell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial assets at FVPL: Held-for-trading: Government securities . . . . . . . Derivative assets . . . . . . . . . . . . Equity securities . . . . . . . . . . . . Private debt securities. . . . . . . . Designated at FVPL: Private debt securities. . . . . . . . Receivable from customers . . . . . . . . . . . . Unquoted debt securitiesgross . . . . . . . AFS investments . . . . . . . . . . . . . . . . . . . . . Miscellaneous COCI . . . . . . . . . . . . . . . . . Total financial assets . . . . . . . . . . . . . . . . . Financial Liabilities Deposit liabilities: Demand . . . . . . . . . . . . . . . . . . . . . . . . Savings. . . . . . . . . . . . . . . . . . . . . . . . . Time . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial liabilities at FVPL . . . . . . . . . . . Bills and acceptances payable. . . . . . . . . . Subordinated debt . . . . . . . . . . . . . . . . . . . . Accrued interest and other financial liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . Total financial liabilities . . . . . . . . . . . . . . Repricing gap . . . . . . . . . . . . . . . . . . . . . . . Cumulative gap . . . . . . . . . . . . . . . . . . . . .

P P 32,677 11,900 17,010 88 18,300

5,404

5,404 44,577 17,098 18,300

646 44,238 247 263 P113,381

2,095 14,693 550 1,521

1,310 5,897 401 2,969

4,212 1 1,548 P 5,761

2,179 454 175 17 63,229 7,162 46,023 5 P 124,648

2,179 454 175 17 4,051 132,269 8,361 52,324 5 P285,214

P30,847 P10,577

P P P P 29,896 P 29,896 60,309 17,315 3,718 1,801 101,533 184,676 10,040 4,744 839 858 6,481 22,962 6,650 6,650 2,745 3,071 228 371 2,043 8,458 6,452 6,452 P 3,030 11,749 P 164,804 11,749 P270,843

P 73,094

P25,130 P 4,785

P 40,287 P 5,717 P 5,792 P 2,731 40,287 46,004 51,796 54,527

(P40,156) P 14,371 14,371

Note: Non-interest bearing financial assets and liabilities are lumped in greater than 1 year bucket.

F-67

Up to 1 Month

1 to 3 Months

Consolidated January 1, 2011 (As Restated) 3 to 6 6 to 12 Months months

Beyond 1 year

Total

Financial Assets COCI . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due from BSP and other banks . . . . . . Interbank loans receivable . . . . . . . . . . Securities held under agreements to resell. . . . . . . . . . . . . . . . . . . . . . . . . . . Financial assets at FVPL: Held-for-trading: Government securities. . . . . Derivative assets. . . . . . . . . . Equity securities . . . . . . . . . . Designated at FVPL: . . . . . . . . . . Private debt securities . . . . . Receivable from customersgross . . Unquoted debt securitiesgross. . . . . AFS investments . . . . . . . . . . . . . . . . . . HTM investments . . . . . . . . . . . . . . . . . Miscellaneous COCI . . . . . . . . . . . . . . . Total financial assets . . . . . . . . . . . . . . . Financial Liabilities Deposit liabilities: Demand. . . . . . . . . . . . . . . . . . . . . . Savings . . . . . . . . . . . . . . . . . . . . . . Time . . . . . . . . . . . . . . . . . . . . . . . . Financial liabilities at FVPL . . . . . . . . Bills and acceptances payable . . . . . . . Subordinated debt . . . . . . . . . . . . . . . . . Accrued interest and other financial liabilities . . . . . . . . . . . . . . . . . . . . . . . Total financial liabilities. . . . . . . . . . . . Repricing gap . . . . . . . . . . . . . . . . . . . . Cumulative gap . . . . . . . . . . . . . . . . . .

P P 20,781 8,647 12,692 6,800

5,457

5,457 29,428 12,692 6,800

28,858 260 84 949 P 70,424

3,492 39,514 465 615 2,699 P55,432

1,779 7,496 1 429 2,761 P12,466 P

2,662 2,369 4 647 5,682

9,599 911 200 34,201 8,130 33,399 31,172 2 P 123,071

9,599 911 200 5,271 112,731 11,225 34,531 38,228 2 P267,075

P P P 54,669 18,217 4,236 16,477 5,939 1,661 58 9,607 316 180 P24,472 P 6,077 P

P 1,968 604 258 5,487 8,317 (P2,635) 24,327

27,964 P 27,964 92,192 171,282 2,508 27,189 6,517 6,575 1,643 12,004 5,487 12,735 12,735 P263,236 3,839

80,811

P 143,559

(P10,387) P30,960 P 6,389 (10,387) 20,573 26,962

(P20,488) P 3,839

Note: Non-interest bearing financial assets and liabilities are lumped in greater than 1 year bucket.

F-68

Up to 1 Month

1 to 3 Months

Parent Company December 31, 2012 3 to 6 6 to 12 Months months

Beyond 1 year

Total

Financial Assets COCI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due from BSP and other banks. . . . . . . . . . . Interbank loans receivable . . . . . . . . . . . . . . . Securities held under agreements to resell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial assets at FVPL: Held-for-trading: Government securities . . . . . . . . . Derivative assets . . . . . . . . . . . . . . Equity securities. . . . . . . . . . . . . . . Private debt securities . . . . . . . . . . Designated at FVPL: . . . . . . . . . . . . . . . Private debt securities . . . . . . . . . . Receivable from customers . . . . . . . . . . . . . . Unquoted debt securitiesgross . . . . . . . . . AFS investments . . . . . . . . . . . . . . . . . . . . . . . Miscellaneous COCI. . . . . . . . . . . . . . . . . . . . Total financial assets. . . . . . . . . . . . . . . . . . . . Financial Liabilities Deposit liabilities: Demand . . . . . . . . . . . . . . . . . . . . . . . . . . Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial liabilities at FVPL . . . . . . . . . . . . . Bills and acceptances payable . . . . . . . . . . . . Subordinated debt . . . . . . . . . . . . . . . . . . . . . . Accrued interest and other financial liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total financial liabilities. . . . . . . . . . . . . . . . . Repricing gap . . . . . . . . . . . . . . . . . . . . . . . . . Cumulative gap . . . . . . . . . . . . . . . . . . . . . . .

P 9,821 11,499 18,300

5,548 P 5,548 30,004 39,825 11,499 18,300

55,042 217 671 P95,550

20,847 100 1,287

1,248 6,939 6,774

6,110 2 312 P 6,424

1,971 454 99 193 57,355 7,499 55,721 1 P 158,845

1,971 454 99 193 1,248 146,293 7,818 64,765 1 P298,014

P22,234 P14,961

P P P P 28,417 P 28,417 63,839 14,859 4,517 3,156 106,454 192,825 8,289 3,807 851 866 6,351 20,164 6,196 284 6,480 8,481 1,902 663 23 1,649 12,718 9,939 9,939 P 4,045 12,041 P 165,135 12,041 P282,584

P80,609

P20,568 P12,227

P14,941 P 1,666 P 2,734 P 2,379 14,941 16,607 19,341 21,720

(P6,290) P 15,430 15,430

Note: Non-interest bearing financial assets and liabilities are lumped in greater than 1 year bucket.

F-69

Up to 1 Month

1 to 3 Months

Parent Company December 31, 2011 3 to 6 6 to 12 Months months

Beyond 1 year

Total

Financial Assets COCI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due from BSP and other banks . . . . . . . . Interbank loans receivable . . . . . . . . . . . . . Securities held under agreements to resell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial assets at FVPL: Held-for-trading: Government securities . . . . . . . Derivative assets . . . . . . . . . . . . Equity securities . . . . . . . . . . . . Private debt securities. . . . . . . . Designated at FVPL: Private debt securities. . . . . . . . Receivable from customers . . . . . . . . . . . . Unquoted debt securitiesgross . . . . . . . AFS investments . . . . . . . . . . . . . . . . . . . . . Miscellaneous COCI . . . . . . . . . . . . . . . . . Total financial assets . . . . . . . . . . . . . . . . . Financial Liabilities Deposit liabilities: Demand . . . . . . . . . . . . . . . . . . . . . . . . Savings. . . . . . . . . . . . . . . . . . . . . . . . . Time . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial liabilities at FVPL . . . . . . . . . . . Bills and acceptances payable. . . . . . . . . . Subordinated debt . . . . . . . . . . . . . . . . . . . . Accrued interest and other financial liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . Total financial liabilities . . . . . . . . . . . . . . Repricing gap . . . . . . . . . . . . . . . . . . . . . . . Cumulative gap . . . . . . . . . . . . . . . . . . . . .

P P 30,499 11,900 17,010 88 18,300

5,303

5,303 42,399 17,098 18,300

646 44,101 247 234 P111,037

2,095 14,478 550 1,520

1,309 5,555 401 2,955

3,644 1 1,546 P 5,191

2,179 454 173 17 60,294 7,162 44,174 5 P 119,761

2,179 454 173 17 4,050 128,072 8,361 50,429 5 P276,840

P30,631 P10,220

Q Q Q Q 30,042 Q 30,042 60,309 17,315 3,718 1,801 101,549 184,692 10,040 4,744 839 858 7,246 23,727 6,650 6,650 2,663 2,927 4 1,725 7,319 6,452 6,452 P 2,659 9,908 P 163,572 (P43,811) P 8,050 9,908 P268,790 8,050

P 73,012

P24,986 P 4,561

P 38,025 P 5,645 P 5,659 P 2,532 38,025 43,670 49,329 51,861

Note: Non-interest bearing financial assets and liabilities are lumped in greater than 1 year bucket.

F-70

Up to 1 Month

1 to 3 Months

Parent Company January 1, 2011 (As Restated) 3 to 6 6 to 12 Beyond 1 Months months year

Total

Financial Assets COCI . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due from BSP and other banks. . . . . . Interbank loans receivable . . . . . . . . . . Securities held under agreements to resell . . . . . . . . . . . . . . . . . . . . . . . . . . Financial assets at FVPL: Held-for-trading: Government securities . . . . Derivative assets . . . . . . . . . Equity securities. . . . . . . . . . Designated at FVPL: . . . . . . . . . . Private debt securities . . . . . Receivable from customersgross . . Unquoted debt securitiesgross . . . . Receivable from SPV . . . . . . . . . . . . . . AFS investments . . . . . . . . . . . . . . . . . . HTM investments . . . . . . . . . . . . . . . . . Miscellaneous COCI. . . . . . . . . . . . . . . Total financial assets. . . . . . . . . . . . . . . Financial Liabilities Deposit liabilities: Demand . . . . . . . . . . . . . . . . . . . . . Savings . . . . . . . . . . . . . . . . . . . . . . Time . . . . . . . . . . . . . . . . . . . . . . . . Financial liabilities at FVPL . . . . . . . . Bills and acceptances payable . . . . . . . Subordinated debt . . . . . . . . . . . . . . . . . Accrued interest and other financial liabilities . . . . . . . . . . . . . . . . . . . . . . . Total financial liabilities . . . . . . . . . . . Repricing gap . . . . . . . . . . . . . . . . . . . . Cumulative gap . . . . . . . . . . . . . . . . . .

P P 16,787 11,432 12,245 6,800

5,310

5,310 28,219 12,245 6,800

28,690 260 949 P 65,731

3,492 39,320 494 624 548 2,699 P58,609

1,779 7,174 1 429 2,761 P12,144 P

2,144 2,369 1 647 5,161

9,599 911 187 31,115 8,101 31,961 31,084 2 P 118,270

9,599 911 187 5,271 108,443 11,225 624 32,939 38,140 2 P 259,915

P 54,669 18,217 16,439 5,881 58 9,542 171 6,739 404 P24,673

4,236 1,642

P 1,968 603 5,487 425

28,163 P 28,163 92,084 171,174 2,986 27,551 6,517 6,575 3,144 12,857 5,487 2,595 10,163 P 261,970 (P2,055)

87,447

P 5,878

8,483

P 135,489 (P17,219) (2,055)

(P21,716) P33,936 P 6,266 (21,716) 12,220 18,486

(P3,322) 15,164

Note: Non-interest bearing financial assets and liabilities are lumped in greater than 1 year bucket. The following table sets forth, for the year indicated, the impact of changes in interest rates on the Groups and the Parent Companys repricing gap for the years ended December 31, 2012 and 2011, and January 1, 2011 (in millions):
Consolidated December 31, 2012 Statement of Income Equity December 31, 2011 Statement of Income Equity January 1, 2011 (As Restated) Statement of Income Equity

+50bps. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -50bps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . +100bps. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -100bps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q 104 (104) 209 (209)

Q 104 (104) 209 (209)

P 234 (234) 468 (468)

P 234 (234) 468 (468)

P 92 (92) 185 (185)

P 92 (92) 185 (185)

F-71

Parent Company December 31, 2012 Statement of Income Equity December 31, 2011 Statement of Income Equity January 1, 2011 (As Restated) Statement of Income Equity

+50bps. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -50bps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . +100bps. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -100bps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q 88 (88) 176 (176)

Q 88 (88) 176 (176)

P 22 (222) 445 (445)

P 222 (222) 445 (445)

P 50 (50) 100 (100)

P 50 (50) 100 (100)

As one of the long-term goals in the risk management process, the Parent Company has set the adoption of the economic value approach in measuring the interest rate risk in the banking book to complement the earnings approach currently used. Foreign currency risk Foreign exchange is the risk to earnings or capital arising from changes in foreign exchange rates. The Group takes on exposure to effects of fluctuations in the prevailing foreign currency exchange rates on its financials and cash flows. Foreign currency liabilities generally consist of foreign currency deposits in the Parent Companys FCDU books, accounts made in the Philippines or which are generated from remittances to the Philippines by Filipino expatriates and overseas Filipino workers who retain for their own benefit or for the benefit of a third party, foreign currency deposit accounts with the Parent Company and foreign currency-denominated borrowings appearing in the regular books of the Parent Company. Foreign currency deposits are generally used to fund the Parent Companys foreign currency-denominated loan and investment portfolio in the FCDU. Banks are required by the BSP to match the foreign currency liabilities with the foreign currency assets held through FCDUs. In addition, the BSP requires a 30.00% liquidity reserve on all foreign currency liabilities held through FCDUs. Outside the FCDU, the Parent Company has additional foreign currency assets and liabilities in its foreign branch network. The Groups policy is to maintain foreign currency exposure within acceptable limits and within existing regulatory guidelines. The Group believes that its profile of foreign currency exposure on its assets and liabilities is within conservative limits for a financial institution engaged in the type of business in which the Group is involved. The table below summarizes the exposure to foreign exchange rate risk. Included in the table are the assets and liabilities at carrying amounts, categorized by currency (in millions).
Consolidated December 31, 2012 USD Others Total

Assets COCI and due from BSP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due from other banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interbank loans receivable and securities held under agreements to resell . . . . . . . Loans and receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial assets at FVPL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . AFS investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Liabilities Bills and acceptances payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued taxes, interest and other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net Exposure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-72

591 Q 175 Q 766 1,849 643 2,492 560 560 4,547 237 4,784 1,261 1,261 2,453 2,453 11,072 159 11,231 22,333 5,454 1,592 1,646 8,692 1,214 89 8 167 264 Q 950 23,547 5,543 1,600 1,813 8,956 Q14,591

Q13,641

USD

Consolidated December 31, 2011 Others

Total

Assets COCI and due from BSP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due from other banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interbank loans receivable and securities held under agreements to resell . . . . Loans and receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial assets at FVPL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . AFS investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Liabilities Deposit liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bills and acceptances payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued taxes, interest and other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net Exposure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

878 P 4,408 405 5,810 4,086 8,006 5,142 28,735 510 7,122 1,640 834 10,106

134 P 1,012 320 4,728 405 5,810 4,086 8,006 269 5,411 723 78 3,489 3,567 (P2,844) 29,458 510 7,200 1,640 4,323 13,673 P15,785

P18,629

Consolidated January 1, 2011 (As Restated) USD Others Total

Assets COCI and due from BSP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due from other banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interbank loans receivable and securities held under agreements to resell . . . . Loans and receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial assets at FVPL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . AFS investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . HTM investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Liabilities Deposit liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bills and acceptances payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued taxes, interest and other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net Exposure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

754 3,969 526 3,772 5,388 923 6,831 12,082 34,245 2 6,353 1,559 322 8,236

160 217 29 1 362 769 1 3,177 3,178 (P2,409)

914 4,186 555 3,773 5,388 923 6,831 12,444 35,014 2 6,354 1,559 3,499 11,414

P26,009

P23,600

F-73

Parent Company December 31, 2012 USD Others Total

Assets COCI and due from BSP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due from other banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interbank loans receivable and securities held under agreements to resell . . . . . . . . . Loans and receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial assets at FVPL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . AFS investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Liabilities Bills and acceptances payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued taxes, interest and other expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net Exposure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

591 331 560 3,950 1,261 1,940 10,985 19,618 5,241 1,560 1,644 8,445

P175 215 51 70 511 3 25 28 P483

766 546 560 4,001 1,261 1,940 11,055 20,129 5,244 1,560 1,669 8,473

P11,173

P11,656

Parent Company December 31, 2011 USD Others Total

Assets COCI and due from BSP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due from other banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interbank loans receivable and securities held under agreements to resell . . . . . Loans and receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial assets at FVPL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . AFS investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Liabilities Deposit liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bills and acceptances payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued taxes, interest and other expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net Exposure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

810 P 907 405 5,068 4,086 7,946 4,984 24,206

134 P 944 320 1,227 405 5,068 4,086 7,946 269 5,253 723 24,929 P 7,171 1,573 3,704 12,448

7,093 1,573 215 8,881

78 3,489 3,567

P15,325

(P2,844) P12,481

F-74

Parent Company January 1, 2011 (As Restated) USD Others Total

Assets COCI and due from BSP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due from other banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interbank loans receivable and securities held under agreements to resell . . . . . Loans and receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial assets at FVPL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . AFS investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . HTM investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Liabilities Deposit liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bills and acceptances payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued taxes, interest and other expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net Exposure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

754 P 468 526 3,772 5,388 923 6,831 12,082 30,744 2 6,353 1,559 322 8,236

160 P 914 217 685 29 555 1 3,773 5,388 923 6,831 362 12,444 769 1 3,177 3,178 31,513 2 6,354 1,559 3,499 11,414

P22,508

(P2,409) P20,099

Information relating to the Parent Companys currency derivatives is contained in Note 22. The Parent Company has outstanding foreign currency spot transactions (in equivalent peso amounts) of P2.1 billion (sold) and P1.4 billion (bought) as of December 31, 2012 and P4.7 billion (sold) and P2.5 billion (bought) as of December 31, 2011. 5. are: Cash equivalentsCarrying amounts approximate fair values due to the relatively short-term maturity of these investments. Debt securitiesFair values are generally based upon quoted market prices. If the market prices are not readily available, fair values are obtained from independent parties offering pricing services, estimated using adjusted quoted market prices of comparable investments or using the discounted cash flow methodology. Equity securitiesfair values of quoted equity securities are based on quoted market prices. While fair values of unquoted equity securities are the same as the carrying value since the fair value could not be reliably determined due to the unpredictable nature of future cash flows and the lack of suitable methods of arriving at a reliable fair value. Loans and receivablesFor loans with fixed interest rates, fair values are estimated by discounted cash flow methodology, using the Groups current market lending rates for similar types of loans. For loans with floating interest rates, with repricing frequencies on a quarterly basis, the Group assumes that the carrying amount approximates fair value. Where the repricing frequency is beyond three months, the fair value of floating rate loans is determined using the discounted cash flow methodologies. LiabilitiesExcept for time deposit liabilities and subordinated debt, the carrying values approximate fair values due to either the presence of a demand feature or the relatively short-term maturities of these liabilities. Derivative instrumentsFair values are estimated based on quoted market prices or acceptable valuation models. Time deposit liabilities and subordinated debt including designated at FVPLFair value is determined using the discounted cash flow methodology. F-75 Financial Instruments and Fair Value Measurement The methods and assumptions used by the Group in estimating the fair value of the financial instruments

The following table presents a comparison of the carrying amounts and fair values of the financial assets and liabilities not presented on the statement of financial position at fair value:
Consolidated December 31, 2012 Carrying Fair Market Value Value December 31, 2011 Carrying Fair Market Value Value January 1, 2011 (As Restated) Carrying Fair Market Value Value

Financial Assets Loans and Receivables COCI and due from BSP . . Q42,774,487 Q42,774,487 P43,556,905 P43,556,905 P29,743,172 P29,743,172 Due from other banks. . . . 4,042,769 4,042,769 6,423,981 6,423,981 5,141,549 5,141,549 Interbank loans receivable. . . . . . . . . . . . 11,498,756 11,498,756 17,097,648 17,097,648 12,691,967 12,691,967 Securities held under agreements to resell . . . 18,300,000 18,300,000 18,300,000 18,300,000 6,800,000 6,800,000 Receivables from customers: Business loans . . . . . 83,382,445 84,566,445 67,327,489 67,435,795 57,614,436 58,549,272 GOCCs and NGAs. . . . . . . . . . . 24,410,497 24,410,497 27,774,012 27,774,012 17,080,112 17,080,115 Consumers. . . . . . . . . 11,196,835 11,483,394 7,521,449 7,588,400 7,545,568 7,965,925 LGUs . . . . . . . . . . . . . 7,157,470 7,215,785 5,900,276 5,901,463 6,352,406 6,623,560 Fringe benefits . . . . . 643,608 648,299 697,075 697,075 729,274 730,200 Unquoted debt securities . . . . . . . . . . . . 3,859,268 5,131,586 4,588,497 5,231,048 7,625,791 8,676,069 Other receivables . . . . . . . 14,057,386 14,057,386 12,440,237 12,440,237 13,367,891 13,367,891 Other assets . . . . . . . . . . . . 808 808 5,220 5,220 1,970 1,970 HTM investments: Government securities . . . 32,739,615 35,503,136 Other debt securities. . . . . 5,488,576 5,738,780 Financial Liabilities Financial liabilities at amortized cost Deposit liabilities: Demand . . . . . . . . . . . 28,152,296 28,152,296 29,896,120 29,896,120 27,964,372 27,964,372 Savings. . . . . . . . . . . . 192,793,260 192,793,260 184,676,120 184,676,120 171,282,454 171,282,454 Time . . . . . . . . . . . . . . 19,908,821 20,134,885 22,961,698 23,180,938 27,189,058 27,310,825 Bills and acceptances payable: BSP and local bank . . . . . . . . . . . . 6,998,633 6,998,633 4,413,379 4,413,379 2,542,970 2,542,970 Foreign banks . . . . . . 2,870,946 2,870,946 1,110,136 1,110,136 9,440,466 9,440,466 Acceptances outstanding . . . . . . 33,859 33,859 134,460 134,460 17,161 17,161 3,173,463 2,800,450 2,800,450 3,541 3,541 Others. . . . . . . . . . . . . 3,173,463 Subordinated debt . . . . . . . 9,938,816 10,956,745 6,452,473 7,118,314 5,486,735 5,685,638 Accrued interest payable . . . . . . . . . . . . . . 1,987,231 1,987,231 2,005,487 2,005,487 2,170,952 2,170,952 Other liabilities . . . . . . . . . 13,091,920 13,091,920 9,638,197 9,638,197 10,563,600 10,563,600 (Forward)

F-76

Parent Company December 31, 2012 Carrying Fair Market Value Value December 31, 2011 Carrying Fair Market Value Value January 1, 2011 (As Restated) Carrying Fair Market Value Value

Financial Assets Loans and Receivables COCI and due from BSP . . Q42,079,372 Q42,079,372 P42,795,706 P42,795,706 P29,583,597 P29,583,597 Due from other banks . . . . . 3,293,782 3,293,782 4,906,698 4,906,698 3,945,632 3,945,632 Interbank loans receivable . . . . . . . . . . . . . 11,498,756 11,498,756 17,097,648 17,097,648 12,245,259 12,245,259 Securities held under agreements to resell . . . . 18,300,000 18,300,000 18,300,000 18,300,000 6,800,000 6,800,000 Receivables from customers: Business loans . . . . . . . 80,968,054 82,152,054 65,641,416 65,749,721 56,800,960 56,800,960 GOCCs and NGAs . . . 24,410,497 24,410,497 27,774,012 27,774,012 17,080,112 17,080,115 Consumers . . . . . . . . . . 11,102,326 11,388,885 7,418,170 7,485,471 6,674,781 7,355,138 LGUs. . . . . . . . . . . . . . . 7,157,470 7,215,785 5,900,276 5,901,463 6,352,406 6,623,560 Fringe benefits. . . . . . . 629,871 634,560 687,103 687,103 715,608 716,513 Unquoted debt securities . . 3,859,268 5,131,586 4,588,497 5,231,048 7,625,791 8,676,069 Other receivables . . . . . . . . . 12,009,362 12,009,362 10,643,477 10,643,477 11,292,077 11,292,077 Other assets. . . . . . . . . . . . . . 808 808 5,220 5,220 1,970 1,970 HTM investments: Government securities . . . . 32,651,512 35,415,033 Other debt securities . . . . . . 5,488,576 5,738,780 Financial Liabilities Financial liabilities at amortized cost Deposit liabilities: Demand . . . . . . . . . . . . 28,417,452 28,417,452 30,042,425 30,042,425 28,163,081 28,163,081 Savings . . . . . . . . . . . . . 192,824,803 192,824,803 184,692,779 184,692,779 171,173,893 171,173,893 Time . . . . . . . . . . . . . . . 20,164,420 20,390,484 23,726,483 23,945,723 27,550,759 27,672,526 Bills and acceptances payable: BSP and local bank . . 6,940,295 6,940,295 2,902,338 2,902,338 1,861,937 1,861,937 Foreign banks . . . . . . . 2,571,194 2,571,194 881,110 881,110 9,569,923 9,569,923 Acceptances outstanding . . . . . . . 33,859 33,859 134,460 134,460 17,161 17,161 Others . . . . . . . . . . . . . . 3,173,463 3,173,463 3,400,450 3,400,450 1,407,640 1,407,640 Subordinated debt . . . . . . . . 9,938,816 10,956,745 6,452,473 7,118,314 5,486,735 5,685,638 Accrued interest payable . . 1,988,623 1,988,623 2,003,056 2,003,056 2,170,326 2,170,326 Other liabilities . . . . . . . . . . 10,051,904 10,051,904 7,904,902 7,904,902 7,993,133 7,993,133 The discount rate used in estimating the fair value of loans and receivables ranges from 0.30% to 9.25% and from 5.00% to 9.25% as of December 31, 2012 and 2011 for peso-denominated receivables, respectively, and 3.25% as of December 31, 2012 and 2011 for foreign currency-denominated receivables. The discount rate used in estimating the fair values of the subordinated debt and time deposits ranges from 1.38% to 3.63% and from 1.20% to 4.99% as of December 31, 2012 and 2011, respectively. Fair value hierarchy The Group uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation technique: Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities Level 2: other techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or indirectly Level 3: techniques which use inputs which have a significant effect on the recorded fair value that are not based on observable market data. F-77

The Group and the Parent Company held the following financial instruments measured at fair value:
Consolidated December 31, 2012 Level 2 Level 3

Level 1

Total

Financial Assets Financial assets at FVPL: Held-for-trading: Government securities . . . . . . . . . . . . . . . . . . . . . . . Derivative assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . Private debt securities . . . . . . . . . . . . . . . . . . . . . . . Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . Designated at FVPL: Private debt securities . . . . . . . . . . . . . . . . . . . . . . . AFS investments: Government securities . . . . . . . . . . . . . . . . . . . . . . . Other debt securities. . . . . . . . . . . . . . . . . . . . . . . . . Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial Liabilities Financial Liabilities at FVPL: Designated at FVPL . . . . . . . . . . . . . . . . . . . . . . . . . Derivative liabilities . . . . . . . . . . . . . . . . . . . . . . . . .

Q 1,970,754 59,044 99,502 250,552 Q 2,379,852 Q55,558,527 8,979,888 440,230 Q64,978,645

395,457 1,247,756

Q 1,970,754 454,501 99,502 250,552 1,247,756 Q 4,023,065 Q55,558,527 10,920,133 440,230 Q66,918,890

Q1,643,213 Q

Q 1,940,245 Q

Q1,940,245

Q Q

283,751

Q6,196,070 Q6,196,070

Q 6,196,070 283,751 Q 6,479,821

Q 283,751

Level 1

Consolidated December 31, 2011 Level 2 Level 3

Total

Financial Assets Financial assets at FVPL: Held-for-trading: Government securities . . . . . . . . . . . . . . . . . . . . . . . Derivative assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . Private debt securities . . . . . . . . . . . . . . . . . . . . . . . Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . Designated at FVPL: Private debt securities . . . . . . . . . . . . . . . . . . . . . . . AFS investments: Government securities . . . . . . . . . . . . . . . . . . . . . . . Other debt securities. . . . . . . . . . . . . . . . . . . . . . . . . Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial Liabilities Financial Liabilities at FVPL: Designated at FVPL . . . . . . . . . . . . . . . . . . . . . . . . . Derivative liabilities . . . . . . . . . . . . . . . . . . . . . . . . .

Q 2,178,701 91,719 16,910 175,332 Q 2,462,662 Q42,614,457 5,713,829 155,967 Q48,484,253

362,332 4,050,671

Q 2,178,701 454,051 16,910 175,332 4,050,671 Q 6,875,665 Q42,614,457 9,391,518 155,967 Q52,161,942

Q4,413,003 Q

Q 3,677,689 Q

Q3,677,689

Q Q

171,013

Q6,479,170 Q6,479,170

Q 6,479,170 171,013 Q 6,650,183

Q 171,013

F-78

Level 1

Consolidated January 1, 2011 (As Restated) Level 2 Level 3

Total

Financial Assets Financial assets at FVPL: Held-for-trading: Government securities . . . . . . . . . . . . . . . . . . . . . . . Derivative assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . Private debt securities . . . . . . . . . . . . . . . . . . . . . . . Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . Designated at FVPL: Private debt securities . . . . . . . . . . . . . . . . . . . . . . . AFS investments: Government securities . . . . . . . . . . . . . . . . . . . . . . . Other debt securities. . . . . . . . . . . . . . . . . . . . . . . . . Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial Liabilities Financial Liabilities at FVPL: Designated at FVPL . . . . . . . . . . . . . . . . . . . . . . . . . Derivative liabilities . . . . . . . . . . . . . . . . . . . . . . . . .

P 9,598,734 40,337 200,354 P 9,839,425 P27,568,048 2,361,193 190,664 P30,119,905

870,195 5,271,027

P 9,598,734 910,532 200,354 5,271,027 P15,980,647 P27,568,048 6,434,689 190,664 P34,193,401

P6,141,222 P

P 4,073,496 P

P4,073,496

P P

P P

57,852 57,852

P6,516,744 P6,516,744

P 6,516,744 57,852 P 6,574,596

Level 1

Parent Company December 31, 2012 Level 2 Level 3

Total

Financial Assets Financial assets at FVPL: Held-for-trading: Government securities . . . . . . . . . . . . . . . . . . . . . . . Derivative assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . Private debt securities . . . . . . . . . . . . . . . . . . . . . . . Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . Designated at FVPL: Private debt securities . . . . . . . . . . . . . . . . . . . . . . . AFS investments: Government securities . . . . . . . . . . . . . . . . . . . . . . . Other debt securities. . . . . . . . . . . . . . . . . . . . . . . . . Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial Liabilities Financial Liabilities at FVPL: Designated at FVPL . . . . . . . . . . . . . . . . . . . . . . . . . Derivative liabilities . . . . . . . . . . . . . . . . . . . . . . . . .

Q 1,970,754 59,044 99,502 192,585 Q 2,321,885 Q53,822,929 8,611,469 310,808 Q62,745,206

395,457 1,247,756

Q 1,970,754 454,501 99,502 192,585 1,247,756 Q 3,965,098 Q53,822,929 10,551,714 310,808 Q64,685,451

Q1,643,213 Q

Q 1,940,245 Q

Q1,940,245

Q Q

283,751

Q6,196,070 Q6,196,070

Q 6,196,070 283,751 Q 6,479,821

Q 283,751

F-79

Level 1

Parent Company December 31, 2011 Level 2 Level 3

Total

Financial Assets Financial assets at FVPL: Held-for-trading: Government securities . . . . . . . . . . . . . . . . . . . . . . . Derivative assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . Private debt securities . . . . . . . . . . . . . . . . . . . . . . . Designated at FVPL: Private debt securities . . . . . . . . . . . . . . . . . . . . . . . AFS investments: Government securities . . . . . . . . . . . . . . . . . . . . . . . Other debt securities. . . . . . . . . . . . . . . . . . . . . . . . . Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial Liabilities Financial Liabilities at FVPL: Designated at FVPL . . . . . . . . . . . . . . . . . . . . . . . . . Derivative liabilities . . . . . . . . . . . . . . . . . . . . . . . . .

P 2,178,701 91,719 172,875 16,910 P 2,460,205 P41,218,164 5,334,621 36,637 P46,589,422

362,332 4,050,671

P 2,178,701 454,051 172,875 16,910 4,050,671 P 6,873,208 P41,218,164 9,012,310 36,637 P50,267,111

P4,413,003 P

P 3,677,689 P

P3,677,689

P P

171,013

P6,479,170 P6,479,170

P 6,479,170 171,013 P 6,650,183

P 171,013

Level 1

Parent Company January 1, 2011 (As Restated) Level 2 Level 3

Total

Financial Assets Financial assets at FVPL: Held-for-trading: Government securities . . . . . . . . . . . . . . . . . . . . . . . Derivative assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . Designated at FVPL: Private debt securities . . . . . . . . . . . . . . . . . . . . . . . AFS investments: Government securities . . . . . . . . . . . . . . . . . . . . . . . Other debt securities. . . . . . . . . . . . . . . . . . . . . . . . . Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial Liabilities Financial Liabilities at FVPL: Designated at FVPL . . . . . . . . . . . . . . . . . . . . . . . . . Derivative liabilities . . . . . . . . . . . . . . . . . . . . . . . . .

P 9,598,734 40,337 186,842 P 9,825,913 P26,456,593 2,306,487 54,164 P28,817,244

870,195 5,270,790

P 9,598,734 910,532 186,842 5,270,790 P15,966,898 P26,456,593 6,071,477 54,164 P32,582,234

P6,140,985 P

P 3,764,990 P

P3,764,990

P P

P P

57,852 57,852

P6,516,744 P6,516,744

P 6,516,744 57,852 P 6,574,596

When fair values of listed equity and debt securities, as well as publicly traded derivatives at the reporting date are based on quoted market prices or binding dealer price quotations, without any deduction for transaction costs, the instruments are included within Level 1 of the hierarchy. For all other financial instruments, fair value is determined using valuation techniques. Valuation techniques include net present value techniques, comparison to similar instruments for which market observable prices exist and other revaluation models.

F-80

Instruments included in Level 3 include those for which there is currently no active market. In applying the discounted cash flow analysis to determine the fair value of financial liabilities designated at FVPL, the Group and the Parent Company used discount rate ranging from 1.38% to 3.63% and from 1.20% to 4.99% as of December 31, 2012 and 2011, respectively. As of December 31, 2012 and 2011, there were no transfers between Level 1 and Level 2 fair value measurements, and no transfers into and out of level 3 fair value measurements. The following table shows a reconciliation of the beginning and closing amount of Level 3 financial assets and liabilities which are recorded at fair value of the Group and the Parent Company:
December 31, 2012 December 31, 2011 January 1, 2011

Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Add total losses (gain) recorded in profit and loss . . . . . . . . . . . . . . . . . . Balance at end of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q6,479,170 P6,516,744 P6,309,823 (283,100) (37,574) 206,921 Q6,196,070 P6,479,170 P6,516,744

The table below sets forth, the potential effect of reasonably possible change in interest rates (alternative valuation assumption) on the Groups valuation of Level 3 financial instruments (amounts in million pesos):
December 31, 2012 Statement of Income Equity December 31, 2011 Statement of Income Equity January 1, 2011 Statement of Income Equity

Financial Liability Subordinated debt designated at FVPL +50bps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 50bps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . +100bps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -100bps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6. Segment Information

Q 14 (14) 90 (90)

Q 14 (14) 90 (90)

P 45 (45) 90 (90)

P 45 (45) 90 (90)

P 15 (15) 117 (117)

P 15 (15) 117 (117)

Business Segments The Groups operating businesses are determined and managed separately according to the nature of services provided and the different markets served with each segment representing a strategic business unit. The Groups business segments follow: Retail Bankingprincipally handling individual customers deposits, and providing consumer type loans, credit card facilities and fund transfer facilities; Corporate Bankingprincipally handling loans and other credit facilities and deposit accounts for corporate and institutional customers; and Treasuryprincipally providing money market, trading and treasury services, as well as the management of the Groups funding operations by use of T-bills, government securities and placements and acceptances with other banks, through treasury and wholesale banking. These segments are the bases on which the Group reports its primary segment information. Other operations of the Group comprise of the operations and financial control groups. Transactions between segments are conducted at estimated market rates on an arms length basis. Interest is credited to or charged against business segments based on a pool rate which approximates the marginal cost of funds. For management purposes, business segment report is done on a quarterly basis. Business segment information provided to the board of directors, chief operating decision maker (CODM) is based on the Regulatory Accounting Principles (RAP) submitted to the BSP in compliance with the reportorial requirements under the Financial Reporting Package (FRP) for banks, which differ from PFRS. Significant differences arose from the manner of provisioning for impairment and credit losses, measurement of investment properties and the fair value measurement of financial instruments. The report submitted to CODM represents only the results of operation for each of the reportable segment. The Group has no significant customer which contributes 10.00% or more of the consolidated revenue. F-81

Business segment information of the Group follows:

2012 Retail Banking Interest income . . . . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . . Net interest margin. . . . . . . . . . . . . . . . . . Other income. . . . . . . . . . . . . . . . . . . . . . . Other expenses . . . . . . . . . . . . . . . . . . . . . Segment result . . . . . . . . . . . . . . . . . . . . . Inter-segment Imputed income. . . . . . . . . . . . . . . . Imputed cost. . . . . . . . . . . . . . . . . . . Segment result to third party . . . . . . . . . Unallocated expenses . . . . . . . . . . . . . . . Net income before share in net income of an associate and income tax . . . . . Share in net income of an associate . . . Net income before income tax . . . . . . . . Income tax . . . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . Non-controlling interest . . . . . . . . . . . . . Net income for the year attributable to equity holders of the Parent Company . . . . . . . . . . . . . . . . . . . . . . . . Other Information Segment assets . . . . . . . . . . . . . . . . . . . . . Unallocated assets . . . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . Segment liabilities . . . . . . . . . . . . . . . . . . Unallocated liabilities . . . . . . . . . . . . . . . Total liabilities . . . . . . . . . . . . . . . . . . . . . Other Segment Information Capital expenditures . . . . . . . . . . . . . . . . Depreciation and amortization. . . . . . . . Unallocated depreciation and amortization . . . . . . . . . . . . . . . . . . . . . Total depreciation and amortization . . . Provision for (reversal of) impairment, credit and other losses. . . . . . . . . . . . . Q 37,130 Q 674,855 Q 249,369 (Q149,367) Q 121,714 Q Q Q Q 506,515 160,741 Q Q 6,119 170,691 Q Q 3,131 6,470 Q Q 170,204 77,616 Q Q205,217,147 Q32,452,570 Q 40,985,859 Q16,131,643 Q 50,745,189 Q95,365,478 Q147,433,116 Q39,211,636 Q Q Corporate Banking Adjustments and Eliminations* 110,371 58,048 168,419 637,100 (447,306) 358,213 4,511,306 (4,511,306) Q 503,284 Q 358,213

Treasury

Others

Total Q 11,360,607 (4,384,902) 6,975,705 10,861,086 (8,972,651) 8,864,140 8,864,140 (2,922,013) 5,942,127 10,309 5,952,436 (924,734) 5,027,702 (375,896)

1,230,721 Q 6,590,457 Q 3,231,110 Q (2,128,538) (596,735) (1,714,888) (897,817) 905,734 (3,086,619) (3,078,702) 4,511,306 (2,096,482) 1,432,604 Q 2,338,922 Q (2,414,824) 4,231,117 5,993,722 1,562,453 (3,120,771) 4,435,404 1,516,222 5,733,577 (603,858) 6,645,941

197,948 Q (2,789) 195,159 2,022,222 (1,714,097) 503,284

4,651,806

(Q4,754,066) Q328,001,353 3,005,186 Q331,006,539 (Q6,489,036) Q288,298,183 2,961,465 Q291,259,648 (Q284,710) Q 61,364 Q 401,259 476,882 236,353 713,235 933,701

The eliminations and adjustments column mainly represent the RAP to PFRS adjustments

F-82

2011 (As Restated) Retail Banking Interest income . . . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . Net interest margin . . . . . . . . . . . . . . . . Other income . . . . . . . . . . . . . . . . . . . . . Other expenses . . . . . . . . . . . . . . . . . . . . Segment result . . . . . . . . . . . . . . . . . . . . Inter-segment Imputed income. . . . . . . . . . . . . . . Imputed cost. . . . . . . . . . . . . . . . . . Segment result to third party . . . . . . . . Unallocated expenses . . . . . . . . . . . . . . Net income before share in net income of an associate and income tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Share in net income of an associate . . Net income before income tax. . . . . . . Income tax. . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . Non-controlling interest . . . . . . . . . . . . Net income for the year attributable to equity holders of the Parent Company Other Information Segment assets . . . . . . . . . . . . . . . . . . . . Unallocated assets . . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . Segment liabilities . . . . . . . . . . . . . . . . . Unallocated liabilities . . . . . . . . . . . . . . Total liabilities . . . . . . . . . . . . . . . . . . . . Other Segment Information Capital expenditures . . . . . . . . . . . . . . . Depreciation and amortization. . . . . . . Unallocated depreciation and amortization . . . . . . . . . . . . . . . . . . . . Total depreciation and amortization . . . . . . . . . . . . . . . . . . . . Provision for (reversal of) impairment and credit losses. . . . . . . . . . . . . . . . . P 18,072 (P248,993) P 809,008 P 57,498 P 916,815 P P P 166,118 P154,421 P P 556 88,936 P 4,676 P5,468 P P 182,583 12,639 P P 170,569 P187,646,586 P 32,584,614 P 44,265,932 P 9,826,586 (P1,129,540) P 48,015,755 P124,180,936 P102,414,597 P36,296,942 (P2,356,960) P P Corporate Banking Adjustments and Eliminations* P 682,211 54,787 736,998 877,188 (324,688) 1,289,498 (3,737,997) 3,737,997 P1,289,498

Treasury

Others 66,393 (4,251) 62,142 2,378,784 (1,625,041) 815,885 P 815,885

Total P 12,472,160 (5,268,704) 7,203,456 10,325,756 (6,569,761) 10,959,451 10,959,451 (5,393,362)

1,113,053 P 6,507,214 P 4,103,289 P (1,179,459) (1,984,296) (2,155,485) (66,406) 1,017,801 (2,558,105) (1,606,710) 3,737,997 2,131,287 P 4,522,918 1,550,080 (1,043,515) 5,029,483 (2,110,281) 2,919,202 P 1,947,804 4,501,903 (1,018,412) 5,431,295 (1,627,716) 3,803,579

5,566,089 68,955 5,635,044 (879,352) 4,755,692 (86,340)

4,669,352

P308,551,270 3,515,369 P312,066,639 P273,194,178 3,898,024 P277,092,202 P P 353,933 432,033 224,371 656,404 1,552,400

The eliminations and adjustments column mainly represent the RAP to PFRS adjustments

F-83

2010 (As Restated) Retail Banking Interest income. . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . Net interest margin . . . . . . . . . . . . . . . Other income . . . . . . . . . . . . . . . . . . . . Other expenses . . . . . . . . . . . . . . . . . . . Segment result . . . . . . . . . . . . . . . . . . . Inter-segment Imputed income. . . . . . . . . . . . . . Imputed cost . . . . . . . . . . . . . . . . Segment result to third party . . . . . . . Unallocated expenses . . . . . . . . . . . . . Net income before share in net income of an associate and income tax . . . . . . . . . . . . . . . . . . . . Share in net income of an associate . . . . . . . . . . . . . . . . . . . . . . Net income before income tax. . . . . . Income tax. . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . Non-controlling interest . . . . . . . . . . . Net income for the year attributable to equity holders of the Parent Company. . . . . . . . . . . . . . . . . . . . . . Other Information Segment assets . . . . . . . . . . . . . . . . . . . Unallocated assets . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . Segment liabilities . . . . . . . . . . . . . . . . Unallocated liabilities . . . . . . . . . . . . . Total liabilities . . . . . . . . . . . . . . . . . . . Other Segment Information Capital expenditures . . . . . . . . . . . . . . Depreciation and amortization . . . . . Unallocated depreciation and amortization . . . . . . . . . . . . . . . . . . . Total depreciation and amortization . . . . . . . . . . . . . . . . . . . Provision for (reversal of) impairment and credit losses . . . . . P 618,438 (P232,077) P 380,474 (P46,561) P1,679,498 P P P P 291,432 161,207 P P 4,530 262,862 P P 9,233 1,780 P P 11,288 57,258 P P 64,378 P189,232,060 P 24,282,218 P 42,900,590 P14,836,876 (P5,884,169) P 42,722,421 P121,940,477 P113,967,830 P28,799,188 (P14,319,174) P P Corporate Banking Adjustments and Eliminations* P 196,871 84,850 281,721 1,200,145 (620,418) 861,448 (4,763,404) 4,763,404 P 861,448

Treasury

Others 240,935 (7,004) 233,931 2,813,268 (823,742) 2,223,457 P 2,223,457

Total P 12,331,053 (4,771,576) 7,559,477 10,095,657 (6,488,103) 11,167,031 11,167,031 (6,255,591)

1,480,269 P 6,030,114 P 4,382,864 P (1,095,226) (1,835,228) (1,918,968) 385,043 1,075,764 (3,560,959) (2,100,152) 4,763,404 2,663,252 P 4,194,886 2,074,849 (873,386) 5,396,349 (2,769,933) 2,626,416 P 2,463,896 2,931,631 (609,598) 4,785,929 (1,993,471) 2,792,458

4,911,440 45,065 4,956,505 (924,218) 4,032,287 (466,568)

3,565,719

P293,110,742 4,009,286 P297,120,028 P265,367,575 3,380,867 P268,748,442 P P 316,483 547,485 290,119 837,604 2,399,772

The eliminations and adjustments column mainly represent the RAP to PFRS adjustments

F-84

Geographical Segments Although the Groups businesses are managed on a worldwide basis, the Group operates in five (5) principal geographical areas of the world. The distribution of assets, liabilities, credit commitments items and revenues by geographic region of the Group follows:
Assets December 31, 2011 (As Restated) P300,809,127 5,136,569 5,279,980 541,984 298,979 P312,066,639 January 1, 2011 (As Restated) P284,253,866 6,194,228 5,069,930 1,264,388 337,616 P297,120,028 Liabilities December 31, 2011 (As Restated) P269,180,023 4,320,174 3,069,855 275,895 246,255 P277,092,202 January 1, 2011 (As Restated) P259,579,003 5,201,196 2,772,714 938,516 257,013 P268,748,442

December 31, 2012 Philippines. . . . . . . . . . . . . . . . . . . . . . Asia (excluding Philippines) . . . . . . USA and Canada . . . . . . . . . . . . . . . . United Kingdom. . . . . . . . . . . . . . . . . Other European Union Countries . . P320,514,714 4,786,765 5,156,870 308,233 239,957 P331,006,539

December 31, 2012 P283,683,617 4,120,423 3,150,382 76,051 229,175 P291,259,648

Capital Expenditure December 31, January 1, December 31, 2011 2011 2012 (As Restated) (As Restated) Philippines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Asia (excluding Philippines) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . USA and Canada. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United Kingdom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other European Union Countries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P399,026 1,895 338 P401,259 Credit Commitments December 31, January 1, December 31, 2011 2011 2012 (As Restated) (As Restated) Philippines . . . . . . . . . . . . . . . . . . . . . . Asia (excluding Philippines) . . . . . . . USA and Canada. . . . . . . . . . . . . . . . . United Kingdom . . . . . . . . . . . . . . . . . Other European Union Countries. . . P442,084 515,684 37,606 P995,374 P2,026,118 70,893 36,558 P2,133,569 P3,203,881 82,422 11,280 P3,297,583 P341,572 5,433 4,855 2,073 P353,933 Revenues December 31, 2011 (As Restated) P21,152,270 761,750 632,123 144,683 176,045 P22,866,871 P278,242 28,612 159 6,459 3,011 P316,483

December 31, 2012 P20,726,570 771,601 605,993 117,116 10,723 P22,232,003

January 1, 2011 (As Restated) P20,566,948 874,112 809,595 118,901 102,219 P22,471,775

The Philippines is the home country of the Parent Company, which is also the main operating company. The Group offers a wide range of financial services as discussed in Note 1. Additionally, most of the remittance services are managed and conducted in Asia, Canada, USA and United Kingdom. The areas of operations include all the primary business segments. The Group has no significant customers which contribute 10% or more of the revenues. 7. Financial Assets at Fair Value Through Profit or Loss This account consists of:
Consolidated December 31, 2012 December 31, 2011 January 1, 2011 (As Restated)

Held-for-trading: Government securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Derivative assets (Note 22). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Private debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Designated at FVPL: Private debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q1,970,754 454,501 250,552 99,502 2,775,309 1,247,756 Q4,023,065

P2,178,701 454,051 175,332 16,910 2,824,994 4,050,671 P6,875,665

P 9,598,734 910,532 200,354 10,709,620 5,271,027 P15,980,647

F-85

Parent Company December 31, 2012 December 31, 2011 January 1, 2011 (As Restated)

Held-for-trading: Government securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Derivative assets (Note 22). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Private debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Designated at FVPL: Private debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q1,970,754 454,501 192,585 99,502 2,717,342 1,247,756 Q3,965,098

P2,178,701 454,051 172,875 16,910 2,822,537 4,050,671 P6,873,208

P 9,598,734 910,532 186,842 10,696,108 5,270,790 P15,966,898

Government and private debt securities include unrealized gain of P50.1 million and P31.9 million as of December 31, 2012 and 2011, respectively, for the Group and the Parent Company. As of December 31, 2012 and 2011, the effective interest rates of government securities ranges from 0.67% to 6.72% and from 1.94% to 6.88%, respectively. As of December 31, 2012 and 2011, the effective interest rates of private debt securities ranges from 3.95% to 7.20%, respectively. Equity securities include unrealized loss of P3.9 million and P4.3 million for the Group and the Parent Company as of December 31, 2012, respectively, and unrealized gain of P4.8 million and P4.9 million for the Group and the Parent Company as of December 31, 2011, respectively. Designated financial assets at FVPL represent USD-denominated investments in CLN. The CLNs are part of a group of financial instruments that together are managed on a fair value basis, in accordance with the documented risk management and investment strategy of the Parent Company. Unrealized gain from financial assets designated at FVPL amounted to P16.3 million and unrealized loss of P4.5 million as of December 31, 2012 and 2011, respectively. On March 22 and August 17, 2012, the Parent Company pre-terminated investments in CLN designated at financial assets at FVPL with a total face amount of USD47.5 million or P2.0 billion and USD15.0 million or P636.3 million, respectively, in which the Parent Company realized trading gain of USD0.2 million or equivalent to P8.3 million. The carrying amount of the preterminated securities as of pre-termination dates amounted to USD48.1 million or P2.1 billion and USD14.8 million or P628.2 million, respectively.

F-86

8.

Loans and Receivables This account consists of:

Consolidated December 31, December 31, 2012 2011 January 1, 2011 Parent Company December 31, December 31, January 1, 2012 2011 2011 P85,239,740 5,072,884 2,082,774 86,200 484,103 92,965,701 415,871 92,549,830 11,225,478 6,838,802 3,697,134 4,221,452 720,006 15,477,394 119,252,702 12,710,967

Receivable from customers: Loans and discounts . . . . . . . . . . . . . . . . . . Q124,072,963 P102,665,659 Customers liabilities on acceptances, letters of credit and trust receipts. . . . . 4,150,208 7,068,555 Bills purchased (Note 21) . . . . . . . . . . . . . 2,556,211 3,604,241 Lease contracts receivable (Note 27) . . . 2,043,456 1,875,682 Credit card receivables. . . . . . . . . . . . . . . . 286,623 335,671 Less unearned and other deferred income . . . . 133,109,461 910,617 132,198,844 Unquoted debt securities (Note 16) . . . . . . . . . Other receivables: Accounts receivable . . . . . . . . . . . . . . . . . . Accrued interest receivable. . . . . . . . . . . . Sales contract receivables . . . . . . . . . . . . . Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . 7,818,199 7,517,056 6,190,680 4,633,079 593,434 18,934,249 Less allowance for credit losses (Note 15) . . . 158,951,292 14,243,783 115,549,808 909,680 114,640,128 8,361,129 6,072,310 6,344,908 3,902,891 469,009 16,789,118 139,790,375 13,541,340

P85,647,736 Q123,118,335 P102,090,119 5,072,884 2,082,774 1,779,149 484,103 95,066,646 595,399 94,471,247 11,225,478 6,857,057 5,864,079 4,221,452 722,474 17,665,062 123,361,787 13,046,309 4,150,208 2,556,211 105,859 286,623 130,217,236 676,591 129,540,645 7,818,199 4,731,355 6,150,746 4,633,079 561,034 16,076,214 153,435,058 13,298,210 7,068,555 3,604,241 106,350 335,671 113,204,936 705,225 112,499,711 8,361,129 4,183,025 6,312,182 3,902,891 468,604 14,866,702 135,727,542 13,074,591

Q144,707,509 P126,249,035 P110,315,478 Q140,136,848 P122,652,951 P106,541,735

Below is the reconciliation of loans and receivables as to classes:

Consolidated December 31, 2012 Business Loans GOCCs and NGAs Unquoted Fringe Debt Consumers Benefits Securities Q

LGUs

Others

Total

Receivable from customers: Loans and discounts . . . . . . . Q83,058,722 Q21,598,814 Q7,287,123 Q11,469,948 Q658,356 Q Customers liabilities on acceptances, letters of credit and trust receipts. . . 2,658,590 1,491,618 Bills purchased (Note 21) . . . 1,165,415 1,390,796 Lease contracts receivable (Note 27) . . . . . . . . . . . . . . . 2,041,954 1,502 Credit card accounts . . . . . . . 286,623 88,924,681 Less unearned and other deferred income . . . . . . . . . . . . . . . . . . . . . 910,511 88,014,170 Unquoted debt securities . . . . . . . . Other receivables: Accounts receivable. . . . . . . . Accrued interest receivable . . . . . . . . . . . . . . Sales contract receivables. . . Miscellaneous . . . . . . . . . . . . . Less allowance for credit losses (Note 15) . . . . . . . . . . . . . . . . . . . 88,014,170 4,631,725 24,481,228 24,481,228 24,481,228 70,731 7,287,123 7,287,123 7,287,123 129,653 11,758,073 106 11,757,967 11,757,967 561,132 658,356 658,356 658,356 14,748

Q124,072,963

7,818,199 7,818,199 3,958,931

7,517,056 6,190,680 4,633,079 593,434 18,934,249 4,876,863

4,150,208 2,556,211 2,043,456 286,623 133,109,461 910,617 132,198,844 7,818,199 7,517,056 6,190,680 4,633,079 593,434 158,951,292 14,243,783

Q83,382,445 Q24,410,497 Q7,157,470 Q11,196,835 Q643,608 Q3,859,268 Q14,057,386 Q144,707,509

F-87

Consolidated December 31, 2011 Business Loans GOCCs and NGAs Fringe Consumers Benefits Unquoted Debt Securities

LGUs

Others P

Total P102,665,659

Receivable from customers: Loans and discounts . . . . . . P67,431,847 P20,774,498 P5,975,274 P7,772,107 P711,933 P Customers liabilities on acceptances, letters of credit and trust receipts . . 1,361,663 5,706,892 Bills purchased (Note 21). . . . . . . . . . . . . . 2,221,971 1,382,270 Lease contracts receivable (Note 27). . . . . . . . . . . . . . 1,875,682 Credit card accounts . . . . . . 335,671 72,891,163 Less unearned and other deferred income . . . . . . . . . . . . Unquoted debt securities. . . . . . . Other receivables: Accounts receivable . . . . . . P Accrued interest receivable . . . . . . . . . . . . . Sales contract receivables . . . . . . . . . . . . Miscellaneous. . . . . . . . . . . . Less allowance for credit losses (Note 15) . . . . . . . . . . . . . . . . . . 71,981,483 4,653,994 P 27,863,660 89,648 P 5,975,274 74,998 P 8,107,778 586,329 711,933 14,858 909,680 71,981,483 27,863,660 27,863,660 5,975,274 5,975,274 8,107,778 8,107,778 P 711,933 711,933 P

8,361,129

7,068,555 3,604,241 1,875,682 335,671 115,549,808 909,680 114,640,128 8,361,129

P6,072,310 6,344,908 3,902,891 469,009 16,789,118 4,348,881

P6,072,310 6,344,908 3,902,891 469,009 139,790,375 13,541,340

8,361,129 3,772,632

P67,327,489 P27,774,012 P5,900,276 P7,521,449 P697,075 P4,588,497 P12,440,237 P126,249,035 Parent Company December 31, 2012 Business Loans GOCCs and NGAs Fringe Consumers Benefits Unquoted Debt Securities Q

LGUs

Others

Total Q123,118,335

Receivable from customers: Loans and discounts . . . . . Q82,226,939 Q21,598,813 Q7,287,123 Q11,360,846 Q644,614 Q Customers liabilities on acceptances, letters of credit and trust receipts . . . . . . . . . . . . . . 2,658,589 1,491,619 Bills purchased (Note 21). . . . . . . . . . . . . 1,165,415 1,390,796 Lease contract receivable (Note 27). . . . . . . . . . . . . 105,859 Credit card accounts . . . . . 286,623 86,156,802 Less unearned and other deferred income . . . . . . . . . . . Unquoted debt securities . . . . . . Other receivables: Accounts receivable . . . . . Accrued interest receivable . . . . . . . . . . . . Sales contract receivables . . . . . . . . . . . Miscellaneous. . . . . . . . . . . Less allowance for credit losses (Note 15) . . . . . . . . . . . . . . . . . 676,591 85,480,211 85,480,211 4,512,157 24,481,228 24,481,228 24,481,228 70,731 7,287,123 7,287,123 7,287,123 129,653 11,647,469 11,647,469 11,647,469 545,143 644,614 644,614 644,614 14,743

7,818,199 7,818,199 3,958,931

4,731,355 6,150,746 4,633,079 561,034 16,076,214 4,066,852

4,150,208 2,556,211 105,859 286,623 130,217,236 676,591 129,540,645 7,818,199 4,731,355 6,150,746 4,633,079 561,034 153,435,058 13,298,210

Q80,968,054 Q24,410,497 Q7,157,470 Q11,102,326 Q629,871 Q3,859,268 Q12,009,362 Q140,136,848

F-88

Parent Company December 31, 2011 Business Loans GOCCs and NGAs Fringe Consumers Benefits Unquoted Debt Securities P

LGUs

Others

Total P102,090,119

Receivable from customers: Loans and discounts . . . . . . P67,028,397 P20,774,498 P5,975,274 P7,610,102 P701,848 P Customers liabilities on acceptances, letters of credit and trust receipts . . . . . . . . . . . . . . . 1,361,663 5,706,892 Bills purchased (Note 21). . . . . . . . . . . . . . 2,221,971 1,382,270 Lease contract receivable (Note 27). . . . . . . . . . . . . . 106,350 Credit card accounts . . . . . . 335,671 70,718,381 Less unearned and other deferred income . . . . . . . . . . . . 705,225 70,013,156 Unquoted debt securities. . . . . . . Other receivables: Accounts receivable . . . . . . Accrued interest receivable . . . . . . . . . . . . . Sales contract receivables . . . . . . . . . . . . Miscellaneous. . . . . . . . . . . . Less allowance for credit losses (Note 15) . . . . . . . . . . . . . . . . . . 70,013,156 4,371,740 27,863,660 27,863,660 27,863,660 89,648 5,975,274 5,975,274 5,975,274 74,998 7,945,773 7,945,773 7,945,773 527,603 701,848 701,848 701,848 14,745

8,361,129 8,361,129 3,772,632

4,183,025 6,312,182 3,902,891 468,604 14,866,702 4,223,225

7,068,555 3,604,241 106,350 335,671 113,204,936 705,225 112,499,711 8,361,129 4,183,025 6,312,182 3,902,891 468,604 135,727,542 13,074,591

P65,641,416 P27,774,012 P5,900,276 P7,418,170 P687,103 P4,588,497 P10,643,477 P122,652,951

Refer to Note 31 for the loans and receivables to related parties. As of December 31, 2012 and 2011, 90.89% and 92.16%, respectively, of the total receivable from customers of the Group were subject to quarterly interest repricing. As of December 31, 2012 and 2011, 90.62% and 94.05%, respectively, of the total receivable from customers of the Parent Company were subject to quarterly interest repricing. Remaining receivables carry annual fixed interest rates ranging from 2.25% to 12.97% as of December 31, 2012 and from 2.55% to 9.00% as of December 31, 2011 for foreign currency-denominated receivables, and from 0.85% to 18.50% as of December 31, 2012 and from 5.55% to 15.00% as of December 31, 2011 for peso-denominated receivables. Sales contract receivables bear fixed interest rate per annum ranging from 1.76% to 15.00% and from 1.76% to 16.50% as of December 31, 2012 and 2011, respectively. The EIR of Receivable from customers, Unquoted debt instruments and Sales contract receivables range from 2.25% to 12.97% as of December 31, 2012 and from 2.63% to 9.00% as of December 31, 2011 for foreign currency-denominated receivables, and from 0.85% to 47.40% as of December 31, 2012 and from 5.55% to 15.00% as of December 31, 2011 for peso-denominated receivables. Unquoted debt instruments include the zero-coupon notes received by the Parent Company on October 15, 2004, at the principal amount of P803.5 million (Tranche A Note) payable in five (5) years and at the principal amount of P3.4 billion (Tranche B Note) payable in eight (8) years in exchange for the outstanding loans receivable from National Steel Corporation (NSC) of P5.3 billion. The notes are secured by a first ranking mortgage and security interest over the NSC Plant Assets. As of December 31, 2012 and 2011, these notes had a carrying value of nil and P186.0 million, respectively. As of December 31, 2012 and 2011, unquoted debt instruments include bonds issued by Philippine Sugar Corporation (PSC) amounting to P2.7 billion with accrued interest included under Accrued interest receivable amounting to P2.3 billion. The bonds carry an annual interest rate of 4.00% and will mature in 2014. The full repayment of principal and accumulated interest to maturity is guaranteed by a sinking fund managed by the F-89

Parent Companys Trust Banking Group (TBG). As of December 31, 2012 and 2011, the sinking fund amounted to P5.2 billion and P5.1 billion, respectively, earning an average rate of return of 8.82% per annum. Management expects that the value of the sinking fund in the year 2014 will be more than adequate to cover the full redemption value of PSC bonds. On November 27, 1997, Maybank Philippines, Inc. (Maybank) and the Parent Company signed a deed of assignment transferring to the Parent Company certain Maybank assets (included under Accounts receivable) and liabilities in connection with the sale of the Parent Companys 60.00% equity in Maybank. As of December 31, 2012 and 2011, the balance of these receivables amounted to P3.4 billion and P3.5 billion, respectively, and the transferred liabilities (included under Bills payable to BSP and local bankssee Note 18 and Accrued interest payable) amounted to P3.1 billion and P3.3 billion, respectively. The excess of the transferred receivables over the transferred liabilities is fully covered by an allowance for credit losses amounting to P262.5 million and P241.8 million as of December 31, 2012 and 2011, respectively. The remaining 40% equity ownership of the Parent Company in Maybank was sold in June 2000 (see Note 32). BSP Reporting The table below shows the industry sector analysis of the Groups and Parent Companys receivable from customers before taking into account the allowance for credit losses (amounts in millions).
December 31, 2012 Carrying Amount % Consolidated December 31, 2011 Carrying Amount % January 1, 2011 Carrying Amount %

Loans and Receivables Receivable from customers: Primary target industry: . . . . . . . . . . . . . . . . . . Public administration and defense . . . . Wholesale and retail . . . . . . . . . . . . . . . . Transport, storage and communication. . . . . . . . . . . . . . . . . . . Electricity, gas and water . . . . . . . . . . . . Manufacturing . . . . . . . . . . . . . . . . . . . . . Financial intermediaries . . . . . . . . . . . . . Agriculture, hunting and forestry . . . . . Secondary target industry:. . . . . . . . . . . . . . . . Real estate, renting and business activities . . . . . . . . . . . . . . . . . . . . . . . . Construction . . . . . . . . . . . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q 22,766 21,496 17,051 18,180 13,317 10,207 2,899

17.10 16.15 12.81 13.66 10.00 7.67 2.18

P 21,617 21,370 16,696 14,604 13,215 5,550 2,688

18.71 18.49 14.45 12.64 11.44 4.80 2.33

P 7,951 23,819 11,397 12,991 10,146 3,986 3,194

8.36 25.05 11.99 13.67 10.67 4.19 3.36

11,434 2,349 13,410 Q133,109

8.59 1.77 10.07 100.00

8,014 1,159 10,637 P115,550

6.94 1.00 9.20 100.00

7,155 786 13,642 P95,067

7.53 0.83 14.35 100.00

F-90

December 31, 2012 Carrying Amount %

Parent Company December 31, 2011 Carrying Amount %

January 1, 2011 Carrying Amount %

Loans and Receivables Receivable from customers: Primary target industry: . . . . . . . . . . . . . . . . . . Public administration and defense . . . . Wholesale and retail . . . . . . . . . . . . . . . . Transport, storage and communication. . . . . . . . . . . . . . . . . . . Electricity, gas and water . . . . . . . . . . . . Manufacturing . . . . . . . . . . . . . . . . . . . . . Financial intermediaries . . . . . . . . . . . . . Agriculture, hunting and forestry . . . . . Secondary target industry:. . . . . . . . . . . . . . . . Real estate, renting and business activities . . . . . . . . . . . . . . . . . . . . . . . . Construction . . . . . . . . . . . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q 22,739 21,192 16,186 18,180 13,228 10,193 2,705

17.46 16.27 12.43 13.96 10.16 7.83 2.08

P 21,617 21,140 16,147 14,604 12,634 5,520 2,619

19.10 18.67 14.26 12.90 11.16 4.88 2.31

P 7,668 23,165 11,397 12,991 9,960 3,857 3,153

8.25 24.92 12.26 13.97 10.71 4.15 3.39

11,395 2,148 12,251 Q130,217

8.75 1.65 9.41 100.00

7,998 990 9,936 P113,205

7.07 0.87 8.78 100.00

6,347 786 13,642 P92,966

6.83 0.85 14.67 100.00

The information (gross of unearned and other deferred income) relating to receivable from customers as to secured and unsecured and as to collateral follows:
December 31, 2012 Amount % Consolidated December 31, 2011 Amount % January 1, 2011 Amount %

Secured: Real estate mortgage . . . . . . . . . Chattel mortgage . . . . . . . . . . . . Bank deposit hold-out . . . . . . . . Shares of stocks . . . . . . . . . . . . . Others. . . . . . . . . . . . . . . . . . . . . . Unsecured . . . . . . . . . . . . . . . . . . . . . .

Q 21,457,030 4,336,447 1,615,415 358,267 21,660,562 49,427,721 83,681,740 Q133,109,461

16.12 P 20,363,457 3.26 3,146,685 1.21 2,640,111 0.27 358,596 16.27 11,111,247 37.13 62.87 37,620,096 77,929,712

17.62 P13,584,215 2.72 2,222,510 2.28 2,381,335 0.31 493,888 9.62 9,145,475 32.55 67.45 27,827,423 67,239,223

14.29 2.34 2.50 0.52 9.62 29.27 70.73 100.00

100.00 P115,549,808

100.00 P95,066,646

December 31, 2012 Amount %

Parent Company December 31, 2011 Amount %

January 1, 2011 Amount %

Secured: Real estate mortgage . . . . . . . . . Chattel mortgage . . . . . . . . . . . . Bank deposit hold-out . . . . . . . . Shares of stocks . . . . . . . . . . . . . Others. . . . . . . . . . . . . . . . . . . . . . Unsecured . . . . . . . . . . . . . . . . . . . . . .

Q 21,435,750 3,200,301 1,612,914 358,267 19,445,870 46,053,102 84,164,134 Q130,217,236

16.46 P 20,332,088 2.46 2,824,504 1.24 2,634,352 0.28 358,596 14.93 9,223,956 35.37 64.63 35,373,496 77,831,440

17.96 P13,541,857 2.50 2,230,005 2.32 2,288,931 0.32 493,888 8.15 7,452,451 31.25 68.75 26,007,132 66,958,569

16.12 3.26 1.21 0.27 16.27 37.13 62.87 100.00

100.00 P113,204,936

100.00 P92,965,701

F-91

Non-performing Loans (NPL) as to secured and unsecured follows:

December 31, 2012 Consolidated December 31, 2011 January 1, 2011 December 31, 2012 Parent Company December 31, 2011 January 1, 2011

Secured . . . . . . . . . . . . . . . . . Unsecured. . . . . . . . . . . . . . .

Q3,801,846 2,685,591 Q6,487,437

P5,215,732 1,696,344 P6,912,076

P4,321,843 Q3,801,846 3,344,338 2,662,759 P7,666,181 Q6,464,605

P5,209,048 1,636,094 P6,845,142

P4,313,895 3,283,943 P7,597,838

Generally, NPLs refer to loans whose principal and/or interest is unpaid for thirty (30) days or more after due date or after they have become past due in accordance with existing BSP rules and regulations. This shall apply to loans payable in lump sum and loans payable in quarterly, semi-annual, or annual installments, in which case, the total outstanding balance thereof shall be considered nonperforming. In the case of loans that are payable in monthly installments, the total outstanding balance thereof shall be considered nonperforming when three (3) or more installments are in arrears. In the case of loans that are payable in daily, weekly, or semi-monthly installments, the total outstanding balance thereof shall be considered nonperforming at the same time that they become past due in accordance with existing BSP regulations, i.e., the entire outstanding balance of the receivable shall be considered as past due when the total amount of arrearages reaches ten percent (10.00%) of the total loan balance. Loans are classified as nonperforming in accordance with BSP regulations, or when, in the opinion of management, collection of interest or principal is doubtful. Loans are not reclassified as performing until interest and principal payments are brought current or the loans are restructured in accordance with existing BSP regulations, and future payments appear assured. Loans which do not meet the requirements to be treated as performing loans shall also be considered as NPLs. Current banking regulations allow banks that have no unbooked valuation reserves and capital adjustments to exclude from nonperforming classification those loans classified as Loss in the latest examination of the BSP which are fully covered by allowance for credit losses, provided that interest on said receivables shall not be accrued. The details of the NPL of the Group and the Parent Company follow:
2012 Consolidated 2011 2010 2012 Parent Company 2011 2010

Total NPLs . . . . . . . . . . . . . . Less NPL fully covered by allowance for credit losses. . . . . . . . . . . . . . . . .

Q6,487,437

P6,912,076

P7,666,181

Q6,464,605

P6,845,142

P7,597,838

2,718,043 Q3,769,394

2,341,141 P4,570,935

2,757,358 P4,908,823

2,697,422 Q3,767,183

2,341,141 P4,504,001

2,643,936 P4,953,902

Most of these loans are secured by real estate or chattel mortgages. Restructured loans of the Group and the Parent Company as of December 31, 2012 amounted to P2.6 billion and P2.5 billion, respectively. Restructured loans of the Group and the Parent Company as of December 31, 2011 amounted to P3.4 billion and P3.3 billion, respectively. Restructured loans of the Group and the Parent Company as of January 1, 2011 amounted to P2.9 billion. Interest income on loans and receivables consists of:
2012 Consolidated 2011 2010 2012 Parent Company 2011 2010

Receivable from customers and sales contract receivables . . . . . . . . . . . . Unquoted debt securities. . . . . . . . . . . . . .

Q7,372,917 78,434 Q7,451,351

P7,245,830 275,699 P7,521,529

P6,618,284 355,017 P6,973,301

Q7,235,499 78,434 Q7,313,933

P7,127,101 275,699 P7,402,800

P6,572,548 355,017 P6,927,565

F-92

Interest income accrued on impaired loans and receivable amounted to P302.8 million in 2012, P373.3 million in 2011, and P354.6 million in 2010 (Note 15). 9. Receivable from Special Purpose Vehicle

Receivable from SPV represents the present value of the notes received by the Parent Company from the sale of the first pool and second pool of NPAs to an SPV in December 2006 and March 2007, respectively. The asset sale and purchase agreements (ASPA) were executed on December 19, 2006. As of December 31, 2012 and 2011, Receivable from SPV is net of allowance for credit losses amounting to P258.8 million and P833.8 million (Note 15). The more significant terms of the sale are as follows: a. Certain NPAs of the Parent Company were sold to the SPV and divided into two pools. The sale of the first pool of NPAs with an outstanding balance of P11.7 billion was made on December 29, 2006 for a total consideration of P11.7 billion. The agreed purchase price of the first pool of NPAs shall be paid as follows: i. ii. An initial amount of P1.1 billion, which was received in full and acknowledged by the Parent Company on February 14, 2007; and The balance of P10.6 billion, through issuance of SPV Notes, shall be paid over five (5) years based on a cash flow waterfall arrangement and at an interest equivalent to the 3-month MART prevailing as of the end of the quarter prior to the payment date.

b.

Under the ASPA, the sale of the second pool of NPAs amounting to P7.6 billion with allowance for credit losses of P5.5 billion became effective in March 2007. The agreed purchase price of this pool of NPAs shall be paid as follows: a. b. An initial amount of P751.1 million, which was received in full and acknowledged by the Parent Company on April 26, 2007; and The balance of P6.8 billion through issuance of SPV Notes, shall be paid over five (5) years based on a cash flow waterfall arrangement and at an interest equivalent to the 3-month MART prevailing as of the end of the quarter prior to the payment date. In case of insufficiency of funds for payment of the SPV Notes, the buyer of the NPAs, with the consent of the Parent Company, which consent shall not be unreasonably withheld, may write-off the SPV Notes, including all interest, fees and charges outstanding and payable.

10. Investment Securities This account consists of:

Consolidated December 31, 2012 December 31, 2011 January 1, 2011 (As Restated)

AFS investments: Government securities (Notes 16, 18, 22 and 30) . . . . . . . . . . . Other debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity securitiesnet of allowance for impairment losses (Note 15) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . HTM investments: Government securities (Notes 15, 18 and 30) . . . . . . . . . . . . . . . Other debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q55,558,527 P42,614,457 10,920,133 9,391,518 518,819 Q66,997,479 Q Q 317,833 P52,323,808 P P

P27,568,048 6,434,689 528,519 P34,531,256 P32,739,615 5,488,576 P38,228,191

F-93

Parent Company December 31, 2012 December 31, 2011 January 1, 2011 (As Restated)

AFS investments: Government securities (Notes 16, 18, 22 and 30) . . . . . . . . . . . Other debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity securitiesnet of allowance for impairment losses (Note 15) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . HTM investments: Government securities (Notes 15, 18 and 30) . . . . . . . . . . . . . . . Other debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q53,822,929 P41,218,164 10,551,714 9,012,310 389,398 Q64,764,041 Q Q 198,503 P50,428,977 P P

P26,456,593 6,071,476 411,272 P32,939,341 32,651,512 5,488,576 P38,140,088

As of December 31, 2012 and 2011, unquoted AFS equity securities amounted to P78.6 million and P161.9 million for the Group and the Parent Company, respectively. No impairment loss has been recognized on these securities in 2012 and 2011. Other debt securities consist of notes issued by private entities and the host contracts on the CLN and deposits issued by foreign banks. Effective interest rates range from 2.35% to 8.15% and from 0.98% to 5.23% for peso-denominated and foreign currency-denominated AFS investments, respectively, as of December 31, 2012. Effective interest rates range from 2.49% to 8.15% and from 1.96% to 6.78% for peso-denominated and foreign currency-denominated AFS investments, respectively, as of December 31, 2011. As of December 31, 2012 and 2011, the fair value of the AFS investments in the form of Fixed Rate Treasury Notes pledged to fulfill its collateral requirements for the peso rediscounting facility of BSP and for the outstanding cross currency swaps amounted to P3.5 billion and P4.5 billion, respectively. As of December 31, 2010, the fair value of the AFS investments in the form of Fixed Rate Treasury Notes and HTM investment in the form of US Treasury Notes pledged in order to fulfill its collateral requirements for the peso rediscounting facility of BSP amounted to P7.1 billion and USD112.5 million or P4.9 billion, respectively. The counterparties have an obligation to return the securities to the Parent Company once the obligations have been settled down. There are no other significant terms and conditions associated with the pledged investments. Interest income on trading and investment securities consists of:
Consolidated 2011 (As Restated) 2010 (As Restated) Parent Company 2011 2010 (As Restated) (As Restated)

2012

2012

AFS investments . . . . . . . . . HTM investments . . . . . . . . Financial assets at FVPL. . . . . . . . . . . . . . . . .

P2,627,530 608,224 P3,235,754

P1,776,577 P1,036,740 P2,532,161 1,756,145 2,411,037 728,014 P4,260,736 991,622 P4,439,399 608,224 P3,140,385

P1,691,357 P 946,388 1,755,621 2,410,142 728,014 P4,174,992 991,622 P4,348,152

F-94

Trading and investment securities gains (losses)net consist of:

Consolidated 2011 (As Restated) 2010 (As Restated) Parent Company 2011 2010 (As Restated) (As Restated)

2012

2012

Financial assets at FVPL: Designated at FVPL . . . P 31,240 (P 135,378) P 104,387 P 31,240 (P 135,378) P 104,387 Derivatives. . . . . . . . . . . 194,247 78,823 785,318 194,247 78,825 801,502 Held-for-trading . . . . . . 449,744 (32,164) 840,133 440,660 (32,288) 840,132 AFS investments . . . . . . . . . . 4,287,934 3,596,089 1,185,384 4,205,426 3,566,589 1,088,004 HTM investments . . . . . . . . . 141,274 141,274 Financial liabilities at FVPL: Derivative liabilities. . . (112,738) (113,162) 372,615 (112,738) (113,162) 356,432 Designated at FVPL . . . 283,100 37,575 (206,921) 283,100 37,575 (206,921) P5,133,527 P 3,573,057 P3,080,916 P5,041,935 P 3,543,435 P2,983,536 The movements in Net unrealized gains (losses) on AFS investments, gross of deferred tax are as follows:
Consolidated December 31, 2011 (As Restated)

December 31, 2012

January 1, 2011

Balance at the beginning of the year. . . . . . . . . . . . . . . . . . . . . . . . . . . Realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrealized gains recognized in equity . . . . . . . . . . . . . . . . . . . . . . . . . Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

776,980 (P1,186,832) (P 871,733) (4,287,934) (3,596,089) (1,185,384) 4,557,062 5,559,901 870,285 P 776,980 (P1,186,832)

P 1,046,108

December 31, 2012

Parent Company December 31, 2011 (As Restated)

January 1, 2011

Balance at the beginning of the year. . . . . . . . . . . . . . . . . . . . . . . . . . . Realized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrealized gains recognized in equity . . . . . . . . . . . . . . . . . . . . . . . . . Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

679,119 (P1,248,647) (P 922,603) (4,205,426) (3,556,589) (1,088,004) 4,430,993 5,484,355 761,960 904,686 P 679,119 (P1,248,647)

In 2010, the Bank participated in the bond exchange transaction and exchanged its HFT and AFS investment securities for New ROP 2021 and Reopened 2034 bonds amounting to USD110.6 million and USD11.2 million. The Banks trading gain on this transaction amounted to USD2.8 million which is equivalent to Q121.3 million. In 2012 and 2011, the Parent Company has pledged part of its AFS investments as security for the Surety Bond issued by PNB General Insurers, Co. Inc. As of December 31, 2012 and 2011, the fair value of the AFS investments in the form of Fixed Rate Treasury Notes pledged amounted to Q817.1 million and Q863.1 million, respectively. Reclassification of Financial Assets On October 12, 2011, the Parent Company had identified a clear change of intent to exit or trade in the short term its HTM investments rather than hold until maturity. The Parent Company disposed of a more than insignificant amount of its HTM investments. This disposal necessitated the reclassification of the remaining HTM investments to AFS securities in accordance with PAS 39. As of the date of reclassification, the amortized cost of HTM investments reclassified to AFS investments amounted to Q32.5 billion. Reclassified AFS investments are initially measured at its fair value amounting to Q35.7 billion. Any difference between the amortized cost of HTM investments and its fair value when reclassified is recognized in the statement of other comprehensive income. As of December 31, 2012 and 2011, the carrying value of the securities reclassified out of HTM investments to AFS investments amounted to Q1.94 billion and Q9.8 billion, respectively. F-95

For the periods ended December 31, 2012 and 2011, the net unrealized gain reclassified from equity to profit or loss due to sale of AFS investments amounted to Q341.5 million and Q2.5 billion, respectively. 11. Property and Equipment The composition of and movements in furniture, fixtures and equipment and leasehold improvements follow:
Consolidated December 31, 2012 Furniture, Fixtures and Equipment Leasehold Improvements

Total

Cost Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Disposals/others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated Depreciation and Amortization Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Disposals/others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net Book Value at End of Year

Q 3,042,550 Q 354,065 Q 3,396,615 269,349 131,910 401,259 (190,801) (27,446) (218,247) 3,121,098 2,330,702 237,322 (157,517) 2,410,507 Q 710,591 458,529 199,900 60,853 (28,708) 232,045 Q 226,484
Consolidated December 31, 2011 Furniture, Fixtures and Equipment Leasehold Improvements

3,579,627 2,530,602 298,175 (186,225) 2,642,552 Q 937,075

Total

Cost Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Disposals/others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated Depreciation and Amortization Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Disposals/others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net Book Value at End of Year

Q2,926,974 Q 306,727 Q 3,233,701 270,277 83,656 353,933 (154,701) (36,318) (191,019) 3,042,550 2,233,057 243,842 (146,197) 2,330,702 Q 711,848 354,065 185,147 26,498 (11,745) 199,900 Q 154,165 Q 3,396,615 2,418,204 270,340 (157,942) 2,530,602 866,013

Parent Company December 31, 2012 Furniture, Fixtures and Equipment Leasehold Improvements

Total

Cost Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Disposals/others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance at end of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated Depreciation and Amortization Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Disposals/others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance at end of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net Book Value at End of Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-96

P2,638,258 207,446 (99,087) 2,746,617 2,089,542 186,206 (83,169) 2,192,579 P 554,038

P 251,243 126,137 (4,173) 373,207 123,554 49,209 (2,882) 169,881 P 203,326

P 2,889,501 333,583 (103,260) 3,119,824 2,213,096 235,415 (86,051) 2,362,460 P 757,364

Parent Company December 31, 2011 Furniture, Fixtures and Equipment Leasehold Improvements

Total

Cost Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Disposals/others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated Depreciation and Amortization Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Disposals/others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net Book Value at End of Year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P2,585,182 182,249 (129,173) 2,638,258 2,020,323 194,040 (124,821) 2,089,542 P 548,716

P188,508 73,087 (10,352) 251,243 94,502 36,986 (7,934) 123,554 P127,689

P2,773,690 255,336 (139,525) 2,889,501 2,114,825 231,026 (132,755) 2,213,096 P 676,405

The composition of and movements in land and buildings of the Group and the Parent Company carried at appraised value follow:
Land December 31, 2012 Buildings Total

Appraised Value Balance at beginning of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Disposals/others. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated Depreciation Balance at beginning of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Disposals/others. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allowance for Impairment Losses (Note 15) . . . . . . . . . . . . . . . . . . . Net Book Value at End of Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P11,295,469 1,000 11,296,469 191,450 P11,105,019

P6,870,978 P18,166,447 302,068 303,068 (280,931) (280,931) 6,892,115 2,230,309 175,642 (22,003) 2,383,948 46,536 P4,461,631
December 31, 2011 Buildings

18,188,584 2,230,309 175,642 (22,003) 2,383,948 237,986 P15,566,650

Land

Total

Appraised Value Balance at beginning of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Disposals/others. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated Depreciation Balance at beginning of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Disposals/others. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allowance for Impairment Losses (Note 15) . . . . . . . . . . . . . . . . . . . Net Book Value at End of Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P11,345,823 P6,751,681 P18,097,504 158,115 158,115 (50,354) (38,818) (89,172) 11,295,469 191,450 Q11,104,019 6,870,978 2,071,919 158,790 (400) 2,230,309 46,174 Q4,594,495 18,166,447 2,071,919 158,790 (400) 2,230,309 237,624 Q15,698,514

The appraised value of land and building was determined by independent appraisers based on highest and best use of property being appraised. Depreciation on the revaluation increment of the buildings amounted to P69.5 million in 2012, Q74.8 million in 2011 and Q86.3 million in 2010 for the Group and the Parent Company. F-97

Had the land and buildings been carried at cost, the net book value of the land and buildings would have been Q4.7 billion and Q4.6 billion as of December 31, 2012 and 2011, respectively, for the Group and the Parent Company. Depreciation and amortization consists of:
2012 Consolidated 2011 2010 2012 Parent Company 2011 2010

Property and equipment . . . . . . . . . . . . . Investment properties (Note 13). . . . . . Other foreclosed properties (Note 14) . .

Q473,817 P429,130 P441,646 Q411,057 P389,816 P387,771 227,802 200,820 381,236 225,768 198,765 379,181 11,616 26,454 14,722 5,728 5,359 14,539 Q713,235 P656,404 P837,604 Q642,553 P593,940 P781,491

As of December 31, 2012 and 2011, property and equipment of the Parent Company with gross carrying amounts of P736.7 million and P727.0 million, respectively, is fully depreciated but is still being used. 12. Investments in Subsidiaries and an Associate The details of this account follow:
Consolidated 2012 2011 Parent Company 2012 2011

Acquisition cost of: Subsidiaries: PNB IIC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P P P2,028,202 P2,028,202 PNB Europe PLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . 887,109 887,109 PNB GRF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 753,061 753,061 PNB Holdings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 377,876 377,876 PNB Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 350,000 350,000 JapanPNB Leasing . . . . . . . . . . . . . . . . . . . . . . . . . 218,331 218,331 PNB ItalySpA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 176,520 176,520 PNB Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62,351 62,351 PNB Forex, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000 50,000 Omicron Asset Portfolio (SPV-AMC), Inc. . . . . . . 32,223 32,223 Tanzanite Investments (SPV-AMC), Inc. . . . . . . . . 32,223 32,223 Tau Portfolio Investments (SPV-AMC), Inc.. . . . . 32,224 32,224 PNB CorporationGuam . . . . . . . . . . . . . . . . . . . . . 7,672 7,672 PNB Venture Capital Corporation (60% owned) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,061 5,061 5,061 5,061 PNB Remittance Center, Ltd. . . . . . . . . . . . . . . . . . . 32,042 Associate: Allied Commercial Bank (ACB) (39.41% owned) . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,763,903 2,763,903 2,763,903 2,763,903 2,768,964 Accumulated equity in net earnings: Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . Equity in net earnings for the year (Note 25) . . . . . . . . . Equity in net unrealized gain (loss) on AFS investments of an associate . . . . . . . . . . . . . . . . . . . . . . Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less allowance for impairment losses (Note 15). . . . . . . . . . . 132,816 10,309 (6,795) 136,330 2,768,964 63,109 68,955 752 132,816 7,776,756 999,884 7,808,798 503,154

Q2,905,294 P2,901,780 Q6,776,872 P7,305,644 As part of the Groups rehabilitation program in 2002, the SEC approved on November 7, 2002 the application of the accumulated translation adjustment of P1.6 billion to eliminate the Parent Companys remaining deficit of P1.3 billion as of December 31, 2001, after applying the total reduction in par value amounting to P7.6 billion. The SEC approval is subject to the following conditions: (a) remaining translation adjustment of P310.7 million as of December 31, 2001 (shown as part of Capital paid in excess of par value in F-98

the statement of financial position) will not be used to wipe out losses that may be incurred in the future without prior approval of SEC; and (b) for purposes of dividend declaration, any future surplus account of the Parent Company shall be restricted to the extent of the deficit wiped out by the translation adjustment. As of December 31, 2012 and 2011, the acquisition cost of the investments in the Parent Companys separate financial statements includes the balance of P2.1 billion consisting of the translation adjustment and accumulated equity in net earnings, net of dividends subsequently received from the quasi-reorganization date, that were closed to deficit on restructuring date and is not available for dividend declaration. In 2012, 2011 and 2010, the Parent Companys subsidiaries declared cash dividends amounting to P231.6 million, P216.8 million and P20.3 million, respectively. These are presented as part of Miscellaneous income other (see Note 25) in the parent company financial statements. Effective January 31, 2011, the Group acquired an additional 30.00% interest in the voting shares of Japan PNB Leasing, increasing its ownership interest to 90.00%. A cash consideration of P115.2 million was paid to the non-controlling interest shareholders. The carrying value of the net assets of Japan PNB Leasing at the acquisition date was P384.0 million, and the carrying value of the additional interest acquired was P115.2 million. The consideration approximates the carrying value of the interest acquired. Investment in Allied Commercial Bank In August 2009, the Parent Company acquired 39.41% ownership in ACB in Xiamen China for a total consideration of CNY394.1 million or USD 57.7 million (equivalent to P2.8 billion). The following table illustrates the summarized financial information of ACB (in thousands):
2012 2011

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13. Investment Properties The composition of and movements in this account follow:

Q8,402,405 P10,552,082 2,290,586 4,034,827 346,727 375,071 25,614 174,873

Land

Consolidated December 31, 2012 Buildings and Improvements

Total

Cost Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Disposals/others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance at end of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated Depreciation Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation (Note 11) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Disposals/others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance at end of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated Impairment Losses (Note 15) Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for (recovery from) impairment losses . . . . . . . . . . . . . . . . Disposals/others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance at end of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net Book Value at End of Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-99

Q17,319,875 Q 5,429,337 Q22,749,212 608,996 197,270 806,266 (1,911,093) (1,600,859) (3,511,952) 16,017,778 2,798,435 (161,725) 205,454 2,842,164 Q13,175,614 4,025,748 2,645,744 227,802 (760,873) 2,112,673 1,204,920 11,742 (606,321) 610,341 Q 1,302,734 20,043,526 2,645,744 227,802 (760,873) 2,112,673 4,003,355 (149,983) (400,867) 3,452,505 Q14,478,348

Land

Consolidated December 31, 2011 Buildings and Improvements

Total

Cost Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Disposals/others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance at end of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated Depreciation Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation (Note 11) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Disposals/others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance at end of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated Impairment Losses (Note 15) Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for (recovery from) impairment losses . . . . . . . . . . . . . . . . Disposals/others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance at end of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net Book Value at End of Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P19,903,712 P 6,403,309 P26,307,021 423,815 306,694 730,509 (3,007,652) (1,280,666) (4,288,318) 17,319,875 4,059,708 (378,341) (882,932) 2,798,435 P14,521,440 5,429,337 3,059,018 200,820 (614,094) 2,645,744 1,275,096 161,542 (231,718) 1,204,920 P 1,578,673
Parent Company December 31, 2012 Buildings and Improvements

22,749,212 3,059,018 200,820 (614,094) 2,645,744 5,334,804 (216,799) (1,114,650) 4,003,355 P16,100,113

Land

Total

Cost Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Disposals/others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance at end of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated Depreciation Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation (Note 11) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Disposals/others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance at end of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated Impairment Losses (Note 15) Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for (recovery from) impairment losses . . . . . . . . . . . . . . . . Disposals/others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance at end of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net Book Value at End of Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q17,319,875 Q 5,327,412 Q22,647,287 608,996 197,270 806,266 (1,911,092) (1,600,001) (3,511,093) 16,017,779 2,798,435 (161,725) 205,454 2,842,164 Q13,175,615 3,924,681 2,613,729 225,768 (760,741) 2,078,756 1,204,920 11,742 (606,321) 610,341 Q 1,235,584 19,942,460 2,613,729 225,768 (760,741) 2,078,756 4,003,355 (149,983) (400,867) 3,452,505 Q14,411,199

F-100

Land

Parent Company December 31, 2011 Buildings and Improvements

Total

Cost Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Disposals/others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance at end of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated Depreciation Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation (Note 11) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Disposals/others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance at end of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated Impairment Losses (Note 15) Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for (recovery from) impairment losses . . . . . . . . . . . . . . . . Disposals/others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance at end of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net Book Value at End of Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P19,903,712 P 6,301,383 P26,205,095 423,815 306,695 730,510 (3,007,652) (1,280,666) (4,288,318) 17,319,875 4,059,708 (378,341) (882,932) 2,798,435 P14,521,440 5,327,412 3,029,058 198,765 (614,094) 2,613,729 1,275,096 161,542 (231,718) 1,204,920 P 1,508,763 22,647,287 3,029,058 198,765 (614,094) 2,613,729 5,334,804 (216,799) (1,114,650) 4,003,355 P16,030,203

Investment properties include real properties foreclosed or acquired in settlement of loans. The fair value of the investment properties of the Parent Company as of December 31, 2012 and 2011 as determined by independent and/or in-house appraisers amounted to P21.9 billion and P26.2 billion, respectively. The fair value of the investment properties of the Group as of December 31, 2012 and 2011 as determined by independent and/ or in-house appraisers amounted to P22.0 billion and P26.3 billion, respectively. Valuations were derived on the basis of recent sales of similar properties in the same area as the investment properties and taking into account the economic conditions prevailing at the time the valuations were made. The Group and the Parent Company are exerting continuing efforts to dispose these properties. As discussed in Note 32, investment properties with an aggregate fair value of P300.0 million are mortgaged in favor of BSP. Foreclosed investment properties of the Parent Company still subject to redemption period by the borrowers amounted to P437.2 million and P308.6 million, as of December 31, 2012 and 2011, respectively. For the Parent Company, direct operating expenses on investment properties that generated rental income during the year (other than depreciation and amortization), included under Miscellaneous expenses Foreclosure and other ROPArelated expenses in Note 25, amounted to P39.2 million, P27.7 million, and P20.4 million in 2012, 2011, and 2010, respectively. While direct operating expenses on investment properties that did not generate rental income included under Miscellaneous expensesForeclosure and other ROPA related expenses in Note 25, amounted to P242.5 million, P292.0 million, and P532.0 million in 2012, 2011, and 2010, respectively. For the Group, direct operating expenses on investment properties that generated rental income during the year (other than depreciation and amortization), included under Miscellaneous expensesForeclosure and other ROPArelated expenses in Note 25, amounted to P44.5 million, P27.7 million, and P20.4 million in 2012, 2011, and 2010, respectively. While direct operating expenses on investment properties that did not generate rental income included under Miscellaneous expensesForeclosure and other ROPArelated expenses in Note 25, amounted to P242.5 million, P292.0 million, and P532.0 million in 2012, 2011, and 2010, respectively.

F-101

14. Other Assets This account consists of:

Consolidated Parent Company December 31, January 1, December 31, January 1, 2011 2011 2011 2011 December 31, December 31, (As Restated) (As Restated) (As Restated) (As Restated) 2012 2012

Assets held by SPV . . . . . . . . . . . . . Q2,223,506 P1,875,075 P1,854,168 Q P P Real estate under JV agreements . . . . . . . . . . . . . . . . . . 1,014,678 2,419,610 2,358,301 1,014,678 2,419,610 2,358,301 Software costs . . . . . . . . . . . . . . . . . . 376,055 409,390 502,435 371,505 403,055 495,167 Deferred reinsurance premiums. . . 211,151 230,685 194,275 Chattel properties-net . . . . . . . . . . . 116,159 69,339 82,479 112,006 62,489 81,855 Prepaid expenses . . . . . . . . . . . . . . . 85,629 116,981 78,157 47,421 90,361 62,703 Deferred charges. . . . . . . . . . . . . . . . 81,400 82,039 153,676 81,400 52,934 69,786 Stationeries and supplies. . . . . . . . . 34,547 35,479 121,320 33,150 33,999 121,320 Documentary stamps on hand . . . . 28,284 78,908 83,078 28,284 78,908 83,078 Miscellaneous COCI . . . . . . . . . . . . 808 5,220 1,970 808 5,220 1,970 Sundry debits. . . . . . . . . . . . . . . . . . . 86,445 68,685 26,997 86,327 68,685 Interoffice float . . . . . . . . . . . . . . . . . 13,813 13,813 Miscellaneous (Note 26) . . . . . . . . . 281,598 395,520 296,820 236,606 263,289 145,800 4,453,815 Less allowance for impairment losses (Note 15) . . . . . . . . . . . . . . 1,459,390 5,804,691 1,907,303 5,809,177 1,328,050 1,952,855 92,872 3,496,192 518,566 3,502,478 587,400

Q2,994,425 P3,897,388 P4,481,127 Q1,859,983 P2,977,626 P2,915,078

Real Estate under JV Agreements On April 30, 2009, the Parent Company signed a JVA with Eton Properties Philippines, Inc. (EPPI). Refer to Note 31 for the terms of the JVA. As of December 31, 2012 and 2011, the net carrying value of real estate under JV amounted to P0.95 billion and P1.9 billion, respectively. Miscellaneous Miscellaneous assets of the Group include postages, refundable deposits and exchange trading rights. Under the PSE rules, all exchange trading rights are pledged at its full value to the PSE to secure the payment of all debts due to other members of the PSE arising out of or in connection with the present or future members contracts. As of December 31, 2012 and 2011, the latest transacted price of the exchange trading right (as provided by the PSE) amounted to P8.5 million. Software Costs Movements in Software costs are as follows:
Consolidated 2012 2011 Parent Company 2012 2011

Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization (Note 25) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance at end of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q 409,390 P 502,435 Q 403,055 P 495,167 120,215 69,122 119,576 66,416 (153,550) (162,167) (151,126) (158,528) Q 376,055 P 409,390 Q 371,505 P 403,055

F-102

15. Allowance for Impairment and Credit Losses Movements in the allowance for impairment losses on non-financial assets follow:
Consolidated Parent Company December 31, January 1, 2011 2011 December 31, December 31, December 31, January 1, (As Restated) (As Restated) 2012 2012 2011 2011

Balance at beginning of year: Property and equipment (Note 11). . . Q 237,624 P 209,142 P 234,314 Q 237,624 P 209,142 P 234,314 Investments in subsidiaries and an associate (Note 12). . . . . . . . . . . . . . 503,154 432,644 432,644 Investment properties (Note 13). . . . . 4,003,355 5,334,805 4,865,527 4,003,355 5,334,805 4,569,375 Other assets (Note 14) . . . . . . . . . . . . . 1,907,303 1,328,050 817,495 518,566 587,400 310,805 Provisions (reversals) during the year . . . . Disposals, transfers and others . . . . . . . . . . Balance at end of year: Property and equipment (Note 11). . . Investments in subsidiaries and an associate (Note 12). . . . . . . . . . . . . . Investment properties (Note 13). . . . . Other assets (Note 14) . . . . . . . . . . . . . 6,148,282 (451,791) (546,610) 237,986 3,452,505 1,459,390 6,871,997 5,917,336 359,540 2,095,982 (1,083,255) (1,141,321) 237,624 4,003,355 1,907,303 209,142 5,334,805 1,328,050 5,262,699 8,529 (487,981) 237,986 999,884 3,452,505 92,872 6,563,991 5,547,138 (268,376) 2,136,361 (1,032,916) (1,119,508) 237,624 503,154 4,003,355 518,566 209,142 432,644 5,334,805 587,400

Q5,149,881 P 6,148,282 P 6,871,997 Q4,783,247 P 5,262,699 P 6,563,991

Movements in the allowance for impairment and credit losses on financial assets follow:
Consolidated Parent Company December 31, January 1, December 31, 2011 2011 December 31, December 31, January 1, 2012 (As Restated) (As Restated) 2012 2011 2011

Balance at beginning of year: Loans and receivables . . . . . . . . . . . . Q13,541,340 P13,046,309 P13,097,095 Q13,074,591 P12,710,967 P12,728,730 Receivable from SPV . . . . . . . . . . . . 833,848 736,624 800,981 AFS investments . . . . . . . . . . . . . . . . 927,488 697,052 681,462 927,488 677,619 643,273 Provisions during the year . . . . . . . . . . . . . Accretion, accounts charged off, transfers and others. . . . . . . . . . . . . . . . . Balance at end of year: Loans and receivables (Note 8) . . . . Receivable from SPV (Note 9) . . . . AFS investments (Note 10) . . . . . . . 14,468,828 551,233 152,130 14,243,783 928,408 13,743,361 1,028,082 (302,615) 13,541,340 927,488 13,778,557 303,790 (338,986) 13,046,309 697,052 14,835,927 14,125,210 (47,682) 1,084,050 (302,779) 13,298,210 258,848 928,408 (373,333) 13,074,591 833,848 927,488 14,172,984 272,457 (320,231) 12,710,967 736,624 677,619

Q15,172,191 P14,468,828 P13,743,361 Q14,485,466 P14,835,927 P14,125,210

Provision for impairment, credit and other losses consists of:

2012 Consolidated 2011 2010 2012 Parent Company 2011 2010

Provision for impairment . . . . . . . . . . . . Provision for credit losses . . . . . . . . . . . . . . . . . Provision for other losses (Note 32). . . . . . . . . . . . . . Q

(Q451,791) P 359,540 551,233 834,259 933,701 1,028,082 164,778 P1,552,400

P2,095,982 Q 303,790 P2,399,772

8,529 (47,682) 834,259

(P268,376) P2,136,361 1,084,050 164,778 P 980,452 272,457 P2,408,818

Q795,106

F-103

Below is the breakdown of provision for (reversal of) credit losses by type of loans and receivable.
December 31, 2012 Individual Collective Impairment Impairment Total Consolidated December 31, 2011 Individual Collective Impairment Impairment Total P77,899 P77,899 P499,907 240,431 37,875 P778,213 P December 31, 2010 Individual Collective Impairment Impairment Total (P383,767) P53,867 675,114 (41,424) 249,923 P53,867 P (P329,900) 675,114 (41,424) 303,790

Receivable from customers . . . . . . . . . . . Q 277,248 Q240,000 Q 517,248 P422,008 Unquoted debt securities . . . . . . . . . . . . 186,299 186,299 240,431 Other receivables . . . . . . . (153,234) (153,234) 37,875 Q 310,313 Q240,000 Q 550,313 P700,314

December 31, 2012 Individual Collective Impairment Impairment Total

Parent Company December 31, 2011 Individual Collective Impairment Impairment Total P77,899 P77,899 P458,618 240,431 37,908

December 31, 2010 Individual Collective Impairment Impairment Total (P497,299) P53,867 675,114 105,132 282,947 P53,867 P (P443,432) 675,114 105,132 336,814

Receivable from customers . . . . . . . . . . . Q 256,472 Q240,000 Q 496,472 P380,719 Unquoted debt securities . . . . . . . . . . . . 186,299 186,299 240,431 Other receivables . . . . . . . (156,373) (156,373) 37,908 Q 286,398 Q240,000 Q 526,398 P659,058

P736,957 P

The movements in allowance for credit losses for loans and receivables by class follow:
Consolidated December 31, 2012 Business Loans GOCCs and NGAs Fringe Consumers Benefits Unquoted Debt Securities

LGUs

Others

Total

Balance at beginning of year . . . . . . . . . . . . . . . . . . . . Q4,653,994 Q 89,648 Q 74,998 Q586,329 Q14,858 Q3,772,632 Q4,348,881 Q13,541,340 Provisions (reversals) during the year . . . . . . . . . . . . . . . . 424,835 (18,748) 78,800 31,413 948 186,299 (153,234) 550,313 Accretion on impaired loans (Note 8) . . . . . . . . . . . . . . . . (261,780) (169) (24,145) (15,731) (953) (302,778) Accounts charged off, transfers and others . . . . . . (185,324) (40,879) (105) 681,216 454,908 Balance at end of year . . . . . . Q4,631,725 Q 70,731 Q129,653 Q561,132 Q14,748 Q3,958,931 Q4,876,863 Q14,243,783
Consolidated December 31, 2011 Business Loans GOCCs and NGAs Fringe Consumers Benefits Unquoted Debt Securities

LGUs

Others

Total

Balance at beginning of year . . . . . . . . . . . . . . . . . . . . P4,624,834 P112,037 P 71,759 P316,861 P23,960 P3,599,687 P4,297,171 P13,046,309 Provisions (reversals) during the year . . . . . . . . . . . . . . . . . 232,563 (22,389) 18,846 278,638 (7,751) 240,431 37,875 778,213 Accretion on impaired loans (Note 8) . . . . . . . . . . . . . . . . (220,880) (15,607) (67,896) (1,464) (67,486) (373,333) Accounts charged off, transfers and others. . . . . . . 17,477 58,726 113 13,835 90,151 Balance at end of year . . . . . . P4,653,994 P 89,648 P 74,998 P586,329 P14,858 P3,772,632 P4,348,881 P13,541,340

F-104

Parent Company December 31, 2012 Business Loans GOCCs and NGAs Fringe Consumers Benefits Unquoted Debt Securities

LGUs

Others

Total

Balance at beginning of year . . . . . . . . . . . . . . . . . . . . Q4,371,740 Q 89,648 Q 74,998 Q527,603 Q14,745 Q3,772,632 Q4,223,225 Q13,074,591 Provisions (reversals) during the year . . . . . . . . . . . . . . . . 402,197 (18,748) 78,800 33,271 952 186,299 (156,373) 526,398 Accretion on impaired loans (Note 8) . . . . . . . . . . . . . . . . (261,780) (169) (24,145) (15,731) (954) (302,779) Balance at end of year . . . . . . Q4,512,157 Q 70,731 Q129,653 Q545,143 Q14,743 Q3,958,931 Q4,066,852 Q13,298,210
Parent Company December 31, 2011 Business Loans GOCCs and NGAs Fringe Consumers Benefits Unquoted Debt Securities

LGUs

Others

Total

Balance at beginning of year . . . . . . . . . . . . . . . . . . . . P4,401,346 P112,037 P 71,759 P316,861 P23,960 P3,599,687 P4,185,317 P12,710,967 Provisions (reversals) during the year . . . . . . . . . . . . . . . . . 191,274 (22,389) 18,846 278,638 (7,751) 240,431 37,908 736,957 Accretion on impaired loans (Note 8) . . . . . . . . . . . . . . . . (220,880) (15,607) (67,896) (1,464) (67,486) (373,333) Balance at end of year . . . . . . P4,371,740 P 89,648 P 74,998 P527,603 P14,745 P3,772,632 P4,223,225 P13,074,591

The movements in allowance for credit losses on AFS investments and receivable from SPV for the Group and the Parent Company follow:
Consolidated December 31, 2011 (As Restated) AFS InvestmentsEquity Receivable Securities from SPV January 1, 2011 (As Restated) AFS InvestmentsEquity Receivable Securities from SPV

December 31, 2012 AFS InvestmentsEquity Receivable Securities from SPV

Balance at beginning of year . . . . . . . . Provisions during the year . . . . . . . . . . Disposals, transfers and others . . . . . . Balance at end of year . . . . . . . . . . . . . .

Q927,488 920 Q928,408

Q Q

P697,052 249,869 (19,433) P927,488

P P

P681,462 15,590 P697,052

P P

Parent Company December 31, 2012 December 31, 2011 AFS AFS InvestmentsInvestmentsReceivable Receivable Equity Equity from SPV from SPV Securities Securities

Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provisions (reversals) during the year. . . . . . . . . . . . . . . . . . . . . Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16. Deposit Liabilities

Q927,488 920 Q928,408

Q 833,848 P677,619 (575,000) 249,869 Q 258,848 P927,488

P736,624 97,224 P833,848

Of the total deposit liabilities of the Parent Company, P12.9 billion and P11.1 billion are noninterestbearing as of December 31, 2012 and 2011, respectively. Remaining deposit liabilities generally earned annual fixed interest rates ranging from 0. 09% to 2.55% in 2012 and from 0.20% to 7.00% in 2011 for foreign currency-denominated deposit liabilities, and from 0.25% to 4.32% in 2012 and from 0.50% to 10.00% in 2011 for peso-denominated deposit liabilities. On March 29, 2012, BSP Circular No. 753 was issued providing unification of the statutory and liquidity reserve requirement, non-remuneration of the unified reserve requirement, exclusion of vault cash and demand deposits as eligible forms of reserve requirement compliance, and reduction in the unified reserve requirement ratios. F-105

As of December 31, 2012, under existing BSP regulations, non-FCDU deposit liabilities of the Group are subject to reserves equivalent to 18.00%. As of December 31, 2011, under existing BSP regulations, non-FCDU deposit liabilities of the Group are subject to liquidity reserves equivalent to 11.00% and statutory reserves equivalent to 10.00%. Available reserves follow:
2012 2011

Due from BSP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . AFS investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Time loan unquoted securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash and other cash items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q36,531,047 6,965,950 3,092,529 Q46,589,526

P37,513,558 4,559,997 3,096,485 4,166,007 P49,336,047

As of December 31, 2012 and 2011, the Parent Company was in compliance with such regulations. Time deposit of the Group and the Parent Company includes the following Long-term Negotiable Certificates of Time Deposits (LTNCDs): 5.18% P3.10 Billion LTNCD On November 18, 2011, the Parent Company issued P3.10 billion worth of LTNCDs which will mature on February 17, 2017. Among the significant terms and conditions of the LTNCDs are: a. b. Issue price at 100% of the face value of each LTNCD. The LTNCDs bear interest at the rate of 5.18% per annum from and including the issue date, up to and excluding the call option date or the maturity date. Interest will be payable quarterly in arrears on the 17th of February, May, August and November of each year, commencing on November 18, 2011. The Parent Company may redeem the LTNCDs in whole but not in part at a redemption price equal to 100% of the principal amount together with accrued and unpaid interest before maturity date on any interest payment date. The LTNCDs may not be redeemed at the option of the holders. The LTNCDs will constitute direct, unconditional, unsecured and unsubordinated obligations of the Bank. The LTNCDs will at all times rank pari passu and without any preference among themselves, and at least pari passu with all other direct, unconditional, unsecured and unsubordinated obligations of the Bank, except for any obligation enjoying a statutory preference or priority established under Philippine laws. Each Holder, by accepting the LTNCDs, irrevocably agrees and acknowledges that: (a) it may not exercise or claim any right of set-off in respect of any amount owed to it by the Parent Company arising under or in connection with the LTNCDs; and (b) it shall, to the fullest extent permitted by applicable law, waive and be deemed to have waived all such rights of set-off.

c.

d.

e.

6.50% P3.25 Billion LTNCD On March 25, 2009, the Parent Company issued P3.25 billion worth of LTNCDs which will mature on March 31, 2014. Among the significant terms and conditions of the LTNCDs are: a. b. Issue price at 100% of the face value of each LTNCD. The LTNCDs bear interest at the rate of 6.50% per annum from and including the issue date, up to and excluding the early redemption date or the maturity date. Interest will be payable quarterly in arrears on the 19th of March, June, September and December of each year, commencing on June 30, 2009. The Parent Company may redeem the LTNCDs in whole but not in part at a redemption price equal to 100% of the principal amount together with accrued and unpaid interest before maturity date on any interest payment date. The LTNCDs may not be redeemed at the option of the holders. F-106

c.

d.

The LTNCDs will constitute direct, unconditional, unsecured and unsubordinated obligations of the Bank. The LTNCDs will at all times rank pari passu and without any preference among themselves, and at least pari passu with all other direct, unconditional, unsecured and unsubordinated Pesodenominated obligations of the Parent Company, present and future, other than obligations mandatorily preferred by law. Each Holder, by accepting a LTNCDs, irrevocably agrees and acknowledges that: (a) it may not exercise or claim any right of set-off in respect of any amount owed to it by the Parent Company arising under or in connection with the LTNCDs; and (b) it shall, to the fullest extent permitted by applicable law, waive and be deemed to have waived all such rights of set-off.

e.

Interest expense on deposit liabilities consists of:

2012 Consolidated 2011 2010 2012 Parent Company 2011 2010

Savings . . . . . . . . . . . . . . . . . LTNCDs . . . . . . . . . . . . . . . . Time . . . . . . . . . . . . . . . . . . . Demand. . . . . . . . . . . . . . . . .

Q2,556,648 380,515 90,991 71,628 Q3,099,782

P3,255,308 236,251 369,254 150,642 P4,011,455

P2,703,177 216,328 343,656 178,672 P3,441,833

Q2,556,682 380,515 102,662 72,657 Q3,112,516

P3,255,308 236,251 368,640 150,642 P4,010,841

P2,703,177 216,328 355,703 178,672 P3,453,880

In 2012, 2011 and 2010, interest expense on LTNCDs include amortization of transaction costs amounting to P9.5 million, P14.6 million, and P5.1 million, respectively. 17. Financial Liabilities at Fair Value Through Profit or Loss This account, both for Group and Parent Company, consists of:
December 31, 2012 December 31, 2011

Designated at FVPL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Derivative liabilities (Note 22) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q6,196,070 283,751 Q6,479,821

P6,479,170 171,013 P6,650,183

Financial liability designated at FVPL represents the subordinated note issued in 2008. On June 19, 2008, the Parent Company issued P6.0 billion subordinated notes due in 2018 (2008 Notes). The subordinated note is part of a group of financial instruments that together are managed on a fair value basis, in accordance with the Parent Companys documented risk management and investment strategy. Among the significant terms and conditions of the issuance of such 2008 Notes are: (a) Issue price at 100.00% of the principal amount; (b) The 2008 Notes bear interest at the rate of 8.50% per annum from and including June 19, 2008 to but excluding June 19, 2013. Interest will be payable quarterly in arrears on the 19th of March, June, September and December of each year, commencing on September 19, 2008. Unless the 2008 Notes are previously redeemed, interest from and including June 19, 2013 to but excluding June 19, 2018 will be reset at the equivalent of the higher of (i) five-year PDST-F Fixed Rate Treasury Notes (FXTN) as of reset date multiplied by 80.00%, plus a step-up spread of 2.0123% per annum or (ii) difference of interest rate and five-year PDST-F FXTN as of issue date multiplied by 150% plus five-year PDST-F FXTN as of reset date, and such step-up interest rate shall be payable quarterly in arrears on 19th of March, June, September and December of each year, commencing on September 19, 2013. The 2008 Notes will mature on June 19, 2018, if not redeemed earlier; (c) The 2008 Notes constitute direct, unconditional, unsecured and subordinated obligations of the Parent Company and at all times rank pari passu without preference among themselves and at least equally with all other present and future unsecured and subordinated obligations of the Parent Company; (d) The Parent Company may redeem the 2008 Notes in whole but not in part at a redemption price equal to 100.00% of the principal amount together with accrued and unpaid interest on the day following the last day of the twentieth (20th) interest period from issue date, subject to the prior consent of the BSP and the compliance by the Parent Company with the prevailing requirements for the granting by the BSP of its consent thereof. The 2008 Notes may not be redeemed at the option of the noteholders; and F-107

(e) Each noteholder, by accepting the 2008 Notes, irrevocably agrees and acknowledges that: (i) it may not exercise or claim any right of set-off in respect of any amount owed by the Parent Company arising under or in connection with the 2008 Notes; and (ii) it shall, to the fullest extent permitted by applicable law, waive and be deemed to have waived all such rights of set-off. As of December 31, 2012 and 2011, change in the fair value of the designated subordinated debt at FVPL that is attributable to changes in credit risk is not significant. 18. Bills and Acceptances Payable This account consists of:
Consolidated December 31, December 31, 2012 2011 Parent Company December 31, December 31, 2012 2011

Bills payable to: BSP and local banks. . . . . . . . . . . . . . . . . . . . . . . . . Foreign banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acceptances outstanding . . . . . . . . . . . . . . . . . . . . . . . . .

Q 6,998,633 P4,413,379 Q 6,940,295 P2,902,338 2,870,946 1,110,136 2,571,194 881,110 3,173,463 2,800,450 3,173,463 3,400,450 13,043,042 33,859 Q13,076,901 8,323,965 134,460 P8,458,425 12,684,952 33,859 Q12,718,811 7,183,898 134,460 P7,318,358

As of December 31, 2012, the annual interest rates range from 0.06% to 1.77% for foreign currencydenominated borrowings, and from 0.03% to 12.00% for peso-denominated borrowings of the Group and of the Parent Company. As of December 31, 2011, the annual interest rates range from 0.06% to 1.75% for foreign currencydenominated borrowings, and from 1.87% to 12.00% for peso-denominated borrowings of the Group and of the Parent Company. The Parent Companys bills payable to BSP includes the transferred liabilities from Maybank amounting to P1.6 billion and P1.7 billion as of December 31, 2012 and 2011, respectively (see Note 8). Bills payableothers also includes funding from the Development Bank of the Philippines, Land Bank of the Philippines and the Social Security System under which the Parent Company acts as a conduit for certain financing programs of these institutions. Lending to such programs is shown under Loans and receivables (see Note 8). As of December 31, 2012 and 2011, bills payable with a carrying value of P3.0 billion and P3.3 billion is secured by a pledge of certain AFS investments with face value of P2.8 billion and P3.0 billion, respectively. As of December 31, 2010, bills payable with a carrying value of P8.5 billion is secured by a pledge of certain AFS investments with face value of P6.8 billion and HTM investments with face value of P3.4 billion. Refer to Note 10 for further details. Following are the significant terms and conditions of the agreements entered into by the Parent Company: (a) Each party represents and warrants to the other that it is duly authorized to execute and deliver the Agreement, and to perform its obligations and has taken all the necessary action to authorize such execution, delivery and performance; (b) The term or life of this borrowing is up to one year; (c) Some borrowings bear a fixed interest rate while others have floating interest rate; (d) The Parent Company has pledged its AFS investments, in form of US Treasury Notes and ROP Global bonds, in order to fulfill its collateral requirement; (e) Haircut from market value ranges from 20.00% to 30.00% depending on the tenor of the bond; (f) Substitution of pledged securities is allowed if one party requested and the other one so agrees. F-108

Interest expense on bills payable and other borrowings consists of:

2012 Consolidated 2011 2010 2012 Parent Company 2011 2010

Subordinated ...... Bills payable . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . .

debt(*)

Q1,091,512 P1,102,495 188,603 149,104 5,005 5,650 Q1,285,120 P1,257,249

P1,083,585 235,277 10,881 P1,329,743

Q1,091,512 132,306 3,872 Q1,227,690

P1,102,495 107,999 4,634 P1,215,128

P1,083,585 189,329 7,867 P1,280,781

(*) Consist of interest on subordinated debt at amortized cost and designated at FVPL 19. Accrued Taxes, Interest and Other Expenses This account consists of:
Consolidated December 31, December 31, 2012 2011 Parent Company December 31, December 31, 2012 2011

Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PDIC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other taxes and licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q1,987,231 P2,005,487 Q1,988,623 P2,003,056 497,103 428,158 496,807 428,158 264,295 239,384 264,294 239,384 170,798 55,359 99,756 52,181 149,050 242,169 147,911 220,803 994,863 1,010,661 871,290 839,352 Q4,063,340 P3,981,218 Q3,868,681 P3,782,934

Other expenses includes accrued rental, information technology, and other operating expenses. 20. Subordinated Debt 5.88% P3.5 Billion Subordinated Notes On May 9, 2012, the Parent Companys BOD approved the issuance of unsecured subordinated notes of P3.5 billion that qualify as Lower Tier 2 capital. The Parent Company issued P3.5 billion, 5.88% subordinated notes due in 2022, pursuant to the authority granted by the BSP to the Bank on May 27, 2011. EIR on this note is 6.04%. Among the significant terms and conditions of the issuance of such 2012 Notes are: (a) Issue price at 100.00% of the principal amount; (b) The 2012 Notes bear interest at the rate of 5.875% per annum from and including May 09, 2012 to but excluding May 09, 2022. Interest will be payable quarterly in arrears on the 9th of August, November, February and June of each year, commencing on May 09, 2012. Unless the 2012 Notes are previously redeemed, at their principal amount on Maturity date or May 09, 2022. The stepped-up interest will be payable quarterly in arrears on 9th of August, November, February and May of each year, commencing on May 09, 2012; (c) The 2011 Notes constitute direct, unconditional, unsecured and subordinated obligations of the Parent Company and at all times rank pari passu without preference among themselves and at least equally with all other present and future unsecured and subordinated obligations of the Parent Company; (d) The Parent Company may redeem the 2012 Notes in whole but not in part at a redemption price equal to 100.00% of the principal amount together with accrued and unpaid interest on the day following the last day of the fiftieth (15th) interest period from issue date, subject to the prior consent of the BSP and the compliance by the Bank with the prevailing requirements for the granting by the BSP of its consent thereof. The 2012 Notes may not be redeemed at the option of the noteholders; and (e) Each noteholder, by accepting the 2012 Notes, irrevocably agrees and acknowledges that it may not exercise or claim any right of set-off in respect of any amount owed by the Parent Company arising under or in connection with the 2012 Notes. F-109

6.75% P6.5 Billion Subordinated Notes On May 15, 2011, the Parent Companys BOD approved the issuance of unsecured subordinated notes of P6.5 billion that qualify as Lower Tier 2 capital. The Parent Company issued P6.5 billion, 6.75% subordinated notes (the 2011 Notes) due in 2021, pursuant to the authority granted by the BSP to the Bank on May 27, 2011. EIR on this note is 6.94%. Among the significant terms and conditions of the issuance of such 2011 Notes are: (a) Issue price at 100.00% of the principal amount; (b) The 2011 Notes bear interest at the rate of 6.75% per annum from and including June 15, 2011 to but excluding June 15, 2021. Interest will be payable quarterly in arrears on the 15th of September, December, March and June of each year, commencing on June 15, 2011. Unless the 2011 Notes are previously redeemed, at their principal amount on Maturity date or June 15, 2021. Interest will be payable quarterly in arrears on 15th of September, December, March and June of each year, commencing on June 15, 2011; (c) The 2011 Notes constitute direct, unconditional, unsecured and subordinated obligations of the Parent Company and at all times rank pari passu without preference among themselves and at least equally with all other present and future unsecured and subordinated obligations of the Parent Company; (d) The Parent Company may redeem the 2011 Notes in whole but not in part at a redemption price equal to 100.00% of the principal amount together with accrued and unpaid interest on the day following the last day of the fiftieth (15th) interest period from issue date, subject to the prior consent of the BSP and the compliance by the Bank with the prevailing requirements for the granting by the BSP of its consent thereof. The 2011 Notes may not be redeemed at the option of the noteholders; and (e) Each noteholder, by accepting the 2011 Notes, irrevocably agrees and acknowledges that it may not exercise or claim any right of set-off in respect of any amount owed by the Parent Company arising under or in connection with the 2011 Notes. 10.00% P5.5 Billion Subordinated Notes On May 26, 2006 and August 3, 2006, the Parent Companys BOD approved the issuance of unsecured subordinated notes of P5.5 billion that qualify as Lower Tier 2 capital. The MB, in its Resolution Nos. 979 dated August 3, 2006 and 874 dated July 6, 2006, approved this issuance subject to the Parent Companys compliance with certain conditions. Relative to this, on August 10, 2006, the Parent Company issued P5.5 billion, 10.00% subordinated notes (the 2006 Notes) due in 2016. EIR on this note is 10.40%. Among the significant terms and conditions of the issuance of such 2006 Notes are: (a) Issue price at 100.00% of the principal amount; (b) The 2006 Notes bear interest at the rate of 10.00% per annum from and including August 10, 2006 to but excluding August 10, 2011. Interest will be payable quarterly in arrears on the 10th of February, May, August and November of each year, commencing on August 10, 2006. Unless the 2006 Notes are previously redeemed, interest from and including August 10, 2011 to but excluding August 10, 2016 will be reset at the equivalent of the five- year Money Market Association of the Philippines 1 Fixed Rate Treasury Notes (MART1 FXTN) as of reset date multiplied by 80.00%, plus a spread of 4.4935% per annum. The stepped-up interest will be payable quarterly in arrears on 10th of February, May, August and November of each year, commencing on November 10, 2011; (c) The 2006 Notes constitute direct, unconditional, unsecured and subordinated obligations of the Parent Company and at all times rank pari passu without preference among themselves and at least equally with all other present and future unsecured and subordinated obligations of the Parent Company; (d) The Parent Company may redeem the 2006 Notes in whole but not in part at a redemption price equal to 100.00% of the principal amount together with accrued and unpaid interest on the day following the last day of the twentieth (20th) interest period from issue date, subject to the prior consent of the BSP and the compliance by the Bank with the prevailing requirements for the granting by the BSP of its consent thereof. The 2006 Notes may not be redeemed at the option of the noteholders; and F-110

(e) Each noteholder, by accepting the 2006 Notes, irrevocably agrees and acknowledges that: (i) it may not exercise or claim any right of set-off in respect of any amount owed by the Parent Company arising under or in connection with the 2006 Notes; and (ii) it shall, to the fullest extent permitted by applicable law, waive and be deemed to have waived all such rights of set- off. On August 10, 2011, the 2006 Notes were redeemed by the Parent Company at par/face value. As of December 31, 2012 and 2011, subordinated debt is net of unamortized transaction cost of P61.2 million and P47.5 million, respectively. In 2012, 2011 and 2010, amortization of transaction costs amounting to P12.2 million, P18.0 million and P19.4 million, respectively, were charged to Interest expensebills payable and other borrowings in the statements of income. 21. Other Liabilities This account consists of:
Consolidated Parent Company December 31, January 1, December 31, 2011 2011 December 31, December 31, January 1, 2012 (As Restated) (As Restated) 2012 2011 2011

Accounts payable . . . . . . . . . . . . . . . . Q 4,693,074 P 3,659,636 P 3,917,375 Q 4,513,263 P 3,648,395 P 3,705,783 Insurance contract liabilities. . . . . . . 2,623,901 1,612,946 1,800,984 Bills purchasedcontra (Note 8) . . 2,553,891 2,296,039 2,132,659 2,553,891 2,296,039 2,132,659 Provisions (Note 32) . . . . . . . . . . . . . 1,575,433 874,950 710,172 1,575,433 874,950 710,172 Retirement liability (Note 26) . . . . . 1,400,235 1,409,525 1,240,693 1,386,796 1,357,949 1,234,265 Managers checks and demand drafts outstanding. . . . . . . . . . . . . . 623,621 475,041 963,332 623,621 475,041 963,332 Deferred reinsurance premiums . . . . 509,488 458,178 353,940 Deposits on lease contracts. . . . . . . . 445,152 388,243 309,314 Due to Treasurer of the Philippines. . . . . . . . . . . . . . . . . . . . 290,649 220,053 253,619 290,649 220,053 253,619 Other dormant credits . . . . . . . . . . . . 252,218 275,030 287,562 252,218 275,030 287,562 Deferred credits . . . . . . . . . . . . . . . . . 181,473 207,484 328,531 181,473 200,663 233,309 Payment order payable . . . . . . . . . . . 174,406 152,810 166,986 174,406 152,810 166,986 Due to other banks . . . . . . . . . . . . . . . 142,212 98,671 567,831 351,061 346,159 319,253 Withholding tax payable . . . . . . . . . . 127,123 137,215 136,301 119,687 130,224 130,204 Due to BSP . . . . . . . . . . . . . . . . . . . . . 102,616 102,965 104,844 102,616 102,965 104,844 Margin deposits and cash letters of 31,358 212,390 59,094 31,358 212,390 59,094 credit . . . . . . . . . . . . . . . . . . . . . . . . Liabilities held by SPV . . . . . . . . . . . 11,945 29,640 86,619 Miscellaneous (Note 28) . . . . . . . . . . 1,107,598 1,405,149 502,270 805,864 1,178,953 225,721 Q16,846,393 P14,015,965 P13,922,126 Q12,962,336 P11,471,621 P10,526,803

Miscellaneous liabilities of the Group include interoffice floats, contribution and payments for compensation premiums and remittancerelated payable.

F-111

22. Derivative Financial Instruments The table below shows the fair values of derivative financial instruments entered into by the Parent Company, recorded as derivative assets or derivative liabilities, together with the notional amounts. The notional amount is the amount of a derivatives underlying asset, reference rate or index and is the basis upon which changes in the value of derivatives are measured. The notional amounts indicate the volume of transactions outstanding as of December 31, 2012 and 2011 and January 1, 2011 and are not indicative of either market risk or credit risk (amounts in thousands, except average forward rate).
December 31, 2012 Average Forward Rate Liabilities Notional Amount(*)

Assets

Freestanding derivatives: Currency forwards BUY: JPY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . USD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EUR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SGD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SELL USD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EUR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SGD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . AUD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . JPY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CHF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . GBP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CAD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . HKD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SEK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cross currency swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest rate swaps (Php) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Embedded derivatives: Credit default swaps (USD) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

20 74 25,214 430 983 10 133 208 201,970 162,556 59,044 3,859

3,706 185,391 2 10,400 43 73 573 24 23 2 4 83,510

0.49 42.01 54.48 33.65 41.11 54.18 33.65 43.15 0.48 45.05 66.11 41.39 5.30 6.32

300,000 165,043 63 1,958 285,064 800 1,958 700 540,000 1,050 1,790 510 200 300 86,000 6,109,000 262 47,500

Q454,501

Q283,751

(*) The notional amounts pertain to the original currency except for the Embedded derivatives, which represent the equivalent USD amounts.

F-112

Assets

December 31, 2011 Average Liabilities Forward Rate

Notional Amount(*)

Freestanding derivatives: Currency forwards BUY: JPY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . USD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CHF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EUR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . GBP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SELL: USD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EUR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SGD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . AUD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . JPY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CHF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . GBP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . NZD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CAD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cross currency swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest rate swaps (Php) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Embedded derivatives: Credit default swaps (USD) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

70 60,170 25 34,784 1,595 11 45 137 320 148 11 223,234 91,719 41,782

18,779 58 77 33 47,236 79 177 192 47 224 39,802 64,309

0.56 43.33 46.94 57.41 67.97 43.788 56.88 33.76 43.75 0.56 46.83 68.30 33.74 42.47

300,000 217,804 200 150 371 481,140 3,400 100 400 330,000 1,100 871 50 500 86,000 6,319,000 262 87,500

P454,051

P171,013

(*) The notional amounts pertain to the original currency except for the Embedded derivatives, which represent the equivalent USD amounts.
January 1, 2011 (As Restated) Average Liabilities Forward Rate Notional Amount(*)

Assets

Freestanding derivatives: Currency forwards BUY: JPY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SGD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . USD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SELL: USD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EUR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SGD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . AUD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . JPY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CHF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . GBP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cross currency swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest rate swaps (Php). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest rate swaps (USD). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Warrants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Embedded derivatives: Credit default swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4,419 535 34,675 582 56 61 8 53,397 572,051 120,381 124,367

9,301 11,602 1,431 536 792 461 38 15,971 17,720

0.53 33.90 44.08 44.04 58.13 33.90 43.68 0.53 46.37 68.00

300,000 2,596 39,316 172,578 11,000 2,596 600 134,000 282 550 185,000 6,181,625 23,000 262 147,500

P910,532

P57,852

(*) The notional amounts pertain to the original currency except for the Embedded derivatives, which represent the equivalent USD amounts.

F-113

In May and June of 2008, the Parent Company entered into cross currency swap agreements with various counterparty banks in which the proceeds from the 2008 Notes were swapped for USD. The aggregate notional amount of the cross currency swaps is US$185.0 million or P8.1 billion while its net positive fair value amounted to P37.4 million as of December 31, 2010. The Parent Company renewed some of these agreements with various counterparty banks in May and June of 2011 with terms to maturities of two years. The aggregate notional amount of these cross currency swaps is US$79.0 million or P3.4 billion while its positive (negative) fair value amounted to P190.3 million and (P32.3 million) as of December 31, 2012 and 2011, respectively. In 2008, the Group has pledged a part of its AFS investments in order to fulfill collateral requirements of various cross currency swap transactions, which expired in 2011. Net proceeds from this transaction amounted to P81.4 million. Refer to Note 10 for further details. On June 21, 2011, the Parent Company entered into a cross currency swap agreement with a notional amount of US$7.0 million or P299.0 million and will mature on June 17, 2013. Proceeds of the 2011 Notes were swapped for USD. As of December 31, 2012 and 2011, its positive (negative) fair value amounted to P11.7 million and (P7.5 million), respectively. In order to fulfill collateral requirements, the Parent Company has pledged its cash amounting to US$2.0 million or P82.1 million and US$2.0 million or P85.4 million as of December 31, 2012 and 2011. As of December 31, 2012 and 2011, the Parent Company holds 261,515 shares of ROP Warrants Series B1 at their fair value of US$1.44 million and US$2.09 million, respectively. Embedded derivatives that have been bifurcated are credit derivatives in structured notes with a notional reference of USD47.5 million and a positive fair value of P3.86 million as of December 31, 2012 and a notional reference of USD87.5 million with a positive fair value of P41.8 million as of December 31, 2011, and notional reference of USD147.5 million and a positive fair value of P124.4 million as of January 1, 2011. The table below shows the rollforward analysis of net derivatives assets (liabilities) as of December 31, 2012, 2011 and January 1, 2010 (in millions):
2012 2011 2010

Balance at beginning of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Changes in fair value (Note 10) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q 283 P 755 P 1,090 82 (34) 1,158 (194) (438) (1,395) Q 171 P 283 P 853

The changes in fair value of the derivatives are included in Trading and investments securities gainsnet in the statement of income.

F-114

23. Maturity Analysis of Assets and Liabilities The following table shows an analysis of assets and liabilities of the Group and Parent Company analyzed according to whether they are expected to be recovered or settled within one year and beyond one year from reporting date:
Consolidated Less than Twelve Months December 31, 2012 Over Twelve Months

Total

Financial Assets COCI. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due from BSP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due from other banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interbank loans receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities held under agreements to resell. . . . . . . . . . . . . . . . . . . Financial assets at FVPL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans receivablesgross (Note 8) . . . . . . . . . . . . . . . . . . . . . . . . . Unquoted debt securities classified as loans (Note 8) . . . . . . . . . Other receivablesgross (Note 8) . . . . . . . . . . . . . . . . . . . . . . . . . AFS investmentsgross (Note 10). . . . . . . . . . . . . . . . . . . . . . . . . Miscellaneous COCI (Note 14) . . . . . . . . . . . . . . . . . . . . . . . . . . . . Nonfinancial Assets Property and equipmentnet At cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . At appraised value. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investments in subsidiaries and an associatenet . . . . . . . . . . . . Investment propertiesnet. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assetsgross (Note 14)(*) . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Allowance for impairment and credit losses (Note 15). . . Unearned and other deferred income (Note 8) . . . . . . . . . .

5,599,088 Q Q 5,599,088 37,175,399 37,175,399 4,042,769 4,042,769 11,498,756 11,498,756 18,300,000 18,300,000 4,023,065 4,023,065 45,314,788 87,794,673 133,109,461 3,997,264 3,820,935 7,818,199 18,934,249 18,934,249 4,449,652 63,476,235 67,925,887 808 808 153,335,838 155,091,843 308,427,681

2,185,051 2,185,051 Q155,520,889

937,075 Q 937,075 15,566,650 15,566,650 2,905,294 2,905,294 14,478,348 14,478,348 1,780,682 1,780,682 2,267,957 4,453,008 37,936,006 40,121,057 16,631,582 910,617 17,542,199 Q193,027,849 Q331,006,539

(Forward) F-115

Consolidated December 31, 2012 Less than Over Twelve Months Twelve Months

Total

Financial Liabilities Deposit liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial liabilities at FVPL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bills and acceptances payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subordinated debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued interest payable (Note 19). . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities (Note 21): Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bills purchasedcontra . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Insurance contract liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . Due to other banks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Managers checks and demand drafts outstanding . . . . . . . . Payment order payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deposit on lease contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due to TOP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Margin deposits and cash letters of credit . . . . . . . . . . . . . . . . Due to BSP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Nonfinancial Liabilities Accrued taxes and other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities(**) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q223,150,780 283,751 12,768,365 1,987,231 4,693,074 2,553,891 2,623,901 142,212 623,621 174,406 180,700 31,358 102,616 427,542 249,743,448 706,964 1,406,852 2,113,816 Q251,857,264

Q17,703,597 6,196,070 308,536 9,938,816 264,452 290,649 983,499 35,685,619 1,369,145 2,347,620 3,716,765 Q39,402,384

Q240,854,377 6,479,821 13,076,901 9,938,816 1,987,231 4,693,074 2,553,891 2,623,901 142,212 623,621 174,406 445,152 290,649 31,358 102,616 1,411,041 285,429,067 2,076,109 3,754,472 5,830,581 Q291,259,648

(*) Includes deferred charges, prepaid expense and intangibles (software and exchange trading right) (**) Includes withholding taxes payable
Consolidated December 31, 2011 (As Restated) Less than Over Twelve Months Twelve Months Total

Financial Assets COCI. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due from BSP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due from other banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interbank loans receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities held under agreements to resell. . . . . . . . . . . . . . . . . . . Financial assets at FVPL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans receivablesgross (Note 8) . . . . . . . . . . . . . . . . . . . . . . . . . Unquoted debt securities classified as loans (Note 8) . . . . . . . . . Other receivablesgross (Note 8) . . . . . . . . . . . . . . . . . . . . . . . . . AFS investmentsgross (Note 10). . . . . . . . . . . . . . . . . . . . . . . . . Miscellaneous COCI (Note 14) . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5,404,110 P P 5,404,110 38,152,795 38,152,795 6,423,981 6,423,981 17,097,648 17,097,648 18,300,000 18,300,000 2,824,994 4,050,671 6,875,665 40,972,474 74,577,334 115,549,808 4,362,294 3,998,835 8,361,129 16,789,118 16,789,118 1,727,769 51,523,527 53,251,296 5,220 5,220 152,060,403 134,150,367 286,210,770

(Forward) F-116

Consolidated December 31, 2011 (As Restated) Less than Over Twelve Months Twelve Months Total

Nonfinancial Assets Property and equipmentnet At cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . At appraised value. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investments in subsidiaries and an associatenet . . . . . . . . . . . . Investment propertiesnet. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assetsgross (Note 14)(*) . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Allowance for impairment and credit losses (Note 15). . . Unearned and other deferred income (Note 8) . . . . . . . . . .

3,095,195 3,095,195 P155,155,598

866,013 866,013 15,698,514 15,698,514 2,901,780 2,901,780 16,100,113 16,100,113 1,775,789 1,775,789 2,704,276 5,799,471 40,046,485 43,141,680 16,376,131 909,680 17,285,811 P174,196,852 P312,066,639

Financial Liabilities Deposit liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial liabilities at FVPL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bills and acceptances payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subordinated debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued interest payable (Note 19). . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities (Note 21): Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bills purchasedcontra . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Insurance contract liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . Due to other banks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Managers checks and demand drafts outstanding . . . . . . . Payment order payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deposit on lease contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due to TOP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Margin deposits and cash letters of credit. . . . . . . . . . . . . . . Due to BSP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Nonfinancial Liabilities Accrued taxes and other expenses. . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities(**). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P219,183,534 P 18,350,404 P237,533,938 171,013 6,479,170 6,650,183 7,129,369 1,329,056 8,458,425 6,452,473 6,452,473 450,070 1,555,417 2,005,487 4,184,550 2,296,039 1,484,193 98,671 475,041 152,810 212,390 102,965 54,888 235,995,533 568,260 1,806,132 2,374,392 P238,369,925 356,597 220,053 34,743,170 4,184,550 2,296,039 1,484,193 98,671 475,041 152,810 356,597 220,053 212,390 102,965 54,888 270,738,703

1,407,471 1,975,731 2,571,636 4,377,768 3,979,107 6,353,499 P 38,722,277 P277,092,202

(*) Includes deferred charges, prepaid expense and intangibles (software and exchange trading right) (**) Includes withholding taxes payable

F-117

Consolidated January 1, 2011 (As Restated) Less than Over Twelve Months Twelve Months Total

Financial Assets COCI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due from BSP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due from other banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interbank loans receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities held under agreements to resell . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial assets at FVPL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans receivablesgross (Note 8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unquoted debt securities classified as loans (Note 8). . . . . . . . . . . . . . . . . . . Other receivablesgross (Note 8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . AFS investmentsgross (Note 9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . HTM investments (Note 10) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Miscellaneous COCI (Note 14). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Nonfinancial Assets Property and equipmentnet At cost. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . At appraised value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investments in subsidiaries and an associatenet . . . . . . . . . . . . . . . . . . . . . Investment propertiesnet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assetsgross (Note 14)(*) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Allowance for impairment and credit losses (Note 15) . . . . . . . . . . . . Unearned and other deferred income (Note 8). . . . . . . . . . . . . . . . . . . .

5,457,186 24,285,986 5,141,549 12,691,967 6,800,000 10,709,620 41,533,614 2,432,733 17,665,062 1,455,663 3,529,989 1,970 131,705,339

5,271,027 53,533,032 8,792,745 33,772,645 34,698,202 136,067,651

5,457,186 24,285,986 5,141,549 12,691,967 6,800,000 15,980,647 95,066,646 11,225,478 17,665,062 35,228,308 38,228,191 1,970 267,772,990

3,288,631 3,288,631 P134,993,970 P213,502,650 57,852 10,352,330 615,534 3,917,375 2,132,659 1,800,984 567,831 963,332 166,986 59,094 104,844 287,562 234,529,033 666,278 1,499,680 2,165,958 P236,694,991

815,497 15,816,443 2,832,073 17,913,198 1,829,430 2,518,576 41,725,217 P177,792,868 P 12,933,234 6,516,744 1,651,808 5,486,735 1,555,418 309,314 253,619 28,706,872 1,487,733 1,858,846 3,346,579 P 32,053,451

815,497 15,816,443 2,832,073 17,913,198 1,829,430 5,807,207 45,013,848 15,071,411 595,399 15,666,810 P297,120,028 P226,435,884 6,574,596 12,004,138 5,486,735 2,170,952 3,917,375 2,132,659 1,800,984 567,831 963,332 166,986 309,314 253,619 59,094 104,844 287,562 263,235,905 2,154,011 3,358,526 5,512,537 P268,748,442

Financial Liabilities Deposit liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial liabilities at FVPL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bills and acceptances payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subordinated debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued interest payable (Note 19) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities(Note 21): Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bills purchasedcontra . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Insurance contract liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due to other banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Managers checks and demand drafts outstanding . . . . . . . . . . . . . . . . . Payment order payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deposit on lease contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due to TOP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Margin deposits and cash letters of credit . . . . . . . . . . . . . . . . . . . . . . . . Due to BSP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Nonfinancial Liabilities Accrued taxes and other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities(**) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(*) Includes deferred charges, prepaid expense and intangibles (software and exchange trading right) (**) Includes withholding taxes payable

F-118

Parent Company December 31, 2012 Less than Over Twelve Months Twelve Months

Total

Financial Assets COCI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due from BSP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due from other banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interbank loans receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities held under agreements to resell. . . . . . . . . . . . . . . . . . . . . . . . Financial assets at FVPL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans receivablesgross (Note 8). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unquoted debt securities classified as loans (Note 8) . . . . . . . . . . . . . . Other receivablesgross (Note 8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . AFS investmentsgross (Note 10) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Miscellaneous COCI (Note 14) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Nonfinancial Assets Property and equipmentnet At cost. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . At appraised value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investments in subsidiaries and an associatenet. . . . . . . . . . . . . . . . . Investment propertiesnet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assetsgross (Note 14)*. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Allowance for impairment and credit losses (Note 15). . . . . . . . Unearned and other deferred income (Note 8) . . . . . . . . . . . . . . .

5,548,325 36,531,047 3,293,782 11,498,756 18,300,000 3,965,098 44,116,062 3,997,264 16,076,214 4,423,628 808 147,750,984

86,101,174 3,820,935 61,268,821 151,190,930

5,548,325 36,531,047 3,293,782 11,498,756 18,300,000 3,965,098 130,217,236 7,818,199 16,076,214 65,692,449 808 298,941,914

375,255 375,255 Q148,126,239 Q223,703,078 283,751 12,717,585 1,988,623 4,513,263 2,553,891 351,061 623,621 174,406 31,358 102,616 427,540 247,470,793 590,100 570,273 1,160,373 Q248,631,166

757,364 15,566,650 6,776,872 14,411,199 1,673,718 1,576,792 40,762,595 Q191,953,525 Q 17,703,597 6,196,070 1,226 9,938,816 290,649 983,498 35,113,856 1,289,958 2,340,160 3,630,118 Q 38,743,974

757,364 15,566,650 6,776,872 14,411,199 1,673,718 1,952,047 41,137,850 14,319,490 676,591 14,996,081 Q325,083,683 Q241,406,675 6,479,821 12,718,811 9,938,816 1,988,623 4,513,263 2,553,891 351,061 623,621 174,406 290,649 31,358 102,616 1,411,038 282,584,649 1,880,058 2,910,433 4,790,491 Q287,375,140

Financial Liabilities Deposit liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial liabilities at FVPL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bills and acceptances payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subordinated debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued interest payable (Note 19) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities (Note 21): Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bills purchasedcontra. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due to other banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Managers checks and demand drafts outstanding . . . . . . . . . . . . Payment order payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due to TOP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Margin deposits and cash letters of credit. . . . . . . . . . . . . . . . . . . . Due to BSP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Nonfinancial Liabilities Accrued taxes and other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities(**) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(*) Includes deferred charges, prepaid expense and intangibles (software and exchange trading right) (**) Includes withholding taxes payable

F-119

Parent Company December 31, 2011 (As restated) Less than Over Twelve Months Twelve Months Total

Financial Assets COCI. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due from BSP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due from other banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interbank loans receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities held under agreements to resell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial assets at FVPL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans receivablesgross (Note 8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unquoted debt securities classified as loans (Note 8) . . . . . . . . . . . . . . . . . . . Other receivablesgross (Note 8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Receivable from SPVnet. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . AFS investmentsgross (Note 10). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . HTM investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Miscellaneous COCI (Note 14) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Nonfinancial Assets Property and equipmentnet At cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . At appraised value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investments in subsidiaries and an associatenet . . . . . . . . . . . . . . . . . . . . . . Investment propertiesnet. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assetsgross (Note 14)(*) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Allowance for impairment and credit losses (Note 15). . . . . . . . . . . . . Unearned and other deferred income (Note 8) . . . . . . . . . . . . . . . . . . . .

5,303,112 37,492,594 4,906,698 17,097,648 18,300,000 2,822,537 39,636,745 4,362,294 14,866,702 1,690,359 5,220 146,483,909

4,050,671 73,568,191 3,998,835 49,666,106 131,283,803

5,303,112 37,492,594 4,906,698 17,097,648 18,300,000 6,873,208 113,204,936 8,361,129 14,866,702 51,356,465 5,220 277,767,712

587,674 587,674 P147,071,583 P220,129,913 171,013 5,599,598 447,639 4,044,557 2,296,039 346,159 475,041 152,810 212,390 102,965 54,888 234,033,012 815,232 1,033,138 1,848,370 P235,881,382

676,405 15,698,514 7,305,644 16,030,203 1,696,698 2,903,298 44,310,762 P175,594,565 P 18,331,774 6,479,170 1,718,760 6,452,473 1,555,417 220,053 34,757,647 1,839,595 1,658,630 3,498,225 P 38,255,872

676,405 15,698,514 7,305,644 16,030,203 1,696,698 3,490,972 44,898,436 14,520,645 705,225 15,225,870 P307,440,278 P238,461,687 6,650,183 7,318,358 6,452,473 2,003,056 4,044,557 2,296,039 346,159 475,041 152,810 220,053 212,390 102,965 54,888 268,790,659 2,654,827 2,691,768 5,346,595 P274,137,254

Financial Liabilities Deposit liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial liabilities at FVPL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bills and acceptances payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subordinated debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued interest payable (Note 19). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities (Note 21): Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bills purchasedcontra . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Insurance contract liabilities Due to other banks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Managers checks and demand drafts outstanding . . . . . . . . . . . . . . . . . Payment order payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deposit on lease contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due to TOP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Margin deposits and cash letters of credit . . . . . . . . . . . . . . . . . . . . . . . . . Due to BSP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Nonfinancial Liabilities Accrued taxes and other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities(**) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(*) Includes deferred charges, prepaid expense and intangibles (software and exchange trading right) (**) Includes withholding taxes payable

F-120

Parent Company January 1, 2011 (As Restated) Less than Over Twelve Months Twelve Months Total

Financial Assets COCI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due from BSP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due from other banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interbank loans receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities held under agreements to resell. . . . . . . . . . . . . . . . . . . . . . . . Financial assets at FVPL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans receivablesgross (Note 8). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unquoted debt securities classified as loans (Note 8) . . . . . . . . . . . . . . Other receivablesgross (Note 8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Receivable from SPVnet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . AFS investmentsgross (Note 10) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . HTM investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Miscellaneous COCI (Note 14) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Nonfinancial Assets Property and equipmentnet At cost. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . At appraised value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investments in subsidiaries and an associatenet. . . . . . . . . . . . . . . . . Investment propertiesnet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assetsgross (Note 14)(*) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Allowance for impairment and credit losses (Note 15). . . . . . . . Unearned and other deferred income (Note 8) . . . . . . . . . . . . . . .

5,309,611 24,273,986 3,530,188 12,245,259 6,800,000 15,966,898 40,973,150 2,432,733 15,477,394 1,377,671 3,529,989 1,970 131,918,849

51,992,552 8,792,745 624,450 32,239,290 34,610,098 128,259,135

5,309,611 24,273,986 3,530,188 12,245,259 6,800,000 15,966,898 92,965,702 11,225,478 15,477,394 624,450 33,616,961 38,140,087 1,970 260,177,984

1,590,772 1,590,772 P133,509,621 P213,954,498 57,852 11,449,021 614,908 3,705,782 2,132,659 319,253 963,332 166,986 59,094 104,844 287,563 233,815,792 953,906 589,235 1,543,141 P235,358,933

658,865 15,816,443 7,325,446 17,841,232 1,738,583 1,767,246 45,147,815 P173,406,950 P 12,933,234 6,516,744 1,407,640 5,486,735 1,555,418 253,619 28,153,390 1,694,170 1,234,265 2,928,435 P 31,081,825

658,865 15,816,443 7,325,446 17,841,232 1,738,583 3,358,018 46,738,587 13,418,052 415,872 13,833,924 P293,082,647 P226,887,732 6,574,596 12,856,661 5,486,735 2,170,326 3,705,782 2,132,659 319,253 963,332 166,986 253,619 59,094 104,844 287,563 261,969,182 2,648,076 1,823,500 4,471,576 P266,440,758

Financial Liabilities Deposit liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial liabilities at FVPL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bills and acceptances payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subordinated debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued interest payable (Note 19) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities (Note 21): Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bills purchasedcontra. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Insurance contract liabilities Due to other banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Managers checks and demand drafts outstanding . . . . . . . . . . . . Payment order payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deposit on lease contracts Due to TOP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Margin deposits and cash letters of credit. . . . . . . . . . . . . . . . . . . . Due to BSP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Nonfinancial Liabilities Accrued taxes and other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities(**) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(*) Includes deferred charges, prepaid expense and intangibles (software and exchange trading right) (**) Includes withholding taxes payable

F-121

24. Equity Capital stock consists of (amounts in thousands, except for par value and number of shares):
Shares Amount

PreferredP40 par value Authorized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CommonP40 par value Authorized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Issued and outstanding (Note 29) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Parent Company shares are listed in the PSE. The preferred shares have the following features:

195,175,444 1,054,824,557 662,245,916

P26,489,837

(a) Non-voting, non-cumulative, fully participating on dividends with the common shares; (b) Convertible, at any time at the option of the holder who is qualified to own and hold common shares on a one (1) preferred share for one (1) common share basis; (c) With mandatory and automatic conversion into common shares upon the sale of such preferred shares to any person other than the NG or any other government agency or GOCCs; and (d) With rights to subscribe to additional new preferred shares with all of the features described above, in the event that the Bank shall offer new common shares for subscription, in such number corresponding to the number of shares being offered. As of December 31, 2012 and 2011, the Group has 200,112 treasury shares. Pursuant to the 1986 Revised Charter of the Parent Company, the Parent Companys authorized capital stock was P10 Billion divided into 100,000,000 common shares with a par value of P100.00 per share. Its principal stockholder was the National Government (NG) which owned 25,000,000 common shares. On the other hand, private stockholders owned 8,977 common shares. To foster a financial intermediations system that is both competitive and efficient, the partial privatization of the Parent Company was carried out through the following public offerings:
Type of Offering No. of Shares Offered Offer Price Authorized Number of Shares Issued and Outstanding Shares

Date of Offering

Par Value

June 1989 April 1992 December 1995

Initial Public Offering Second Public Offering Third Public Offering

10,800,000 common shares 8,033,140 common shares 7,200,000 common shares and 2,400,000 covered warrants

P100.00 P100.00 P100.00 P265.00 P100.00 P260.00

250,000,000 common shares 250,000,000 common shares 250,000,000 common shares

36,011,569 common shares 80,333,350 common shares 99,985,579 common shares

After the three (3) public offerings, the NG sold a total of 54.41% of its shareholdings to both the Philippine public and international investors. On May 27, 1996, the privatization of the Parent Company was completed when the Parent Companys new Articles of Incorporation and By-Laws were approved by the SEC under SEC Registration No. ASO96-005555. As of May 27, 1996, the NG owned 45.59% of the outstanding shares of the Parent Company. The Parent Companys authorized capital stock was increased to P25 billion pesos divided into 250,000,000 common shares with a par value of P100.00 per share.

F-122

As part of the Parent Companys capital build-up program, the Parent Company also completed the following right offerings:
Type of Offering No. of Shares Offered Basis of Subscription Offer Price Authorized Number of Shares Issued and Outstanding Shares

Date of Offering

Par Value

Stock 68,740,086 One (1) Right P100.00 P137.80 250,000,000 206,220,257 Rights common shares Share for common shares common shares Offering every two common shares September 2000 Pre71,850,215 Five (5) Right P100.00 P 60.00 833,333,334 206,220,257 emptive common shares Shares for common shares common shares Rights with every Six (6) Offering 170,850,215 common shares warrants September 1999 On August 18, 2000, the SEC approved the decrease of the capital stock of the Parent Company from P25.0 billion divided into 250,000,000 common shares with a par value of P100.00 per share to P15.0 billion divided into 250,000,000 common shares with a par value of P60.00 per share. Subsequently on November 7, 2000, the SEC approved the increase of the capital stock of the Parent Company from P15.0 Billion divided into 250,000,000 common shares with a par value of P60.00 per share to P50,000,000,040 divided into 833,333,334 shares with a par value of P60.00 per share. On July 23, 2002, the SEC approved the decrease of the capital stock of the Parent Company from P50,000,000,040.00 divided into 833,333,334 shares with a par value of P60.00 per share to P33,333,333,360.00 divided into 833,333,334 shares with a par value of P40.00 per share. On the same day, the SEC also approved the increase of the capital stock of the Parent Company from P33,333,333,360.00 divided into 833,333,334 shares with a par value of P40.00 per share to P50,000,000,040.00 divided into 1,054,824,557 common shares and 195,175,444 preferred shares both with a par value of P40.00 each. In July 2007, the Parent Company made a primary and secondary offering of up to 160,811,091 common shares. The Offer consisted of: (i) primary offer by the Parent Company of up to 89,000,000 new shares from the Parent Companys authorized but unissued common share capital, and (ii) secondary offer of up to an aggregate of 71,811,091 existing shares, comprising (a) 17,453,340 shares offered by the NG, and (b) 54,357,751 shares which were owned by the Philippine Deposit Insurance Corporation (PDIC) in the form of convertible preferred shares. The Primary Offer Shares and Secondary Offer Shares were offered at the Offer Price of P59.00 per share. As of December 31, 2012, 2011 and 2010, the Parent Company had 30,825, 31,301 and 31,732 stockholders, respectively. Surplus and Capital Paid in Excess of Par Value of the Parent Company amounting to P9.8 billion as of December 31, 2012 and 2011 which represents the balances of accumulated translation adjustment, accumulated equity in net earnings and revaluation increment from land that have been applied to eliminate the Parent Companys deficit through a quasi-reorganization in 2002 and 2000, are not available for dividend declaration without prior approval from the Philippine SEC and the BSP. Capital Management The primary objectives of the Parent Companys capital management are to ensure that it complies with externally imposed capital requirements and it maintains strong credit ratings and healthy capital ratios in order to support its business and to maximize shareholders value. The Parent Company manages its capital structure and makes adjustments to it in the light of changes in economic conditions and the risk characteristics of its activities. In order to maintain or adjust the capital structure, the Parent Company may adjust the amount of dividend payment to shareholders, return capital structure, or issue capital securities. No changes were made in the objectives, policies and processes from the previous periods. F-123

Regulatory Qualifying Capital Under existing BSP regulations, the determination of the Parent Companys compliance with regulatory requirements and ratios is based on the amount of the Parent Companys unimpaired capital (regulatory net worth) reported to the BSP, which is determined on the basis of regulatory policies, which differ from PFRS in some respects. In addition, the risk-based capital ratio of a bank, expressed as a percentage of qualifying capital to riskweighted assets, should not be less than 10.00% for both solo basis (head office and branches) and consolidated basis (parent bank and subsidiaries engaged in financial allied undertakings but excluding insurance companies). Qualifying capital and risk-weighted assets are computed based on BSP regulations. Risk-weighted assets consist of total assets less cash on hand, due from BSP, loans covered by hold-out on or assignment of deposits, loans or acceptances under letters of credit to the extent covered by margin deposits and other non-risk items determined by the Monetary Board (MB) of the BSP. The BSP approved the booking of additional appraisal increment of P431.8 million in 2002 on properties and recognition of the same in determining the capital adequacy ratio, and booking of translation adjustment of P1.6 billion in 2002 representing the increase in peso value of the investment in foreign subsidiaries for purposes of the quasi-reorganization and rehabilitation of the Parent Company, provided that the same shall be excluded for dividend purposes. The CAR, which is based on consolidated CAR combined credit, market and operational risks (BSP Circular No. 538), as of December 31, 2012, 2011 and 2010 as reported to the BSP are shown in the table below (amounts in millions).
2012 Consolidated Actual Required Actual 2011 Required Actual 2010 Required

Tier 1 capital. . . . . . . . . . . . . . . . Tier 2 capital. . . . . . . . . . . . . . . . Gross qualifying capital . . . . . . Less required deductions . . . . . Total qualifying capital . . . . . Risk weighted assets . . . . . . . . Tier 1 capital ratio . . . . . . . . . . . Total capital ratio. . . . . . . . . . . . Tier 1 capital. . . . . . . . . . . . . . . . Tier 2 capital. . . . . . . . . . . . . . . . Gross qualifying capital . . . . . . Less required deductions . . . . . Total qualifying capital . . . . . Risk weighted assets . . . . . . . . Tier 1 capital ratio . . . . . . . . . . . Total capital ratio. . . . . . . . . . . .

Q 26,508.6 14,707.2 41,215.8 3,122.7 Q 38,093.1 Q21,023.9 Q210,239.2 11.87% 18.12% Q 27,398.5 15,141.3 42,539.8 9,472.2 Q 33,067.6 Q19,886.2 Q198,861.7 11.40% 16.63%

P 30,500.9 15,065.8 45,566.7 159.5 P 45,407.2 P20,969.1 P209,691.0 14.51% 21.65% P 31,196.7 14,993.0 46,189.7 6,511.3 P 39,678.4 P20,013.3 P200,132.9 13.96% 19.83%

P 27,242.3 14,226.1 41,468.4 0.4 P 41,468.0 P21,365.7 P213,656.5 12.75% 19.41% P 27,978.0 14,158.4 42,136.4 6,426.0 P 35,710.4 P20,347.5 P203,474.7 12.17% 17.55%

The Group and its individually regulated subsidiaries/operations have complied with all externally imposed capital requirement throughout the year. Internal Capital Adequacy Assessment Process (ICAAP) Implementation In compliance with BSP Circular 639, the Bank has adopted its live ICAAP Document for 2011 to 2013. However, the BOD and the Management recognized that ICAAP is beyond compliance, i.e. it is about how to effectively run the Banks operations by ensuring that the Bank maintains at all times an appropriate level and quality of capital to meet its business objective and commensurate to its risk profile. In line with its ICAAP principles, the Bank shall maintain a capital level that will not only meet the BSP CAR requirement but will also cover all material risks that it may encounter in the course of its business. The ICAAP process highlights close integration of capital planning/strategic management with risk management. The Bank has in place a risk management framework that involves a collaborative process for assessing and managing identified Pillar 1 and Pillar 2 risks. The Bank complies with the required annual submission of updated ICAAP. F-124

Financial Performance The following basic ratios measure the financial performance for the periods ended December 31, 2012, 2011 and 2010 of the Group and the Parent Company (amounts in millions):
Consolidated 2011 2010 (As Restated) (As Restated) Parent Company 2011 2010 (As Restated) (As Restated)

2012

2012

Return on average equity (a/b) . . . . . . . . . . . . . . . . a.) Net income . . . . . . . . . . . . . . . . b.) Average total equity . . . . . . . . Return on average assets (c/d). . . . . . . . . . . . . . . . . c.) Net income . . . . . . . . . . . . . . . . d.) Average total assets . . . . . . . . Net interest margin on average earning assets (e/f) . . . . . . . . . . e.) Net interest income. . . . . . . . . f.) Average interest earning assets . . . . . . . . . . . . . . . . . . . . . Q

13.46% 5,028 37,361 1.56% Q 5,028 321,537 2.63% Q 6,976 P P

15.01% 4,756 31,673 1.56% P 4,756 304,593 2.95% 7,203 P P

15.24% 4,032 26,460 1.40% P 4,032 287,645 3.38% 7,559 Q Q

12.83% 4,555 35,506 1.44% Q 4,555 316,262 2.62% 6,762 P P P

15.73% 4,715 29,972 1.57% 4,715 300,261 2.94% 7,020 238,701 P P

14.74% 3,659 24,826 1.29% P 3,659 282,584 3.43% 7,443

264,968

244,568

223,377

258,515

217,075

Note: Average balances were the sum of beginning and ending balances of the respective statement of financial position accounts as of the end of the year divided by two (2). 25. Income and Expenses Service fees and commission income consists of:
2012 Consolidated 2011 2010 2012 Parent Company 2011 2010

Deposit-related . . . . . . . . . . . . . . . . . Q 860,606 P 920,967 P 951,368 Q 860,606 P 920,967 P 951,368 Remittance. . . . . . . . . . . . . . . . . . . . . 811,559 936,610 987,097 420,901 442,721 433,695 Trust fees (Note 30) . . . . . . . . . . . . . 134,690 136,848 125,311 134,690 136,848 125,311 Credit-related . . . . . . . . . . . . . . . . . . 173,366 267,245 324,194 89,435 144,803 198,843 Miscellaneous . . . . . . . . . . . . . . . . . . 150,443 82,320 60,000 91,318 37,463 45,244 Q2,130,664 P2,343,990 P2,447,970 Q1,596,950 P1,682,802 P1,754,461 Miscellaneous income consists of:
Consolidated 2011 2010 (As Restated) (As Restated) Parent Company 2012 2011 2010

2012

Income of SPV . . . . . . . . . . . . . . . . . . . . . . Q 989,376 P 762,828 P 942,263 Q P P Rental (Notes 27 and 31) . . . . . . . . . . . . . 172,512 172,462 204,712 180,127 179,691 180,291 Share in net income of an associate . . . . 10,309 68,955 45,065 Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 669,988 906,688 403,408 225,318 612,269 430,086 Q1,842,185 P1,910,933 P1,595,448 Q405,445 P791,960 P610,377 Net gains on sale or exchange of assets include net gains from sale of investment properties in 2012, 2011, and 2010 amounting to P474.4 million, P886.4 million and P876.9 million, respectively, for the Group and the Parent Company.

F-125

Miscellaneous expenses consist of:

Consolidated 2011 2010 (As Restated) (As Restated) Parent Company 2012 2011 2010

2012

Expenses of SPV . . . . . . . . . . . . . . . Q 559,468 P 109,211 P 95,471 Q P P Security, clerical, messengerial . . . 516,836 526,720 555,960 504,643 512,754 496,527 Insurance . . . . . . . . . . . . . . . . . . . . . . 542,238 512,070 541,529 529,664 496,522 526,525 Foreclosure and other ROPA related expenses (Note 13) . . . . . 287,028 319,749 552,410 281,664 319,515 552,410 Promotional . . . . . . . . . . . . . . . . . . . . 376,585 291,470 423,963 341,381 291,470 386,908 Transportation and travel . . . . . . . . 243,436 231,705 227,663 222,747 217,925 208,960 Management and professional fees . . . . . . . . . . . . . . . . . . . . . . . . . 217,110 204,801 203,730 159,090 150,740 144,800 Information technology . . . . . . . . . . 191,982 197,706 269,485 147,398 124,050 136,627 Amortization of software costs (Note 14) . . . . . . . . . . . . . . . . . . . . 153,550 162,167 156,708 151,126 158,528 153,774 Stationery and supplies used . . . . . 136,602 147,876 142,936 117,455 126,517 117,738 Postage, telephone and telegram . . . . . . . . . . . . . . . . . . . . . 116,611 132,216 112,186 78,214 87,650 58,979 EARE (Note 28) . . . . . . . . . . . . . . . . 131,567 130,395 130,800 110,925 116,917 109,256 Others . . . . . . . . . . . . . . . . . . . . . . . . . 660,794 431,133 293,811 597,654 209,390 242,760 Q4,133,807 P3,397,219 P3,706,652 Q3,241,961 P2,811,978 P3,135,264 Expenses of SPV consists of salaries and wages, taxes and licenses and other operating and administrative expenses. Miscellaneousothers include repairs and maintenances, membership dues, utilities and litigation expenses. 26. Retirement Plan The Parent Company and certain subsidiaries of the Group, have separate funded, noncontributory defined benefit retirement plans covering substantially all its officers and regular employees. Under these retirement plans, all covered officers and employees are entitled to cash benefits after satisfying certain age and service requirements. The Parent Companys annual contribution to the retirement plan consists of a payment covering the current service cost, amortization of the unfunded actuarial accrued liability and interest on such unfunded actuarial liability. The retirement plan provides a retirement benefit equal to one hundred and twelve percent (112.00%) of plan salary per month for every year of credited service. The following table shows the actuarial assumptions as of December 31, 2012 and 2011 used in determining the retirement benefit obligation of the Parent Company:
2012 2011

Expected rate of return on plan assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Salary rate increase. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Estimated working lives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

8% 9% 6% 6% 8% 8% 14 years 14 years

As of December 31, 2012, the discount rate used in determining the retirement obligation is 5.7%. The overall expected rate of return on plan assets is determined based on the market prices prevailing on that date applicable to the period over which the obligation is to be settled. The latest actuarial valuation was made as of December 31, 2012.

F-126

The amount of liability recognized in the Parent Companys statements of financial position (included under Other liabilities) follows:
December 31, 2012 December 31, 2011

Present value of defined benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fair value of plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrecognized amortizations: Past service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Actuarial loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Retirement liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q3,141,154 1,317,811 1,823,343 (48,740) (387,807) Q1,386,796

P2,828,807 797,884 2,030,923 (53,614) (619,360) P1,357,949

The amounts included in Compensation and fringe benefits in the Parent Companys statements of income are as follows:
2012 2011 2010

Current service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected return on plan assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of non-vested past service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . Net actuarial loss (gain) recognized during the year . . . . . . . . . . . . . . . . . . . . .

Q265,458 P 160,225 P218,827 175,165 143,754 218,128 (77,294) (116,864) (42,005) 4,874 4,874 4,873 24,034 (18,305) 26,860 Q392,237 P 173,684 P426,683

The movements in the retirement liability recognized under Other liabilities in the Parent Companys statements of financial position follow:
December 31, 2012 December 31, 2011

Balance at beginning of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Retirement expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Actual contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q1,357,949 P1,234,265 392,237 173,684 (363,390) (50,000) Q1,386,796 P1,357,949

Changes in the present value of the defined benefit obligation of the Parent Company are as follows:
December 31, 2012 December 31, 2011

Balance at beginning of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Current service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Changes in the fair value of the plan assets of the Parent Company are as follows:

Q2,828,807 P1,827,591 265,458 160,225 175,165 143,754 (140,457) (191,951) 12,181 889,188 Q3,141,154 P2,828,807

December 31, 2012

December 31, 2011

Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Actuarial gain (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Benefits paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance at end of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-127

Q 797,884 P 973,864 363,390 50,000 219,699 (150,893) (140,457) (191,951) 77,295 116,864 Q1,317,811 P 797,884

The fair value of the plan assets as of December 31, 2012 and 2011 includes the fair value of the investments in the Parent Company shares of stock amounting to P712.9 million and P441.8 million, respectively. The actual return on plan assets of the Parent Company amounted to gains/(loss) of P297.0 million, (P34.0 million) and P254.4 million in 2012, 2011 and 2010, respectively. The Parent Company believes that the plan has enough funds to pay any retiring employee. Accordingly, it does not expect to contribute to the plan in 2013. The major categories of plan assets as a percentage of the fair value of total plan assets follow:
December 31, 2012 December 31, 2011

Parent Companys own common shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Government securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Debt securities and others. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

54% 7% 39% 100%

55% 20% 25% 100%

Information on the Parent Companys retirement plan are as follows:

2012 2011 2010 2009 2008

Present value of the defined benefit obligation. . . . . . . . . . . . . . . . . . . . . . . . . . Fair value of plan assets . . . . . . . . . . . . . . . Deficit on plan assets . . . . . . . . . . . . . . . . . . Experience adjustments arising on plan liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . Experience adjustments arising on plan assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q3,141,154 1,317,811 1,823,343 (216,253) 219,699

P2,828,807 797,884 2,030,923 (66,200) (150,893)

P1,827,591 P2,218,999 P1,218,986 973,864 750,100 421,196 853,727 1,468,899 797,790 (273,035) 212,432 (24,385) 70,857 (92,518) 151,035

As of December 31, 2012 and 2011, the retirement liability (asset) included in Other liabilities (See Note 21) and Other assets (See Note 14), respectively, of certain subsidiaries of the Group follows:
PNB Europe PNB Capital PNB Securities PNB Italy Japan-PNB PNB Gen

2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q 2,124 39,970

(Q1,219) (1,609)

Q579 115

Q7,377 7,741

Q 956 1,277

Q2,403 2,473

Retirement expense of the Group charged against operations, included in Compensation and fringe benefits in the statements of income amounted to P393.1 million, P185.7 million and P443.5 million in 2012, 2011 and 2010, respectively. 27. Leases The Parent Company leases the premises occupied by majority of its branches (about 41.59% of the branch sites are Parent Company-owned). Some of its subsidiaries also lease the premises occupied by their Head Offices and most of their branches. The lease contracts are for periods ranging from 1 to 25 years and are renewable at the Groups option under certain terms and conditions. Various lease contracts include escalation clauses, most of which bear an annual rent increase of 10%. Rent expense charged against current operations (included in Occupancy and equipment-related costs in the statements of income) amounted to P387.2 million in 2012, P388.7 million in 2011 and P357.7 million in 2010 for the Group, of which P268.6 million in 2012, P253.3 million in 2011 and P222.6 million in 2010 pertain to the Parent Company. Future minimum rentals payable under non-cancelable operating leases follow:
Consolidated 2012 2011 Parent Company 2012 2011

Within one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Beyond one year but not more than five years . . . . . . . . . . . . . . . . More than five years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q274,632 P 97,972 Q193,544 P 57,635 536,520 126,199 383,661 74,444 17,911 8,272 16,432 7,761 Q829,063 P232,443 Q593,637 P139,840

F-128

The Parent Company has entered into commercial property leases on its investment properties. These noncancelable leases have lease terms of one to five years. Some leases include escalation clauses (such as 5% per year). In 2012, 2011 and 2010, total rent income (included under Miscellaneous income) amounted to P172.5 million, P172.5 million and P204.7 million, respectively, for the Group and P180.1 million, P179.7 million and P180.3 million, respectively, for the Parent Company (see Note 25). Future minimum rentals receivable under non-cancelable operating leases follow:
Consolidated 2012 2011 Parent Company 2012 2011

Within one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Beyond one year but not more than five years . . . . . . . . . . . . . . . . . . . .

Q 56,233 P 6,880 Q 4,153 P2,272 94,074 14,632 10,898 2,241 Q150,307 P21,512 Q15,051 P4,513

Leases where the Group substantially transfers to the lessee all risks and benefits incidental to ownership of the leased asset are classified as finance leases and are presented as receivable at an amount equal to the Groups net investment in the lease. Finance income is recognized based on the pattern reflecting a constant periodic rate of return on the banks net investment outstanding in respect of the finance lease (EIR method). Lease payments relating to the period are applied against the gross investment in the lease to reduce both the principal and the unearned finance income. Future minimum lease receivables under finance leases are as follows:
Consolidated 2012 2011 Parent Company 2012 2011

Within one year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Beyond one year but not more than five years . . . . . . . . . . . . More than five years. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total (Note 8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less amounts representing finance charges . . . . . . . . . . . . . . . Present value of minimum lease payments . . . . . . . . . . . . . . .

Q 889,311 P1,205,291 Q 1,959 P 1,800 1,068,345 585,691 18,100 19,850 85,800 84,700 85,800 84,700 2,043,456 292,797 Q1,750,659 1,875,682 267,181 P1,608,501 105,859 60,655 Q 45,204 106,350 62,911 P 43,439

28. Income and Other Taxes Under Philippine tax laws, the Parent Company and certain subsidiaries are subject to percentage and other taxes (presented as Taxes and Licenses in the statements of income) as well as income taxes. Percentage and other taxes paid consist principally of gross receipts tax and documentary stamp tax. Income taxes include the corporate income tax, discussed below, and final taxes paid which represents final withholding tax on gross interest income from government securities and other deposit substitutes and income from the FCDU transactions. These income taxes, as well as the deferred tax benefits and provisions, are presented as Provision for income tax in the statements of income. Effective November 1, 2005, Republic Act (RA) No. 9337, an act amending the National Internal Revenue Code (NIRC of 1997), provides that the RCIT rate shall be 30.0% and interest allowed as a deductible expenses shall be reduced by 33.0% of interest income subjected to final tax. A minimum corporate income tax (MCIT) of 2% on modified gross income is computed and compared with the RCIT. Any excess of MCIT over the RCIT is deferred and can be used as a tax credit against future income tax liability for the next three years. In addition, net operating loss carry over (NOLCO) is allowed as a deduction from taxable income in the next three years from the period of incurrence for the Parent Company and certain subsidiaries. FCDU offshore income (income from non-residents) is tax-exempt while gross onshore income (income from residents) is generally subject to 10% income tax. In addition, interest income on deposit placement with other FCDUs and offshore banking units (OBUs) is taxed at 7.50%. RA No. 9294 provides that the income derived by the FCDU from foreign currency transactions with non-residents, OBUs, local commercial banks including branches of foreign banks is tax-exempt while interest income on foreign currency loans from residents other than OBUs or other depository banks under the expanded system is subject to 10.00% income tax. F-129

Provision for income tax consists of:

Consolidated 2011 2010 (As Restated) (As Restated) Parent Company 2012 2011 2010

2012

Current Regular . . . . . . . . . . . . . . . . . . . . Final. . . . . . . . . . . . . . . . . . . . . . . Deferred. . . . . . . . . . . . . . . . . . . . . . . .

Q293,052 P206,690 637,167 671,171 930,219 877,861 (5,485) 1,491 Q924,734 P879,352

P325,322 Q205,490 P124,591 P 89,796 618,826 621,892 656,960 605,808 944,148 827,382 781,551 695,604 (19,930) 43,842 26,837 (3,334) P924,218 Q871,224 P808,388 P692,270

Net deferred tax asset/liability of the Group is included in the following accounts in the statements of financial position:
December 31, 2012 December 31, 2011

Deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q1,780,682 9,481 Q1,771,201

P1,775,789 24,885 P1,750,904

The components of net deferred tax assets follow:

Consolidated December 31, December 31, 2012 2011 Parent Company December 31, December 31, 2012 2011

Deferred tax asset on: Allowance for impairment, credit and other losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated depreciation on investment properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax liability on: Fair value adjustment on investment properties . . . Revaluation increment on land and buildings . . . . . Unrealized trading gains on derivatives . . . . . . . . . . Unrealized gain on AFS investments. . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q4,323,439 624,305 168,438 5,116,182 1,988,219 878,483 141,835 8,856 327,588 3,344,981 Q1,771,201

P4,446,842 784,797 67,500 5,299,139 2,184,845 909,138 106,777 34,637 312,838 3,548,235 P1,750,904

Q4,277,440 623,627 4,901,067 1,988,219 878,483 141,835 218,812 3,227,349 Q1,673,718

P4,414,337 784,119 5,198,456 2,184,845 909,138 106,777 20,862 280,136 3,501,758 P1,696,698

Provision for deferred tax charged directly to OCI during the year follows:
Consolidated 2012 2011 Parent Company 2012 2011

Unrealized gain (loss) on AFS investments. . . . . . . . . . . . . . . . . . . .

(Q25,781)

P22,217

(Q20,862)

P15,048

F-130

Based on the five-year financial forecast prepared by management and duly approved by the Executive Committee of the BOD, the Parent Companys net deferred tax assets of P1.7 billion as of December 31, 2012 and 2011 is expected to be realized from its taxable profits within the next three to five years. The Parent Company and certain subsidiaries did not recognize deferred tax assets on the following unused tax credit and losses and temporary differences since they believe that the related tax benefits will not be realized in the future:
Consolidated 2012 2011 Parent Company 2012 2011

Allowance for impairment and credit losses . . . . . . . . . . . Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . MCIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Derivative liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . NOLCO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q 745,941 P 858,985 Q 745,941 P 858,985 472,630 262,485 472,630 262,485 361,071 284,775 348,562 273,512 85,125 51,304 85,125 51,304 1,172 3,400,843 3,394,739 585,760 411,607 583,434 403,570 Q2,251,699 P5,269,999 Q2,235,692 P5,244,595

Details of the Groups NOLCO follow:

Year Incurred Amount Used/Expired Balance Expiry Year

2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P 8,618,816 P 8,618,816 P 2010 to 2012 1,577,682 1,577,682 2012 704 704 2013 346 346 2014 122 122 2015 P10,197,670 P10,196,498 P1,172

The Groups NOLCO of P8.6 billion in 2007 and P11.5 billion in 2006 includes the Parent Companys loss on sale of NPAs to SPV companies amounting to P6.8 billion in 2007 and P9.6 billion in 2006, which can be claimed as deductions from taxable income for a period of five consecutive taxable years immediately following the year of sale. In 2012, remaining unused NOLCO has expired. Details of the Groups MCIT follow:
Year Incurred Amount Used/Expired Balance Expiry Year

2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P 60,325 95,437 129,013 136,621 P421,396

P60,325 P60,325

95,437 129,013 136,621

2012 2013 2014 2015

P361,071

Details of the Parent Companys NOLCO follow:

Year Incurred Amount Used/Expired Balance Expiry Year

2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P 8,618,816 612,358 1,572,628 P10,803,802

P 8,618,816 612,358 1,572,628 P10,803,802

P P

2010 to 2012 2011 2012

Details of the Parent Companys MCIT follow:

Year Incurred Amount Used/Expired Balance Expiry Year

2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P 59,125 89,796 124,591 134,175 P407,687

P59,125 P59,125

89,796 124,591 134,175

2012 2013 2014 2015

P348,562

F-131

The reconciliation between the statutory income tax rate to effective income tax rate follows:
Consolidated 2011 2010 (As Restated) (As Restated) Parent Company 2011 2010 (As Restated) (As Restated)

2012

2012

Statutory income tax rate . . . . . . . . . . . . . Tax effects of: FCDU income before tax . . . . . . . . Net non-deductible expenses . . . . . Optional standard deduction. . . . . . Tax-exempt income . . . . . . . . . . . . . Tax-paid income. . . . . . . . . . . . . . . . Net unrecognized deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . Effective income tax rate . . . . . . . . . . . . .

30.00% (13.59) 4.78 (0.08) (7.24) (0.22) 1.89 15.54%

30.00% (16.61) 6.96 (4.70) (3.78) 3.74 15.61%

30.00% (14.81) 7.10 (8.09) (5.08) 9.53 18.65%

30.00% (14.90) 5.50 (6.41) (0.59) 2.46 16.06%

30.00% (16.94) 7.08 (4.78) (3.49) 2.77 14.64%

30.00% (16.87) 5.72 (8.50) (5.03) 10.59 15.91%

Current tax regulations define expenses to be classified as entertainment, amusement and recreation expenses (EARE) and set a limit for the amount that is deductible for tax purposes. EARE are limited to 1.00% of net revenues for sellers of services. EARE charged against current operations (included in Miscellaneous expense in the statements of income) amounted to P131.6 million in 2012, P130.4 million in 2011 and P130.8 million in 2010 for the Group, and P110.9 million in 2012, P116.9 million in 2011 and P109.3 million in 2010 for the Parent Company (see Note 25). 29. Earnings Per Share The earnings per share of the Group, attributable to equity holders of the Parent Company, are calculated as follows:
2012 2011 (As Restated) 2010 (As Restated)

a)

Net income attributable to equity holders of the Parent Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less income attributable to convertible preferred stocks classified as equity (in thousand pesos) . . . . . . . . . . . . . . . Net income attributable to common shareholders . . . . . . . . Weighted average number of common shares for basic earnings per share (Note 24) . . . . . . . . . . . . . . . . . . . . . . . . Effect of dilution: Convertible preferred shares . . . . . . . . . . . . . . . . . . . . . . . . . . Adjusted weighted average number of common shares for diluted earnings per share. . . . . . . . . . . . . . . . . . . . . . . . . . . Basic earnings per share (b/c) . . . . . . . . . . . . . . . . . . . . . . . . . Diluted earnings per share (a/e). . . . . . . . . . . . . . . . . . . . . . . .

4,651,806 P

4,669,352

3,565,719

b) c) d) e) f) g)

4,651,806 662,245,916 662,245,916

4,669,352 662,245,916 662,245,916

3,565,719 662,245,916 662,245,916 5.38 5.38

7.02 P 7.02

7.05 P 7.05

30. Trust Operations Securities and other properties held by the Parent Company in fiduciary or agency capacities for its customers are not included in the accompanying statements of financial position since these are not assets of the Parent Company. Such assets held in trust were carried at a value of P56.0 billion and P55.6 billion as of December 31, 2012 and 2011, respectively (see Note 32). In connection with the trust functions of the Parent Company, government securities amounting to P607.2 million and P553.3 million (included under AFS investments) as of December 31, 2012 and 2011, respectively, are deposited with the BSP in compliance with trust regulations. In compliance with existing banking regulations, the Parent Company transferred from surplus to surplus reserves P9.7 million, P8.3 million and P5.1 million in 2012, 2011 and 2010, respectively, corresponding to the 10.00% of the net income realized in the preceding years from its trust, investment management and other fiduciary business until such related surplus reserve constitutes 20.00% of its regulatory capital. F-132

31. Related Party Transactions In the ordinary course of business, the Parent Company has loans and other transactions with its subsidiaries and affiliates, and with certain Directors, Officers, Stockholders and Related Interests (DOSRI). Under the Parent Companys policy, these loans and other transactions are made substantially on the same terms as with other individuals and businesses of comparable risks. The amount of direct credit accommodations to each of the Parent Companys DOSRI, 70.00% of which must be secured, should not exceed the amount of their respective deposits and book value of their respective investments in the Parent Company. In the aggregate, DOSRI loans generally should not exceed the Parent Companys equity or 15% of the Parent Companys total loan portfolio, whichever is lower. As of December 31, 2012 and 2011 and January 1, 2011, the Parent Company was in compliance with such regulations. The information relating to the DOSRI loans of the Group follows:
Consolidated December 31, 2011 Parent Company December 31, 2011

December 31, 2012

January 1, 2011

December 31, 2012

January 1, 2011

Total Outstanding DOSRI Accounts . . . . . . . . . . . . . . . . Q2,650,526 P4,916,441 P2,191,313 Q2,650,526 P4,916,441 P2,191,313 Percent of DOSRI accounts granted prior to effectivity of BSP Circular No. 423 to total loans . . . . . . . . . . . . . . . 2.03% 4.34% 2.35% 2.04% 4.36% 2.36% Percent of DOSRI accounts granted after effectivity of BSP Circular No. 423 to total loans . . . . . . . . . . . . . . . 2.03% 4.34% 2.35% 2.04% 4.36% 2.36% Percent of DOSRI accounts to total loans . . . . . . . . . . . . . . . 2.03% 4.34% 2.35% 2.04% 4.36% 2.36% Percent of unsecured DOSRI accounts to total DOSRI accounts . . . . . . . . . . . . . . . . . 3.29% 14.60% 23.95% 3.29% 14.60% 23.95% Percent of past due DOSRI accounts to total DOSRI accounts . . . . . . . . . . . . . . . . . 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Percent of nonaccruing DOSRI accounts to total DOSRI accounts. . . . . . . . . . 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% In accordance with existing BSP regulations, the reported DOSRI performing loans exclude loans extended to certain borrowers before these borrowers became DOSRI. On January 31, 2007, BSP Circular No. 560 was issued providing the rules and regulations that govern loans, other credit accommodations and guarantees granted to subsidiaries and affiliates of banks and quasibanks. Under the said Circular, total outstanding exposures to each of the banks subsidiaries and affiliates shall not exceed 10% of a banks net worth, the unsecured portion of which shall not exceed 5% of such net worth. Further, the total outstanding exposures to subsidiaries and affiliates shall not exceed 20% of the net worth of the lending bank. BSP Circular No. 560 is effective on February 15, 2007.

F-133

Details on significant related party transactions of the Group and the Parent Company follow (transactions with subsidiaries have been eliminated in the consolidated financial statements). Transactions reported under subsidiaries represent companies where the Parent Company has control. Transactions reported under other related parties represent companies which are under common control.
December 31, 2012 Category Amount/ Volume Outstanding Balance Nature, Terms and Conditions

Subsidiaries Receivables from customers

Q 564,000

Accounts receivable

106,458

Accrued interest receivable Deposit liabilities Bills Payable

1,026 552,297 863,579

Accrued interest payable Due to Banks Interest income Interest expense Other income Other expense Other Related Parties Receivable from customers Q28,271 12,772 7,615 2,004

3,473 205,480

Revolving credit lines with fixed annual interest rate of 4.25% and maturity terms of less than 31 days UnsecuredP564.0 million with no impairment No collateral Advances to finance deficit in pension liability, remittance cover and additional working capital Non-interest bearing, unsecured, payable on demand Interest on receivables from customers With annual rates ranging from 0.1% to 3.0% and maturity terms ranging from 30 days to one (1) year Foreign currency-denominated bills payable with fixed annual interest rate of 1.03% and maturity term of 180 days; unsecured No collateral Interest on deposit liabilities and bills payable Clearing accounts for funding and settlement of remittances Interest income on receivable from customers Interest expense on deposit liabilities and bills payable Rental income with lease term of three (3) years and annual escalation rate of 10% Share in utilities expense

2,873,011

Sales Contract Receivables

Accrued interest receivables Bills payable

Loans with interest rates ranging from 0.5% to 16.5% and maturity terms ranging from one (1) month to 25 years. SecuredP2.8 billion and unsecured P0.07 billion; with no impairment Collateral includes bank deposit holdout, real estate and chattel mortgages 105,750 From sale of investment property Title will be transferred upon full payment Non-interest bearing loan payable within one year SecuredP105.8 million; with no impairment Collateral pertains to investment property sold 1,647 Interest on receivables from customers 554,175 Foreign currency-denominated bills payable with fixed annual interest rate of 1.77% and maturity term of 181 days, no collateral

(Forward) F-134

Category

Amount/ Volume

December 31, 2012 Outstanding Balance Nature, Terms and Conditions

Deposit liabilities Interest income Profit from asset sold Interest expense Other income 154,464 39,095 10,626 16,830

1,272,976

Due from other banks

Q 196,977

Investment securities Securities transactions: Purchases Sales Trading gains Loan releases Loan collections

270,212 16,431,445 11,884,060 19,017 512,941 2,326,902

Amount/ Volume Outstanding Balance

With annual rates ranging from 0.38% to 1.73% and maturity terms ranging from 30 days to one (1) year Interest income on receivable from customers Gain from sale of investment property Interest expense on deposit liabilities Rental income with lease term of 10 years from November 1, 2007 to October 31, 2017 and annual escalation rate of 5% starting sixth year of the lease term Includes savings deposits with interest rate of 0.13% 52,443,860 shares of stock classified as AFS investments with allowance for impairment loss of P270.0 million. Outright purchase of securities Outright sale of securities Gain from sale of investment securities Loan drawdowns Settlement of loans and interest

December 31, 2011 Category Nature, Terms and Conditions

Subsidiaries Due from banks Receivables from customers

P223,548 600,000

Accounts receivable

28,364

Accrued interest receivable Deposit liabilities

1,255 946,379

Accounts payable Accrued interest payable Due to Banks Interest income Interest expense Other income Other expense P17,860 18,576 7,228 2,004

235 537 250,360

Clearing accounts for funding and settlement of remittances Revolving credit lines with fixed annual interest rates ranging from 4.90% to 5.15% and maturity terms of less than 31 days UnsecuredP600.0 million with no impairment Collateral includes bank deposit holdout, real estate and chattel mortgages Advances for working capital Non-interest bearing, unsecured, payable on demand Interest on receivables from customers With annual rates ranging from 0.38% to 1.73% and maturity terms ranging from 30 days to one (1) year Loan repayments received on behalf of subsidiary clients Interest on deposit liabilities Clearing accounts for funding and settlement of remittances Interest income on receivable from customers Interest expense on deposit liabilities and bills payable Rental income with lease term of three (3) years and annual escalation rate of 10% Share in utilities expense

(Forward) F-135

Category

Amount/ Volume

December 31, 2011 Outstanding Balance Nature, Terms and Conditions

Other Related Parties Receivable from customers

Accrued interest receivables Deposit liabilities

Interest income Interest expense Other expense Other income

118,917 5,356 4,774 16,830

Due from other banks Investment securities Securities transactions: Purchases Sales Trading loss Loan releases Loan collections

Loans with interest rates ranging from 1.0% to 15.0% and maturity terms ranging from six (6) months to 25 years SecuredP4.1 billion and unsecuredP0.7 billion; with no impairment Collateral includes bank deposit holdout, real estate and chattel mortgages and collateral participation certificates 28,958 Interest on receivables from customers 653,960 With annual rates ranging from 0.5% to 1.44% and maturity terms ranging from 30 days to one (1) year Interest income on receivable from customers Interest expense on deposits and bills payable Marketing expenseJoint Venture Rental income with lease term of 10 years from November 1, 2007 to October 31, 2017 and annual escalation rates of 5% starting sixth year of the lease term. P 163,594 Includes savings deposit with interest rate of 0.13% 270,212 52,443,860 shares of stock classified as AFS Investments with allowance for impairment loss of P270.0 million. Outright purchase of securities Outright sale of securities Loss from sale of investment securities Loan drawdowns Settlement of loans and interest
December 31, 2010 Outstanding Balance

4,781,525

12,718,836 11,049,302 (125,414) 3,222,193 545,419

Amount/ Volume

Category

Nature, Terms and Conditions

Subsidiaries Due from banks Interbank loans receivable Accounts receivable Accrued interest receivable Due to banks Deposit liabilities Bills payable

23,615 28,987 28,987 8 14,004 713,963 1,676,160

Accounts payable

291

Clearing accounts for funding and settlement of remittances With annual interest rate of 0.79% and maturity term of 30 days; unsecured Advances for additional working capital Non-interest bearing, unsecured, payable on demand Interest on receivables from customers Clearing accounts for funding and settlement of remittances With annual interest rates ranging from 0.38% to 1.73% and maturity terms ranging from 30 days to one (1) year Foreign currency-denominated bills payable with interest rate ranging from 0.25% to 1.07% and maturity terms from one (1) to three (3) months; unsecured Loan repayments received on behalf of subsidiary clients

(Forward) F-136

December 31, 2010 Category Amount/ Volume Outstanding Balance Nature, Terms and Conditions

Accrued interest payable Interest income Interest expense Other income Utilities expense Other Related Parties Receivable from customers

531 P 193 15,496 5,856 1,606 2,191,313

Interest on deposit liabilities Interest income on interbank loans receivables Interest expense on deposit liabilities and bills payable Rental income with lease term of three (3) years and annual escalation rate of 10.0% Share in utilities expense

Due from other banks Investment securities Accrued interest receivables Deposit liabilities Interest income Interest expense Other income P147,210 10,565 16,830

Other expense Loan releases Loan collections

11,916 153,091 222,492

Loans with interest rates ranging from 2.5% to 16.5% and maturity terms ranging from one (1) month to 25 years SecuredP1.7 billion and unsecured P0.5 million with no impairment Collateral includes bank deposit holdout, real estate and chattel mortgages and collateral participation certificates 77,502 Includes savings deposit with interest rate of 0.13% 270,212 52,443,860 shares of stock classified as AFS investments with allowance for impairment loss of P269.0 million 7,918 Interest on receivables from customers P1,020,194 With annual rates ranging from 0.5% to 1.44% and maturity terms ranging from 30 days to one (1) year Interest income on receivable from customers Interest expense on deposit liabilities Rental income with lease term of 10 years from November 1, 2007 to October 31, 2017 and annual escalation rate of 5.0% starting sixth year of the lease term Marketing expenseJoint Venture Loan drawdowns Settlement of loans and interest

The related party transactions shall be settled in cash. There are no provisions for credit losses in 2012, 2011 and 2010. The compensation of the key management personnel follows:
2012 Consolidated 2011 2010 2012 Parent Company 2011 2010

Short-term employee benefits. . . . . . . . Post-employment benefits . . . . . . . . . . .

Q135,347 P152,623 P161,808 Q118,187 P 88,996 P 86,809 19,642 14,683 24,908 19,138 12,109 21,227 Q154,989 P167,306 P186,716 Q137,325 P101,105 P108,036

The Parent Company and EPPI signed two JVA for the development of two properties under Real estate under joint venture (JV) agreement by the Group and Parent Company with book values of P1.2 billion. EPPI and the Group are under common control. These two projects are among the Banks strategies in reducing its non-performing assets. The nature of the transactions is purely joint venture undertaking where the risks and benefits are shared by both parties based on the agreed parameters. Exit mechanisms and warranties were provided in the JVA to protect the interests of both parties. F-137

The Parent Company contributed the aforementioned properties into the JV as approved by BSP. EPPI, on the other hand, contributed its resources and technical expertise for the completion of the said JV. The Parent Company is prohibited to contribute funds for the development of the JV. Hence, there are no receivables from each party with respect to the JV. Transactions with Retirement Plans Management of the retirement funds of the Group and the Parent Company is handled by the PNB Trust Banking Group (TBG). As of December 31, 2012, the fair values and carrying values of the funds amounted to P1.32 billion for the Parent Company and P1.35 billion and P1.34 billion for the Group, respectively. Relevant information on assets/liabilities and income/expense of the funds as of and for the year ended December 31, 2012 are as follow:
Consolidated Parent Company

Investment securities: Held for trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Available-for-sale. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Held-to-maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deposits with other banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deposit with PNB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans and other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Fund Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trust Fees Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other Contra Accounts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Fund Liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P 712,875 P 712,875 212,437 194,663 68,000 68,000 263,830 255,621 50,792 50,791 37,807 36,614 P1,345,741 P P 754 754 P1,318,564 P P 773 (2) 771
Parent Company

Fund Income

Consolidated

Unrealized gains on HFT (PNB). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gains on sale of investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fund Expense Trust fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P271,049 20,738 72 P291,859 P P 2,442 270 2,712

P271,049 20,213 72 P291,334 P P 2,409 227 2,636

As of December 31, 2012, the retirement fund of the Group and the Parent Company include 7,833,795 shares of PNB classified under HFT. No limitations and restrictions are provided and voting rights over these shares are exercised by a trust officer or any of its designated alternate officer of TBG. As of December 31, 2012, AFS and HTM investments include government and private debt securities and various funds. Deposits with other banks pertain to Special Deposit Accounts (SDA) placement with BSP. Loans and other receivables include accrued interest amounting to P0.04 million and income include interest on deposit with PNB amounting to P0.90 million, both for the Group and the Parent Company. Investments are approved by an authorized fund manager or officer of TBG. 32. Provisions, Contingent Liabilities and Other Commitments In the normal course of business, the Group makes various commitments and incurs certain contingent liabilities that are not presented in the financial statements including several suits and claims which remain unsettled. No specific disclosures on such unsettled assets and claims are made because any such specific disclosures would prejudice the Groups position with the other parties with whom it is in dispute. Such exemption from disclosures is allowed under PAS 37, Provisions, Contingent Liabilities and Contingent Assets. The Group and its legal counsel believe that any losses arising from these contingencies which are not specifically provided for will not have a material adverse effect on the financial statements. F-138

In November 1994, the BSP, Maybank and the Parent Company executed a Memorandum of Agreement (MA) providing for the settlement of Maybanks P3.0 billion liabilities to the BSP. Under this MA, the Parent Company is jointly and severally liable with Maybank for the full compliance and satisfaction of the terms and conditions therein. The MA provides for the creation of an escrow fund to be administered by the BSP where all collections from conveyed assets and certain annual guaranteed payments required under the MA are to be deposited. Relative to the sale of the Parent Companys 60% interest in Maybank, the Parent Company has requested the BSP to consider the revision of the terms of the MA to, among others, (a) delete the provision on the annual guaranteed payments in consideration of an immediate payment by the Parent Company of an agreed amount, and (b) exclude Maybank as a party to the MA. On May 7, 1997, the BSP approved the Parent Companys request to amend the terms of the MA, subject to the following conditions among others: a) b) c) The Parent Company shall remit P150.0 million to the escrow account out of the proceeds from sale; The Parent Company shall remit to the escrow account an amount equivalent to 50% of any profit that may be realized by the Parent Company on account of the sale; and If the amount in the escrow account has not reached the total of P3.0 billion by June 30, 2013, the difference shall be paid by the Parent Company by way of a debit to its regular account with the BSP.

On November 28, 1997, the Parent Company remitted P150.0 million in compliance with item (a). The Parent Company anticipates that the payment of P150.0 million to the BSP together with the existing balance of the funds in escrow as of that date will allow the escrow account to reach the required P3.0 billion earlier than programmed. This has effectively released the Parent Company from any further payments under the MA. The Parent Companys remaining investment in Maybank was sold on June 29, 2000. The sale was approved by the BSP on August 16, 2000. On August 17, 2007, the Parent Company and the BSP amended certain provisions of the MA as follows: 1. 2. 3. 4. The Parent Company will no longer act as the collecting agent for the BSP on the conveyed assets (Asset Pool 1); The Parent Company will no longer remit the amount collected from the Asset Pool 1 to the escrow account; BSP will revert to the Parent Company all the Asset Pool 1 accounts categorized as sugar and sugarrelated accounts; and The Parent Company will submit to BSP acceptable collaterals with an appraised value of at least P300.0 million as substitute for the sugar-related loans under Asset Pool 1.

On the same date, the Parent Company executed a real estate mortgage over certain investment properties with an aggregate fair value of P300.0 million in favor of the BSP (see Note 13). As of December 31, 2012 and 2011, the total trust assets of the escrow account maintained with the BSP amounted to P2.9 billion and P2.7 billion, respectively. Average yield during the year was 5.49%. Management expects that the value of the escrow account and the collection from the Asset Pool 1 by 2013 will be more than adequate to cover the P3.0 billion liabilities due the BSP. As discussed in Note 8, in 2004, the Parent Company sold the outstanding loans receivable of P5.3 billion from National Steel Corporation (NSC) to SPV companies under the provisions of RA No. 9182. On October 10, 2008, simultaneous to the denial of their application in the Philippine courts for injunctive relief, the SPV companies filed a Notice of Arbitration with the Singapore International Arbitration Centre (SIAC). Mainly, the SPV companies claimed damages and a suspension of payments on the ground that the consortium of banks (the banks) and the Liquidator breached a duty to settle pre-closing real estate taxes (taxes due as of October 14, 2004) due on the NSC Plant Assets and to deliver to them titles to NSCs Plant Assets free from all liens and encumbrances. However, the banks and the Liquidator dispute the assertions that pre-closing taxes were in arrears, invoking under an installment agreement executed between the Liquidator and the City of Iligan. As part of the agreement to sell the plant assets to the SPV companies, the Liquidator assumed responsibility of settling and paying the Plant Assets pre-closing real estate taxes, while the SPV companies assumed the responsibility of updating the post-closing taxes (taxes due after October 14, 2004). Consequently, all pre-closing real estate taxes due on the plant assets have been paid in accelerated basis on December 18, 2008. F-139

On October 13, 2008, after the commencement of the arbitration but before the arbitral panel was constituted, the SPV companies filed, as a preservatory measure, a petition for injunctive relief against the NSC Liquidator, NSC Secured Creditors, and NSC Stockholders so that the arbitration proceedings under SIAC will not be rendered moot. On October 14, 2008, the Singapore High Court granted the petition and restrained the NSC Liquidator, the NSC Secured Creditors and the NSC Shareholders, jointly and severally, substantially from declaring the SPV companies in default and declaring all installments due until the arbitration proceeding at the SIAC is settled. Thereafter, upon application by the Parent Company for a variation of the injunction and an order of the Singapore High court, the SPV companies remitted P750.0 million cash in place of the Standby Letter of Credit which they undertook to provide under the Asset Purchase Agreement, subject to the condition that the amount shall not be subject to any set-off pending an award from the arbitration proceedings. On January 26, 2009, the Parent Company applied for an Order to compel the SPV companies to issue another Standby Letter of Credit of P1.0 billion which they likewise undertook to provide under the Asset Purchase Agreement, but this application was denied on March 5, 2009 by the Singapore High Court. The denial of the second variation (the P1.0 billion Standby Letter of Credit) was elevated to the Court of Appeals of Singapore but the same was also denied on September 11, 2009, without prejudice, however, to resort to the same reliefs before the Arbitration Panel. In April 2010, the Arbitral Panel was constituted. The Parent Company filed therein an application to discharge or vary the injunction. On July 7, 2010, the Arbitration Panel issued a ruling denying the Parent Companys application for a discharge of the injunction issued by the Singapore High Court. On the application to vary the injunction order, no ruling was made by the Arbitration Panel. Consequently, the main issues for alleged breach of the Asset Purchase Agreement, damages and suspension of payments were heard before the Arbitration Panel. On May 9, 2012, the Arbitration Panel issued a Partial Award in favor of the SPV companies, including such reliefs as payment of a certain sum of money and transfer of clean titles on the plant assets under the name of NSC by the bank consortium and the NSC Liquidator in favor of the SPV companies. The Parent Company, one of the members of the consortium, holds a forty-one percent (41%) interest in the claim, and has already set aside the appropriate reserve provision for the same. Meanwhile, on July 9, 2012, the bank consortium filed with the Singapore High Court a Petition to Set Aside the Partial Award rendered by the Arbitration Panel, which Petition is pending to date. Movements of provisions for legal claims both for the Group and the Parent Company are as follows:
December 31, 2012 December 31, 2011

Balance at beginning of the year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reclassification and settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance at end of the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . BSP Reporting

Q 874,950 834,259 (133,776) Q1,575,433

P710,172 164,778 P874,950

The following is a summary of various commitments, contingent assets and contingent liabilities at their equivalent peso contractual amounts:
Consolidated December 31, December 31, 2012 2011 Parent Company December 31, December 31, 2012 2011

Trust department accounts (Note 30). . . . . . . . . . . . . Deficiency claims receivable . . . . . . . . . . . . . . . . . . . Inward bills for collection . . . . . . . . . . . . . . . . . . . . . . Outstanding guarantees issued . . . . . . . . . . . . . . . . . . Outward bills for collection. . . . . . . . . . . . . . . . . . . . . Unused commercial letters of credit . . . . . . . . . . . . . Other contingent accounts . . . . . . . . . . . . . . . . . . . . . . Confirmed export letters of credit . . . . . . . . . . . . . . . Items held as collateral. . . . . . . . . . . . . . . . . . . . . . . . .

Q55,976,479 P55,565,213 Q55,976,479 P55,565,213 6,309,340 6,334,950 6,309,340 6,334,950 140,548 1,542,449 140,548 1,542,449 628,422 728,343 179,212 271,980 105,029 123,224 105,029 123,082 36,096 85,260 36,096 85,260 41,317 41,265 41,311 41,259 78,126 5,261 78,126 5,261 244 259 236 250 F-140

33. Notes to Statements of Cash Flows The amounts of due from BSP which have original maturities of more than three months are as follows:
2012 2011

Due from BSP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34. Other Matters

P20,200,000

On October 26, 2011, the Parent Company (as successor to Allied Banking Corporation (ABC) upon merger) signed a Voting Trust Agreement with Oceanic Holding (BVI) Limited (Oceanic BVI) and another party (a trustee) for the sale of Oceanic BVIs investment in Oceanic Bank Holding that owns 100% of Oceanic Bank in the United States of America. ABC owns 27.78% of Oceanic BVIs common stock. On October 28, 2011, the U.S. Federal Reserve Board approved the Voting Trust Agreement in order to facilitate the merger of ABC into the Parent Company in a manner that addresses U.S regulatory concerns. With the approval of the U.S. Federal Reserve board of the Voting Trust Agreement, the Parent Company and ABC can now proceed with the implementation of merger. On March 31, 2012, a stock purchase agreement was entered into with a First National Bank of Northern California (FNB Bancorp.) to sell Oceanic BVI, different from the initial plan to sell Oceanic BVI. On September 22, 2012, the sale of Oceanic BVI to FNB Bancorp. was completed. 35. Events After Reporting Date On February 7, 2013, the BSP has accepted the Parent Companys proposal to make an early payment to settle the P3.0 billion obligation to the BSP as disclosed in Note 32. Government securities held under the escrow fund were transferred to the Parent Company and the real estate collaterals pledged to BSP were also released. On February 9, 2013, the Parent Company concluded its planned merger with ABC as approved and confirmed by the Board of Directors of the Parent Company and of ABC on January 22 and 23, 2013, respectively. The respective shareholders of the Parent Company and ABC, representing at least two-thirds of the outstanding capital stock of both banks, approved the amended terms of the Plan of Merger of the two banks on March 6, 2012. The original Plan of Merger was approved by the affirmative vote of ABC and the Parent Companys respective shareholders on June 24, 2008, representing at least two-thirds of the outstanding capital stock of both banks. On March 26, 2012, the Parent Company submitted to the BSP and PDIC applications for consent to the merger. On April 12, 2012, the application for the merger was filed with the SEC. On July 25, 2012, the Parent Company received notice that the PDIC had given its consent to the merger. Likewise, on August 2, 2012, the Monetary Board of the BSP issued a resolution giving its consent to the merger. Finally, on January 17, 2013, the SEC granted its approval to the merger. In addition, with respect to ABCs overseas subsidiaries, the Parent Company has also filed notices in relation to the merger with various relevant foreign regulatory agencies; and as of January 17, 2013 had received all necessary approvals to effectuate the merger. The purchase consideration as of February 9, 2013, the acquisition date, amounted to P41.5 billion which represents 423,962,500 common shares at the fair value of P97.90 per share in exchange for the 100% voting interest in ABC at the share swap ratio of 130 PNB common shares for one ABC share and 22.763 PNB common shares for one ABC preferred share. The fair value of the shares is the published price of the shares of the Parent Company as of February 8, 2013. There are no contingent considerations arrangements. The Parent Company, the Acquirer, has elected to measure the non-controlling interests in ABC, the Acquiree, at their proportionate share of the ABCs net identifiable assets and liabilities. As at acquisition date, the Parent Company or the Acquirer, is still in the process of determining the fair values of ABCs or the Acquirees net identifiable assets and liabilities and the total acquisition/transaction related costs. The merger of the Parent Company and ABC will enable the two banks to advance their long-term strategic business interests as they capitalized on their individual strengths and markets. F-141

36. Approval of the Release of the Financial Statements The accompanying financial statements of the Parent Company and its Subsidiaries (the Group) and of the Parent Company were authorized for issue by the Parent Companys BOD on February 22, 2013. 37. Report on the Supplementary Information Required Under Revenue Regulations (RR) No. 19-2011 and 15-2010 In addition to the required supplementary information under RR No. 15-2010, on December 9, 2012, the Bureau of Internal Revenue (BIR) issued RR No. 19-2011 which prescribes the new annual income tax forms that will be used for filing effective taxable year 2012. Specifically, companies are required to disclose certain tax information in their respective notes to financial statements. For the taxable year December 31, 2012, the Parent Company reported the following revenues and expenses for income tax purposes (in absolute amounts): Revenues Services/operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-operating and taxable other income: Service charges, fees and commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trading and securities gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Others. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 7,220,292,765 2,527,048,778 1,577,717,522 867,931,681 4,972,697,981 P12,192,990,746 Expenses Cost of services: Compensation and fringe benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Itemized deductions: Compensation and fringe benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Taxes and licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Security, messengerial and janitorial. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Transportation and travel. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Repairs and Maintenance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Communication, light and water . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EAR. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Management and professional fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bad debts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 704,718,627 4,760,891,133 5,465,609,760 1,739,970,366 997,966,393 275,452,919 255,167,583 167,653,588 150,706,558 146,578,910 97,091,656 82,884,796 17,752,392 5,331,024 4,893,395,175 8,829,951,360 P14,295,561,120 On November 25, 2010, the Bureau of Internal Revenue issued Revenue Regulations (RR) 15-2010 to amend certain provisions of RR 21-2002. The Regulations provide that starting 2010 the notes to financial statements shall include information on taxes, duties and license fees paid or accrued during the taxable year. The Parent Company remitted the following types of taxes for the tax period January to December 2012 (in absolute amounts). 1. Taxes and licenses
Amount

Gross receipts tax Documentary stamp taxes Local taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real estate tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P 532,498,226 599,067,001 4,450,760 454,781 13,027,192 P1,149,497,960

F-142

2.

Withholdings taxes
Amount

Final income taxes withheld on interest on deposits and yield on deposit substitutes. . . . . . . . . . . . Withholding taxes on compensation and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expanded withholding taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . VAT withholding taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other final taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P417,587,661 367,573,055 79,139,849 590,175 11,128,441 P876,019,181

Tax Cases and Assessments As of December 31, 2012, the Parent Company has outstanding cases filed in courts for various claims for tax refund. Management is of the opinion that the ultimate outcome of these cases will not have a material impact on the financial statements of the Parent Company.

F-143

Philippine National Bank and Subsidiaries Interim Condensed Consolidated Financial Statements September 30, 2013 and for the nine-month periods ended September 30, 2013 and 2012 (With Comparative Audited Statement of Financial Position as of December 31, 2012) and Report on Review of Interim Condensed Consolidated Financial Statements

A member firm of Ernst & Young Global Limited

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SyCip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Philippines

Tel: (632) 891 0307 Fax: (632) 819 0872 ey.com/ph

BOA/PRC Reg. No. 0001, December 28, 2012, valid until December 31, 2015 SEC Accreditation No. 0012-FR-3 (Group A), November 15, 2012, valid until November 16, 2015

REPORT ON REVIEW OF INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The Stockholders and the Board of Directors Philippine National Bank and Subsidiaries Introduction We have reviewed the accompanying interim condensed consolidated financial statements of Philippine National Bank and Subsidiaries (the Group), which comprise the consolidated statement of financial position as at September 30, 2013 and the related consolidated statements of income, consolidated statements of comprehensive income, consolidated statements of changes in equity and consolidated statements of cash flows for the nine-month periods ended September 30, 2013 and 2012, and other explanatory information. Management is responsible for the preparation and fair presentation of these interim condensed consolidated financial statements in accordance with Philippine Accounting Standards (PAS) 34, Interim Financial Reporting. Our responsibility is to express a conclusion on these interim condensed consolidated financial statements based on our review. Scope of Review We conducted our review in accordance with Philippine Standard on Review Engagements 2410, Review of Interim Financial Information Performed by the Independent Auditor of the Entity. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with Philippine Standards on Auditing and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. Conclusion Based on our review, nothing has come to our attention that causes us to believe that the accompanying interim condensed consolidated financial statements are not prepared, in all material respects, in accordance with PAS 34, Interim Financial Reporting.

Vicky Lee Salas Partner CPA Certificate No. 86838 SEC Accreditation No. 0115 -AR-3 (Group A), February 14, 2013, valid until February 13, 2016 Tax Identification No. 129-434-735, BIR Accreditation No. 08-001998-53-2012 April 11, 2012, valid until April 10, 2015 PTR No. 4225181, January 2, 2014, Makati City January 10, 2014

A member firm of Ernst & Young Global Limited

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PHILIPPINE NATIONAL BANK AND SUBSIDIARIES INTERIM CONSOLIDATED STATEMENTS OF FINANCIAL POSITION AS OF SEPTEMBER 30, 2013 (With Comparative Audited Figures as of December 31, 2012) (In Thousands)
September 30, 2013 (Unaudited) December 31, 2012 (Audited) (As restatedNote 2)

ASSETS Cash and Other Cash Items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due from Bangko Sentral ng Pilipinas (Note 6) . . . . . . . . . . . . . . . . . . . . . . . Due from Other Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interbank Loans Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities Held Under Agreements to Resell . . . . . . . . . . . . . . . . . . . . . . . . . . Financial Assets at Fair Value Through Profit or Loss . . . . . . . . . . . . . . . . Available-for-Sale Investments (Notes 7 and 13) . . . . . . . . . . . . . . . . . . . . . . Loans and Receivables (Notes 8, 12, 13 and 20). . . . . . . . . . . . . . . . . . . . . . . . Property and Equipment (Notes 9 and 12) At cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . At appraised value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment in an Associate (Note 10). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment Properties (Notes 11 and 12). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred Tax Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill (Note 12) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other Assets (Notes 12, 14 and 20) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . LIABILITIES AND EQUITY LIABILITIES Deposit Liabilities (Notes 12 and 20) Demand. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Time. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial Liabilities at Fair Value Through Profit or Loss (Notes 4 and 12) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bills and Acceptances Payable (Note 13) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued Taxes, Interest and Other Expenses . . . . . . . . . . . . . . . . . . . . . . . . . Subordinated Debt (Note 13) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income Tax Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other Liabilities (Notes 12, 14 and 17). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EQUITY ATTRIBUTABLE TO EQUITY HOLDERS OF THE PARENT COMPANY Capital Stock (Notes 1, 12 and 15). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital Paid in Excess of Par Value (Notes 1, 12 and 15) . . . . . . . . . . . . . . . Surplus Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Surplus (Note 2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Revaluation Increment on Land and Buildings . . . . . . . . . . . . . . . . . . . . . . . Remeasurement Losses on Retirement Plan . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated Translation Adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net Unrealized Gain (Loss) on Available-for-Sale Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Parent Company Shares Held by a Subsidiary. . . . . . . . . . . . . . . . . . . . . . . . NON-CONTROLLING INTERESTS (Note 2). . . . . . . . . . . . . . . . . . . . . . . . TOTAL EQUITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TOTAL LIABILITIES AND EQUITY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

8,834,910 129,183,083 15,769,346 12,090,151 25,000,000 11,568,043 80,024,140 258,199,665

5,599,088 37,175,399 4,042,769 11,498,756 18,300,000 4,023,065 66,997,479 144,707,509

1,478,865 21,494,782 18,716,555 1,149,940 16,017,500 6,575,258 Q606,102,238

937,075 15,566,650 2,900,233 14,478,348 1,780,682 2,183,698 P330,190,751

Q119,621,247 285,221,218 49,135,151 453,977,616 7,363,698 14,466,567 5,533,484 9,949,829 94,750 30,830,158 522,216,102

P 28,152,296 192,793,260 19,908,821 240,854,377 6,479,821 13,076,901 3,914,290 9,938,816 149,050 17,285,251 291,698,506

Q 43,448,337 26,499,909 524,003 13,243,993 2,816,962 (2,256,802) 115,215 (3,578,466) 80,813,151 3,072,985 83,886,136 Q606,102,238

P 26,489,837 2,037,272 569,887 7,266,067 2,816,962 (781,900) (992,620) 1,037,252 (4,740) 38,438,017 54,228 38,492,245 P330,190,751

See accompanying Notes to Interim Condensed Consolidated Financial Statements. F-146

PHILIPPINE NATIONAL BANK AND SUBSIDIARIES INTERIM CONSOLIDATED STATEMENTS OF INCOME (In Thousands, Except Earnings Per Share)
Nine Months Ended September 30 2012 (Unaudited, 2013 As restatedNote 2) (Unaudited)

INTEREST INCOME ON Loans and receivables (Note 20) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trading and investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deposits with banks and others (Note 6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interbank loans receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . INTEREST EXPENSE ON Deposit liabilities (Note 20) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bills payable and other borrowings (Notes 13 and 17) . . . . . . . . . . . . . . . . . . . . . NET INTEREST INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Service fees and commission income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Service fees and commission expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . NET SERVICE FEES AND COMMISSION INCOME . . . . . . . . . . . . . . . . . OTHER INCOME Trading and investment securities gainsnet (Note 7). . . . . . . . . . . . . . . . . . . . . Foreign exchange gainsnet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net gain on sale or exchange of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Miscellaneous (Notes 10 and 16). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TOTAL OPERATING INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . OPERATING EXPENSES Compensation and fringe benefits (Note 17). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Taxes and licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Occupancy and equipment-related costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for impairment, credit and other losses . . . . . . . . . . . . . . . . . . . . . . . . . Miscellaneous (Note 16) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TOTAL OPERATING EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . INCOME BEFORE INCOME TAX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PROVISION FOR INCOME TAX (Note 18) . . . . . . . . . . . . . . . . . . . . . . . . . . . NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ATTRIBUTABLE TO: Equity Holders of the Parent Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-controlling Interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Basic/Diluted Earnings Per Share Attributable to Equity Holders of the Parent Company (Note 19). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q 9,628,901 2,817,828 1,070,392 15,577 13,532,698 2,897,533 919,426 3,816,959 9,715,739 2,475,682 625,434 1,850,248 5,223,486 635,448 495,228 2,246,566 20,166,715 4,473,539 1,358,864 1,002,018 911,877 734,319 4,403,057 12,883,674 7,283,041 1,292,814 5,990,227 5,932,042 58,185 Q 5,990,227 Q 5.71

P 5,714,771 2,405,623 497,745 11,396 8,629,535 2,270,337 931,075 3,201,412 5,428,123 1,557,671 161,523 1,396,148 4,007,341 1,245,304 475,802 628,005 13,180,723 2,767,740 898,178 728,469 540,463 1,326,878 2,646,529 8,908,257 4,272,466 669,691 3,602,775 3,595,491 7,284 P 3,602,775 P 5.43

See accompanying Notes to Interim Condensed Consolidated Financial Statements. F-147

PHILIPPINE NATIONAL BANK AND SUBSIDIARIES INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In Thousands)
Nine Months Ended September 30 2012 2013 (Unaudited, (Unaudited) As restatedNote 2)

NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . OTHER COMPREHENSIVE INCOME (LOSS) Items that recycle to profit or loss in subsequent periods: Changes in net unrealized loss on available-for-sale investments. . . . . . . . Accumulated translation adjustment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Share in equity adjustments of an associate. . . . . . . . . . . . . . . . . . . . . . . . . . . Items that do not recycle to profit or loss in subsequent periods: Remeasurement (losses) gains on retirement plan (Note 17) . . . . . . . . . . . . OTHER COMPREHENSIVE LOSS FOR THE PERIOD, NET OF TAX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TOTAL COMPREHENSIVE INCOME FOR PERIOD . . . . . . . . . . . . . . . . . ATTRIBUTABLE TO: Equity Holders of the Parent Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-controlling Interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q 5,990,227

P3,602,775

(4,649,829) 1,339,581 (1,474,902) (4,785,150) Q 1,205,077 Q 949,257 255,820

(101,641) (384,871) (6,795) 170,029 (323,278) P3,279,497 P3,272,213 7,284 P3,279,497

Q 1,205,077

See accompanying Notes to Interim Condensed Consolidated Financial Statements. F-148

PHILIPPINE NATIONAL BANK AND SUBSIDIARIES INTERIM CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (In Thousands)
Attributable to Equity Holders of the Parent Company Equity in Net Parent Company Net Unrealized Unrealized Shares Remeasurement Gain (Loss) on Gain on AFS Investment of Held by a Losses on Availablean Associate Subsidiary Retirement Plan for-Sale (Note 10) (Note 15) (Note 2) Investments

Capital Stock (Note 15)

Capital Paid in Excess of Par Value

Surplus Reserves

Surplus (Note 2)

Revaluation Increment Accumulated on Land and Translation Buildings Adjustment

Total

Non-controlling Interests (Note 2)

Total Equity

Balance at January 1, 2013, as previously reported . . . . . . . . . . . . . . Q26,489,837 Q 2,037,272 Q569,887 Q 6,888,348 Q2,816,962 Effect of retroactive application of PAS 19 (Revised) (Note 2) . . . . . . . 331,500 Effect of retroactive application of PFRS 10 (Note 2) . . . . . . . . . . . . . . . 46,219 Balance at January 1, 2013, as restated . . . . . . . . . . . . . . . . . . . . . . . . Total comprehensive income (loss) for the period . . . . . . . . . . . . . . . . . . . Issuance of capital stock (Notes 12 and 15) . . . . . . . . . . . . . . . . . . . . . . . . Non-controlling interest arising on a business combination (Note 2) . . . . Transfer from surplus reserves . . . . . . Disposal of Parent Company shares held by a subsidiary . . . . . . . . . . . . . 26,489,837 16,958,500 2,037,272 24,462,637 569,887 (45,884) 7,266,067 5,932,042 45,884 2,816,962

(Q992,620) Q (992,620) 1,107,835 115,215 (P451,708) P (451,708) (384,871) (P836,579) P

1,037,252 1,037,252 (4,615,718) (Q3,578,466) 742,343 742,343 (101,641) 640,702

(Q4,740) Q (4,740) 4,740 Q

(781,900)

Q38,842,198 (450,400) 46,219

Q 904,693 22 (850,487) 54,228 255,820 2,762,937 Q3,072,985 P 531,247 (39) (484,361) 46,847 7,284 P 54,131

Q39,746,891 (450,378) (804,268) 38,492,245 1,205,077 41,421,137 2,762,937 4,740 Q83,886,136 P34,974,437 (683,131) (484,361) 33,806,945 3,279,497 P37,086,442

(781,900) 38,438,017 (1,474,902) 949,257 41,421,137 4,740

F-149

Balance at September 30, 2013 . . . . Q43,448,337 Q26,499,909 Q524,003 Q13,243,993 Q2,816,962 Q Balance at January 1, 2012, as previously reported . . . . . . . . . . . . . . P26,489,837 P 2,037,272 P560,216 P 2,246,213 P2,816,962 Effect of retroactive application of PAS 19 (Revised) (Note 2) . . . . . . . 320,965 Effect of retroactive application of PFRS 10 (Note 2) . . . . . . . . . . . . . . . Balance at January 1, 2012, as restated . . . . . . . . . . . . . . . . . . . . . . . . Total comprehensive income (loss) for the period . . . . . . . . . . . . . . . . . . . Transfer to surplus reserves . . . . . . . . . 26,489,837 2,037,272 560,216 68,209 2,567,178 3,595,491 (68,209) 2,816,962

(Q2,256,802) Q80,813,151 (1,004,057) P34,443,190 (683,092)

P 6,795 6,795 (6,795) P

(P4,740) P (4,740) (P4,740)

(1,004,057) 33,760,098 170,029 3,272,213

Balance at September 30, 2012 . . . . . . P26,489,837 P 2,037,272 P628,425 P 6,094,460 P2,816,962

(P834,028) P37,032,311

See accompanying Notes to Interim Condensed Consolidated Financial Statements.

PHILIPPINE NATIONAL BANK AND SUBSIDIARIES INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands)
Nine Months Ended September 30 2012 (Unaudited, 2013 As restated Note 2) (Unaudited)

CASH FLOWS FROM OPERATING ACTIVITIES Income before income tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjustments for: Realized trading gain on available-for-sale (AFS) investments (Note 7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of premium on AFS investments . . . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for impairment, credit and other losses . . . . . . . . . . . . . . . . . Net gain on sale or exchange of assets. . . . . . . . . . . . . . . . . . . . . . . . . . . Gain from step-up acquisition (Notes 10 and 16) . . . . . . . . . . . . . . . . . Amortization of software costs (Note 16) . . . . . . . . . . . . . . . . . . . . . . . . Dividend income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mark-to-market loss (gain) on derivatives (Note 7) . . . . . . . . . . . . . . . Gain on mark-to-market of financial instruments designated at fair value through profit or loss (FVPL) (Note 7). . . . . . . . . . . . . . . . . . . Amortization of capitalized transaction costs. . . . . . . . . . . . . . . . . . . . . Share in net income of an associate (Note 10 and 16) . . . . . . . . . . . . . Changes in operating assets and liabilities:. . . . . . . . . . . . . . . . . . . . . . . Decrease (increase) in amounts of: Loans and receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial assets at FVPL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Increase (decrease) in amounts of: Financial liabilities at FVPL . . . . . . . . . . . . . . . . . . . . . . . . . . Deposit liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued taxes, interest and other expenses . . . . . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash generated from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividends received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of: AFS investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from redemption of placements with the Bangko Sentralng Pilipinas (BSP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Placements with the BSP and other banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acquisitions of: AFS investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property and equipment (Note 9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Software cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash and cash equivalents acquired from merger (Note 12) . . . . . . . . . . . . Net cash provided by (used in) investing activities . . . . . . . . . . . . . . . . . . . .

7,283,041

4,272,466

(4,758,988) 1,031,306 911,877 734,319 (495,228) (140,958) 137,310 (32,070) (28,959) (196,070) 19,935 (4,975)

(3,503,600) (644,239) 540,463 1,326,878 (475,802) 114,501 (2,093) 66,934 (246,416) 15,725 (48,580)

(22,010,281) (933,382) (1,860,545) (2,878,350) 71,925,542 (130,908) 3,653,471 52,226,087 (369,419) 32,070 51,888,738

(5,774,800) 3,326,508 218,467 (1,688,420) 1,576,191 1,929,520 1,003,703 (734,169) 2,093 271,627

194,608,113 996,862 292,527 (Q190,542,213) (761,644) (75,395) 64,444,869 68,963,119

185,458,857 1,761,893 237,213 20,200,000 (19,300,000) (Q190,690,408) (552,353) (62,595) (2,947,393)

(Forward) F-150

Nine Months Ended September 30 2012 2013 (Unaudited, (Unaudited) As restatedNote 2)

CASH FLOWS FROM FINANCING ACTIVITIES Settlement of bills and acceptances payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from bills and acceptances payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds (settlement) of subordinated debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash provided by (used in) financing activities . . . . . . . . . . . . . . . . . . . . . . NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD Cash and other cash items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due from BSP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due from other banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interbank loans receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities held under agreements to resell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CASH AND CASH EQUIVALENTS AT END OF PERIOD Cash and other cash items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due from BSP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due from other banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interbank loans receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities held under agreements to resell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . OPERATIONAL CASH FLOWS FROM INTEREST AND DIVIDENDS Interest received. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividends received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(58,005,726) 55,915,347 (4,500,000) (6,590,379) 114,261,478 5,599,088 37,175,399 4,042,769 11,498,756 18,300,000 76,616,012 8,834,910 129,183,083 15,769,346 12,090,151 25,000,000 Q 190,877,490

(34,672,028) 33,518,980 3,474,111 2,321,063 (354,703) 5,404,110 17,952,795 6,423,981 17,097,648 18,300,000 65,178,534 3,952,171 25,328,899 5,138,015 9,404,746 21,000,000 Q 64,823,831

Q 13,618,767 3,607,677 32,070

9,108,707 3,243,226 2,093

See accompanying Notes to Interim Condensed Consolidated Financial Statements. F-151

PHILIPPINE NATIONAL BANK AND SUBSIDIARIES NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Amounts in Thousand Pesos Except When Otherwise Indicated) 1. Corporate Information

Philippine National Bank (the Parent Company) was established in the Philippines in 1916 and started commercial operations that same year. On May 27, 1996, the Parent Company was registered with the Philippine Securities and Exchange Commission (SEC) with a corporate term of 50 years. Its principal place of business is at PNB Financial Center, President Diosdado Macapagal Boulevard, Pasay City. As of September 30, 2013, the Lucio Tan Group Inc. (LTG) held indirect ownership of 45.51% of the Parent Companys shares through its various subsidiaries, while 31.19% of the Parent Companys shares are held by various companies associated with or who issue proxies/special powers of attorney in favor of Director Lucio C. Tan and the latter owns directly 1.19% of the Parent Companys shares. The remaining 22.11% of the Parent Companys shares are held by other stockholders. As of December 31, 2012, the companies and persons affiliated/associated to or who issue proxies/special powers of attorney in favor of Director Lucio C. Tan held a total of about 68.85% of the Parent Company while the remaining 31.15% was held by the public. The Parent Company provides a full range of banking and other financial services to corporate, middle-market and retail customers, the National Government (NG), local government units (LGUs) and government-owned and controlled corporations (GOCCs) and various government agencies. The Parent Companys principal commercial banking activities include deposit-taking, lending, bills discounting, foreign exchange dealing, investment banking, fund transfers/remittance servicing and a full range of retail banking and trust services through its 655 and 338 domestic branches as of September 30, 2013 and December 31, 2012, respectively. The Parent Company has the largest overseas network among Philippine banks with 81 and 78 branches, representative offices, remittance centers and subsidiaries as of September 30, 2013 and December 31, 2012, respectively, in 16 locations in the United States, Canada, Europe, the Middle East and Asia. The subsidiaries of the Parent Company are engaged in a number of diversified financial and related businesses such as remittance, life and non-life insurance, merchant banking, leasing, stock brokerage, foreign exchange trading and/or related services. The Parent Company previously operated under a rehabilitation program pursuant to the memorandum of agreement signed by the Republic of the Philippines, the Philippine Deposit Insurance Corporation (PDIC) and LTG on May 3, 2002. In May 2007, the Parent Company concluded its 5-year Rehabilitation Plan as approved by the Bangko Sentral ng Pilipinas (BSP). Merger with Allied Banking Corporation The respective shareholders of the Parent Company and Allied Banking Corporation (ABC), representing at least two-thirds of the outstanding capital stock of both banks, approved the amended terms of the Plan of Merger of the two banks on March 6, 2012. The original plan of the merger which was effected via a share-forshare exchange was approved by the affirmative vote of ABC and the Parent Companys respective shareholders, representing at least two-thirds of the outstanding capital stock of both banks, on June 24, 2008. Under the approved amended terms, the Parent Company will be the surviving entity. It will issue to ABC shareholders 130 Parent Company common shares for every ABC common share and 22.763 Parent Company common shares for every ABC preferred share. Merger and business combination are terms used interchangeably within the accompanying interim condensed consolidated financial statements and have the same meaning. On March 26, 2012, the Parent Company submitted to the BSP and PDIC applications for consent to the merger. On April 12, 2012, the application for the merger was filed with the Philippine SEC. The PDIC, the Monetary Board of the BSP and the Philippine SEC gave consent and approved the merger on July 25, 2012, August 2, 2012 and January 17, 2013, respectively. In addition, with respect to ABCs overseas subsidiaries, the Parent Company has also filed notices in relation to the merger with various relevant foreign regulatory agencies; and as of February 9, 2013 had received all necessary approvals and complied with conditions to effectuate the merger. On February 9, 2013, the Parent Company concluded its planned merger with ABC as approved and confirmed by the Board of Directors (BOD) of the Parent Company and of ABC on January 22 and 23, 2013, respectively. The purchase consideration as of February 9, 2013, the acquisition date, amounted to P41.5 billion which represents 423,962,500 common shares at the fair value of P97.90 per share in exchange for the 100.00% F-152

voting interest in ABC at the share swap ratio of 130 PNB common shares for one ABC share and 22.763 PNB common shares for one ABC preferred share. The fair value of the shares is the published price of the shares of the Parent Company as of February 9, 2013. There are no contingent considerations arrangements as part of the merger. The Parent Company, the Acquirer, has elected to measure the non-controlling interests in ABC, the Acquiree, at their proportionate share in ABCs net identifiable assets and liabilities. As at November 14, 2013, the Parent Company is still in the process of finalizing the fair values of ABCs net identifiable assets and liabilities and the total acquisition/transaction related costs. The merger of the Parent Company and ABC will enable the two banks to advance their long-term strategic business interests as they capitalized on their individual strengths and markets. 2. Basis of Preparation and Changes to the Groups Accounting Policies

Basis of Preparation The interim condensed consolidated financial statements of the Parent Company and its subsidiaries (the Group) as of September 30, 2013 and for the nine months ended September 30, 2013 and 2012 have been prepared in accordance with Philippine Accounting Standards (PAS) 34, Interim Financial Reporting. The interim condensed consolidated financial statements do not include all the information and disclosures required in the annual financial statements, and should be read in conjunction with the Groups annual consolidated financial statements as of and for the year ended December 31, 2012. Amounts in the consolidated financial statements are presented to the nearest thousand pesos (P000) unless otherwise stated. Seasonality or Cyclicality of Interim Operations Seasonality or cyclicality of interim operations is not applicable to the Groups type of business. Basis of Consolidation The interim condensed consolidated financial statements as of September 30, 2013 include the financial statements of the Parent Company and the following wholly-owned and majority-owned subsidiaries:
Country of Incorporation Effective Percentage of Ownership Direct Indirect Functional Currency

Subsidiaries

Nature of Business

Allied Savings Bank (ASB)(*) . . . . . . . . . . . . . . . . . . PNB Capital and Investment Corporation (PNB Capital) . . . . . . . . . . . . . . . . . . PNB Forex, Inc. . . . . . . . . . . . . . PNB Holdings Corporation (PNB Holdings) . . . . . . . . . . . PNB General Insurers, Inc.(a) . . . . . . . . . . . . PNB Securities, Inc.. . . . . . . . . . PNB CorporationGuam . . . . PNB International Investments Corporation (PNB IIC) . . . . . PNB Remittance Centers, Inc. (PNB RCC)(b) . . . . . . . . . . . . . PNB RCI Holding Co. Ltd.(b) . . . . . . . . . . . . . . . . . . . . Allied Bank Philippines (UK) Plc(*) . . . . . . . . . . . . . . . . PNB Europe PLC . . . . . . . . . . . . PNB Remittance Co. (Canada)(c) . . . . . . . . . . . . . . . .

Banking

Philippines

100.00

Php

Investment FX trading Investment Insurance Securities Brokerage Remittance Investment Remittance Holding Company of PNB RCC Banking Banking Remittance F-153

- do - do - do - do - do USA - do - do - do -

100.00 100.00 100.00

Php Php Php Php Php USD USD USD USD

100.00 100.00 100.00 100.00 100.00 100.00

United Kingdom - do Canada

100.00 100.00

100.00

Great Britain Pound (GBP) GBP Canadian Dollar

Subsidiaries

Nature of Business

Country of Incorporation

Effective Percentage of Ownership Direct Indirect

Functional Currency

PNB Global Remittance & Financial Co. (HK) Ltd. . . . . PNB Italy SpA (PISpA) . . . . . . Allied Commercial Bank (ACB)(*) . . . . . . . . . . . . . . . . . . JapanPNB Leasing and Finance Corporation (JapanPNB Leasing) . . . . . JapanPNB Equipment Rentals Corporation(d) . . . . . . PNB Life Insurance, Inc. (PNB LII)(*) . . . . . . . . . . . . . . . . . . . . Allied Leasing and Finance Corporation (ALFC) . . . . . . . ACR Nominees Limited(e)(*) . . . Allied Banking Corporation (Hong Kong) Limited (ABCHK)(*) . . . . . . . . . . . . . . . Oceanic Holding (BVI) Ltd. (OHBVI)(*) . . . . . . . . . . . . . . . (*) (a) (b) (c) (d) (e)

Remittance Remittance Banking

Hong Kong Italy Peoples Republic of China

100.00 100.00 90.00

Hong Kong Dollar (HKD) Euro USD

Leasing/Financing Rental Insurance Rental Banking

Philippines - do - do - do Hong Kong

90.00 80.00 57.21

90.00 51.00

Php Php Php Php HKD

Banking Holding Company

- do British Virgin Islands

51.00 27.78

HKD USD

Subsidiaries acquired as a result of the merger with ABC. owned through PNB Holdings owned through PNB IIC owned through PNB RCI Holding Co. Ltd. owned through Japan-PNB Leasing owned through ABCHK

The financial statements of the subsidiaries are prepared on the same reporting period as the Parent Company using consistent accounting policies. All significant intra-group balances, transactions, income and expenses and profits and losses resulting from intra-group transactions are eliminated in full in the consolidation. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. Control is achieved where the Group is exposed, or has rights, to variable return from its involvement with an entity and has the ability to affect those returns through its power over the entity. The Group has power over the entity when it has existing rights that give it the current ability to direct the relevant activities (i.e., activities that significantly affect the entitys returns). Consolidation of subsidiaries ceases when control is transferred out of the Group or Parent Company. The results of subsidiaries acquired or disposed of during the period are included in the consolidated statement of income from the date of acquisition or up to the date of disposal, as appropriate. If the Group losses control over a subsidiary, it: Derecognizes the assets (including goodwill) and liabilities of the subsidiary Derecognizes the carrying amount of any non-controlling interest Derecognizes the cumulative translation differences, recorded in equity Recognizes the fair value of the consideration received Recognizes the fair value of any investment retained Recognizes any surplus or deficit in profit or loss Reclassifies the parents share of components previously recognized in other comprehensive income to profit or loss or retained earnings, as appropriate The Group accounts for its investments in OHBVI as a subsidiary although the Group holds less than 50% of the issued share capital on the basis of the voting rights of 42.78% assigned by certain stockholders to the F-154

Parent Company. The Group has the ability to govern the financial and operating policies of OHBVI on the basis of the combined voting rights arising from its direct ownership and assigned voting rights of 70.56%. Changes in Accounting Policies and Disclosures The accounting policies adopted in the preparation of the interim condensed consolidated financial statements are consistent with those followed in the Groups annual financial statements as of and for the year ended December 31, 2012, except for the adoption of the following new, amendments and improvements to Philippine Financial Reporting Standards (PFRS) which became effective as of January 1, 2013. Except as otherwise indicated, these changes in the accounting policies did not have any significant impact on the financial position or performance of the Group: New and Revised Standards and Interpretations PFRS 11, Joint Arrangements PAS 27, Separate Financial Statements (as revised in 2011) PAS 28, Investments in Associates and Joint Ventures (as revised in 2011) Improvements to PFRSs (2009-2011 cycle) PFRS 1, First-time Adoption of PFRSBorrowing Costs PAS 1, Presentation of Financial StatementsClarification of the requirements for comparative information PAS 16, Property, Plant and EquipmentClassification of servicing equipment PAS 32, Financial Instruments: PresentationTax effect of distribution to holders of equity instruments PAS 34, Interim Financial ReportingInterim financial reporting and segment information for total assets and liabilities PFRS 7, Financial instruments: DisclosuresOffsetting Financial Assets and Financial Liabilities The Group disclosed the requirements of the amendments regarding the information about rights of set-off and related arrangements (such as collateral agreements). The new disclosures are required for all recognized financial instruments that are set off in accordance with PAS 32. These disclosures also apply to recognized financial instruments that are subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are set-off in accordance with PAS 32. Refer to Note 22 for the details and the tabular format of the required offsetting disclosures which the Group retrospectively applied. PFRS 10, Consolidated Financial Statements PFRS 10 replaces the portion of PAS 27, Consolidated and Separate Financial Statements that addresses the accounting for consolidated financial statements. It also includes the issues raised in Standing Interpretations Committee (SIC) No. 12, ConsolidationSpecial Purpose Entities. PFRS 10 establishes a single control model that applies to all entities including special purpose entities. The changes introduced by PFRS 10 requires management to exercise significant judgment to determine which entities are controlled, and therefore, are required to be consolidated by a parent, compared with the requirements in PAS 27. Refer to Note 3 for the significant judgment made by management in identifying entities for consolidation. Deconsolidation of Investment in SPVOpal Portfolio Investments (SPV-AMC), Inc. (OPII) Before the effectivity of PFRS 10, OPII is consolidated by PNB based on the provisions of SIC 12. Under SIC 12, control over an SPE may exist even in cases where an entity owns little or none of the SPEs equity, such as when an entity retains majority of the residual risks related to the SPE in order to obtain benefits from its activities. Beginning January 1, 2013, the Group adopted PFRS 10 which supersedes SIC 12. PFRS 10 establishes control as the basis for determining which entities are consolidated in the consolidated financial statements. Based on managements assessment, the Parent Company should no longer consolidate OPII since it failed to demonstrate control over OPII following the control model under PFRS 10. F-155

PAS 1, Presentation of Financial StatementsPresentation of Items of Other Comprehensive Income or OCI (Amendments) The Group applied amendments to PAS 1 and changed the grouping of items presented in OCI either: items that can be reclassified (or recycled) to profit or loss at a future point in time (for example, upon derecognition or settlement). These include Accumulated Translation Adjustment, Net Unrealized Gain (Loss) on Available-for-Sale Investments and Equity in Net Unrealized Loss on AFS Investment of an Associate; or items that will never be recycled to profit or loss. These include Remeasurement Losses on Retirement Plan. The amendments affect presentation only and have no impact on the Groups financial position or performance. PFRS 12, Disclosure of Interests with Other Entities PFRS 12 includes all of the disclosures that were previously in PAS 27 related to consolidated financial statements, as well as all of the disclosures that were previously included in PAS 31 and PAS 28. A number of new disclosures are also required. These disclosures relate to an entitys interests in subsidiaries, joint arrangements, associates and structured entities. The Group has no significant interests in joint arrangements, associates and structured entities that require disclosures. None of the majority owned subsidiaries are held by non-controlling interests that are considered material to the Group and which will require additional disclosures by PFRS 12. Refer to Basis of Consolidation, Notes 3 and 10 for disclosures related to subsidiaries and associate. PFRS 13, Fair Value Measurement PFRS 13 establishes a single source of guidance under PFRSs for all fair value measurements. PFRS 13 does not change when an entity is required to use fair value, but rather provides guidance on how to measure fair value under PFRS when fair value is required or permitted. This standard has no significant impact in the fair value measurement of financial assets and liabilities at FVPL, AFS investments, land and buildings. Refer to Note 4 for the disclosures required by the standard. PAS 19, Employee Benefits (Revised) Amendments to PAS 19 range from fundamental changes such as removing the corridor mechanism and the concept of expected returns on plan assets to simple clarifications and rewording. The revised standard also requires new disclosures such as, among others, a sensitivity analysis for each significant actuarial assumption, information on asset-liability matching strategies, duration of the defined benefit obligation, and disaggregation of plan assets by nature and risk. The adoption of PAS 19 (Revised), which required retrospective application, resulted in the restatement of previously reported retirement obligation/asset of the Group. The adjustment amounts were determined by the Group with the assistance of an external actuary. The Parent Company and certain subsidiaries had chosen to close to Surplus the net effect of all transition adjustments as at January 1, 2011 (the transition date) upon retrospective application of PAS 19 (Revised). The Group will retain the remeasurements recognized in other comprehensive income and will not transfer these to other items in equity. The effects of retroactive application of PAS 19 (Revised) and PFRS 10 are detailed below:
December 31, 2012 Effect of Effect of retroactive retroactive application of application of PAS 19R PFRS 10

As previously reported

As restated

Consolidated statements of financial position Assets Other assetsnet. . . . . . . . . . . . . . . . . . . . . . . . . . . . Liabilities Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity Remeasurement losses on retirement plan . . . . . . Surplus. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-controlling interests . . . . . . . . . . . . . . . . . . . . . . . .

P 2,994,425 16,846,393 6,888,348 904,693 F-156

429 450,807 (781,900) 331,500 22

(P816,217) P 2,178,637 (11,949) 46,219 (850,487) 17,285,251 (781,900) 7,266,067 54,228

As previously reported

January 1, 2012 Effect of Effect of retroactive retroactive application of application of PAS 19R PFRS 10

As restated

Consolidated statements of financial position Assets Other assetsnet. . . . . . . . . . . . . . . . . . . . . . . . . . . . Liabilities Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity Remeasurement losses on retirement plan . . . . . . Surplus. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-controlling interests . . . . . . . . . . . . . . . . . . . . . . . .

P 3,897,388 14,015,965 2,246,213 531,247

(P1,217) 681,915 (1,004,057) 320,965 (39)

(P514,002) P 3,382,169 (29,641) (484,361) 14,668,239 (1,004,057) 2,567,178 46,847

As an effect of retrospective application of PAS 19 (Revised) and PFRS 10, other income and other expenses decreased by P907.9 million and P760.1 million, respectively, while income attributable to non-controlling interests decreased by P139.6 million for the nine month period ended September 30, 2012. The following are the additional significant accounting policies as a result of the merger with ABC and the adoption of new accounting standards: Revenue Recognition Interchange fee and awards revenue on credit cards Discounts lodged under Interchange fees are taken up as income upon receipt from member establishments of charges arising from credit availments by the Groups cardholders. These discounts are computed based on certain agreed rates and are deducted from amounts remitted to the member establishments. The Group operates a loyalty points program which allows customers to accumulate points when they purchase from member establishments using the issued card of the Group. The points can then be redeemed for free products subject to a minimum number of points being obtained. Consideration received is allocated between the discounts earned, interchange fee and the points earned, with the consideration allocated to the points equal to its fair value. The fair value is determined by applying statistical analysis. The fair value of the points issued is deferred and recognized as revenue when the points are redeemed. Policy Loans Policy loans included under loans and receivables are carried at their unpaid balances plus accrued interest and are fully secured by the policy values on which the loans are made. Impairment of Nonfinancial Assets Goodwill Goodwill is reviewed for impairment, annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. Impairment is determined for goodwill by assessing the recoverable amount of the cash-generating unit (or group of cash-generating units) to which the goodwill relates. Where the recoverable amount of the cashgenerating unit (or group of cash-generating units) is less than the carrying amount of the cash-generating unit (or group of cash-generating units) to which goodwill has been allocated (or to the aggregate carrying amount of a group of cash-generating units to which the goodwill relates but cannot be allocated), an impairment loss is recognized immediately in the consolidated statement of income. Impairment losses relating to goodwill cannot be reversed for subsequent increases in its recoverable amount in future periods. The Group performs its annual impairment test of goodwill at reporting date. Business Combinations and Goodwill Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred measured at acquisition date fair value and the amount F-157

of any non-controlling interest in the acquiree. For each business combination, the Group elects whether to measure the non-controlling interest in the acquiree at fair value or at the proportionate share of the acquirees identifiable net assets. Acquisition-related costs are expensed as incurred and included in administrative expenses. When the Group acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date. This includes the separation of embedded derivatives in host contracts by the acquiree. If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the Group as an acquirer shall report in its financial statements provisional amounts for the items for which the accounting is incomplete. During the measurement period, the Group as an acquirer shall retrospectively adjust the provisional amounts recognised at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date and, if known, would have affected the measurement of the amounts recognised as of that date. During the measurement period, the Group as an acquirer shall also recognise additional assets or liabilities if new information is obtained about facts and circumstances that existed as of the acquisition date and, if known, would have resulted in the recognition of those assets and liabilities as of that date. The measurement period ends as soon as the Group as an acquirer receives the information it was seeking about facts and circumstances that existed as of the acquisition date or learns that more information is not obtainable. However, the measurement period shall not exceed one year from the acquisition date. If the business combination is achieved in stages, the previously held equity interest is remeasured at its acquisition date fair value and any resulting gain or loss is recognised in the consolidated statement of income. Any contingent consideration to be transferred by the acquirer will be recognised at fair value at the acquisition date. Contingent consideration classified as an asset or liability that is a financial instrument and within the scope of PAS 39, Financial Instruments: Recognition and Measurement, is measured at fair value with changes in fair value recognised either in the consolidated statement of income or as a change to OCI. If the contingent consideration is not within the scope of PAS 39, it is measured in accordance with the appropriate PFRS. Contingent consideration that is classified as equity is not remeasured and subsequent settlement is accounted for within equity. Goodwill is initially measured at cost, being the excess of the aggregate of the consideration transferred and the amount recognised for non-controlling interest over the net identifiable assets acquired and liabilities assumed. If the fair value of the net assets acquired is in excess of the aggregate consideration transferred, the gain is recognised in the consolidated statement of income. After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Groups cash-generating units that are expected to benefit from the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units. Where goodwill has been allocated to a cash-generating unit and part of the operation within that unit is disposed of, the goodwill associated with the disposed operation is included in the carrying amount of the operation when determining the gain or loss on disposal. Goodwill disposed in these circumstance is measured based on the relative values of the disposed operation and the portion of the cash-generating unit retained. Where there are business combinations in which all the combining entities within the Group are ultimately controlled by the same ultimate parent before and after the business combination and that the control is not transitory (business combinations under common control), the Group accounts for such business combinations under the purchase method of accounting, if the transaction was deemed to have substance from the perspective of the reporting entity. In determining whether the business combination has substance, factors such as the underlying purpose of the business combination and the involvement of parties other than the combining entities such as the non-controlling interest, shall be considered. In cases where the business combination has no substance, the Group shall account for the transaction similar to a pooling of interests. The assets and liabilities of the acquired entities and that of the Group are reflected at their carrying values. The difference in the amount recognized and the fair value of the consideration given, is accounted for as an equity transaction, i.e., as either a contribution or distribution of equity. Further, when a subsidiary is disposed in a common control transaction, the difference in the amount recognized and the fair value consideration received, is also accounted for as an equity transaction.

F-158

Life Insurance Contract Liabilities Life insurance liabilities Life insurance liabilities refer to liabilities of the company that are recognized due to the obligations arising from policy contracts issued by PNB LII. The reserves for life insurance contracts are calculated based on prudent statutory assumptions in accordance with generally accepted actuarial methods that are compliant with existing regulations. Insurance contracts with fixed and guaranteed terms The liability is determined as the expected discounted value of the benefit payments less the expected discounted value of the theoretical premiums that would be required to meet the benefits based on the valuation assumptions used. The liability is based on mortality, morbidity and investment income assumptions that are established at the time the contract is issued. For unpaid claims and benefits, a provision is made for the estimated cost of all claims and dividends notified but not settled at the reporting date less reinsurance recoveries, using the information available at the time. Provision is also made for the cost of claims incurred but not reported (IBNR) until after the reporting date based on PNB LIIs experience and historical data. Differences between the provision for outstanding claims at the reporting date and subsequent revisions and settlements are included in the consolidated statement of income in later years. Policy and contract claims payable forms part of the liability section of the consolidated statement of financial position under Other liabilities. Aggregate reserve for life policies represents the accumulated total liability for policies in force on the statement of financial position date. Such reserves are established at amounts adequate to meet the estimated future obligations of all life insurance policies in force. The reserves are calculated using actuarial methods and assumptions in accordance with statutory requirements and as approved by the Insurance Commission (IC), subject to the minimum liability adequacy test. Unit-linked insurance contracts PNB LII issues unit-linked insurance contracts. Considerations received from unit-linked insurance contracts, in excess of the portion that is placed under a withdrawable segregated account, are recognized as revenue. PNB LIIs revenue from unit-linked contracts consists of charges deducted from the policyholders separate account, in accordance with the unit-linked policy contract. Since the segregated fund assets belong to the unitlinked policyholders, corresponding segregated fund liabilities are set-up equal to the segregated fund assets less redemptions outside the segregated funds. The segregated fund assets are valued at market price. Changes in the segregated fund assets due to investment earnings or market value fluctuations result in the same corresponding change in the segregated fund liabilities. Such changes in fund value have no effect in the consolidated statement of income. Collections received from unit-linked policies are separated to segregated fund assets from which PNB LII withdraws administrative and cost of insurance charges in accordance with the policy provisions of the unit-linked insurance contracts. After deduction of these charges, the remaining amounts in the segregated fund assets are equal to the surrender value of the unit-linked policyholders, and are withdrawable anytime. The equity of each unit-linked policyholder in the fund is monitored through the designation of outstanding units for each policy. Hence, the equity of each unit-linked insurance contract in the fund is equal to the total number of outstanding units of the policyholder multiplied by the net asset value per unit (NAVPU). The NAVPU is the market value of the fund divided by the total number of outstanding units. Liability Adequacy Test Liability adequacy tests on life insurance contracts are performed annually to ensure the adequacy of the insurance contract liabilities. In performing these tests, current best estimates of future contractual cash flows, claims handling and policy administration expenses are used. Any deficiency is immediately charged against profit or loss initially by establishing a provision for losses arising from the liability adequacy tests. F-159

For nonlife insurance contracts, liability adequacy tests are performed at the end of each reporting date to ensure the adequacy of insurance contract liabilities, net of related deferred acquisition cost (DAC) assets. The provision for unearned premiums is increased to the extent that the future claims and expenses in respect of current insurance contracts exceed future premiums plus the current provision for unearned premiums. Retirement Benefits Defined benefit plan The net defined benefit liability or asset is the aggregate of the present value of the defined benefit obligation at the end of the reporting period reduced by the fair value of plan assets and adjusted for any effect of limiting a net defined benefit asset to the asset ceiling. The asset ceiling is the present value of any economic benefits available in the form of refunds from the plan or reductions in future contributions to the plan. The cost of providing benefits under the defined benefit plans is actuarially determined using the projected unit credit method. Defined benefit costs comprise the following: (a) service cost; (b) net interest on the net defined benefit liability or asset; and (c) remeasurements of net defined benefit liability or asset. Service costs which include current service costs, past service costs and gains or losses on non-routine settlements are recognized as expense in profit or loss. Past service costs are recognized when plan amendment or curtailment occurs. Net interest on the net defined benefit liability or asset is the change during the period in the net defined benefit liability or asset that arises from the passage of time which is determined by applying the discount rate based on high quality corporate bonds to the net defined benefit liability or asset. Net interest on the net defined benefit liability or asset is recognized as expense or income in profit or loss. Remeasurements comprising actuarial gains and losses, return on plan assets and any change in the effect of the asset ceiling (excluding net interest on defined benefit liability) are recognized immediately in OCI in the period in which they arise. Remeasurements are not reclassified to profit or loss in subsequent periods. Plan assets are assets that are held by a long-term employee benefit fund or qualifying insurance policies. Plan assets are not available to the creditors of the Group, nor can they be paid directly to the Group. Fair value of plan assets is based on market price information. When no market price is available, the fair value of plan assets is estimated by discounting expected future cash flows using a discount rate that reflects both the risk associated with the plan assets and the maturity or expected disposal date of those assets (or, if they have no maturity, the expected period until the settlement of the related obligations). The Groups right to be reimbursed of some or all of the expenditure required to settle a defined benefit obligation is recognized as a separate asset at fair value when and only when reimbursement is virtually certain. Employee leave entitlement Employee entitlements to annual leave are recognized as a liability when they are accrued to the employees. The undiscounted liability for leave expected to be settled wholly before twelve months after the end of the annual reporting period is recognized for services rendered by employees up to the end of the reporting period. Future Changes in Accounting Policies The Group will adopt the standards and interpretations enumerated below when these become effective. Except as otherwise indicated, the Group does not expect the adoption of these new and amended PFRS, PAS and Philippine Interpretations to have significant impact on its consolidated financial statements.

F-160

New Standards and Interpretations PAS 32, Financial Instruments: PresentationOffsetting Financial Assets and Financial Liabilities (Amendments) The amendments clarify the meaning of currently has a legally enforceable right to set-off and also clarify the application of the PAS 32 offsetting criteria to settlement systems (such as central clearing house systems) which apply gross settlement mechanisms that are not simultaneous. The amendments affect presentation only and have no impact on the Groups financial position or performance. The amendments to PAS 32 are to be retrospectively applied for annual periods beginning on or after January 1, 2014. PAS 36, Impairment of AssetsRecoverable Amount Disclosures for Non-Financial Assets (Amendments) These amendments remove the unintended consequences of PFRS 13 on the disclosures required under PAS 36. In addition, these amendments require disclosure of the recoverable amounts for the assets or cashgenerating units (CGUs) for which impairment loss has been recognized or reversed during the period. These amendments are effective retrospectively for annual periods beginning on or after January 1, 2014 with earlier application permitted, provided PFRS 13 is also applied. The amendments affect disclosures only and have no impact on the Groups financial position or performance. Investment Entities (Amendments to PFRS 10, PFRS 12 and PAS 27) These amendments are effective for annual periods beginning on or after January 1, 2014. They provide an exception to the consolidation requirement for entities that meet the definition of an investment entity under PFRS 10. The exception to consolidation requires investment entities to account for subsidiaries at fair value through profit or loss. It is not expected that this amendment would be relevant to the Group since none of the entities in the Group would qualify to be an investment entity under PFRS 10. Philippine Interpretation IFRIC 21, Levies (IFRIC 21) IFRIC 21 clarifies that an entity recognizes a liability for a levy when the activity that triggers payment, as identified by the relevant legislation, occurs. For a levy that is triggered upon reaching a minimum threshold, the interpretation clarifies that no liability should be anticipated before the specified minimum threshold is reached. IFRIC 21 is effective for annual periods beginning on or after January 1, 2014. The Group does not expect that IFRIC 21 will have material financial impact in future financial statements. PAS 39, Financial Instruments: Recognition and MeasurementNovation of Derivatives and Continuation of Hedge Accounting (Amendments) These amendments provide relief from discontinuing hedge accounting when novation of a derivative designated as a hedging instrument meets certain criteria. These amendments are effective for annual periods beginning on or after January 1, 2014. The Group has not novated its derivatives during the current period. However, these amendments would be considered for future novations. PFRS 9, Financial Instruments PFRS 9, as issued, reflects the first phase on the replacement of PAS 39 and applies to the classification and measurement of financial assets and liabilities as defined in PAS 39, Financial Instruments: Recognition and Measurement. Work on impairment of financial instruments and hedge accounting is still ongoing, with a view to replacing PAS 39 in its entirety. PFRS 9 requires all financial assets to be measured at fair value at initial recognition. A debt financial asset may, if the fair value option (FVO) is not invoked, be subsequently measured at amortized cost if it is held within a business model that has the objective to hold the assets to collect the contractual cash flows and its contractual terms give rise, on specified dates, to cash flows that are solely payments of principal and interest on the principal outstanding. All other debt instruments are subsequently measured at fair value through profit or loss. All equity financial assets are measured at fair value either through OCI or profit or loss. Equity financial assets held for trading must be measured at fair value through profit or loss. For FVO liabilities, the amount of change in the fair value of a liability that is attributable to changes in credit risk must be presented in OCI. The remainder of the change in fair value is presented in profit or loss, unless presentation of the fair value change in respect of the liabilitys credit risk in OCI would create or enlarge F-161

an accounting mismatch in profit or loss. All other PAS 39 classification and measurement requirements for financial liabilities have been carried forward into PFRS 9, including the embedded derivative separation rules and the criteria for using the FVO. The adoption of the first phase of PFRS 9 will have an effect on the classification and measurement of the Groups financial assets. The Group is still evaluating the effects of the adoption of PFRS 9. Entities are given the option to early adopt Phase One of PFRS 9, however, the mandatory effectivity of the full PFRS 9 is deferred until the issue date of the final version of PFRS 9 is known. Philippine Interpretation IFRIC 15, Agreements for the Construction of Real Estate This interpretation covers accounting for revenue and associated expenses by entities that undertake the construction of real estate directly or through subcontractors. The interpretation requires that revenue on construction of real estate be recognized only upon completion, except when such contract qualifies as construction contract to be accounted for under PAS 11 or involves rendering of services in which case revenue is recognized based on stage of completion. Contracts involving provision of services with the construction materials and where the risks and reward of ownership are transferred to the buyer on a continuous basis will also be accounted for based on stage of completion. The SEC and the Financial Reporting Standards Council have deferred the effectivity of this interpretation until the final Revenue standard is issued by the International Accounting Standards Board and an evaluation of the requirements of the final Revenue standard against the practices of the Philippine real estate industry is completed. 3. Significant Accounting Judgments and Accounting Estimates

The following are the additional critical judgment and estimates as a result of the merger with ABC that are applied in 2013 and have a risk of material adjustment to the carrying amounts of the assets and liabilities: Judgments (a) Product classification The Group classified its unit-linked products as insurance contracts due to the significant insurance risk at issue. All of the Groups insurance products are classified and treated as insurance contracts. (b) Assessment of control over the entities for consolidation The Group has majority owned subsidiaries discussed in Note 2. Management concluded that the Group controls these majority-owned subsidiaries arising from voting rights and, therefore, consolidates the entity in its consolidated financial statements. In addition, the Group accounts for its investments in OHBVI as a subsidiary although the Group holds less than 50.00% of OHBVIs issued share capital on the basis of the voting rights of 42.78% assigned by certain stockholders to the Parent Company. Management concluded that the Group has the ability to control the relevant activities and to affect its returns in OHBVI on the basis of the combined voting rights arising from its direct ownership and assigned voting rights of 70.56%. On the other hand, management concluded that it will not consolidate OPII since the Parent Company failed to demonstrate that is has control over the relevant activities of and affect its return on OPII. (c) Business Combination The Parent Company accounted for the tax impact of the merger as a tax-free merger on the basis that a request for a ruling from the Bureau of Internal Revenue (BIR) was submitted on April 26, 2013. The ruling being requested was to confirm that the statutory merger of PNB and ABC is a tax-free merger under Section 40(c)(2) of the National Internal Revenue Code (NIRC) of 1997 as amended (Tax Code). As of September 30, 2013, the ruling request is still pending with the Law Division of the BIR. The Group believes that the BIR will issue such confirmation on the basis of BIR Preliminary Ruling No. 01-2008 (dated September 28, 2008) whereby the BIR held that the statutory merger of PNB and ABC complies with Revenue Memorandum Ruling (RMR) No. 1-2001, subject to the submission of the merger documents and documents pertaining to the assets and liabilities transferred. RMR No. 1-2001 provides the fact pattern that should be present in order to secure BIR confirmation for a tax-free Section 40(C)(2) transaction. F-162

Estimates (a) Fair valuation in business combination The Group determines the acquisition date fair values of identifiable assets acquired and liabilities assumed from the acquiree without quoted market price based on the following: for financial assets and liabilities that are short term in nature, carrying values approximate fair values for financial assets and liabilities that are long term in nature, fair values are estimated through the discounted cash flow methodology, using the appropriate market rates (e.g., current lending rates) for nonfinancial assets such as property and equipment and investment properties, fair values are determined based an appraisal valuation which follows sales comparison approach and depreciated replacement cost approach Refer to Note 12 for the details of the fair values of the identifiable assets and liabilities assumed from business combination. (b) Aggregate reserves for life policies In determining the aggregate reserves for life policies estimates are made as to the expected number of deaths, illness or injury for each of the years in which PNB LII is exposed to risk. These estimates are based on standard mortality and morbidity tables as required by the Insurance Code (the Code). The estimated number of deaths, illness or injury determines the value of possible future benefits to be paid out, which will be factored into ensuring sufficient cover by reserves, which in return is monitored against current and future premiums. Estimates are also made as to future investment income arising from the assets backing life insurance contracts. These estimates are based on current market returns, as well as expectations about future economic and financial developments. In accordance with the provision of the Code, estimates for future deaths, illness or injury and investment returns are determined at the inception of the contract and are used to calculate the liability over the term of the contract. The interest rate used to discount future liabilities does not exceed 6.00% as required by the Code. Likewise, no lapse, surrender and expense assumptions are factored in the computation of the liability. The carrying values of the aggregate reserves for life policies of the Group (shown as part of the Other liabilities account in the statements of financial position) amounted to P4.4 billion as of September 30, 2013. (c) Valuation of insurance contracts Estimates have to be made both for the expected ultimate cost of claims reported at reporting date and for the expected ultimate cost of IBNR at the reporting date. It can take a significant period of time before the ultimate claim costs can be established with certainty. Nonlife insurance contract liabilities are not discounted for the time value of money. The main assumption underlying the estimation of the claims provision is that a companys past claims development experience can be used to project future claims development and hence ultimate claims costs. Historical claims development is mainly analyzed by accident years as well as by significant business lines and claim types. Large claims are usually separately addressed, either by being reserved at the face value of loss adjuster estimates or separately projected in order to reflect their future development. 4. Fair Value Hierarchy of Financial Instruments

The Group uses the following hierarchy for determining and disclosing the fair value of assets and liabilities by valuation technique. These levels are based in the inputs that are used to determine the fair value and can be summarized in: Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly Level 3: inputs are unobservable inputs for the asset or liability F-163

The Group held the following assets and liabilities measured at recurring and non-recurring fair value measurements at their corresponding level in the fair value hierarchy:
Level 1 September 30, 2013 (Unaudited) Level 2 Level 3 Total

Recurring Fair Value Measurements Financial Assets Financial assets at FVPL: Held-for-trading: Government securities. . . . . . . . . . Private debt securities . . . . . . . . . . Equity securities . . . . . . . . . . . . . . . Derivative assets. . . . . . . . . . . . . . . Designated at FVPL: Segregated fund assets(*) . . . . . . . . AFS investments: Government securities . . . . . . . . . . . . . . Other debt securities . . . . . . . . . . . . . . . . Equity securities(**) . . . . . . . . . . . . . . . . . Financial Liabilities Financial liabilities at FVPL: Designated at FVPL: Segregated fund liabilities . . . . . . . . . . . Derivative liabilities . . . . . . . . . . . . . . . . . . . . Non-Recurring Fair Value Measurements Property and equipment Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fair Values of Assets Carried at Cost Financial Assets Loans and Receivables Receivables from customers . . . . . . . . . . . . . Unquoted debt securities . . . . . . . . . . . . . . . . Financial Liabilities Financial liabilities at amortized cost Time Deposits. . . . . . . . . . . . . . . . . . . . . . . . . . Subordinated debt . . . . . . . . . . . . . . . . . . . . . . Non-financial Assets Investment property(***) Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Buildings and improvements . . . . . . . . . . . . .

Q 3,571,964 219,573 192,968 2,235,945 Q 6,220,450 Q59,930,637 18,288,888 1,254,720 Q79,474,245

418,672

4,706,206

3,571,964 219,573 192,968 418,672 6,942,151

Q Q

418,672

4,706,206

Q 11,345,328

49,871 Q 324,333 374,204 Q

Q 59,980,508 20,000 18,308,888 466 1,579,519 20,466 Q 79,868,915

Q 2,454,348 Q 2,454,348

Q Q

203,144 203,144

Q Q

4,706,206 4,706,206

Q Q

7,160,554 203,144 7,363,698

Q Q

Q14,741,233 9,585,229 Q24,326,462

Q Q

Q 14,741,233 9,585,229 Q 24,326,462

Q Q

Q Q

Q241,814,257 8,809,297 Q250,623,554

Q241,814,257 8,809,297 Q250,623,554

Q Q

Q Q

Q 49,409,533 10,929,190 Q 60,338,723

Q 49,409,533 10,929,190 Q 60,338,723

Q Q

Q24,176,040 3,597,214 Q27,773,254

Q Q

Q 24,176,040 3,597,214 Q 27,773,254

(*) Excludes cash component (**) Excludes unquoted available-for-sale securities (***) Based on the fair values from appraisal reports which is different from their carrying amounts which are carried at cost.

F-164

Level 1

December 31, 2012 (Audited) Level 2 Level 3

Total

Financial Assets Financial assets at FVPL: Held-for-trading: Government securities . . . . . . . . . . . . . . Private debt securities . . . . . . . . . . . . . . Equity securities . . . . . . . . . . . . . . . . . . . Derivative assets . . . . . . . . . . . . . . . . . . . Designated at FVPL: Private debt securities . . . . . . . . . . . . . . AFS investments: Government securities. . . . . . . . . . . . . . . . . . . Other debt securities . . . . . . . . . . . . . . . . . . . . Equity securities . . . . . . . . . . . . . . . . . . . . . . . . Financial Liabilities Financial liabilities at FVPL: Designated at FVPL . . . . . . . . . . . . . . . . . . . . Derivative liabilities . . . . . . . . . . . . . . . . . . . .

Q 1,970,754 99,502 250,552 59,044 Q 2,379,852 Q55,558,527 8,979,888 440,230 Q64,978,645

395,457 1,247,756

Q 1,970,754 99,502 250,552 454,501 1,247,756 Q 4,023,065 Q55,558,527 10,920,133 440,230 Q66,918,890

Q1,643,213 Q

Q 1,940,245 Q

Q1,940,245

Q Q

283,751

Q6,196,070 Q6,196,070

Q 6,196,070 283,751 Q 6,479,821

Q 283,751

For recurring fair value measurement of financial assets and liabilities, the methodologies used in determining fair values are consistent with those used in the latest audited annual financial statements (i.e. discounted cash flow model). For land and buildings under property and equipment and investment property, the fair value is determined based on the appraisal reports of external and internal appraisers. The fair values of the Groups land and building have been determined by the appraisal method on the basis of recent sales of similar properties in the same areas as the investment properties and land and building and taking into account the economic conditions prevailing at the time the valuations were made. Fair values of receivable from customers, unquoted debt securities, time deposits and subordinated debt were determined using the discounted cash flow (DCF) methodology. Discount rates used in the DCF are based on the Groups incremental lending rates for loans and receivables and incremental borrowing rates for time deposits and subordinated debt. The carrying values of receivables from customers and unquoted debt securities amounted to Q237.0 billion and Q7.4 billion, respectively, as of September 31, 2013, and Q127.1 billion and Q3.9 billion, respectively, as of December 31, 2012. The carrying values of time deposits and subordinated debt amounted to Q49.1 billion and Q9.9 billion, respectively, as of September 31, 2013, and Q19.9 billion and Q9.9 billion, respectively, as of December 31, 2012. As of September 30, 2013 and December 31, 2012, there were no transfers between Level 1 and Level 2 fair value measurements, and no transfers into and out of Level 3 fair value measurements. The following table shows a reconciliation of the beginning and closing amount of Level 3 financial assets and liabilities which are recorded at fair value of the Group for the nine months ended September 30, 2013: Financial assets Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Add/(Less): Acquisition arising from the business combination . . . . . . . . . . . . . . . . . . . . . . . . . . Acquisition arising from purchases of investment . . . . . . . . . . . . . . . . . . . . . . . . . . . Total loss recorded in profit or loss (Note 7). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-165 Q 2,755,232 2,189,204 (217,764)

Q4,726,672

Financial liabilities Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Add/(Less): Acquisition arising from the business combination . . . . . . . . . . . . . . . . . . . . . . . . . Acquisition arising from purchases of investment . . . . . . . . . . . . . . . . . . . . . . . . . . Total loss recorded in profit and loss (Note 7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Redemption of unsecured subordinated notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q 6,196,070 2,755,232 2,168,738 (413,834) (6,000,000) Q 4,706,206

The financial instruments classified as Level 3 items as of December 31, 2012 represent the Q6.0 billion, 8.50% Unsecured Subordinated Notes (the Notes) issued by the Parent Company. On June 20, 2013, the Parent Company exercised its call option to early redeem the Notes. The Notes were redeemed at face value and no gain or loss was recognized on the date of settlement. The Group did not present the potential effect of change in valuation assumptions to the value of segregated fund assets and liabilities classified as Level 3 since they are immaterial relative to the overall size of Groups assets and liabilities. Further, their offsetting fair value changes has immaterial impact on profit or loss. 5. Segment Information

Business Segments The Groups operating businesses are determined and managed separately according to the nature of services provided and the different markets served with each segment representing a strategic business unit. The Groups business segments follow: Retail Bankingprincipally handling individual customers deposits, and providing consumer type loans, credit card facilities and fund transfer facilities; Corporate Bankingprincipally handling loans and other credit facilities and deposit accounts for corporate and institutional customers; and Treasuryprincipally providing money market, trading and treasury services, as well as the management of the Groups funding operations by use of T-bills, government securities and placements and acceptances with other banks, through treasury and wholesale banking. Other Segmentsinclude but not limited to insurance, leasing, remittances and other support services. Other operations of the Group comprise of the operations and financial control groups. Transactions between segments are conducted at estimated market rates on an arms length basis. Interest is credited to or charged against business segments based on a pool rate which approximates the marginal cost of funds. For management purposes, business segment report is prepared on a quarterly basis. Business segment information provided to the board of directors, chief operating decision maker (CODM) is based on the Regulatory Accounting Principles (RAP) submitted to the BSP in compliance with the reportorial requirements under the Financial Reporting Package (FRP) for banks, which differ from PFRS. Significant differences arose from the manner of provisioning for impairment and credit losses and measurement of investment properties. The report submitted to CODM represents only the results of operation for each of the reportable segment. Segment assets are those operating assets that are employed by a segment in its operating activities and that either directly attributable to the segment or can be allocated to the segment on a reasonable basis. Segment liabilities are those operating liabilities that result from the operating activities of a segment and that either are directly attributable to the segment or can be allocated to the segment on a reasonable basis. The Group has no significant customer which contributes 10.00% or more of the consolidated revenue.

F-166

Business segment information of the Group follows:

Nine Months Ended September 30, 2013 Corporate Adjustments and Banking Treasury Others Eliminations(*)

Retail Banking

Total

Interest income . . . . . . . . . . . . . . P 2,681,400 P 8,096,827 P3,258,890 P 391,323 Interest expense . . . . . . . . . . . . . 2,399,596 511,788 1,230,326 12,492 Net interest margin . . . . . . . . . . Other income . . . . . . . . . . . . . . . Other expenses . . . . . . . . . . . . . . Segment result . . . . . . . . . . . . . . Inter-segment . . . . . . . . . . . . . . . Imputed income. . . . . . . . . Imputed cost. . . . . . . . . . . . Unallocated expenses . . . . . . . . Net income before share in net income of an associate and income tax. . . . . . . . . . . . . . . . Share in net income of an associate . . . . . . . . . . . . . . . . . Net income before income tax. . . . . . . . . . . . . . . . . . . . . . . Income tax. . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . Non-controlling interest . . . . . . Net income for the period attributable to equity holders of the Parent Company . . . . . Other segment information Capital expenditures . . . . . . . P Depreciation and amortization . . . . . . . . . . . . . . P Unallocated depreciation and amortization . . . . . . . . . . . . . . Total depreciation and amortization . . . . . . . . . . . . . . Provision for impairment, credit and other losses. . . . . . P 404,968 P 24,385 P P 304,966 P 457,212 P 134,343 P 20,120 P 159,965 P 723 P 283,589 P 5,457 P 352,506 P 281,804 1,906,770 4,733,841 (2,545,267) 2,819,269 7,585,039 1,667,155 3,173,771 6,078,423 (2,018,541) 2,028,564 5,909,316 353,057 7,584,823 (800,728) 378,831 3,425,460 2,313,270 1,491,021

(P895,742)P13,532,698 (337,243) 3,816,959 (558,499) 9,715,739 (1,837,266) 11,071,435 (1,088,392) 9,485,547 (1,307,373) 11,301,627 (P1,307,373) 2,819,269 (2,819,269) 11,301,627 4,023,561

Segment result to third party . . P

274,002 P 4,059,882 P6,784,095 P1,491,021

7,278,066 4,975 7,283,041 1,292,814 5,990,227 58,185

P 5,932,042 P P 761,644 652,271 259,606 P P 911,877 734,319

(*) The eliminations and adjustments column mainly represent the RAP to PFRS adjustments.
As of September 30, 2013 Retail Banking Corporate Banking Treasury Others Adjustments and Eliminations(*) Total

Segment assets . . . . . P292,765,268 P203,610,386 P309,158,362 P102,699,018 (P302,218,241) P606,014,793 Unallocated assets . . Total assets . . . . . . . . 87,445 P606,102,238

Segment liabilities . . . . . . . . P432,029,702 P178,041,318 P106,974,979 P 17,416,114 (P298,254,141) P436,207,972 Unallocated liabilities . . . . . . . . Total liabilities . . . . . (*) The eliminations and adjustments column mainly represent the RAP to PFRS adjustments. F-167 86,008,130 P522,216,102

Retail Banking

Nine Months Ended September 30, 2012 (As restated) Corporate Adjustments and Banking Treasury Others Eliminations(*)

Total

Interest income . . . . . . . . . . . . P 954,164 P 5,306,420 P 2,207,986 P 141,707 P Interest expense . . . . . . . . . . . 1,538,743 434,885 1,267,502 1,372 Net interest margin . . . . . . . . Other income . . . . . . . . . . . . . Other expenses . . . . . . . . . . . . Segment result . . . . . . . . . . . . Inter-segment Imputed income. . . . . . . Imputed cost. . . . . . . . . . (584,579) 681,344 2,159,208 (2,062,443) 3,259,362 4,871,535 1,088,063 2,266,762 3,692,836 940,484 4,614,349 807,728 4,747,105 140,335 1,534,101 492,332 1,182,104

19,258 P 8,629,535 (41,090) 3,201,412 60,348 (52,314) (428,478) 436,512 5,428,123 7,865,543 5,297,552 7,996,114 3,259,362 (3,259,362)

(1,274,723) (1,984,639)

Segment result to third party . . . . . . . . . . . . . . . . . . . P 1,196,919 P 2,418,113 P 2,762,466 P 1,182,104 P Unallocated expenses . . . . . . Net income before share in net income of an associate and income tax . . . . . . . . . . Share in net income of an associate . . . . . . . . . . . . . . . Net income before income tax. . . . . . . . . . . . . . . . . . . . . Income tax. . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . Non-controlling interest . . . . Net income for the year attributable to equity holders of the Parent Company. . . . . . . . . . . . . . . Other segment information Capital expenditures . . . . . . . P Depreciation and amortization . . . . . . . . . . . . P Unallocated depreciation and amortization . . . . . . . . Total depreciation and amortization . . . . . . . . . . . . Provision for (reversal of) impairment, credit and other losses . . . . . . . . . . . . . P 461,445 P 114,468 P 4,494 P 154,276 P 3,131 P 4,796 P 83,283 P 30,570 P

436,512 P 7,996,114 3,772,228

P 4,223,886 48,580 4,272,466 669,691 3,602,775 7,284

P 3,595,491 P P 552,353 304,110 236,353 P 540,463

35,186 P 1,410,699 P

974,899

(P29,079)

(P1,064,827) P 1,326,878

(*) The eliminations and adjustments column mainly represent the RAP to PFRS adjustments.
Corporate Banking As of December 31, 2012 (As restated) Adjustments and Eliminations(*) Treasury Others

Retail Banking

Total

Segment assets . . . . . . . P 50,745,189 P95,365,478 P147,433,116 P38,395,849 (P4,754,067) P327,185,565 Unallocated assets . . . . Total assets . . . . . . . . . . 3,005,186 P330,190,751

Segment liabilities . . . . P205,217,147 P32,452,570 P 40,985,859 P16,570,501 (P6,489,036) P288,737,041 Unallocated liabilities . . . . . . . . . . Total liabilities . . . . . . . (*) The eliminations and adjustments column mainly represent the RAP to PFRS adjustments. F-168 2,961,465 P291,698,506

Geographical Segments Although the Groups businesses are managed on a worldwide basis, the Group operates in five (5) principal geographical areas of the world. The distribution of assets, liabilities and credit commitments items as of September 30, 2013, December 31, 2012, and capitalized expenditures and revenues for the nine month periods ended September 30, 2013 and 2012 by geographic region of the Group follows:
Assets September 30, December 31, 2013 2012 Liabilities September 30, December 31, 2013 2012 Credit Commitments September 30, December 31, 2013 2012

Philippines . . . . . . . . . . . Q575,326,745 P319,698,926 Q500,849,706 P284,122,475 Q11,636,915 P435,175 Asia (excluding Philippines) . . . . . . . . 22,969,478 4,786,765 17,217,234 4,120,423 868,587 515,684 USA and Canada. . . . . . 6,558,752 5,156,870 3,531,561 3,150,382 925 37,606 United Kingdom . . . . . . 1,218,847 308,233 517,698 76,051 Other European Union Countries . . . . . . . . . . 28,416 239,957 99,903 229,175 Q606,102,238 P330,190,751 Q522,216,102 P291,698,506 Q12,506,427 P988,465
Capital Expenditure September 30, September 30, 2013 2012 Revenues September 30, September 30, 2013 2012

Philippines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Asia (excluding Philippines) . . . . . . . . . . . . . . . . . . . . . USA and Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United Kingdom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other European Union Countries . . . . . . . . . . . . . . . . .

Q741,424 15,331 12 4,877 Q761,644

P534,020 6,389 10,716 1,187 41 P552,353

Q23,199,843 895,534 399,950 101,305 12,476 Q24,609,108

P15,433,704 558,060 455,747 89,717 6,430 P16,543,658

The Philippines is the home country of the Parent Company, which is also the main operating company. The Group offers a wide range of financial services as discussed in Note 1. Additionally, most of the remittance services are managed and conducted in Asia, Canada, USA and United Kingdom. The areas of operations include all the business segments. 6. Due from BSP

This account includes placements in special deposit accounts (SDAs) of the BSP amounting to P59.4 billion and P5.0 billion as of September 30, 2013 and December 31, 2012, respectively. These SDAs bear interest at annual interest rates ranging from 2.00% to 3.66% in 2013 and 3.50% to 4.69% in 2012. 7. Available-for-Sale Investments This account consists of:
September 30, 2013 (Unaudited) December 31, 2012 (Audited)

Government securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other debt securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity securitiesnet of allowance for impairment losses of P0.9 billion. . . . . . . .

Q59,980,508 18,308,887 1,734,745 Q80,024,140

P55,558,527 10,920,133 518,819 P66,997,479

F-169

Trading and investment securities gainsnet consist of:

Nine Months Ended September 30, September 30, 2013 2012 (Unaudited) (Unaudited)

AFS investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Held-for-trading securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial instruments designated at FVPL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q4,758,988 239,469 196,070 28,959 Q5,223,486

P3,503,600 324,259 246,416 (66,934) P4,007,341

8.

Loans and Receivables This account consists of:

September 30, 2013 (Unaudited) December 31, 2012 (Audited)

Receivable from customers: Loans and discounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Customers liabilities on acceptances, letters of credit and trust receipts . . . Bills purchased. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Credit card receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lease contracts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less unearned and other deferred income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unquoted debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other receivables: Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sales contract receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less allowance for credit losses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q222,981,227 8,890,622 4,719,510 3,755,750 2,673,102 243,020,211 1,138,797 241,881,414 11,345,390 7,135,918 6,644,169 4,766,384 518,534 272,291,809 14,092,144 Q258,199,665

P124,072,963 4,150,208 2,556,211 286,623 2,043,456 133,109,461 910,617 132,198,844 7,818,199 6,190,680 7,517,056 4,633,079 593,434 158,951,292 14,243,783 P144,707,509

The table below shows the industry sector analysis of the Groups receivable from customers before taking into account the allowance for credit losses (amounts in millions):
September 30, 2013 (Unaudited) Carrying % Amount December 31, 2012 (Audited) Carrying % Amount

Loans and Receivables Receivable from customers: Primary target industry: Wholesale and retail . . . . . . . . . . . . . . . . . . . . . . Electricity, gas and water . . . . . . . . . . . . . . . . . . Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . Public administration and defense . . . . . . . . . . Transport, storage and communication . . . . . . Financial intermediaries . . . . . . . . . . . . . . . . . . . Agriculture, hunting and forestry . . . . . . . . . . . Secondary target industry: Real estate, renting and business activities . . . Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P 42,111 36,736 31,014 24,725 20,913 20,088 3,697 30,995 5,762 26,979 P243,020

17.33 15.12 12.76 10.17 8.61 8.27 1.52 12.75 2.37 11.10 100.00

P 21,496 18,180 13,317 22,766 17,051 10,207 2,899 11,434 2,349 13,410 P133,109

16.15 13.66 10.00 17.10 12.81 7.67 2.18 8.59 1.77 10.07 100.00

F-170

The information (gross of unearned and other deferred income) relating to receivable from customers as to secured and unsecured and as to collateral follows:
September 30, 2013 (Unaudited) December 31, 2012 (Audited) Amount % Amount %

Secured: Real estate mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . Chattel mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bank deposit hold-out. . . . . . . . . . . . . . . . . . . . . . . . . . . Shares of stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unsecured . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P 57,724,857 8,446,329 3,385,562 1 32,219,031 101,775,780 141,244,431 P243,020,211

23.75 3.48 1.39 0.00 13.26 41.88 58.12 100.00

P 21,457,030 4,336,447 1,615,415 358,267 21,660,562 49,427,721 83,681,740 P133,109,461

16.12 3.26 1.21 0.27 16.27 37.13 62.87 100.00

Non-performing loans (NPLs) classified as secured and unsecured as reported to BSP follows:
September 30, 2013 (Unaudited) December 31, 2012 (Audited)

Secured . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unsecured. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P 6,674,372 3,652,333 P10,326,705

P3,801,846 2,662,759 P6,464,605

9.

Property and Equipment

For the nine months ended September 30, 2013, the Group purchased assets with a cost of P761.6 million. These exclude assets arising from the business combination (Note 12). Also, assets with net book value of P210.5 million were disposed of by the Group during the nine months ended September 30, 2013. For the nine months ended September 30, 2012, the Group purchased assets with a cost of P552.4 million and disposed assets with net book value of P237.2 million. 10. Investment in an Associate
September 30, 2013 (Unaudited) (Nine Months) December 31, 2012 (Audited) (One Year)

Acquisition cost: ACB (39% owned in 2012). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated equity in net earnings: Balance at beginning of period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity in net earnings for the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity in accumulated translation adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity in net unrealized loss on AFS investments of an associate . . . . . . . . . . . . Balance at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Disposal of previously-held interest in an associate due to step-up acquisition of control over the investee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P 2,763,903 136,330 4,975 (21,296) 120,009 (2,883,912) P

P2,763,903 132,816 10,309 (6,795) 136,330 P2,900,233

With its business combination with ABC (Note 1), the Parent Companys equity interest in ACB increased from 39.41% to 90.41%. This resulted in change in accounting for such investment from an associate to a subsidiary. In accordance with PFRS 3, Business Combination, the step-up acquisition of investment in ACB is accounted for as a disposal of the equity investment in ACB and the line by line consolidation of ACBs assets and liabilities in the Groups financial statements. The disposal resulted in a gain of P83.9 million (included under Miscellaneous income in the statements of income), which included recycling to profit or loss of the cumulative translation adjustment of P21.3 million arising from the translation of the equity investment to the presentation currency of the Group. F-171

11. Investment Properties For the nine months ended September 30, 2013, the Group received foreclosed assets with fair value of P307.2 million as settlement for certain NPL accounts. These exclude assets arising from the business combination (Note 12). Also, assets with net book value of P913.8 million were disposed of by the Group during the nine months ended September 30, 2013. As of September 30, 2012, the Group received foreclosed assets with fair value of P493.4 million and disposed assets with net book value of P1.2 billion. The aggregate fair value of the Groups investment properties as of September 30, 2013 and December 31, 2012 amounted to P27.8 billion and P22.0 billion, respectively, of which P27.3 billion and P21.9 billion, respectively, pertains to the Parent Company. The fair values of the Groups investment properties have been determined by the appraisal method on the basis of recent sales of similar properties in the same areas as the investment properties and taking into account the economic conditions prevailing at the time the valuations were made. 12. Business Combinations As discussed in Note 1, on February 9, 2013, the Parent Company acquired 100.00% of the voting common stocks of ABC, a listed universal bank. The acquisition of ABC was made to strengthen the Parent Companys financial position and enlarge its operations. The Parent Company elected to account for the business combination with ABC under the acquisition method of PFRS 3. The Group has elected to measure the non-controlling interest in the acquiree at proportionate share of identifiable assets and liabilities. Assets acquired and liabilities assumed In accordance with PFRS 3, the Parent Company determined the assets acquired and liabilities assumed from the business combination and provisionally made an assessment of their fair values. The fair values of the identifiable assets and liabilities of ABC and its subsidiaries as at the date of acquisition follow:
Fair value of the net assets recognized on acquisition date

Assets Cash and other cash items. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due from BSP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due from other banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interbank loans receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial assets at fair value through profit or loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Available-for-sale investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans and receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3,138,220 44,481,495 12,514,443 4,310,711 6,502,108 18,693,504 92,168,568 6,546,998 5,015,189 52,574 1,875,509

P195,299,319

F-172

Fair value of the net assets recognized on acquisition date

Liabilities Deposit liabilities Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Time(*) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial liabilities at fair value through profit or loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bills and acceptances payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued taxes, interest and other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subordinated debt(**) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fair values of identifiable assets and liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P 52,098,658 61,989,407 27,101,791 141,189,856 3,877,768 3,480,045 1,653,681 4,498,919 25,975 916,006 8,336,261 163,978,511 P 31,320,808

(*) Includes P3.5 billion worth of Long-term Negotiable Certificates of Time Deposits (LTNCD) issued on October 22, 2009 with interest rate of 7.00% per annum and maturity of October 23, 2014. (**) On March 6, 2013, the Parent Company exercised the option to redeem the subordinated debt issued by ABC prior to its maturity of March 6, 2018. The subordinated debt was redeemed at its face value of P4.5 billion. The total gross contractual amounts of receivables acquired as of February 9, 2013 was P97.4 billion, while the corresponding allowance for credit losses and unearned interest discount amounted to P5.1 billion and P0.1 billion, respectively. Of the gross receivables acquired, P4.8 billion represent NPLs of ABC as of acquisition date, of which P3.5 billion represents the secured portion. The proportionate share and measurement of the non-controlling interests and previously held interest in PNB LII, ACB, ALFC, ABCHK and OHBVI have been determined using the fair values of the respective net assets of these subsidiaries. The business combination resulted in recognition of goodwill which is provisionally determined as follows: Purchase consideration transferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Add: Proportionate share of the non-controlling interest in the net assets of ABC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acquisition-date fair value of previously-held interest in subsidiaries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Fair values of identifiable assets and liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P41,505,929 2,762,937 3,069,442 31,320,808 P16,017,500

The goodwill amounting to P16.0 billion is provisional pending receipt of the final valuation of the identifiable intangible assets. The goodwill arising from acquisition consists largely of the synergies and economies of scale expected from combining the operations of PNB and ABC. Goodwill is allocated entirely to the banking and insurance segments. None of the goodwill recognized is expected to be deductible for income tax purposes. An analysis of cash flows arising from the business combination follows: Net cash and cash equivalents acquired arising from the business combination (under investing activities) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less transaction costs attributable to issuance of shares (under financing activities) . . . . . . . . . . . . . Net cash inflow from the business combination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P64,444,869 84,792 P64,360,077

F-173

The fair value of the 423,962,500 common shares issued as consideration for the net assets of ABC and its subsidiaries was determined on the basis of the closing market price of PNB common shares as of February 9, 2013. From the date of acquisition, ABC and its subsidiaries have contributed P4.5 billion to the Groups revenue and P29.6 million loss to the Groups income before income tax. If the combination had taken place at the beginning of the year, the result of operations of the Group would be as follows: INTEREST INCOME ON Loans and receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trading and investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deposits with banks and others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interbank loans receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . INTEREST EXPENSE ON Deposit liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bills payable and other borrowings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . NET INTEREST INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Service fees and commission income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Service fees and commission expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . NET SERVICE FEES AND COMMISSION INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . OTHER INCOME Trading and investment securities gainsnet. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign exchange gainsnet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net gain on sale or exchange of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TOTAL OPERATING INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . OPERATING EXPENSES Compensation and fringe benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Taxes and licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for impairment, credit and other losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Occupancy and equipment-related costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TOTAL OPERATING EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . INCOME BEFORE INCOME TAX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PROVISION FOR INCOME TAX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ATTRIBUTABLE TO: Equity Holders of the Parent Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-controlling Interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Basic/Diluted Earnings Per Share Attributable to Equity Holders of the Parent Company . . . . . . . .

P10,287,237 2,980,105 1,117,082 36,424 14,420,848 3,071,653 970,251 4,041,904 10,378,944 2,560,112 685,862 1,874,250 6,742,068 647,502 426,574 2,525,276 22,594,614 4,795,547 1,564,612 917,859 1,047,293 962,087 4,837,068 14,124,466 8,470,148 1,335,627 Q 7,134,521 Q 7,058,360 76,161 P 7,134,521 P 6.50

F-174

The effect on total comprehensive income had the merger happened at the beginning of year follows: NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . OTHER COMPREHENSIVE INCOME (LOSS) Items that recycle to profit or loss in subsequent periods: Changes in net unrealized loss on available-for-sale investments. . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated translation adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Changes in revaluation increment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Items that do not recycle to profit or loss in subsequent periods: Remeasurement losses on retirement plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . OTHER COMPREHENSIVE INCOME FOR THE YEAR, NET OF TAX . . . . . . . . . . . . . . . . . TOTAL COMPREHENSIVE INCOME FOR THE YEAR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ATTRIBUTABLE TO: Equity holders of the Parent Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-controlling Interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 7,134,521

(3,284,054) 1,903,389 2,973,981 (1,420,380) 172,936 P 7,307,457 P 6,292,938 1,014,519 P 7,307,457

Taxation On April 26, 2013, the Group filed a request for a ruling from the BIR seeking confirmation that the statutory merger of PNB and ABC is a tax-free merger under Section 40(C)(2) of the NIRC of 1997 as amended (Tax Code). As of September 30, 2013, the ruling request is still pending with the Law Division of the BIR. The Group believes that the BIR will issue such confirmation on the basis of BIR Preliminary Ruling No. 01-2008 (dated September 28, 2008) whereby the BIR held that the statutory merger of PNB and ABC complies with RMR No. 1-2001, subject to the submission of the merger documents and documents pertaining to the assets and liabilities transferred. RMR No. 1-2001 provides the fact pattern that should be present in order to secure BIR confirmation for a tax-free Section 40(C)(2) transaction. Accordingly, the business combination was accounted for as a tax-free merger. 13. Financial Liabilities Long-Term Negotiable Certificates of Deposit On August 5, 2013, the Parent Company issued P5.0 billion worth of LTNCD which will mature on February 5, 2019. Among the significant terms and conditions of the LTNCDs are: (1) Issue price at 100.00% of the face value of each LTNCD. (2) The LTNCDs bear interest at the rate of 3.00% per annum on its principal amount from and including the Issue Date thereof, up to but excluding the Early Redemption Date or Maturity Date (as the case may be). Interest in respect of the LTNCD will be calculated on an annual basis and will be paid in arrears quarterly on the last day of each successive Interest Period. (3) Unless earlier redeemed, the LTNCDs shall be redeemed by the Parent Company on maturity date at an amount equal to one hundred percent (100%) of the aggregate issue price thereof, plus any accrued and unpaid interest thereon. The LTNCDs may not be redeemed at the option of the holders. (4) Subject to the Events of Default in the Terms and Conditions, the LTNCDs cannot be pre- terminated at the instance of any certificate of deposit (CD) Holder before Maturity Date. In the case of an event of default, none of the CD Holders may accelerate the CDs on behalf of other CD Holders, and a CD Holder may only collect from the Parent Company to the extent of his holdings in the CDs. However, the Parent Company may, subject to the General Banking Law of 2000, Section X233.9 of the Manual of Regulations for Banks, Circular No. 304 Series of 2001 of the BSP and other related circulars and issuances, as may be amended from time to time, redeem all and not only part of the outstanding CDs on any Interest Payment Date prior to Maturity Date, at an Early Redemption Amount equal to the Issue Price plus interest accrued and unpaid up to but excluding the Early Redemption Date. (5) The LTNCDs constitute direct, unconditional, unsecured, and unsubordinated obligations of the Parent Company, enforceable according to these Terms and Conditions, and shall at all times rank pari passu F-175

and without any preference or priority among themselves and at least pari passu with all other present and future direct, unconditional, unsecured, and unsubordinated obligations of the Issuer, except for any obligation enjoying a statutory preference or priority established under Philippine laws. (6) The LTNCDs are insured by the Philippine Deposit Insurance Corporation up to a maximum amount of P500,000 subject to applicable law, rules and regulations, as the same may be amended from time to time. Bills and Acceptances Payable As of September 30, 2013, the annual interest rates range from 0.10% to 1.77% for foreign currencydenominated borrowings, and from 1.13% to 12.00% for peso-denominated borrowings of the Group. As of December 31, 2012, the annual interest rates range from 0.06% to 1.77% for foreign currencydenominated borrowings, and from 0.03% to 12.00% for peso-denominated borrowings of the Group. As of September 30, 2013, bills payable with carrying value of Q4.8 billion is secured by a pledge of certain AFS investments with carrying value of P5.8 billion. As of December 31, 2012, bills payable with carrying value of Q3.0 billion is secured by a pledge of certain AFS investments with carrying value of P2.8 billion. As of September 30, 2013, bills payable under the BSP rediscounting facility with carrying value of P144.2 million is secured by a pledge of loans amounting to P235.1 million and certain AFS investments with carrying value of P2.5 billion. As of December 31, 2012, bills payable under the BSP rediscounting facility with carrying values of P1.9 billion and P1.0 billion are secured by a pledge of loans amounting to P2.0 billion and certain AFS investments with carrying value of P2.6 billion, respectively. Subordinated Debt 5.88% P3.5 Billion Subordinated Notes On May 9, 2012, the Parent Companys BOD approved the issuance of unsecured subordinated notes of P3.5 billion that qualify as Lower Tier 2 capital. The 2012 note bear annual nominal interest of 5.88% and effective interest rate (EIR) of 6.04%. Unless previously redeemed by the Parent Company, the 2012 Notes will be redeemed at their principal amount on maturity date or May 9, 2022. The note is callable in 2017 at issue price plus accrued interest. 6.75% P6.5 Billion Subordinated Notes On May 15, 2011, the Parent Companys BOD approved the issuance of unsecured subordinated notes of P6.5 billion that qualify as Lower Tier 2 capital. The 2011 Note bear annual nominal interest of 6.75% and EIR of 6.94%. Unless previously redeemed by the Parent Company, the 2011 Notes will be redeemed at their principal amount on maturity date or June 15, 2021. The note is callable in 2016 at issue price plus accrued interest. The Notes are carried at amortized cost as of September 30, 2013 and December 31, 2012. 14. Other Assets and Other Liabilities As of September 30, 2013, other assets primarily consists of real estate inventories of P1.2 billion, investment in memorial lots of P1.0 billion, deferred reinsurance premium of P0.4 billion and creditable withholding taxes of P1.5 billion. As of December 31, 2012, other assets primarily consist of real estate inventories of P1.0 billion. As of September 30, 2013, other liabilities primarily consists of insurance contract liabilities of P7.7 billion, accounts payable of P5.8 billion, retirement liability of P4.4 billion, bills purchasedcontra of P4.3 billion and managers check and demand drafts of P1.0 billion. As of December 31, 2012, other liabilities primarily consist of insurance contract liabilities of P2.6 billion, accounts payable of P4.7 billion, retirement liability of P1.9 billion, bills purchasedcontra of P2.6 billion and managers check and demand drafts of P0.6 billion. F-176

15. Equity Capital stock consists of (amounts in thousands, except for par value and number of shares):
Shares September 30, December 31, 2013 2012 (Unaudited) (Audited) (Nine Months) (One Year) Amount September 30, December 31, 2013 2012 (Unaudited) (Audited) (Nine Months) (One Year)

PreferredQ40 par value Authorized. . . . . . . . . . . . . . . . . . . . . . . . . . . . . CommonQ40 par value Authorized. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Issued and Outstanding . . . . . . . . . . . . . . . . . . Balance at the beginning of the period . . . . . . . . . . . . . . . . . . . . . . . . . . Issued during the period. . . . . . . . . . . . . Parent Company Shares Held by a Subsidiary . . . . . . . . . . . . . . . . . . . . . .

1,250,000,001

195,175,444 1,054,824,557

662,245,916 423,962,500 1,086,208,416 1,086,208,416

662,245,916 662,245,916 (200,112) 662,045,804

Q26,489,837 16,958,500 43,448,337 Q43,448,337

P26,489,837 26,489,837 (4,740) P26,485,097

On January 17, 2013, the SEC approved the conversion of the Parent Companys 195,175,444 authorized preferred shares into common shares, thereby increasing its authorized common shares to 1,250,000,001. The increase in authorized common shares was intended to accommodate the issuance of the Parent Company of common shares to ABC shareholders relative to the business combination. On May 28, 2013, the Stockholders of the Parent Company approved the following at their Annual Stockholders Meeting: 1. Increase in Authorized Capital Stock of the Parent Company from P50,000,000,040 divided into 1,250,000,001 Common Shares with a par value of Forty Pesos (P40.00) per share to P70,000,000,040 divided into 1,750,000,001 common shares with a par value of Forty Pesos (P40.00) per share. Amendment of Article Vll of the Articles of Incorporation to reflect the aforementioned increase in the authorized capital of stock of the Parent Company.

2.

As of September 30, 2013, the Parent Company is still in the process of preparing documents to file the application for increase in authorized capital stock with the SEC and BSP. Merger Incentives In connection with the merger of the Parent Company with ABC, the BSP gave certain incentives to the Parent Company and the more relevant incentives are: (a) Recognition of the fair value adjustments under generally accepted accounting principles and RAP books; (b) Full recognition of appraisal increment from the revaluation of premises, improvements and equipment in the computation of capital adequacy ratio. Restrictions to Amounts for Dividend Declaration Surplus and Capital Paid in Excess of Par Value of the Parent Company amounting to P9.0 billion as of September 30, 2013 and December 31, 2012 which represents the balances of accumulated translation adjustment and revaluation increment from land that have been applied to eliminate the Parent Companys deficit through a quasi-reorganization in 2002 and 2000, are not available for dividend declaration without prior approval from the Philippine SEC and the BSP.

F-177

Financial Performance The following basic ratios measure the financial performance of the Group for the periods ended September 30, 2013 and 2012 (amounts in millions):
September 30, 2013 (Unaudited) (Nine Months) September 30, 2012 (Unaudited) (Nine Months)

Return on average equity (a/b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a.) Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . b.) Average total equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Return on average assets (c/d). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c.) Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d.) Average total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net interest margin on average earning assets (e/f). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . e.) Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . f.) Average interest earning assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Q Q P

9.8% 5,990 61,189 1.3% 5,990 468,146 2.5% 9,716 396,186 P P P

10.0% 3,603 36,030 1.1% 3,603 315,922 2.1% 5,428 259,833

Note: Average balances were the sum of beginning and ending balances of the respective statement of financial position accounts as of the end of the period divided by two. 16. Miscellaneous Income and Expense Miscellaneous income consists of:
Nine Months Ended September 30, September 30, 2013 2012 (Unaudited) (Unaudited)

Net insurance premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Leasing and financing income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gain from step-up acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Underwriting and arrangers fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Penalties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividend income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commission income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Share in net income of an associate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q1,051,544 303,213 382,361 140,958 83,420 77,750 58,412 21,587 4,975 122,346 Q2,246,566

P 105,943 283,003 109,560 26,113 6,675 48,580 48,131 P628,005

Miscellaneous expenses consist of:

Nine Months Ended September 30, September 30, 2013 2012 (Unaudited) (Unaudited)

Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Security, clerical, messengerial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Increase in aggregate reserve for life policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Advertising costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Information technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Management and professional fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stationery and supplies used . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Transportation and travel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of software costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Repairs and maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Entertainment, amusement and recreation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (Forward) F-178

Q 910,930 P 445,174 613,891 344,645 489,480 461,053 208,740 256,376 110,267 231,161 173,948 227,547 225,996 175,076 102,484 173,734 132,857 137,310 114,501 133,863 84,235 131,839 95,523

Nine Months Ended September 30, September 30, 2013 2012 (Unaudited) (Unaudited)

Postage, telephone and telegram . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fuel & lubricants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Asset disposal costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Donations and contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Brokerage fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Freight . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q 124,141 P 81,182 81,679 14,451 26,279 19,016 25,268 23,672 24,944 23,005 16,308 156,753 452,258 Q4,403,057 P2,646,529

Miscellaneousothers include loss on destroyed property, periodicals and magazines, fines, penalties and other charges. 17. Retirement Plan Defined benefit plan The Parent Company and certain subsidiaries of the Group, have separate funded, noncontributory defined benefit retirement plans covering substantially all its officers and regular employees. Under these retirement plans, all covered officers and employees are entitled to cash benefits after satisfying certain age and service requirements. The Parent Companys annual contribution to the retirement plan consists of a payment covering the current service cost, amortization of the unfunded actuarial accrued liability and interest on such unfunded actuarial liability. The retirement plan provides a retirement benefit equal to one hundred and twelve percent (112%) of plan salary per month for every year of credited service. The following table shows the actuarial assumptions used in determining the retirement benefit obligation of the Parent Company as of September 30, 2013 and December 31, 2012:
September 30, 2013 (Unaudited) December 31, 2012 (Audited)

Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Salary rate increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Estimated working lives. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3%-4% 5%-8% 11-14 years

6% 8% 14 years

The latest actuarial valuation was made as of March 31, 2013. As of September 30, 2013, the Parent Company has two separate retirement plans for the employees of PNB and ABC. The amount of retirement liability recognized for the Parent Company in the Groups statements of financial position (included under Other liabilities) follows:
September 30, 2013 (Unaudited) December 31, 2012 (As restatedNote 2) (Audited)

Present value of defined benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fair value of plan assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Retirement liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q6,329,921 1,975,868 Q4,354,053

P3,141,154 1,317,810 P1,823,344

F-179

Changes in the present value of the defined benefit obligation of the Parent Company are as follows:
September 30, 2013 (Nine Months) (Unaudited) December 31, 2012 (As restatedNote 2) (One Year) (Audited)

Balance at beginning of period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Effect of business combinations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Current service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Remeasurement (gains) losses: Experience adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Actuarial losses arising from changes in financial assumptions . . . . . . . . . Balance at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q3,141,154 1,589,862 278,223 167,763 (117,651) 303,433 967,137 Q6,329,921

P2,828,807 265,458 175,165 (140,457) (216,253) 228,434 P3,141,154

Changes in the fair value of the plan assets of the Parent Company are as follows:
September 30, 2013 (Nine Months) (Unaudited) December 31, 2012 (As restatedNote 2) (One Year) (Audited)

Balance at beginning of period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Effect of business combination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Return on assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q1,317,810 839,976 71,439 63,761 (199,467) (117,651) Q1,975,868

P 797,883 363,390 58,107 238,887 (140,457) P1,317,810

The fair values of plan assets of the Parent Company by each class as at the end of the reporting periods are as follow:
September 30, 2013 (Unaudited) December 31, 2012 (Audited)

Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity instruments Financial institution. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Debt instruments Government securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Below AAA and unrated private debt securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment in mutual funds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans and receivables Financial institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consumption. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest and other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fair value of plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P 276,365 684,674 17,499 596,341 29,157 101,870 1,705,906 P 192,016 46,274 14,049 3,956 3,855 947 8,865 269,962 P1,975,868

P 306,412 712,875 5,100 92,486 97,077 1,213,950 P 58,000 33,611 10,000 2,249 103,860 P1,317,810

The fair value of the plan assets as of September 30, 2013 and December 31, 2012 includes investments in the Parent Companys shares of stock with fair value amounting to P684.7 million and P712.9 million, respectively. There were no changes in the effect of asset ceiling as of September 30, 2013 and December 31, 2012. F-180

The amounts pertaining to the Parent Company that is included in the Groups statements of income are as follows:
Nine Months Ended September 30, September 30, 2012 2013 (As restatedNote 2) (Unaudited) (Unaudited)

Net interest cost(*). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Current service cost(**). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P104,002 278,223 P382,225

P 87,793 199,094 P286,887

(*) Included under interest expense in the statements of income (**) Included under compensation and fringe benefits in the statements of income The amounts of defined benefit cost of the Parent Company which is included in the Groups statements of other comprehensive income from actuarial losses (gains) follow:
Nine Months Ended September 30, September 30, 2012 2013 (As restatedNote 2) (Unaudited) (Unaudited)

Actuarial loss on present value of retirement obligation. . . . . . . . . . . . . . . . . . . . Return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P1,270,570 199,467 1,470,037 4,865 P1,474,902

9,136 (179,165) (170,029)

(P170,029)

All equity and debt instruments held have quoted prices in an active market. The remaining plan assets do not have quoted market prices in an active market, thus, their fair value is determined using the discounted cash flow methodology, using the Parent Companys current incremental lending rates for similar types of loans and receivables. The plan assets have diverse investments and do not have any concentration risk. The sensitivity analysis below has been determined based on reasonably possible changes of each significant assumption on the defined benefit obligation as of the end of the reporting period, assuming if all other assumptions were held constant:
September 30, 2013 Possible Increase fluctuations (decrease)

Discount rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Future salary increase rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

-1.00% +2.00%

P 719,456 1,203,991

The movements in the retirement liability of the Parent Company recognized under Other liabilities in the Groups statements of financial position follow:
September 30, 2013 (Nine Months) (Unaudited) December 31, 2012 (As restatedNote 2) (One Year) (Audited)

Balance at beginning of period. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Retirement liability assumed from business combination . . . . . . . . . . . . . . . . . . Retirement expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Remeasurement losses (gains): Experience adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Actuarial losses arising from changes in financial assumptions . . . . . . . . Return on assets excluding amount in net interest cost . . . . . . . . . . . . . . . . . . . . Balance at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-181

Q1,823,344 749,886 382,225 (71,439) 303,433 967,137 199,467 Q4,354,053

P2,030,924 382,516 (363,390) (216,253) 228,434 (238,887) P1,823,344

There are no actuarial gains and losses arising from changes in demographic assumptions. The major categories of plan assets as a percentage of the fair value of total plan assets follow:
September 30, 2013 (Unaudited) December 31, 2012 (Audited)

Debt securities and others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Parent Companys own common shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Government securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

35% 35% 30% 100%

39% 54% 7% 100%

The carrying values of the plan assets of the Parent Company amounted to Q1.9 billion and Q1.3 billion as of September 30, 2013 and December 31, 2012, respectively. Information on the Parent Companys retirement plan are as follows:
September 30, 2013 (Unaudited) December 31, 2012 (Audited)

Present value of the defined benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fair value of plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deficit on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Experience adjustments arising on plan liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Experience adjustments arising on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18. Income Taxes Provision for income tax consists of:

Q6,329,921 1,975,868 4,354,053 303,433

Q3,141,154 1,317,810 1,823,344 (216,253)

Nine Months Ended September 30, September 30, 2013 2012 (Unaudited) (Unaudited)

Current Regular . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Final. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q ,221,443 590,191 1,811,634 (518,820) Q1,292,814

Q182,123 466,372 648,495 21,196 Q669,691

19. Earnings Per Share The earnings per share of the Group, attributable to equity holders of the Parent Company, are calculated as follows:
Nine Months Ended September 30, September 30, 2012 2013 (Unaudited) (Unaudited) (As restated)

a) Net income attributable to equity holders of the Parent Company. . . . . . . . . . . . . . . b) Weighted average number of common shares for basic earnings per share . . . . . . . c) Basic and diluted earnings per share (a/b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . There are no potential common shares that would dilute the earnings per share.

Q5,932,042 1,038,968 Q 5.71

Q3,595,491 662,046 Q 5.43

F-182

20. Related Party Transactions In the ordinary course of business, the Parent Company has loans and other transactions with its subsidiaries and affiliates, and with certain Directors, Officers, Stockholders and Related Interests (DOSRI). Under the Parent Companys policy, these loans and other transactions are made substantially on the same terms as with other individuals and businesses of comparable risks. The amount of direct credit accommodations to each of the Parent Companys DOSRI, 70.00% of which must be secured, should not exceed the amount of their respective deposits and book value of their respective investments in the Parent Company. In the aggregate, DOSRI loans generally should not exceed the Parent Companys equity or 15.00% of the Parent Companys total loan portfolio, whichever is lower. As of September 30, 2013 and December 31, 2012, the Parent Company was in compliance with such regulations. The information relating to the DOSRI loans of the Group follows:
September 30, 2013 (Unaudited) December 31, 2012 (Audited)

Total Outstanding DOSRI Accounts(*) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Percent of DOSRI accounts granted prior to effectivity of BSP Circular No. 423 to total loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Percent of DOSRI accounts granted after effectivity of BSP Circular No. 423 to total loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Percent of DOSRI accounts to total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Percent of unsecured DOSRI accounts to total DOSRI accounts . . . . . . . . . . . . . . . . . . Percent of past due DOSRI accounts to total DOSRI accounts . . . . . . . . . . . . . . . . . . . . Percent of nonaccruing DOSRI accounts to total DOSRI accounts . . . . . . . . . . . . . . . .

Q4,343,557 1.78% 1.78% 1.78% 10.72% 0.00% 0.00%

Q2,650,526 2.03% 2.03% 2.03% 3.29% 0.00% 0.00%

(*) Includes outstanding unused credit accommodations of Q252.1 million as of September 30, 2013 and Q182.7 million as of December 31, 2012. Excludes loans amounting to Q862.1 million granted prior to the merger date. In accordance with existing BSP regulations, the reported DOSRI performing loans exclude loans extended to certain borrowers before these borrowers became DOSRI. On January 31, 2007, BSP Circular No. 560 was issued providing the rules and regulations that govern loans, other credit accommodations and guarantees granted to subsidiaries and affiliates of banks and quasibanks. Under the said Circular, total outstanding exposures to each of the banks subsidiaries and affiliates shall not exceed 10.00% of a banks net worth, the unsecured portion of which shall not exceed 5.00% of such net worth. Further, the total outstanding exposures to subsidiaries and affiliates shall not exceed 20.00% of the net worth of the lending bank. BSP Circular No. 560 is effective on February 15, 2007. Details on significant related party transactions of the Group follow (transactions with subsidiaries have been eliminated in the consolidated financial statements). Transactions reported under subsidiaries represent companies where the Parent Company has control. Transactions reported under other related parties represent companies which are under common control of LTG.
As of September 30, 2013 (Unaudited) Outstanding Nature, Terms and Conditions Balance

Category Subsidiaries

Amount/ Volume

Receivables from customers . . .

Accounts receivable . . . . . . . . . .

Accrued interest receivable . . . . Deposit liabilities. . . . . . . . . . . . .

Q 578,146 Revolving credit lines with fixed annual interest rate of 4.25% and maturity terms of less than 90 days Unsecured, unimpaired 119,062 Advances to finance deficit in pension liability, remittance cover and additional working capital Non-interest bearing; unsecured; payable on demand 1,423 Interest on receivables from customers 2,354,598 With annual rates ranging from 0.10% to 3.00% and maturity terms ranging from 30 days to one (1) year F-183

Category Subsidiaries

Amount/ Volume

As of September 30, 2013 (Unaudited) Outstanding Balance Nature, Terms and Conditions

Bills payable. . . . . . . . . . . . . . . . .

1,137,465

Accrued interest payable . . . . . . Due to other banks. . . . . . . . . . . . Due from other banks . . . . . . . . .

1,409 211,992 3,213,514

Foreign currency-denominated bills payable with fixed annual interest rate of 0.85% and maturity term of 180 days; unsecured Interest on deposit liabilities and bills payable Clearing accounts for funding and settlement of remittances With annual fixed interest rates ranging from 0.01% to 4.50% including time with maturities of up to 90 days

Category

Amount/ Volume

Nine Months Ended September 30, 2013 (Unaudited) Outstanding Balance Nature, Terms and Conditions

Interest income. . . . . . . . . . . . . . . Q Interest expense . . . . . . . . . . . . . . Rental income . . . . . . . . . . . . . . .

26,744 31,416 15,311

Fees and commissions . . . . . . . . Other expense. . . . . . . . . . . . . . . . Securities transactions: Purchases . . . . . . . . . . . . . . . Sales . . . . . . . . . . . . . . . . . . . Trading gains. . . . . . . . . . . .

160,555 7,220 14,278,667 4,254,239 254,300

Amount/ Volume

Interest income on receivable from customers and bank deposits Interest expense on deposit liabilities and bills payable Rental income with lease terms ranging from 2 to 5 years and annual escalation rates ranging from 5.00% to 10.00% Professional fees on service agreement Share in utilities expense Outright purchase of securities Outright sale of securities Gain from sale of investment securities
As of September 30, 2013 (Unaudited) Outstanding Balance Nature, Terms and Conditions

Category

Other Related Parties Receivable from customers . . . .

Sales contract receivables . . . . .

Accrued interest receivables . . . Bills payable. . . . . . . . . . . . . . . . .

Deposit liabilities. . . . . . . . . . . . .

Accrued interest payable . . . . . . Due from other banks . . . . . . . . .

Q 4,953,911 Loans with interest rates ranging from 0.50% to 16.50% and maturity terms ranging from one (1) month to 25 years SecuredQ3.7 billion and unsecured Q1.3 billion; without impairment Collaterals include bank deposits hold-out, government securities, real estates and chattel mortgages 105,750 Arising from sale of investment property; title will be transferred upon full payment; noninterest bearing loan payable within one year, with no impairment 8,957 Accrued interest of receivables from customers 40,000 With annual interest rates ranging from 5.00% to 5.50%; maturity terms ranging from 90 to 180 days; unsecured 11,710,051 With annual interest rates ranging from 0.38% to 1.93% and maturity terms ranging from 30 days to one (1) year 1,085 Interest on deposit liabilities and bills payable 3,060,642 With annual fixed interest rates ranging from 0.01% to 4.50% including time with maturities of up to 90 days and savings with interest rate of 13.00%

F-184

Category

Amount/ Volume

Nine Months Ended September 30, 2013 (Unaudited) Outstanding Balance Nature, Terms and Conditions

Interest income. . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . Rental income . . . . . . . . . . . . . . .

Q 10,375 22,516 21,759

Rental expense . . . . . . . . . . . . . . . Fees and commissions expense . . . . . . . . . . . . . . . . . . . Securities transactions: Purchases . . . . . . . . . . . . . . . Sales . . . . . . . . . . . . . . . . . . . Other income . . . . . . . . . . . . . . . . Other expense. . . . . . . . . . . . . . . .

15,697

7,907 389,126 161,200 20,570 30,600

Interest income on receivable from customers and due from other banks Interest expense on deposit liabilities and bills payable Rental income with lease terms ranging from 2 to 10 years and annual escalation rates ranging from 5.0% to 10.0% Monthly rent payments to related parties with terms ranging from 24 to 240 months Expense on professional fees on service agreement Outright purchase of securities Outright sale of securities Profit from sale of investment property Donations for various corporate social responsibility projects
As of September 30, 2013 (Unaudited) Outstanding Balance Nature, Terms and Conditions

Category

Amount/ Volume

Key management personnel Loans and receivables. . . . . . . . . Deposit liabilities. . . . . . . . . . . . .

Q387,840 128,184

Interest bearing and no allowance for impairment Includes interest and non-interest bearing deposits

Category

Amount/ Volume

Nine Months Ended September 30, 2013 (Unaudited) Outstanding Balance Nature, Terms and Conditions

Interest income. . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . .

Q13,390 0.7
Amount/ Volume

Interest income on loans and receivables Interest expense on deposit liabilities

As of December 31, 2012 (Audited) Outstanding Balance Nature, Terms and Conditions

Category

Subsidiaries Receivables from customers . . .

Q564,000

Accounts receivable . . . . . . . . . .

106,458

Accrued interest receivable . . . . Deposit liabilities. . . . . . . . . . . . .

1,026 552,297

Bills payable. . . . . . . . . . . . . . . . .

863,579

Accrued interest payable . . . . . . Due to banks. . . . . . . . . . . . . . . . .

3,473 205,480

Revolving credit lines with fixed annual interest rate of 4.25% and maturity terms of less than 31 days UnsecuredQ564.0 million with no impairment Advances to finance deficit in pension liability, remittance cover and additional working capital Non-interest bearing, unsecured, payable on demand Interest on receivables from customers With annual rates ranging from 0.10% to 3.00% and maturity terms ranging from 30 days to one (1) year Foreign currency-denominated bills payable with fixed annual interest rate of 1.03% and maturity term of 180 days; unsecured Interest on deposit liabilities and bills payable Clearing accounts for funding and settlement of remittances

F-185

Category

Amount/ Volume

Nine Months Ended September 30, 2012 (Unaudited) Outstanding Balance Nature, Terms and Conditions

Interest income. . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . Other income . . . . . . . . . . . . . . . . Other expense. . . . . . . . . . . . . . . . Securities transactions: Purchases . . . . . . . . . . . . . . . . . . . Sales. . . . . . . . . . . . . . . . . . . . . . . . Trading gains . . . . . . . . . . . . . . . .

21,823 30,652 5,711 1,503 8,332,487 8,019,961 55,629

Amount/ Volume

Interest income on receivable from customers Interest expense on deposit liabilities and bills payable Rental income with lease term of three (3) years and annual escalation rate of 10.00% Share in utilities expense Outright purchase of securities Outright sale of securities Gain from sale of investment securities
As of December 31, 2012 (Audited) Outstanding Balance Nature, Terms and Conditions

Category

Other Related Parties Receivable from customers . . . .

Sales contract receivables . . . . .

Accrued interest receivables . . . Bills payable. . . . . . . . . . . . . . . . .

Deposit liabilities. . . . . . . . . . . . .

Due from other banks . . . . . . . . . Investment securities. . . . . . . . . .

Q2,466,422 Loans with interest rates ranging from 0.50% to 16.50% and maturity terms ranging from one (1) month to 25 years. SecuredQ2.4 billion and unsecured Q0.1 billion; with no impairment Collateral includes bank deposit hold-out, real estate and chattel mortgages 105,750 Arising from sale of investment property Title will be transferred upon full payment Non-interest bearing loan payable within one year with no impairment 1,647 Interest on receivables from customers 554,175 Foreign currency-denominated bills payable with fixed annual interest rate of 1.77% and maturity term of 181 days, no collateral 1,272,976 With annual rates ranging from 0.38% to 1.73% and maturity terms ranging from 30 days to one (1) year 196,977 Savings deposits with interest rate of 0.13% 270,212 52,443,860 shares of stock classified as AFS investments with allowance for impairment loss of Q270.0 million.
Amount/ Volume Nine Months Ended September 30, 2012 (Unaudited) Outstanding Balance Nature, Terms and Conditions

Category

Interest income. . . . . . . . . . . . . . . Profit from asset sold . . . . . . . . . Interest expense . . . . . . . . . . . . . . Other income . . . . . . . . . . . . . . . .

P 139,722 6,637 10,063 14,087

Interest income on receivable from customers Gain from sale of investment property Interest expense on deposit liabilities Rental income with lease term of 10 years from November 1, 2007 to October 31, 2017 and annual escalation rate of 5.00% starting sixth year of the lease term Outright purchase of securities Outright sale of securities Gain from sale of investment securities Loan drawdowns Settlement of loans and interest

Securities transactions: Purchases . . . . . . . . . . . . . . . . . . . Sales. . . . . . . . . . . . . . . . . . . . . . . . Trading gains . . . . . . . . . . . . . . . . Loan releases . . . . . . . . . . . . . . . . Loan collections. . . . . . . . . . . . . .

8,727,995 8,657,715 313,032 5,315,772 6,825,033

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Category

Amount/ Volume

As of December 31, 2012 (Audited) Outstanding Balance Nature, Terms and Conditions

Key management personnel Loans and receivables. . . . . . . . . Deposit liabilities. . . . . . . . . . . . .

Amount/ Volume

P406,589 186,579

Interest bearing and no allowance for impairment Includes interest and non-interest bearing deposits

Category

Nine Months Ended September 30, 2012 (Unaudited) Outstanding Balance Nature, Terms and Conditions

Interest income. . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . .

P16,072 852

Interest income on loans and receivables Interest expense on deposit liabilities

The related party transactions shall be settled in cash. There are no provisions for credit losses for the nine-month periods ended September 30, 2013 and 2012 in relation to amounts due from related parties. The remuneration to directors in the form of Directors fee for the nine months period ended September 30, 2013 and 2012 amounted to P9.7 million and P3.4 million, respectively. The compensation of the key management personnel follows:
Nine Months Ended September 30, September 30, 2013 2012 (Unaudited) (Unaudited)

Short-term employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Post-employment benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P192,511 134,732 P327,243

P139,355 14,732 P154,087

The Parent Company and Eton Properties Philippines, Inc. (EPPI) signed two Joint Venture Agreements (JVA) for the development of two properties under Real estate under joint venture (JV) agreement by the Parent Company with book values of P1.2 billion (presented under Other assets in the statements of financial position). These two projects are among the Parent Companys strategies in reducing its non-performing assets. The Parent Company contributed the aforementioned properties into the JV as approved by BSP. EPPI, on the other hand, contributed its resources and technical expertise for the completion of the said JV. The Parent Company is prohibited to contribute funds for the development of the JV. Hence, there are no receivables from each party with respect to the JV. Income from the sale of the properties under the JV will be shared by the Parent Company and EPPI in accordance with the terms of the JVA. This JVA does not fall as joint venture arrangement under PFRS 11. Transactions with Retirement Plans Management of the retirement funds of the Group is handled by the Parent Companys Trust Banking Group (TBG). The fair values and carrying values of the funds amounted to P2.0 billion and P1.3 billion, respectively, as of September 30, 2013 and December 31, 2012.

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Relevant information on Funds assets/liabilities as of September 30, 2013 and December 31, 2012 and income/expense for the nine-month period ended September 30, 2013 and 2012 are as follows:
September 30, 2013 (Unaudited) (Nine Months) December 31, 2012 (Audited) (One Year)

Investment securities: Held for trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Available-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Held-to-maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deposits with other banks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deposits with PNB. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans and other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Fund Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due to BIR. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trust fees payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Fund Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q 684,673 744,867 252,590 23,775 264,377 Q1,970,282 Q Q 388 771 1,159

P 712,875 212,437 68,000 263,830 50,792 37,807 P1,345,741 P P 754 754

September 30, 2013 (Unaudited) (Nine Months)

September 30, 2012 (Unaudited) (Nine Months)

Interest income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trading gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividend income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrealized loss on HFT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gains on sale of investment securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fund Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trust fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fund Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q 47,335 1,229 930 (28,202) 93 5 Q 21,390 Q 2,491 6,280 Q 8,771

P 14,513 131,999 46 P146,558 P P 1,652 166 1,818

As of September 30, 2013 and December 31, 2012, the retirement fund of the Group include 7,833,795 shares of PNB classified under HFT. The shares have a market value of P684.7 million and P712.9 million as of September 30, 2013 and December 31, 2012, respectively. No limitations and restrictions are provided and voting rights over these shares are exercised by a trust officer or any of the designated alternate officer of TBG. As of September 30, 2013 and December 31, 2012, AFS and HTM investments include government and private debt securities and various funds. Deposits with other banks pertain to SDA placement with BSP. Loans and other receivables include accrued interest amounting to P8.8 million and P5.2 million as of September 30, 2013 and December 31, 2012, respectively, and income include interest on deposits with PNB amounting to P0.8 million and P0.2 million for the nine-month periods ended September 30, 2013 and 2012, respectively. Deposits with PNB under Prime Savings Account bear annual interest rate of 0.40% while deposits under Wealth Management bear annual interest rate of 5.75% and will mature on April 20, 2015. Investments are approved by an authorized fund manager or officer of TBG. Other Fund Managed by TBG The TBG manages the sinking fund established by Philippine Sugar Corporation (PSC) to secure its borrowings with the Parent Company amounting to P5.0 billion, including interest. The borrowings carry an annual interest rate of 4% and will mature in 2014. As of September 30, 2013 and December 31, 2012, the sinking fund amounted to P5.3 billion and P5.2 billion, respectively. Management expects that the value of the sinking fund in the year 2014 will be more than adequate to cover the full redemption value of PSC bonds.

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21. Contingent Liabilities and Other Commitments In the normal course of business, the Group makes various commitments and incurs certain contingent liabilities that are not presented in the financial statements including several suits and claims which remain unsettled. No specific disclosures on such unsettled assets and claims are made because any such specific disclosures would prejudice the Groups position with the other parties with whom it is in dispute. Such exemption from disclosures is allowed under PAS 37, Provisions, Contingent Liabilities and Contingent Assets. The Group and its legal counsel believe that any losses arising from these contingencies which are not specifically provided for will not have a material adverse effect on the financial statements. The following is a summary of various commitments, contingent assets and contingent liabilities at their equivalent peso contractual amounts:
September 30, 2013 (Unaudited) December 31, 2012 (Audited)

Trust department accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deficiency claims receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Credit card lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Outstanding guarantees issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Outward bills for collection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inward bills for collection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other contingent accounts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unused commercial letters of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Confirmed export letters of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Items held as collateral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22. Offsetting of Financial Assets and Liabilities

Q77,365,408 P55,976,479 11,764,522 6,309,340 10,174,866 1,212,916 628,422 485,317 105,029 452,777 140,548 444,695 41,317 98,835 36,096 81,654 78,126 62 244

The amendments to PFRS 7, which is effective January 1, 2013, require the Group to disclose information about rights of offset and related arrangements (such as collateral posting requirements) for financial instruments under an enforceable master netting agreements or similar arrangements. The effects of these arrangements are disclosed in the succeeding tables. Financial assets
September 30, 2013 (Unaudited) Net amount Gross amounts presented in offset in statements Gross carrying accordance with of financial amounts (before the offsetting position offsetting) criteria [a-b] [a] [b] [c] P 237,356 P P P 237,356 Effect of remaining rights of set-off (including rights to set off financial collateral) that do not meet PAS 32 offsetting criteria Fair value of Financial financial Net exposure instruments collateral [c-d] [d] [e] P P P 11,320 28,793,289 P28,804,609 P226,036 P226,036

Financial assets recognized at end of reporting period by type Derivative assets . . . . . . . . . . . . . Securities held under agreements to resell . . . . . . . . Total. . . . . . . . . . . . . . . . . . . . . . . .

25,000,000 P25,237,356

25,000,000 P25,237,356

December 31, 2012 (Unaudited) Net amount Gross amounts presented in offset in statements Gross carrying accordance with of financial amounts (before the offsetting position offsetting) criteria [a-b] [a] [b] [c] P 391,465 P P P 391,465 18,300,000 P18,691,465 P Effect of remaining rights of set-off (including rights to set off financial collateral) that do not meet PAS 32 offsetting criteria Fair value of Financial financial Net exposure instruments collateral [c-d] [d] [e] P 20 20 P 18,874,894 P18,874,894 P391,445 P391,445

Financial assets recognized at end of reporting period by type Derivative assets . . . . . . . . . . . . . Securities held under agreements to resell . . . . . . . . Total. . . . . . . . . . . . . . . . . . . . . . . .

18,300,000 P18,691,465

F-189

Financial liabilities
September 30, 2013 (Unaudited) Net amount Gross amounts presented in offset in statements Financial liabilities recognized Gross carrying accordance with of financial at end of reporting period by amounts (before the offsetting position type offsetting) criteria [a-b] [a] [b] [c] Derivative liabilities . . . . . . . . . . Securities under Repurchase Agreement . . . . . . . . . . . . . . . . Bills payable . . . . . . . . . . . . . . . . . Total. . . . . . . . . . . . . . . . . . . . . . . . P 202,998 4,812,185 144,208 P5,159,391 P P P 202,998 4,812,185 144,208 P5,159,391 Effect of remaining rights of set-off (including rights to set off financial collateral) that do not meet PAS 32 offsetting criteria Fair value of Financial financial Net exposure instruments collateral [c-d] [d] [e] P44,997 P44,997 P 5,789,941 2,702,176 P8,492,117 P158,001 P158,001

December 31, 2012 (Unaudited) Net amount Gross amounts presented in offset in statements Financial liabilities recognized Gross carrying accordance with of financial at end of reporting period by amounts (before the offsetting position type offsetting) criteria [a-b] [a] [b] [c] Derivative liabilities . . . . . . . . . . Securities sold under agreements to repurchase(*) . . . . . . . . . . . . . . . Bills payable . . . . . . . . . . . . . . . . . Total. . . . . . . . . . . . . . . . . . . . . . . . P 283,751 P P 283,751 Effect of remaining rights of set-off (including rights to set off financial collateral) that do not meet PAS 32 offsetting criteria Fair value of Financial financial Net exposure instruments collateral [c-d] [d] [e] P 2,366 P P281,385

2,971,471 2,948,934 P6,204,156 P

2,971,471 2,948,934 P6,204,156

21,141 P23,507

3,509,709 4,756,800 P8,266,509

P281,385

(*) Included in bills and acceptances payable in the statements of financial position The amounts disclosed in column (d) include those rights to set-off amounts that are only enforceable and exercisable in the event of default, insolvency or bankruptcy. This includes amounts related to financial collateral both received and pledged, whether cash or non-cash collateral, excluding the extent of over-collateralization. 23. Events After Reporting Date Stock Rights Offering and Share Offering The BOD of the Parent Company approved and confirmed the following in its meeting on November 7, 2013: (1) The Parent Company shall conduct a Stock Rights Offering and a Share Offering (collectively, the Offer) to strengthen its capital base as the Parent Company seeks to expand and deepen its lending capabilities to better address the fast-growing Philippine economy, including the financing needs of its burgeoning consumer segment; (2) Subject to regulatory approvals as may be required, such as but not limited to the Philippines SEC and the BSP, and the approval for listing by the Philippine Stock Exchange (the PSE), the Bank has been authorized to issue shares (the Offer Shares) from its authorized but unissued capital stock by way of the Offer; (3) The Offer, which is expected to raise approximately P15.0 Billion, shall be conducted upon such terms and conditions including the final issue size, entitlement ratio, offer price, record date, appointment of the parties and other terms as may hereafter be finally determined by Management. It is expected that the Parent Company major shareholder, LT Group, Inc., will support the Offer. Further, on its special meeting on November 14, 2012, the BOD: (1) approved and confirmed that the shares to be offered in connection with the Offer shall be issued partly from the Banks authorized but unissued capital stock and partly in support of the increase in authorized capital stock previously approved by the Board and shareholders in meetings held on February 9, 2013 and May 28, 2013, respectively; and F-190

(2) approved PNB Capital as lead underwriter for the stock rights offering. Issuance of 3.25%, P4.0 Billion LTNCD On October 21, 2013, the Parent Company issued P4.0 billion worth of LTNCD which will mature on April 22, 2019. Among the significant terms and conditions of the LTNCDs are: (1) Issue price at 100.00% of the face value of each LTNCD. (2) The LTNCDs bear interest at the rate of 3.25% per annum on its principal amount from and including the Issue Date thereof, up to but excluding the Early Redemption Date or Maturity Date (as the case may be). Interest in respect of the LTNCD will be calculated on an annual basis and will be paid in arrears quarterly on the last day of each successive Interest Period. (3) Unless earlier redeemed, the LTNCDs shall be redeemed by the Parent Company on maturity date at an amount equal to one hundred percent (100%) of the aggregate issue price thereof, plus any accrued and unpaid interest thereon. The LTNCDs may not be redeemed at the option of the holders. (4) Subject to the Events of Default in the Terms and Conditions, the LTNCDs cannot be pre-terminated at the instance of any CD Holder before Maturity Date. In the case of an event of default, none of the CD Holders may accelerate the CDs on behalf of other CD Holders, and a CD Holder may only collect from the Parent Company to the extent of his holdings in the CDs. However, the Parent Company may, subject to the General Banking Law of 2000, Section X233.9 of the Manual of Regulations for Banks, Circular No. 304 Series of 2001 of the BSP and other related circulars and issuances, as may be amended from time to time, redeem all and not only part of the outstanding CDs on any Interest Payment Date prior to Maturity Date, at an Early Redemption Amount equal to the Issue Price plus interest accrued and unpaid up to but excluding the Early Redemption Date. (5) The LTNCDs constitute direct, unconditional, unsecured, and unsubordinated obligations of the Parent Company, enforceable according to these Terms and Conditions, and shall at all times rank pari passu and without any preference or priority among themselves and at least pari passu with all other present and future direct, unconditional, unsecured, and unsubordinated obligations of the Issuer, except for any obligation enjoying a statutory preference or priority established under Philippine laws. (6) The LTNCDs are insured by the Philippine Deposit Insurance Corporation up to a maximum amount of P500,000 subject to applicable law, rules and regulations, as the same may be amended from time to time. Impact of various catastrophic events As a result of the typhoons Maring and Santi, the earthquake in Bohol and, in particular typhoon Yolanda which caused significant damage in Central Visayas and certain parts of Southern Luzonthe Group expects to incur losses as a result of claims for property damage by clients of the Groups non-life insurance company, PNB General Insurers, Inc. While the amount of these losses, particularly with respect to losses arising as a result of typhoon Yolanda have not been fully assessed at this time, the Group currently estimates that these losses will be between P700.0 million to P800.0 million. In addition, the Parent Company is still assessing the impact of typhoon Yolanda on its owned and invested properties and loans and receivables. Increase in Equity Investment in ACB On November 22, 2013, the BOD of the Parent Company approved and confirmed the increase in equity investment of the Parent Company in ACB by way of purchase of the remaining equity holdings of natural person investors amounting to USD14.1 million. The increase in equity investment in ACB is in relation to ACBs application of Chinese Yuan (CNY) license with the Chinese Banking Regulatory Commission (CBRC). The CBRC requires foreign banks applying for CNY license to be wholly owned by financial institutions. The Parent Company has yet to request for BSPs approval on the proposed increase in equity investment in ACB.

F-191

Additional Capital Infusion in ASB, Sale of the Parent Companys Consumer Loans to ASB and Closure of PNB Italy SpA The BOD of the Parent Company approved and confirmed the following on its meeting on December 20, 2013: (1) Infusion of additional equity to ASB amounting to P10.0 billion which will be used to build and refocus the Groups consumer lending business. The infusion of additional equity to ASB has yet to be approved by the BSP. (2) Sale of consumer loans of the Parent Company with carrying value amounting to P6.0 billion to ASB on a without recourse basis. (3) Closure of PISpA and shifting to an agent-arrangement to continue remittance business in Italy. 24. Other Matters Maybank Obligation On February 7, 2013, the BSP accepted the Parent Companys proposal to make an early payment to settle Maybanks P3.0 billion obligation to the BSP in exchange of the assets under the escrow fund. The real estate collaterals pledged to BSP were also released as a result of settlement of the obligation to BSP. National Steel Corporation (NSC) The Parent Companys unquoted debt instruments include the zero-coupon notes it received on October 15, 2004 from Special purpose vehicle (SPV) companies at the principal amount of P803.5 million (Tranche A Note) payable in five (5) years and at the principal amount of P3.4 billion (Tranche B Note) payable in eight (8) years in exchange for the outstanding loans receivable from NSC of P5.3 billion. The notes are secured by a first ranking mortgage and security interest over the NSC Plant Assets. As of December 31, 2012, these notes had a carrying value of nil. The above debt instruments and the related mortgaged assets are subject of an on-going case between the creditor banks, Liquidator and SPV companies with regard to real estate taxes imposed on the NSC Plant Assets. On October 10, 2008, simultaneous to the denial of their application in the Philippine courts for injunctive relief, the SPV companies filed a Notice of Arbitration with the Singapore International Arbitration Centre (SIAC). Mainly, the SPV companies claimed damages and a suspension of payments on the ground that the consortium of banks (the banks) and the Liquidator breached a duty to settle pre-closing real estate taxes (taxes due as of October 14, 2004) due on the NSC Plant Assets and to deliver to them titles to NSCs Plant Assets free from all liens and encumbrances. However, the banks and the Liquidator dispute the assertions that pre-closing taxes were in arrears, invoking an installment agreement executed between the Liquidator and the City of Iligan. As part of the agreement to sell the plant assets to the SPV companies, the Liquidator assumed responsibility of settling and paying the Plant Assets pre-closing real estate taxes, while the SPV companies assumed the responsibility of updating the post-closing taxes (taxes due after October 14, 2004). Consequently, all pre-closing real estate taxes due on the plant assets have been paid in accelerated basis on December 18, 2008. On October 13, 2008, after the commencement of the arbitration but before the arbitral panel was constituted, the SPV companies filed, as a preservatory measure, a petition for injunctive relief against the NSC Liquidator, NSC Secured Creditors, and NSC Stockholders so that the arbitration proceedings under SIAC will not be rendered moot. On October 14, 2008, the Singapore High Court granted the petition and restrained the NSC Liquidator, the NSC Secured Creditors and the NSC Shareholders, jointly and severally, substantially from declaring the SPV companies in default and declaring all installments due until the arbitration proceeding at the SIAC is settled. Thereafter, upon application by the Parent Company for a variation of the injunction and an order of the Singapore High court, the SPV companies remitted P750 million cash in place of the Standby Letter of Credit which they undertook to provide under the Asset Purchase Agreement, subject to the condition that the amount shall not be subject to any set-off pending an award from the arbitration proceedings. On January 26, 2009, the Parent Company applied for an Order to compel the SPV companies to issue another Standby Letter of Credit of P1.0 billion which they likewise undertook to provide under the Asset Purchase Agreement, but this application was denied on March 5, 2009 by the Singapore High Court. The denial F-192

of the second variation (the P1.0 billion Standby Letter of Credit) was elevated to the Court of Appeals of Singapore but the same was also denied on September 11, 2009, without prejudice, however, to resort to the same reliefs before the Arbitration Panel. In April 2010, the Arbitral Panel was constituted. The Parent Company filed therein an application to discharge or vary the injunction. On July 7, 2010, the Arbitration Panel issued a ruling denying the Parent Companys application for a discharge of the injunction issued by the Singapore High Court. On the application to vary the injunction order, no ruling was made by the Arbitration Panel. Consequently, the main issues for alleged breach of the Asset Purchase Agreement, damages and suspension of payments were heard before the Arbitration Panel. The last hearings were held from October 17 to 21, 2011. As disclosed to the Philippine Stock Exchange, the Singapore International Arbitration Centre (SIAC) issued on May 9, 2012, a Partial Award regarding the arbitration proceedings between Global Steel Philippines (SPV-AMC), Inc. and Global Ispat Holdings (SPV-AMC), Inc. [Claimants], and Danilo L. Concepcion and Others [Respondents]. Such award was rendered in favor of Claimants, including such reliefs as payment by Respondents of a certain sum of money that may be subject to set-off against receivables from Claimants. On July 9, 2012, the consortium of banks filed with the Singapore High Court a Petition to Set Aside the Partial Award rendered by the Arbitration Panel, which Petition is pending to date. As of September 30, 2013 and December 31, 2012, the Bank has already provided for the possible liability on the case as well as on the note. 25. Approval of the Release of the Interim Condensed Consolidated Financial Statements The accompanying interim condensed consolidated financial statements of the Group were authorized for issue by the Parent Companys BOD on January 10, 2014.

F-193

Philippine National Bank and Subsidiaries Pro forma Condensed Consolidated Financial Information As of and for the year ended December 31, 2012

F-194

SyCip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Philippines

Tel: (632) 891 0307 Fax: (632) 819 0872 ey.com/ph

BOA/PRC Reg. No. 0001, December 28, 2012, valid until December 31, 2015 SEC Accreditation No. 0012-FR-3 (Group A), November 15, 2012, valid until November 16, 2015

REPORT ON REVIEW OF PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION The Stockholders and the Board of Directors Philippine National Bank We have reviewed the pro forma adjustments reflecting the transactions described in Note 2 and the application of those adjustments to the historical amounts in the accompanying pro forma consolidated statement of financial position of Philippine National Bank and Subsidiaries (the Group) as at December 31, 2012, the pro forma consolidated statement of income, pro forma consolidated statement of comprehensive income, pro forma consolidated statement of changes in equity and pro forma consolidated statement of cash flows for the year then ended. The 2012 historical financial information is derived from the historical consolidated financial statements of the Group and Allied Banking Corporation as at December 31, 2012 and for the year then ended, which were audited by us. Such pro forma adjustments are based on the Groups assumptions as described in Note 3 to the pro forma condensed consolidated financial information. The Groups management is responsible for the pro forma condensed consolidated financial information. Our review was conducted in accordance with the Philippine Standard on Assurance Engagements 3000, Assurance Engagements Other than Audits or Reviews of Historical Financial Information (PSAE 3000) and Philippine Securities and Exchange Commission Memorandum Circular No. 2, Series of 2008, Guidelines on Reporting and Attestation of Pro Forma Financial Information Securities Regulation Code Rule 68, as amended, and, accordingly, included such procedures as we considered necessary under the circumstances. A review is substantially less in scope than an examination, the objective of which is the expression of an opinion on managements assumptions, the pro forma adjustments and the application of those adjustments to historical financial information. Accordingly, we do not express an audit opinion. The objective of this pro forma condensed consolidated financial information is to show what the significant effects on the historical financial information might have been had the transactions occurred at an earlier date. However, the pro forma condensed consolidated financial information is not necessarily indicative of the results of operations or related effects on the consolidated financial position that would have been attained had the transactions mentioned in Note 2, actually occurred at an earlier date. Based on our review, nothing has come to our attention that causes us to believe that the managements assumptions do not provide a reasonable basis for presenting the significant effects directly attributable to the transactions described in Note 2, that the related pro forma adjustments do not give appropriate effect to those assumptions, or that the pro forma column does not reflect the proper application of those adjustments to the historical financial statements in the pro forma consolidated statement of financial position as at December 31, 2012 and the pro forma consolidated statement of income, pro forma consolidated statement of comprehensive income, pro forma consolidated statement of changes in equity and pro forma consolidated statement of cash flows for the year then ended.

F-195

SYCIP GORRES VELAYO & CO.

Vicky Lee Salas Partner CPA Certificate No. 86838 SEC Accreditation No. 0115-AR-3 (Group A), February 14, 2013, valid until February 13, 2016 Tax Identification No. 129-434-735 BIR Accreditation No. 08-001998-53-2012, April 11, 2012, valid until April 10, 2015 PTR No. 3669690, January 2, 2013, Makati City November 14, 2013

F-196

PHILIPPINE NATIONAL BANK AND SUBSIDIARIES PRO FORMA CONSOLIDATED STATEMENT OF FINANCIAL POSITION DECEMBER 31, 2012 (In Thousands)
Unaudited Pro forma adjustments Merger Other Adjustments Adjustments (Note 3.A.1) (Note 3.A.2) Pro forma Consolidated Balances (Unaudited)

PNB Group (Audited)

ASSETS Cash and Other Cash Items . . . . . . . . . . . . . . . . . . . . P 5,599,088 P 3,053,428 P Q 8,652,516 Due from Bangko Sentral ng Pilipinas . . . . . . . . . . . 37,175,399 44,481,495 81,656,894 Due from Other Banks . . . . . . . . . . . . . . . . . . . . . . . . . 4,042,769 12,514,443 (286,649) 16,270,563 Interbank Loans Receivable and Securities Held Under Agreements to Resell . . . . . . . . . . . . . . . . . . 29,798,756 4,310,711 34,109,467 Financial Assets at Fair Value Through Profit or Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,023,065 6,502,108 10,525,173 Available-for-Sale Investments . . . . . . . . . . . . . . . . . 66,997,479 18,670,191 85,667,670 Loans and Receivables . . . . . . . . . . . . . . . . . . . . . . . . . 144,707,509 92,168,568 236,876,077 Property and Equipment: At cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 937,075 586,614 1,523,689 At appraised value. . . . . . . . . . . . . . . . . . . . . . . . . . 15,566,650 5,960,384 21,527,034 Investments in Subsidiaries and an Associate . . . . 2,905,294 (2,905,294) Investment Properties . . . . . . . . . . . . . . . . . . . . . . . . . . 14,478,348 5,015,189 19,493,537 Deferred Tax Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,780,682 52,574 1,833,256 Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,017,500 16,017,500 Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,994,425 1,896,928 4,891,353 TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P331,006,539 P208,324,839 (P286,649) Q539,044,729 LIABILITIES AND EQUITY LIABILITIES Deposit Liabilities: Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 28,152,296 P 52,098,658 Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192,793,260 61,989,407 Time. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,908,821 27,101,791 240,854,377 141,189,856 Financial Liabilities at Fair Value Through Profit or Loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,479,821 3,877,768 Bills and Acceptances Payable . . . . . . . . . . . . . . . . . . 13,076,901 3,480,045 Accrued Taxes, Interest and Other Expenses . . . . 4,063,340 1,679,656 Subordinated Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,938,816 4,498,919 Deferred Tax Liability . . . . . . . . . . . . . . . . . . . . . . . . . 916,006 Other Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,846,393 8,336,261 TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . 291,259,648 163,978,511 EQUITY ATTRIBUTABLE TO EQUITY HOLDERS OF THE PARENT COMPANY Capital Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,489,837 16,958,500 Capital Paid in Excess of Par Value . . . . . . . . . . . . . 2,037,272 24,462,637 Surplus Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 569,887 Surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,888,348 140,959 Revaluation Increment on Land and Buildings . . . 2,816,962 Accumulated Translation Adjustment . . . . . . . . . . . (992,620) 21,295 Net Unrealized Gain on Available-for-Sale Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,037,252 Parent Company Shares Held by a Subsidiary . . . (4,740) 38,842,198 41,583,391 NON-CONTROLLING INTERESTS . . . . . . . . . . . 904,693 2,762,937 TOTAL EQUITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39,746,891 44,346,328 TOTAL LIABILITIES AND EQUITY . . . . . . . . . . P331,006,539 P208,324,839

(P273,159) Q 79,977,795 254,782,667 47,010,612 (273,159) 381,771,074 10,357,589 16,556,946 5,742,996 14,437,735 916,006 (13,490) 25,169,164 (286,649) 454,951,510

43,448,337 26,499,909 569,887 7,029,307 2,816,962 (971,325) 1,037,252 (4,740)

80,425,589 3,667,630 84,093,219 (P286,649) Q539,044,729

See accompanying Notes to Pro forma Condensed Consolidated Financial Information F-197

PHILIPPINE NATIONAL BANK AND SUBSIDIARIES PRO FORMA CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 2012 (In Thousands, Except Earnings Per Share)
Pro forma adjustments ABC Group (Audited*) (Note 3.B.1) Other Adjustments (Unaudited) (Note 3.B.2) Pro forma Consolidated Balances (Unaudited)

PNB Group (Audited)

INTEREST INCOME ON Loans and receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . . Trading and investment securities . . . . . . . . . . . . . . . . . Deposits with banks and interbank loans receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . INTEREST EXPENSE ON Deposit liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bills payable and other borrowings . . . . . . . . . . . . . . . . NET INTEREST INCOME . . . . . . . . . . . . . . . . . . . . . Service fees and commission income . . . . . . . . . . . . . . Service fees and commission expense. . . . . . . . . . . . . . NET SERVICE FEES AND COMMISSION INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . OTHER INCOME Trading and investment securities gainsnet . . . . . . . Foreign exchange gains (loss)net. . . . . . . . . . . . . . . . Net gain on sale or exchange of assets . . . . . . . . . . . . . Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TOTAL OPERATING INCOME . . . . . . . . . . . . . . . . OPERATING EXPENSES Compensation and fringe benefits . . . . . . . . . . . . . . . . . Taxes and licenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Occupancy and equipment-related costs . . . . . . . . . . . . Provision for impairment, credit and other losses . . . . Depreciation and amortization . . . . . . . . . . . . . . . . . . . . Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TOTAL OPERATING EXPENSES. . . . . . . . . . . . . . INCOME BEFORE INCOME TAX . . . . . . . . . . . . . PROVISION FOR INCOME TAX . . . . . . . . . . . . . . NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ATTRIBUTABLE TO: Equity Holders of the Parent Company. . . . . . . . . . . . . Non-controlling interest . . . . . . . . . . . . . . . . . . . . . . . . . . EARNINGS PER SHARE Basic/Diluted Earnings Per Share Attributable to Equity Holders of the Parent Company (Note 4) . . Weighted Average Number of Shares (Note 4) . . . . . .

P 7,451,351 3,235,754 673,502 11,360,607 3,099,782 1,285,120 4,384,902 6,975,705 2,130,664 254,447 1,876,217 5,133,527 1,405,105 359,915 1,842,185 17,592,654 3,720,882 1,134,272 1,004,321 933,701 713,235 4,133,807 11,640,218 5,952,436 924,734 P 5,027,702 P 4,651,806 375,896 P 5,027,702

P 6,481,902 2,258,842 491,478 9,232,222 1,944,437 505,517 2,449,954 6,782,268 1,100,640 542,303 558,337 2,852,276 (237,700) 27,158 2,229,335 12,211,674 2,629,790 845,291 900,199 1,783,454 397,339 3,143,130 9,699,203 2,512,471 521,302 P 1,991,169 P 1,967,723 23,446 P 1,991,169

(139,776) (139,776) 139,776 (10,309) 129,467 111,767 111,767 17,700 (8,403)

Q13,933,253 5,494,596 1,164,980 20,592,829 4,904,443 1,790,637 6,695,080 13,897,749 3,231,304 796,750 2,434,554 7,985,803 1,167,405 387,073 4,061,211 29,933,795 6,350,672 1,979,563 1,904,520 2,717,155 1,222,341 7,276,937 21,451,188 8,482,607 1,437,633 Q 7,044,974 Q 6,645,632 399,342 Q 7,044,974

P 26,103 P 26,103 P 26,103

7.02 662,246

6.12 1,086,209

(*) Excluding results from discontinued operations (See Note 3.B.1) See accompanying Notes to Pro forma Condensed Consolidated Financial Information F-198

PHILIPPINE NATIONAL BANK AND SUBSIDIARIES PRO FORMA CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED DECEMBER 31, 2012 (In Thousands)
Pro forma adjustments ABC Group Other (Audited*) Adjustments (Note 3.C.1) (Unaudited) Pro forma Consolidated Balances (Unaudited)

PNB Group (Audited)

NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX Accumulated translation adjustment . . . . . . . . . . . . . . . . . Net unrealized gain (loss) on available-for-sale investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Share in equity adjustments of an associate . . . . . . . . . . . Revaluation increment on land and buildings . . . . . . . . . TOTAL COMPREHENSIVE INCOME FOR THE YEAR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ATTRIBUTABLE TO: Equity holders of the Parent Company . . . . . . . . . . . . . . . Non-controlling Interests. . . . . . . . . . . . . . . . . . . . . . . . . . .

P5,027,702 P 1,991,169

P26,103

Q 7,044,974

(540,912) 294,909 (6,795) (252,798) P4,774,904 P

(528,553) (1,000,960) 255,080 (1,274,433) 716,736

P26,103 P26,103 P26,103

(1,069,465) (706,051) (6,795) 255,080 (1,527,231) Q 5,517,743 Q 5,310,878 206,865 Q 5,517,743

P4,399,008 P 885,767 375,896 (169,031) P4,774,904 P 716,736

(*) Excluding results from discontinued operations (See Note 3.B.1)

See accompanying Notes to Pro forma Condensed Consolidated Financial Information F-199

PHILIPPINE NATIONAL BANK AND SUBSIDIARIES PRO FORMA CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED DECEMBER 31, 2012 (In Thousands)
Consolidated Attributable to Equity Holders of the Parent Company Net Unrealized Parent Revaluation Gain on Share Company Increment on Accumulated Availablein Equity Shares Land and Translation for-Sale Adjustment of Held by a Surplus Buildings Adjustment Investments an Associate Subsidiary

Capital Paid in Excess of Par Capital Stock Value

Surplus Reserves

Total

Noncontrolling Interest

Total Equity

Balance at January 1, 2012 . . . . . . . . . . . . . . . . P26,489,837 P 2,037,272 P560,216 P 2,246,213 P2,816,962 (P451,708) P 742,343 P 6,795 (P4,740) P34,443,190 P 531,247 P34,974,437 Pro forma issuance of capital stock arising from business combination (Note 3.D.1) . . . . . . . . . 16,958,500 24,462,637 41,421,137 41,421,137 Pro forma non-controlling interest arising from business combination (Note 3.D.1) . . . . . . . . . 2,762,937 2,762,937 Total pro forma comprehensive income (loss) for the year. . . . . 6,645,632 255,080 (964,859) (618,180) (6,795) 5,310,878 206,865 5,517,743 Declaration of dividends . . . . . . . . . . . . (2,450) (2,450) Transfer to surplus reserves . . . . . . . . . . . . . 9,671 (9,671) Other pro forma adjustments (Note 3.D.2) . . . . . . . . . (1,852,867) (255,080) 445,242 913,089 (749,616) 169,031 (580,585) Balance at December 31, 2012 . . . . . . . . . . . . . P43,448,337 P26,499,909 P569,887 P 7,029,307 P2,816,962 (P971,325) P1,037,252 P (P4,740) P80,425,589 P3,667,630 P84,093,219

F-200

See accompanying Notes to Pro forma Condensed Consolidated Financial Information

PHILIPPINE NATIONAL BANK AND SUBSIDIARIES PRO FORMA CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 2012 (In Thousands)
Pro forma adjustments ABC Group (Audited*) (Note 3.E.1) Other Adjustments (Unaudited) (Note 3.E.2) Pro forma Consolidated Balances (Unaudited)

PNB Group (Audited)

CASH FLOWS FROM OPERATING ACTIVITIES Income before income tax . . . . . . . . . . . . . . . . . . . . . P 5,952,436 P 2,512,471 P 17,700 P 8,482,607 Adjustments for: Realized trading gain on available-for-sale (AFS) investments . . . . . . . . . . . . . . . . . . . . . (4,287,934) (2,486,548) (6,774,482) Provision for impairment, credit and other losses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 933,701 1,785,814 2,719,515 Increase in aggregate life reserve for life policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 805,884 805,884 Amortization of discount . . . . . . . . . . . . . . . . . . (717,699) (717,699) Depreciation and amortization . . . . . . . . . . . . . 713,235 397,348 111,767 1,222,350 Net gain on sale or exchange of assets . . . . . . (359,915) (212,237) (572,152) Gain on mark-to-market of financial liability designated at fair value through profit or loss (FVPL) . . . . . . . . . . . . . . . . . . . . . . . . . . . (283,099) (81,828) (364,927) Amortization of software costs. . . . . . . . . . . . . 153,550 153,550 Gain on mark-to-market of derivatives . . . . . . (81,510) (81,510) Amortization of transaction costs. . . . . . . . . . . 21,733 21,733 Gain on acquisition of investment properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (27,158) (27,158) Amortization of discount on subordinated debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,515 14,515 Share in net income of an associate . . . . . . . . . (10,309) 10,309 Dividend income . . . . . . . . . . . . . . . . . . . . . . . . . (2,418) (2,418) Changes in operating assets and liabilities: Decrease (increase) in amounts of: Financial assets at FVPL . . . . . . . . . 3,046,847 (6,595,929) (3,549,082) Loans and receivables . . . . . . . . . . . (19,929,523) (3,634,589) (23,564,112) Other Assets . . . . . . . . . . . . . . . . . . . . 765,107 (303,897) 461,210 Increase (decrease) in amounts of: Deposit liabilities . . . . . . . . . . . . . . . 3,310,937 (518,574) (139,776) 2,652,587 Derivative liabilities . . . . . . . . . . . . . 15,655 15,655 Accrued taxes, interest and other (147,858) 178,000 30,142 expenses . . . . . . . . . . . . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . . 2,267,658 (1,019,981) 1,247,677 Net cash used in operations . . . . . . . . . . . . . . . . . . . . Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividends received . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash used in operating activities . . . . . . . . . . . . CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of: AFS investments . . . . . . . . . . . . . . . . . . . . . . . . . Investment properties . . . . . . . . . . . . . . . . . . . . . Property and equipment . . . . . . . . . . . . . . . . . . . Proceeds from redemption of placements with the Bangko Sentral ng Pilipinas . . . . . . . . . . . . . . . . . Acquisition of: AFS investments . . . . . . . . . . . . . . . . . . . . . . . . . Property and equipment . . . . . . . . . . . . . . . . . . . Software cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8,655,061) (974,179) 2,418 (9,626,822) (9,171,054) (584,743) (9,755,797) (17,826,115) (1,558,922) 2,418 (19,382,619)

244,636,344 2,669,604 300,107 20,200,000 (254,009,801) (704,327) (120,215)

32,489,471 541,249 16,897 (20,450,348) (330,881)

277,125,815 3,210,853 317,004 20,200,000 (274,460,149) (1,035,208) (120,215)

F-201

PHILIPPINE NATIONAL BANK AND SUBSIDIARIES PRO FORMA CONSOLIDATED STATEMENT OF CASH FLOWS(Continued) FOR THE YEAR ENDED DECEMBER 31, 2012 (In Thousands)
Pro forma adjustments ABC Group (Audited*) (Note 3.E.1) Other Adjustments (Unaudited) (Note 3.E.2) Pro forma Consolidated Balances (Unaudited)

PNB Group (Audited)

Placements on other banks . . . . . . . . . . . . . . . . . . . . Cash and cash equivalents acquired from business combination . . . . . . . . . . . . . . . . . . . . . . Net cash provided by investing activities . . . . . . . CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from bills and acceptances payable . . . . Proceeds from issuance of subordinated debt . . . . Settlement of bills and acceptances payable . . . . . Equity issuance cost attributable to issuance of shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash provided by financing activities . . . . . . . Cumulative translation adjustment . . . . . . . . . . . . . Other pro forma adjustments . . . . . . . . . . . . . . . . . . NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR Cash and other cash items. . . . . . . . . . . . . . . . . . . . . Due from Bangko Sentral ng Pilipinas . . . . . . . . . . Due from other banks . . . . . . . . . . . . . . . . . . . . . . . . Interbank loans receivable and securities held under agreement to resell . . . . . . . . . . . . . . . . . . . CASH AND CASH EQUIVALENTS AT END OF YEAR Cash and other cash items. . . . . . . . . . . . . . . . . . . . . Due from Bangko Sentral ng Pilipinas . . . . . . . . . . Due from other banks . . . . . . . . . . . . . . . . . . . . . . . . Interbank loans receivable and securities held under agreement to resell . . . . . . . . . . . . . . . . . . . OPERATIONAL CASH FLOWS FROM INTEREST AND DIVIDENDS Interest paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividends received. . . . . . . . . . . . . . . . . . . . . . . . . . .

12,971,712

(5,570,309) 6,696,079

64,158,220 64,158,220

(5,570,309) 64,158,220 83,826,011

P 48,061,417 P 3,474,112 (43,442,941) 8,092,588 11,437,478

64,924 (30,000) 34,924 (508,169) (3,532,963)

(84,792) (84,792) 3,532,963 67,606,391

P 48,126,341 3,474,112 (43,442,941) (84,792) (30,000) 8,042,720 (508,169) 3,532,963 75,510,906

5,404,110 17,952,795 6,423,981 35,397,648 65,178,534

5,404,110 17,952,795 6,423,981 35,397,648 65,178,534

5,599,088 37,175,399 4,042,769 29,798,756 P 76,616,012 P

3,053,428 44,481,495 12,227,794 4,310,711 P64,073,428

8,652,516 81,656,894 16,270,563 34,109,467 P140,689,440

P 4,381,425 P 9,280,915 P 12,232,534 2,485,381 2,418 1,801

P 13,662,340 14,717,915 4,219

(*) Excluding results from discontinued operations (See Note 3.B.1)

See accompanying Notes to Pro forma Condensed Consolidated Financial Information. F-202

PHILIPPINE NATIONAL BANK AND SUBSIDIARIES NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION 1. Corporate Information

Philippine National Bank Philippine National Bank (the Parent Company; PNB) was established in the Philippines in 1916 and started commercial operations that same year. On May 27, 1996, the Parent Company was registered with the Philippine Securities and Exchange Commission (SEC) with a corporate term of 50 years. Its principal place of business is at PNB Financial Center, President Diosdado Macapagal Boulevard, Pasay City. As of December 31, 2012, the companies and person affiliated/associated to or who issue proxies/special powers of attorney in favor of Director Lucio C. Tan held a total of about 68.85% of the Parent Company while the remaining 31.15% was held by the public. The Parent Company provides a full range of banking and other financial services to corporate, middlemarket and retail customers, the National Government, local government units and government-owned and controlled corporations and various government agencies. The Parent Companys principal commercial banking activities include deposit-taking, lending, bills discounting, foreign exchange dealing, investment banking, fund transfers/remittance servicing and a full range of retail banking and trust services through its 338 domestic branches as of December 31, 2012. The Parent Companys international subsidiaries have a network of 65 offices as of December 31, 2012 in key cities of the United States of America, Canada, Western Europe, Middle East and Asia. The subsidiaries of the Parent Company are engaged in a number of diversified financial and related businesses such as remittance, life and non-life insurance, merchant banking, leasing, stock brokerage, foreign exchange trading and/or related services. Allied Banking Corporation Allied Banking Corporation (ABC) is a publicly listed universal bank incorporated on April 11, 1977 and domiciled in the Philippines with registered office address at Allied Bank Center, 6754 Ayala Avenue, Makati City. ABC and its subsidiaries (the ABC Group) are engaged in all aspects of banking, insurance, financing and leasing to personal, commercial, corporate and institutional clients through a network of 325 local and international branches and offices as of December 31, 2012. ABC Groups products and services include deposit taking, lending and related services, domestic and foreign fund transfers, treasury, foreign exchange and trust services. In addition, ABC engages in regular financial derivatives as a means of reducing and managing ABCs and its customers exposures to credit risk, foreign exchange and interest rates. Authorization for Issue of the Pro Forma Condensed Consolidated Financial Information The pro forma condensed consolidated financial information as of and for the year ended December 31, 2012 was authorized for issue by the Board of Directors of the Parent Company on November 14, 2013. 2. Basis of Preparing the Pro Forma Condensed Consolidated Financial Information

Basis of Preparation The unaudited pro forma condensed consolidated financial information has been prepared in accordance with section 8, part II of the Securities Regulation Code 68, As Amended in 2011 (SRC Rule 68). The unaudited pro forma condensed consolidated financial information should be read in conjunction with the audited consolidated financial statements of the Parent Company and its subsidiaries (the PNB Group) as of and for the year ended December 31, 2012 and the ABC Group as of and for the year ended December 31, 2012. The objective of this unaudited pro forma condensed consolidated financial information is to show what the significant effects on the historical information might have been had the merger between the Parent Company F-203

and ABC as described below occurred at an earlier date. However, the unaudited pro forma condensed consolidated financial information is not necessarily indicative of the results of operations or related effects on the consolidated financial statements that would have been attained, had the transactions described below actually occurred at an earlier date nor does it purport to project the results of operations of the merged bank and its subsidiaries for any future period or date. The unaudited pro forma condensed consolidated financial information is not intended to be considered in isolation form, or as a substitute for, financial position or results of operations prepared in accordance with Philippine Financial Reporting Standards (PFRS). The unaudited pro forma condensed consolidated financial information has not been prepared in accordance with the requirements of Article 11 of the Regulation S-X under the United States Exchange Act. The pro forma condensed consolidated financial information is based on the historical financial information of the PNB Group and ABC Group as shown in the audited consolidated financial statements of PNB Group and ABC Group as of and for the year ended December 31, 2012, and after considering the merger between PNB Group and ABC Group which is assumed to happen on earlier date, and after giving effect to certain assumptions and pro forma adjustments. The pro forma adjustments are based upon available information and certain assumptions that the Parent Company believes are reasonable under the circumstances. The unaudited pro forma condensed consolidated financial information has been prepared solely for inclusion in the offering circular prepared by the Parent Company in connection with its stock rights offering, and for no other purpose. Merger with ABC The respective shareholders of the Parent Company and ABC, representing at least two-thirds of the outstanding capital stock of both banks, approved the amended terms of the Plan of Merger of the two banks on March 6, 2012. The original plan of the merger which was effected via a share- for-share exchange was approved by the affirmative vote of ABC and the Parent Companys respective shareholders, representing at least twothirds of the outstanding capital stock of both banks, on June 24, 2008. Under the approved amended terms, the Parent Company will be the surviving entity. It will issue to ABC shareholders 130 Parent Company common shares for every ABC common share and 22.763 Parent Company common shares for every ABC preferred share. Merger and business combination are terms used interchangeably within the accompanying pro forma condensed consolidated financial information and have the same meaning. On March 26, 2012, the Parent Company submitted to the BSP (Bangko Sentral ng Pilipinas) and PDIC (Philippine Deposit Insurance Corporation) applications for consent to the merger. On April 12, 2012, the application for the merger was filed with the Philippine SEC. The PDIC, the Monetary Board of the BSP and the Philippine SEC gave consent and approved the merger on July 25, 2012, August 2, 2012 and January 17, 2013, respectively. In addition, with respect to ABCs overseas subsidiaries, the Parent Company has filed notices in relation to the merger with various relevant foreign regulatory agencies; and as of February 9, 2013 had received all necessary approvals and complied with conditions to effectuate the merger. 3. Pro Forma Adjustments

As discussed in Note 2, on February 9, 2013, the Parent Company acquired 100.00% of the voting common stocks of ABC. The acquisition of ABC was made to strengthen the Parent Companys financial position and enlarge its operations. From the Parent Companys perspective, the business combination has substance and therefore it elected to account for the business combination with ABC Group under the acquisition method of PFRS 3, Business Combinations. In accordance with PFRS 3, PNB determined the assets acquired and liabilities assumed from the business combination and provisionally made an assessment of their fair values. The fair values of the assets acquired and liabilities assumed from business combination were determined by considering the following factors: a. b. The carrying values of cash and other cash items, due from BSP and other banks and interbank loans receivables approximate their fair values. Fair values of financial assets at FVPL and available-for-sale securities (AFS) are based on the quoted market price as of February 9, 2013. For securities with no available market quotes, the fair values are determined based on discounted cash flow (DCF) model for debt instruments while investment in nonmarketable equity securities are measured at cost.

F-204

c.

DCF model is used to arrive at the fair values of loans and receivables. Cash flows for commercial loans were discounted using market interest rates (average rates of recently issued commercial loans), while different market interest rates based on ABCs current lending rates per type and tenor of loans were used to compute the market value of consumer loans. For short-term receivables (i.e. those that will mature in less than a year), management used the carrying values as basis for fair values. The fair values of Land and buildings under Property and equipment, Investment properties and Other assets are based on appraised values as of February 2013 determined by internal and external appraisers using the market value and cost data approach. Other assets which comprised of security deposits and foreclosed chattel mortgages are measured at carrying amount as of February 9, 2013. The fair values of demand and savings deposits are their carrying values as of February 9, 2013 due to their short-term nature. The fair values of time deposits and long-term negotiable certificates of deposits are based on discounted cash flows using different market interest rates per type and tenor and interest risk-free rate plus 0.97% credit spread, respectively. The fair value of financial liabilities at FVPL is determined using observable inputs other than quoted prices. The carrying values of bills payable and accrued taxes, interest and other expenses, and other liabilities approximate their fair values.

d.

e. f.

g. h.

The Parent Company issued to ABC shareholders 130 and 22.763 of its common shares for every ABC common and preferred shares, respectively as consideration for the net assets of the ABC Group as of February 9, 2013. The fair value of the common shares issued as consideration for the net assets of the ABC Group was determined on the basis of the closing market price of PNB common shares as of February 9, 2013. The preliminary allocation of the cost of the acquisition to the assets and liabilities of ABC Group is based on provisional estimates using currently available information. Given the size and complexity of the transaction, the preliminary allocation of the cost of the acquisition is subject to revision to reflect the final determination of fair values. The preliminary accounting will be completed based on further valuations and studies carried out within twelve months from February 9, 2013. The Parent Company has limited information with respect to the fair values of assets and liabilities acquired and possible recognition of certain intangible assets, deferred income tax and contingent liabilities arising from the acquisition which might arise once the purchase price allocation has been finalized. On April 26, 2013, the Group filed a request for a ruling from the Bureau of Internal Revenue (BIR) seeking confirmation that the statutory merger of PNB and ABC is a tax-free merger under Section 40(C)(2) of the National Internal Revenue Code of 1997 as amended. As of September 30, 2013, the ruling request is still pending with the Law Division of the BIR. The Group believes that the BIR will issue such confirmation on the basis of BIR Preliminary Ruling No. 01-2008 (dated September 28, 2008) whereby the BIR held that the statutory merger of PNB and ABC complies with Revenue Memorandum Ruling (RMR) No. 1-2001, subject to the submission of the merger documents and documents pertaining to the assets and liabilities transferred. RMR No. 1-2001 provides the fact pattern that should be present in order to secure BIR confirmation for a tax-free Section 40(C)(2) transaction. Accordingly, the business combination was accounted for as a tax-free merger. A. Pro forma adjustments on the consolidated statement of financial position as of December 31, 2012 For the purpose of the unaudited pro forma consolidated statement of financial position as at December 31, 2012, the merger was assumed to have occurred on December 31, 2012. The following pro forma adjustments have been made: 1. Pro forma adjustment has been made to effect the merger with ABC Group which resulted in recognition of goodwill which is provisionally determined as follows (in thousands): Purchase consideration transferred (1.a). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P41,505,929 Add: Proportionate share of the non-controlling interest in the net assets of ABC (1.b). . . 2,762,937 Acquisition-date fair value of previously-held interest in subsidiaries (1.c) . . . . . . . . 3,069,442 Less: Fair values of identifiable assets and liabilities assumed (1.d). . . . . . . . . . . . . . . . . . . . 31,320,808 Goodwill (1.e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P16,017,500 F-205

a)

Pro forma adjustment has been made to effect the issuance of 423,962,500 common shares of the Parent Company to the shareholders of ABC as consideration for the net assets of ABC Group. Par value and fair value per share amounted to P40.0 and P97.9, respectively. The fair value of the common shares was determined on the basis of the closing market price of PNB common shares as at February 9, 2013. The total par value of P16,958.5 million was shown in the pro forma adjustment as capital stock while the difference amounting to P24,547.4 million between the fair value and par value of the shares issued was treated as addition to Capital Paid in Excess of Par Value. The cost directly attributable to the issuance of shares amounting to P84.8 million was deducted from Cash and Cash Equivalents and Capital Paid in Excess of Par Value. Pro forma adjustment has been made to effect the proportion of non-controlling interest in the net assets of ABC amounting to P2,762.9 million. The non-controlling interest in the acquiree was measured at its proportionate share of identifiable assets and liabilities. With its business combination with ABC, the Parent Companys equity interest in Allied Commercial Bank (ACB) and PNB Life (subsidiaries of ABC) increased from 39.41% to 90.41% and 5.00% to 75.00%, respectively. This resulted in change in accounting treatment from associate to subsidiary for investment in ACB and AFS to subsidiary for investment in PNB Life. In accordance with PFRS 3, the step-up acquisition of investments in ACB and PNBLife are accounted for as a disposal of the equity investment and the line by line consolidation of ACB and PNB Lifes assets and liabilities in the consolidated financial statements. The disposal resulted in a gain of P140.9 million, including recycling to profit or loss of the cumulative translation adjustment of P21.3 million arising from the translation of the equity investment to the presentation currency of the Group. Pro forma adjustment has been made to eliminate the carrying value of PNBs investments in ACB (under Investment in Associate) and PNB Life (under AFS) amounting to P2,905.3 million and P23.3 million, respectively. The difference of P140.9 million between the fair value of these previously-held interests in ACB and PNB Life and the carrying amount, representing the gain discussed above was adjusted to the Surplus account.

b)

c)

d)

Pro forma adjustments have been made to bring the fair value of the assets acquired and liabilities assumed from the business combination into the PNB Groups consolidated statement of financial position. The fair values of the identifiable assets and liabilities of the ABC Group as at the date of acquisition follow (in thousands). Assets Cash and other cash items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due from BSP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due from other banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interbank loans receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial assets at fair value through profit or loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . Available-for-sale investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans and receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Liabilities Deposit liabilities Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial liabilities at fair value through profit or loss . . . . . . . . . . . . . . . . . . . . . . . . . Bills and acceptances payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued taxes, interest and other expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subordinated debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fair values of identifiable assets and liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . F-206 P 3,138,220 44,481,495 12,514,443 4,310,711 6,502,108 18,693,504 92,168,568 6,546,998 5,015,189 52,574 1,875,509 P195,299,319

P 52,098,658 61,989,407 27,101,791 141,189,856 3,877,768 3,480,045 1,679,656 4,498,919 916,006 8,336,261 163,978,511 P 31,320,808

e) 2.

Pro forma adjustment has been made to record the goodwill arising from the merger amounting to P16,017.5 million.

Other pro forma adjustments include the pro forma adjustments to eliminate the intercompany balances between the PNB Group and ABC Group as of December 31, 2012 as follows (in thousands): ABC Due from other banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PNB Deposit liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 286,649 (273,159) (13,490) P

B.

Pro forma adjustments on the consolidated statement of income for the year ended December 31, 2012 For the purpose of the unaudited pro forma consolidated statement of income for the year ended December 31, 2012, the merger was assumed to have occurred on January 1, 2012. The following pro forma adjustments have been made: 1. Pro forma adjustments have been made to bring the entire consolidated statement of income (excluding the results of discontinued operation) of the ABC Group for the year ended December 31, 2012 into the consolidated statement of income of PNB Group. The net loss of the discontinued operation of Oceanic Holding (BVI) Ltd. (a subsidiary of ABC) amounting to P238.1 million were not included in accordance with the pro forma guidance under SRC Rule 68. Other Pro Forma Adjustments a) b) Pro forma adjustment has been made to eliminate the PNBs share in net income of ACB amounting to P10.3 million as a result of the merger. Pro forma adjustments have been made to recognize the additional depreciation arising from fair value adjustment of property and equipment and accretion of interest on the fair value adjustment on deposit liabilities for the year ended December 31, 2012. The fair value adjustments are attributable to the difference between the fair value and carrying amount of ABC Groups property and equipment and deposit liabilities at the date of merger. The impact of these adjustments is summarized below (in thousands). Increase (decrease): Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest on deposit liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . c) P 111,767 (139,776) (8,403)

2.

The gain on step-up acquisition of previously held interest amounting to P140.9 million was not considered in the pro forma consolidated income in accordance with SRC rule 68 as this represents a nonrecurring gain directly attributable to transaction that will not have a continuing impact on PNB Group.

C.

Pro forma adjustments on the consolidated statement of comprehensive income for the year ended December 31, 2012. For the purpose of the unaudited pro forma consolidated statement of comprehensive income for the year ended December 31, 2012, the merger was assumed to have occurred on January 1, 2012. 1. Pro forma adjustments have been made to bring the entire consolidated statement of comprehensive income (excluding the results of discontinued operation) of ABC Group for the year ended December 31, 2012 into the consolidated statement of comprehensive income of PNB Group and after giving effect to certain assumptions and pro forma adjustments. The recycling of the cumulative translation adjustment to profit and loss arising from step-up acquisition of a previously held interest amounting to P21.3 million was not considered in the pro forma consolidated comprehensive income in accordance with SRC rule as this represents a nonrecurring item directly attributable to transaction that will not have a continuing impact on PNB Group. F-207

2.

D.

Pro forma adjustments on the consolidated statement of changes in equity for the year ended December 31, 2012. For the purpose of the unaudited pro forma consolidated statement of changes in equity for the year ended December 31, 2012, the merger was assumed to have occurred on January 1, 2012. The following pro forma adjustments have been made: 1. Pro forma adjustment has been made to record the issuance of 423,962,500 common shares of the Parent Company to the shareholders of ABC as consideration for the net assets of ABC (see Note 3.A.1.a).

Pro forma adjustment has been made to record the non-controlling interest arising from the merger amounting to P2,762.9 million. 2. Other pro forma adjustments have been made to take into account the different assumptions in preparing the pro forma condensed consolidated financial position (assumed transactions have occurred on December 31, 2012) and the pro forma condensed statement of comprehensive income (assumed transactions have occurred on January 1, 2012) amounting to P580.6 million as follows (in thousands):
Other Adjustments

Surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net Unrealized Gain on AFS Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Revaluation Increment on Land and Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated Translation Adjustment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-controlling Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(P1,852,867) 913,089 (255,080) 445,242 169,031 (P580,585)

E.

Pro forma adjustments in the consolidated statement of cash flows for the year ended December 31, 2012. For the purpose of the unaudited pro forma consolidated statement of cash flows for the year ended December 31, 2012, the merger was assumed to have occurred on January 1, 2012. The following pro forma adjustments have been made: 1. Pro forma adjustment has been made to bring the entire consolidated statement of cash flows (excluding the results of discontinued operation) of ABC Group for the year ended December 31, 2012 into the consolidated statement of cash flows of PNB Group. Other Pro Forma Adjustments a) Pro forma adjustment has been made to record the net cash and cash equivalents acquired arising from the business combination amounting to P64,158.2 million and the equity issuance cost incurred on the issuance of shares amounting to P84.8 million. Pro forma adjustments have been made to take into account the different assumptions in preparing the pro forma condensed consolidated financial position (assumed transactions have occurred at December 31, 2012) and the pro forma condensed statement cash flows (assumed transactions have occurred as of January 1, 2012) amounting to P3,533.0 million.

2.

b)

4.

Pro Forma Earnings Per Share (Unaudited)

The pro forma earnings per share of the merged PNB and ABC Group for the year ended December 31, 2012, attributable to equity holders of the Parent Company, is calculated as follows (in thousands, except for Earnings Per Share): a) b) Pro forma net income attributable to equity holders of the Parent Company . . . . . . . . . . . . . . . . . Pro forma weighted average number of common share for basic earnings per share: Number common share outstanding before the merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Number of shares issued in the merger assumed to have occurred at January 1, 2012. . . . . Basic and diluted earnings per share (a/b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . There are no potential common shares that would dilute the earnings per share. F-208 P P6,645,632 662,246 423,963 1,086,209 c) 6.12

Allied Banking Corporation and Subsidiaries Financial Statements December 31, 2012 and 2011 and January 1, 2011 and for the Years Ended December 31, 2012, 2011 and 2010 and Independent Auditors Report
SyCip Gorres Velayo & Co.

F-209

SyCip Gorres Velayo & Co. 6760 Ayala Avenue 1226 Makati City Philippines Phone: (632) 891 0307 Fax: (632) 819 0872 www.sgv.com.ph BOA/PRC Reg. No. 0001, December 28, 2012, valid until December 31, 2015 SEC Accreditation No. 0012-FR-3 (Group A), November 15, 2012, valid until November 16, 2015

INDEPENDENT AUDITORS REPORT The Stockholders and the Board of Directors Allied Banking Corporation We have audited the accompanying consolidated financial statements of Allied Banking Corporation and Subsidiaries (the Group) and the parent company financial statements of Allied Banking Corporation (the Parent Company), which comprise the statements of financial position as at December 31, 2012 and 2011 and January 1, 2011, and the statements of income, the statements of comprehensive income, the statements of changes in equity and the statements of cash flows for each of the three years in the period ended December 31, 2012, and a summary of significant accounting policies and other explanatory information. Managements Responsibility for the Financial Statements The Groups management is responsible for the preparation and fair presentation of these financial statements in accordance with Philippine Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of the financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Philippine Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entitys preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entitys internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

F-210

Opinion In our opinion, the financial statements present fairly, in all material respects, the financial position of the Group and of the Parent Company as at December 31, 2012 and 2011 and January 1, 2011, and their financial performance and their cash flows for each of the three years in the period ended December 31, 2012 in accordance with Philippine Financial Reporting Standards. Other Matter In our auditors report dated March 7, 2012, we issued an unqualified opinion on the 2011 and 2010 financial statements prepared in accordance with accounting principles generally accepted in the Philippines for banks (Philippine GAAP for banks). As discussed in Note 2 to the financial statements, the 2011 and 2010 financial statements previously prepared in accordance with Philippine GAAP for banks have been prepared in accordance with Philippine Financial Reporting Standards. As of December 31, 2011, the Held-to-Maturity investments with carrying value of P21.16 billion and P19.94 billion for the Group and the Parent Company, respectively, have been reclassified to Available-for-Sale investments with fair value of P23.60 billion and P22.14 billion for the Group and the Parent Company, respectively, in accordance with Philippine Financial Reporting Standards (see Note 35). SYCIP GORRES VELAYO & CO.

Janeth T. Nuez Partner CPA Certificate No. 111092 SEC Accreditation No. A-560-A (Group A), Valid until May 31, 2013 Tax Identification No. 900-322-673 BIR Accreditation No. 08-001998-69-2012, April 11, 2012, valid until April 10, 2015 PTR No. 3670006, January 2, 2013, Makati City February 22, 2013

F-211

ALLIED BANKING CORPORATION AND SUBSIDIARIES STATEMENTS OF FINANCIAL POSITION (In Thousands)
Consolidated December 31 2011 (As restated Notes 2 and 35) January 1, 2011 Parent Company December 31 2011 (As restated Notes 2 and 35) January 1, 2011

2012

2012

ASSETS Cash and Other Cash Items (Note 15) . . . . . . . . . . . . . . . . . . . . . Q 3,885,613 P 4,023,559 P 4,636,820 Q 3,621,910 P 3,719,876 P 4,280,874 Due from Bangko Sentral ng Pilipinas (Note 15). . . . . . . . . . . . . 26,082,603 18,286,303 16,297,912 25,897,693 18,174,486 13,892,789 Due from Other Banks (Note 37) . . . . . . . . . . . . . . . . . . . . . 11,771,750 10,821,079 7,442,201 3,719,056 4,106,005 2,938,976 Interbank Loans Receivable and Securities Purchased Under Resale Agreements (Notes 6, 30 and 37) . . . . . . . . . . . . . . . . . . . . . . . 7,955,042 12,578,296 15,058,026 5,053,986 10,120,198 14,470,270 Financial Assets at Fair Value through Profit or Loss (Note 7). . . . . . . . . . . . . . . . . . . . . . . 7,375,526 697,769 3,507,011 7,376,788 696,339 3,506,941 Available-for-Sale Investments (Note 7). . . . . . . . . . . . . . . . . . . . . . . 29,702,086 40,331,832 20,500,595 23,691,775 35,068,085 17,609,758 Held-to-Maturity Investments (Notes 7 and 28) . . . . . . . . . . . . . . . 20,943,291 19,720,205 Loans and Receivables (Notes 8, 16 and 30). . . . . . . . . . . . . . . . . . . . . 100,136,937 97,504,192 81,216,200 90,854,848 87,093,835 71,110,129 Investments in Subsidiaries (Note 9). . . . . . . . . . . . . . . . . . . . . . . 4,142,618 4,172,118 4,172,118 Property and Equipment (Note 10) At appraised values . . . . . . . . . . 3,368,392 2,971,633 2,958,427 3,338,721 2,941,962 2,941,962 At cost . . . . . . . . . . . . . . . . . . . . . 1,447,804 1,567,070 1,701,135 1,161,344 1,246,337 1,368,614 Investment Properties (Note 11) . . 3,971,404 4,317,859 4,536,404 3,780,122 4,009,388 4,266,582 Deferred Tax Asset (Note 27) . . . . . 98,012 33,572 41,130 Other Assets (Note 12) . . . . . . . . . . . 1,982,034 1,976,227 2,275,700 1,771,512 1,823,877 2,136,152 Assets of Disposal Group Classified as Held-for-Sale (Note 13) . . . . . . . . . . . . . . . . . . . . . 7,422,682 8,335,957 20,500 20,500 P197,777,203 P202,532,073 P189,450,809 P174,410,373 P173,193,006 P162,435,870 LIABILITIES AND EQUITY LIABILITIES Deposit Liabilities (Notes 15 and 30) Demand . . . . . . . . . . . . . . . . . . . . . . . . . Q 51,759,063 P 45,490,521 P 41,848,445 Q 50,357,692 P 45,151,949 P 41,798,506 Savings . . . . . . . . . . . . . . . . . . . . . . . . . 67,634,219 70,422,445 68,425,612 65,356,382 68,598,623 66,533,653 Time. . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,678,795 31,196,632 31,220,107 20,954,422 22,352,006 24,956,492 147,072,077 Derivative Liabilities (Notes 7 and 30) . . . . . . . . . . . . . . . . . . . . . . . Bills Payable (Notes 16 and 30). . . . Marginal Deposits . . . . . . . . . . . . . . . Managers Checks and Demand Draft Outstanding . . . . . . . . . . . . Accrued Taxes, Interest and Other Expenses (Note 17) . . . . . . Income Tax Payable . . . . . . . . . . . . . Subordinated Debt (Note 18) . . . . . Insurance Provisions (Note 19) . . . Deferred Tax Liability (Note 27) . . . . . . . . . . . . . . . . . . . . . Other Liabilities (Note 20) . . . . . . . Liabilities of Disposal Group Classified as Held-for-Sale (Note 13) . . . . . . . . . . . . . . . . . . . . . 106,066 5,062,704 34,374 438,543 1,347,729 38,985 4,497,306 4,073,542 510,430 4,089,050 167,270,806 147,109,598 90,411 4,277,935 13,761 928,009 1,168,385 21,412 4,482,791 3,286,717 417,470 4,593,259 6,017,084 172,406,832 141,494,164 138,395 1,608,971 38,290 418,184 1,112,658 16,614 4,469,369 2,512,138 410,897 4,347,404 6,965,387 163,532,471 136,668,496 106,755 5,002,704 34,374 429,530 1,170,758 434 4,497,306 509,722 3,503,452 151,923,531 136,102,578 97,080 4,531,183 13,761 911,382 1,052,368 4,482,791 408,750 3,940,102 151,539,995 133,288,651 137,310 1,398,112 37,077 409,386 1,003,779 1,440 4,469,369 406,682 3,067,119 144,218,925

(Forward) F-212

ALLIED BANKING CORPORATION AND SUBSIDIARIES STATEMENTS OF FINANCIAL POSITION(Continued) (In Thousands)
Consolidated December 31 2011 (As restated Notes 2 and 35) January 1, 2011 Parent Company December 31 2011 (As restated Notes 2 and 35) January 1, 2011

2012

2012

EQUITY Equity Attributable to Equity Holders of Parent Company Preferred stock (Note 22). . . . . . . . . . . . . . Q 50,000 P 50,000 P 50,000 Q 50,000 P 50,000 P 50,000 Common stock (Note 22) . . . . . . . . . . . . . 3,252,495 3,252,495 3,252,495 3,252,495 3,252,495 3,252,495 Equity adjustment from conversion (Note 22) . . . . . . . . . . . . . . . . . . . . . . . . . (592,150) (592,150) (592,150) (592,150) (592,150) (592,150) Surplus reserve (Notes 22 and 28) . . . . . . 213,146 205,207 199,214 213,146 205,207 199,214 Surplus (Note 22) . . . . . . . . . . . . . . . . . . . . 18,196,725 16,333,083 15,020,582 16,256,757 14,421,702 13,309,808 Reserve of disposal group classified as held-for-sale (Note 13) . . . . . . . . . . . . . 97,569 97,371 Net unrealized gains on available-forsale investments (Note 7) . . . . . . . . . . . 2,291,619 3,380,450 778,675 1,589,265 2,893,283 592,797 Revaluation increment of land (Note 10) . . . . . . . . . . . . . . . . . . . . . . . . . 1,737,431 1,482,351 1,473,107 1,718,351 1,463,271 1,463,271 Equity adjustment from translation . . . . . 288,307 457,691 447,478 (1,022) (40,797) (58,490) Non-controlling Interest. . . . . . . . . . . . . . . 25,437,573 5,068,824 30,506,397 24,666,696 5,458,545 30,125,241 20,726,772 5,191,566 25,918,338 22,486,842 22,486,842 21,653,011 21,653,011 18,216,945 18,216,945 P162,435,870

Q197,777,203 P202,532,073

P189,450,809 P174,410,373 P173,193,006

See accompanying Notes to Financial Statements. F-213

ALLIED BANKING CORPORATION AND SUBSIDIARIES STATEMENTS OF INCOME (In Thousands, Except Earnings Per Share)
Consolidated Years Ended December 31 2011 (As restated Notes 2 and 35) 2011 (As restated Notes 2 and 35) Parent Company

2012

2010

2012

2010

CONTINUING OPERATIONS INTEREST INCOME ON Loans and receivables (Notes 8 and 30). . . . . . . . . . . . . . . . . P 6,481,902 P 6,061,874 P 5,505,399 P 5,988,613 P5,563,553 P5,147,582 Trading and investment securities (Note 7). . . . . . . . . . . . . . 2,258,842 2,728,528 3,032,054 1,959,691 2,422,668 2,991,100 Deposits with banks and interbank loans receivable (Note 30) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 491,478 639,954 1,094,907 243,127 515,831 732,637 9,232,222 INTEREST EXPENSE ON Deposit liabilities (Notes 15 and 30) . . . . . . . . . . . . . . . . . . . Bills payable and other borrowings (Notes 16, 20 and 30). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . NET INTEREST INCOME . . . . . . . . . . . . . . . . . . . . . . . . . Trading and investment securities gainsnet (Note 7). . . . Commissions and handling charges (Note 30) . . . . . . . . . . . Foreign exchange gains (losses)net . . . . . . . . . . . . . . . . . . Gain on acquisition of investment properties (Note 11) . . . Miscellaneous (Notes 23 and 25) . . . . . . . . . . . . . . . . . . . . . . TOTAL OPERATING INCOME . . . . . . . . . . . . . . . . . . . . Compensation and fringe benefits (Notes 24 and 30) . . . . . Provision for credit and impairment losses (Note 14) . . . . . Occupancy and other equipmentrelated costs (Note 25). . . Taxes and licenses (Note 27) . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization (Note 10). . . . . . . . . . . . . . . . Miscellaneous (Note 26) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TOTAL OPERATING EXPENSES . . . . . . . . . . . . . . . . . . INCOME BEFORE INCOME TAX FROM CONTINUING OPERATIONS . . . . . . . . . . . . . . . . . . . PROVISION FOR INCOME TAX (Note 27) . . . . . . . . . NET INCOME FROM CONTINUING OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . NET INCOME (LOSS) FROM DISCONTINUED OPERATION (Note 13) . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,944,437 505,517 2,449,954 6,782,268 2,852,276 760,086 (237,700) 27,158 2,569,889 12,753,977 2,629,790 1,783,454 900,199 845,291 397,339 3,685,433 10,241,506 2,512,471 521,302 1,991,169 (238,093) 9,430,356 2,414,908 414,737 2,829,645 6,600,711 537,626 719,686 187,261 36,600 1,991,784 10,073,668 2,827,046 362,334 860,404 772,788 432,820 2,896,096 8,151,488 1,922,180 469,171 1,453,009 56,191 9,632,360 2,466,055 375,019 2,841,074 6,791,286 902,400 796,561 30,914 30,532 1,848,269 2,768,131 1,252,727 856,468 798,053 460,049 2,391,897 8,527,325 1,872,637 609,325 1,263,312 35,090 8,191,431 1,834,033 485,422 2,319,455 5,871,976 2,791,606 657,802 (284,158) 22,534 1,052,431 2,237,010 1,548,204 832,361 780,639 349,084 2,011,837 7,759,135 2,353,056 480,062 1,872,994 8,502,052 2,345,003 399,795 2,744,798 5,757,254 520,970 612,314 120,004 28,787 716,801 7,756,130 2,456,034 350,778 797,154 708,876 384,323 1,574,383 6,271,548 1,484,582 366,695 1,117,887 8,871,319 2,407,610 373,853 2,781,463 6,089,856 887,922 728,159 (20,665) 29,922 919,112 8,634,306 2,429,226 1,211,263 797,441 741,665 417,895 1,427,677 7,025,167 1,609,139 542,319 1,066,820

10,399,962 10,112,191

NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 1,753,076 P 1,509,200 P 1,298,402 P 1,872,994 P1,117,887 P1,066,820 ATTRIBUTABLE TO: Equity Holders of the Parent Company Profit for the year from continuing operations . . . . . . . . . . . P 1,967,723 P 1,302,884 P 1,167,714 Profit (loss) for the year from discontinued operation (Note 13) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (66,142) 15,610 9,748 1,901,581 Non-controlling Interest Profit for the year from continuing operations . . . . . . . . . . . Profit (loss) for the year from discontinued operation. . . . . 23,446 (171,951) (148,505) 1,318,494 150,125 40,581 190,706 1,177,462 95,598 25,342 120,940

P 1,753,076 P 1,509,200 P 1,298,402 EARNINGS PER SHARE (Note 33) Basic and diluted, for net income attributable To common equity holders of the Parent Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P EARNINGS PER SHARE FOR CONTINUING OPERATIONS (Note 33) Basic and diluted, for net income from continuing operations attributable to common equity holders of the Parent Company . . . . . . . . . . . . . . . . . . . . . . . . P

582.35 P

403.07 P

359.71

602.68 P

398.27 P

356.72

See accompanying Notes to Financial Statements. F-214

ALLIED BANKING CORPORATION AND SUBSIDIARIES STATEMENTS OF COMPREHENSIVE INCOME (In Thousands)
Consolidated Years Ended December 31 2011 (As restated Notes 2 and 35) 2011 (As restated Notes 2 and 35) Parent Company

2012

2010

2012

2010

NET INCOME FROM CONTINUING OPERATIONS . . . . Q 1,991,169 P1,453,009 P1,263,312 Q 1,872,994 P1,117,887 P1,066,820 NET INCOME (LOSS) FROM DISCONTINUED OPERATION (Note 13). . . . . . . . . . . . . . . . . . . . . . . . . . (238,093) 56,191 35,090 NET INCOME . . . . . . . . . . . . . . . . . . . . . . OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX CONTINUING OPERATION Changes in net unrealized gain on available-for-sale investments (Note 7) . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity adjustment from translation . . . . . Changes in revaluation increment. . . . . . . DISCONTINUED OPERATION (Note 13) Changes in net unrealized gain on available-for-sale investments. . . . . . . . Equity adjustment from translation . . . . . 1,753,076 1,509,200 1,298,402 1,872,994 1,117,887 1,066,820

(1,000,960) (528,553) 255,080 (1,274,433)

2,687,875 4,869 9,244 2,701,988

1,090,044 (1,304,018) (497,226) 39,775 255,080 592,818 (1,009,163)

2,300,486 17,693 2,318,179

941,779 (21,558) 920,221

4,998 (72,485) (67,487) (1,341,920)

(4,998) 713 (4,285) 2,697,703

(73,482) (73,482) 519,336

(1,009,163)

2,318,179

920,221

TOTAL COMPREHENSIVE INCOME . . . . . . . . . . . . . . . . . . . . . . . . . Q ATTRIBUTABLE TO: Equity Holders of the Parent Company Total comprehensive income for the year from continuing operations . . . . . . . . . . Q Total comprehensive income (loss) for the year from discontinued operation . . . . . . . . . . . . . . . . . . . . . . . . . . Non-controlling Interest Total comprehensive income (loss) for the year from continuing operations . . Total comprehensive income (loss) for the year from discontinued operation . . . . . . . . . . . . . . . . . . . . . . . . . . Q

411,156 P4,206,903 P1,817,738 Q

863,831 P3,436,066 P1,987,041

885,767 P3,925,504 P1,933,003 (84,890) 800,877 14,420 3,939,924 (10,665) 1,922,338

(169,031) (220,690) (389,721)

229,492 37,487 266,979

(76,873) (27,727) (104,600)

411,156 P4,206,903 P1,817,738

See accompanying Notes to Financial Statements. F-215

ALLIED BANKING CORPORATION AND SUBSIDIARIES STATEMENTS OF CHANGES IN EQUITY (In Thousands)
Consolidated Attributable to Equity Holders of Parent Company Net Unrealized Reserve of Gain (Loss) disposal Equity on Available- Revaluation Equity Adjustment group for-Sale Increment Adjustment classified as from Investments of Land from Conversion held-for-sale (Note 7) (Note 10) Translation (Note 22) (Note 13)

Preferred Stock (Note 22)

Common Stock (Note 22)

Surplus Reserve (Notes 22 and 28)

Surplus (Note 22)

Total

Noncontrolling Interest (Note 2)

Total Equity

Balance at January 1, 2012, as restated . . P50,000 P3,252,495 P205,207 P16,333,083 P 3,380,450 P1,482,351 P 457,691 (P592,150) P 97,569 P24,666,696 P5,458,545 P30,125,241 Total comprehensive income. . . . . . . . . . . . . . Transfer to surplus reserve. . . . . . . . . . . . . . . . Dividend declaration. . . . . . . . . . . . . . . . . . . . . 7,939 1,901,581 (7,939) (30,000) (1,088,831) 255,080 (169,384) (97,569) 198 97,569 800,877 (30,000) (389,721) 411,156 (30,000)

Balance at December 31, 2012 . . . . . . . . . . . P50,000 P3,252,495 P213,146 P18,196,725 P 2,291,619 P1,737,431 P 288,307 (P592,150) P Balance at January 1, 2011 . . . . . . . . . . . . . . . P50,000 P3,252,495 P199,214 P15,020,582 P Total comprehensive income. . . . . . . . . . . . . . Transfer to surplus reserve. . . . . . . . . . . . . . . . Balance at December 31, 2011, as previously reported . . . . . . . . . . . . . . . . . . . . Restatement of surplus and other comprehensive income from reclassification (Notes 2 and 35) . . . . . . . . . 50,000 3,252,495 5,993 205,207 1,316,568 (5,993) 16,331,157 1,926

P25,437,573 P5,068,824 P30,506,397 1,571,408 22,298,180 2,368,516 213,167 5,404,733 53,812 1,784,575 27,702,913 2,422,328

778,675 P1,473,107 P 447,478 (P592,150) P 97,371 P20,726,772 P5,191,566 P25,918,338 235,185 1,013,860 2,366,590 9,244 1,482,351 10,213 457,691 (592,150)

F-216

Balance at December 31, 2011, as restated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P50,000 P3,252,495 P205,207 P16,333,083 P 3,380,450 P1,482,351 P 457,691 (P592,150) P 97,569 P24,666,696 P5,458,545 P30,125,241 Balance at January 1, 2010 . . . . . . . . . . . . . . . P50,000 P3,252,495 P194,554 P13,847,780 Total comprehensive income. . . . . . . . . . . . . . Restatement of share in equity balance of disposal group (Note 13) . . . . . . . . . . . . . . . Transfer to surplus reserve. . . . . . . . . . . . . . . . 4,660 1,177,462 (4,660) (P272,134) P1,473,107 P 850,782 (P592,150) P 1,050,809 (305,933) (97,371) 97,371 P18,804,434 P5,296,166 P24,100,600 1,922,338 (104,600) 1,817,738

Balance at December 31, 2010 . . . . . . . . . . . . P50,000 P3,252,495 P199,214 P15,020,582 P

778,675 P1,473,107 P 447,478 (P592,150) P 97,371 P20,726,772 P5,191,566 P25,918,338

See accompanying Notes to Financial Statements.

ALLIED BANKING CORPORATION AND SUBSIDIARIES STATEMENTS OF CHANGES IN EQUITY(Continued) (In Thousands)
Parent Company Net Unrealized Gain (Loss) on Availablefor-Sale Surplus Investments (Note 22) (Note 7)

Preferred Stock (Note 22)

Common Stock (Note 22)

Surplus Reserve (Notes 22 and 28)

Revaluation Increment of Land (Note 10)

Equity Adjustment from Translation

Equity Adjustment from Conversion (Note 22)

Total

Balance at January 1, 2012, as restated . . . . . . . . . . . Total comprehensive income . . . . . . . . . . . . . . . . . . . . . . Transfer to surplus reserve . . . . . . . . . . . . . . . . . . . . . . . . Dividend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance at December 31, 2012 . . . . . . . . . . . . . . . . . . . Balance at January 1, 2011 . . . . . . . . . . . . . . . . . . . . . . . . Total comprehensive income . . . . . . . . . . . . . . . . . . . . . . Transfer to surplus reserve . . . . . . . . . . . . . . . . . . . . . . . . Balance at December 31, 2011, as previously reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Restatement of surplus and other comprehensive income from reclassification (Notes 2 and 35) . . . . . Balance at December 31, 2011, as restated . . . . . . . . . . Balance at January 1, 2010 . . . . . . . . . . . . . . . . . . . . . . . . Total comprehensive income . . . . . . . . . . . . . . . . . . . . . . Transfer to surplus reserve . . . . . . . . . . . . . . . . . . . . . . . . Balance at December 31, 2010 . . . . . . . . . . . . . . . . . . . .

P50,000 P50,000 P50,000 50,000 P50,000 P50,000 P50,000

P3,252,495 P3,252,495 P3,252,495 3,252,495 P3,252,495 P3,252,495 P3,252,495

P205,207 7,939 P213,146 P199,214 5,993 205,207 P205,207 P194,554 4,660 P199,214

P14,421,702 1,872,994 (7,939) (30,000) P16,256,757 P13,309,808 1,117,620 (5,993) 14,421,435 267 P14,421,702 P12,247,648 1,066,820 (4,660) P13,309,808

P 2,893,283 (1,304,018) P 1,589,265 P 592,797 109,211 702,008 2,191,275 P 2,893,283 941,779 P 592,797

P1,463,271 255,080 P1,718,351 P1,463,271 1,463,271 P1,463,271 P1,463,271

(P40,797) (P592,150) P21,653,011 39,775 863,831 (30,000)

(P1,022) (P592,150) P22,486,842 (P58,490) (P592,150) P18,216,945 17,693 (40,797) (592,150) 1,244,524 19,461,469 2,191,542

F-217

(P40,797) (P592,150) P21,653,011 (P36,932) (P592,150) P16,229,904 (21,558) 1,987,041

(P348,982) P1,463,271

(P58,490) (P592,150) P18,216,945

See accompanying Notes to Financial Statements.

ALLIED BANKING CORPORATION AND SUBSIDIARIES STATEMENTS OF CASH FLOWS (In Thousands)
Consolidated Years Ended December 31 2011 (As restated Notes 2 and 35) 2011 (As restated Notes 2 and 35) Parent Company

2012

2010

2012

2010

CASH FLOWS FROM OPERATING ACTIVITIES Income before income tax from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Q 2,512,471 P 1,922,180 P 1,872,637 Q 2,353,056 P 1,484,582 P 1,609,139 Income (loss) before income tax from discontinued operation (Note 13). . . . . . . . . . . . . . . . . . . . . . . . . . . . (204,550) 90,055 54,726 2,307,921 Adjustments for: Trading and investment securities gains on available-for- sale investments (Note 7) . . . . . Provision for credit and impairment losses (Notes 13 and 14). . . . . . . . . . . . . . . . . . . . . . . . . Increase in aggregate life reserve for life policies (Note 26). . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization (Notes 10 and 13) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss from sale of disposal group (Note 13). . . . . Gain on sale of investment properties (Notes 11 and 23) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrealized market loss (gain) on fair value through profit or loss investments (Note 7). . . Gain on acquisition of investment properties (Note 11) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of discount on subordinated debt (Note 18) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gain on sale of property and equipment (Note 10) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gain on sale from dissolution of subsidiary . . . . Changes in operating assets and liabilities: Decrease (increase): Financial assets at fair value through profit or loss . . . . . . . . . . . . . . . . . . . . Loans and receivables . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . Increase (decrease): Deposit liabilities . . . . . . . . . . . . . . . . . . Derivative liabilities . . . . . . . . . . . . . . . . Managers checks and demand drafts outstanding . . . . . . . . . . . . . . . . . . . . . Accrued taxes, interest and other expenses. . . . . . . . . . . . . . . . . . . . . . . . Insurance provisions and liabilities . . . Other liabilities . . . . . . . . . . . . . . . . . . . . Net cash generated from (used in) operations . . . . . . . Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash provided by (used in) operating activities . . CASH FLOWS FROM INVESTING ACTIVITIES Acquisitions of: Available-for-sale investments. . . . . . . . . . . . . . . . Property and equipment (Note 10) . . . . . . . . . . . . Held-to-maturity investments. . . . . . . . . . . . . . . . . Placements on other banks (Note 36) . . . . . . . . . . . . . . Proceeds from sale of: Available-for-sale investments. . . . . . . . . . . . . . . . Investment properties. . . . . . . . . . . . . . . . . . . . . . . . Property and equipment (Note 10) . . . . . . . . . . . . Net cash inflow (outflow) from sale and dissolution of subsidiary (Note 13) . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from placements on other banks . . . . . . . . . . Proceeds from maturities of held-to-maturity investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash provided by (used in) investing activities. . . (2,486,548) 1,785,814 805,884 397,348 290,242 (211,527) (81,828) (27,158) 14,515 (710) 2,012,235 (379,228) 368,309 717,007 433,426 (112,118) (8,738) (36,600) 13,422 (3,851) 1,927,363 (586,191) 1,263,034 513,858 460,644 (228,667) (104,083) (30,532) 9,573 (8,521) 2,353,056 (2,418,924) 1,548,204 349,084 (203,228) (88,782) (22,534) 14,515 (710) (6,381) 1,484,582 (378,671) 350,778 384,323 (99,416) 16,079 (28,787) 13,422 (3,836) 1,609,139 (586,190) 1,211,263 417,895 (222,058) (104,083) (29,922) 9,573 (8,521)

(6,595,929) 2,817,980 1,113,732 (3,634,589) (16,570,998) (3,340,791) 2,499 151,406 (157,325) (518,574) 15,655 (489,466) 178,000 (19,059) (511,456) (8,778,966) (618,286) (9,397,252) 5,325,607 (47,984) 509,825 59,174 57,572 256,410 (4,437,144) (557,602) (4,994,746) (538,093) (207,258) (2,019) 77,735 (14,173) 1,540,642

(6,591,667) 2,794,523 1,016,785 (5,257,150) (16,474,671) (3,487,277) 62,684 391,451 (92,454) 565,918 9,675 (481,852) 118,390 (436,650) 2,813,927 (40,230) 501,996 47,149 866,641 (7,360,740) (420,786) (7,781,526) 1,911,982 (208,336) (6,792) 45,855 664,261 2,141,120 (542,268) 1,598,852

1,688,928 (10,486,352) (626,858) (490,057) 1,062,070 (10,976,409)

(20,450,348) (330,881) (5,570,309) 32,489,471 541,249 16,897 (358,545) 6,337,534

(6,407,366) (6,963,123) (16,616,790) (298,131) (408,582) (304,349) (871,964) (2,988,823) 9,392,447 500,589 249,271 372,315 2,169,111 5,106,272 2,282,364 881,293 175,628 1,431,771 999,127 (4,590,345) 29,095,845 382,142 33,351 56,381 12,646,580

(5,371,218) (3,729,576) (261,653) (348,477) (2,384,187) (3,034,849) 10,540,096 492,128 11,814 2,164,754 5,191,734 2,123,795 775,763 159,608 1,072,140 (2,981,596)

(Forward) F-218

ALLIED BANKING CORPORATION AND SUBSIDIARIES STATEMENTS OF CASH FLOWS(Continued) (In Thousands)
Consolidated Years Ended December 31 2011 (As restated Notes 2 and 35) 2011 (As restated Notes 2 and 35) Parent Company

2012

2010

2012

2010

CASH FLOWS FROM FINANCING ACTIVITIES Increase (decrease) in the amount of: Bills payable . . . . . . . . . . . . . . . . . . . . . . . . . . . Q Margin deposits . . . . . . . . . . . . . . . . . . . . . . . . . Cash dividends paid. . . . . . . . . . . . . . . . . . . . . . . . . . Net cash provided by (used in) financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cumulative translation adjustment . . . . . . . . . . . . . NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR Cash and other cash items . . . . . . . . . . . . . . . . . . . . Due from Bangko Sentral ng Pilipinas (BSP). . . . Due from other banks . . . . . . . . . . . . . . . . . . . . . . . . Interbank loans receivable and securities purchased under resale agreements (SPURA) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash and cash equivalents attributed to disposal group classified as held-for-sale (Note 13) . . . . CASH AND CASH EQUIVALENTS AT END OF YEAR Cash and other cash items . . . . . . . . . . . . . . . . . . . . Due from BSP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due from other banks (Note 37) . . . . . . . . . . . . . . . Interbank loans receivable and SPURA (Notes 6 and 37). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash and cash equivalents attributed to disposal group classified as held-for-sale (Note 13) . . . .

44,311 P 2,007,857 20,613 (24,529) (30,000) 34,924 (508,169) (3,532,963) 1,983,328 86,684 2,181,538

(P1,109,488) Q (40,272) (1,149,760) (571,385) (5,249,420)

471,521 P 3,133,071 20,613 (23,316) (30,000) 462,134 39,775 2,172,080 3,109,755 17,693 537,656

(P1,052,184) (79,708) (1,131,892) (21,558) (2,536,194)

4,023,559 18,286,303 10,821,079 12,493,447 973,818 46,598,206

4,636,820 16,297,912 7,442,201 15,058,026 981,709 44,416,668

5,113,295 19,486,602 9,720,051 15,346,140 49,666,088

3,719,876 18,174,486 4,106,005 10,120,198 36,120,565

4,280,874 13,892,789 2,938,976 14,470,270 35,582,909

4,775,049 15,332,839 2,405,729 15,605,486 38,119,103

3,885,613 26,082,603 6,523,028 6,573,999

4,023,559 18,286,303 10,821,079 12,493,447 973,818

4,636,820 16,297,912 7,442,201 15,058,026 981,709

3,621,910 25,897,693 3,719,056 5,053,986

3,719,876 18,174,486 4,106,005 10,120,198

4,280,874 13,892,789 2,938,976 14,470,270

Q43,065,243 P46,598,206 P 44,416,668 Q38,292,645 P36,120,565 P 35,582,909 OPERATIONAL CASH FLOWS Interest received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Q 9,280,915 P 9,587,459 P Interest paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,485,381 2,885,642 Dividends received . . . . . . . . . . . . . . . . . . . . . . . . . . 1,801 2,028 9,582,499 Q 8,335,965 P 8,384,697 P 2,874,497 2,387,543 2,686,178 13,773 5,583 3,692 8,823,619 2,803,829 15,194

See accompanying Notes to Financial Statements. F-219

ALLIED BANKING CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (Amounts in Thousands, Except When Otherwise Indicated) 1. Corporate Information

Allied Banking Corporation (the Parent Company) is a publicly listed universal bank incorporated on April 11, 1977 and domiciled in the Philippines with registered office address at Allied Bank Center, 6754 Ayala Avenue, Makati City. The Parent Company and its subsidiaries (the Group) are engaged in all aspects of banking, insurance, financing and leasing to personal, commercial, corporate and institutional clients through a network of 325 local and international branches and offices. Allied Banking Corporation is the ultimate parent company of the Group. The Groups products and services include deposit taking, lending and related services, domestic and foreign fund transfers, treasury, foreign exchange and trust services. In addition, the Parent Company engages in regular financial derivatives as a means of reducing and managing the Parent Companys and its customers exposures to credit risk, foreign exchange and interest rates. 2. Summary of Significant Accounting Policies

Basis of Preparation The accompanying financial statements have been prepared under the historical cost convention except for financial assets at fair value through profit or loss (FVPL) which includes derivative financial instruments, and available-for-sale (AFS) investments that have been measured at fair value, and property and equipmentland which have been measured at revalued amount, being its fair value at the date of the revaluation less any and subsequent accumulated impairment losses. All values are rounded to the nearest thousand pesos (P000) except when otherwise indicated. The accompanying financial statements of the Parent Company reflect the accounts maintained in the Regular Banking Unit (RBU) and Foreign Currency Deposit Unit (FCDU). The functional currency of RBU is Philippine Peso and for the FCDU is United States Dollar (USD or US$). For financial reporting purposes, FCDU accounts and foreign currency-denominated accounts in the RBU are translated into their equivalents in Philippine pesos (see policy on Foreign Currency Translation). The financial statements individually prepared for these units are combined after eliminating inter-unit accounts and transactions. Each entity in the Group determines its own functional currency and items included in the financial statements of each entity are measured using that functional currency. The respective functional currencies of the subsidiaries are presented under Basis of Consolidation. Statement of Compliance The financial statements of the Group and of the Parent Company have been prepared in compliance with Philippine Financial Reporting Standards (PFRS). Prior to 2011, the financial statements of the Group and the Parent Company were prepared in accordance with PFRS. In 2011, the Group and the Parent Company changed its accounting policies from PFRS to accounting principles generally accepted in the Philippines for banks (GAAP for banks) to avail of the exemption on tainting rules under Philippine Accounting Standards (PAS) 39, Financial Instruments: Recognition and Measurement provided by the Securities and Exchange Commission (SEC) to financial institutions that participated in the bond exchange program. Under the exemption, the Group and the Parent Company were allowed to retain under held-to-maturity (HTM) investments received from the exchange amounting to P259.32 million and P203.11 million, respectively and the remaining unsold portfolio, provided that the gain from the exchange on July 19, 2011 of the Group and the Parent Company amounting to P3.53 million and P0.27 million, respectively, is deferred. In 2012, to comply with the requirements of a stockholder, the Group and the Parent Company prepared their financial statements in accordance with PFRS. Accordingly, the 2011 financial statements have been restated for comparative purposes. The 2010 financial statements have not been restated since these have been F-220

prepared in accordance with PFRS. Under PFRS, the Group and the Parent Company are allowed to apply either PFRS 1, First Time Adoption of Philippine Financial Reporting Standards or PAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, in accounting for the change from GAAP for banks to PFRS. The Group and the Parent Company adopted PAS 8. Refer to Note 35 for the effect of the change in accounting policy. Presentation of Financial Statements The Group presents its statement of financial position broadly in order of liquidity. An analysis regarding recovery (asset) or settlement (liability) within twelve (12) months after the statement of financial position date (current) and more than twelve (12) months after the statement of financial position date (non-current) is presented in Note 21. Basis of Consolidation The consolidated financial statements include the financial statements of the Parent Company and its subsidiaries and are prepared for the same reporting year as the Parent Company using consistent accounting policies. The Parent Companys subsidiaries, which financial and operating policies are controlled by the Parent Company, follow (see Note 9):
Effective Percentage of Ownership Subsidiary 2012 2011 and 2010 Country of Incorporation

Functional Currency

Banking Allied Savings Bank (ASB) Allied Bank Philippines (UK) Plc (ABUK) Allied Commercial Bank (ACB) Allied Banking Corporation (Hong Kong) Limited (ABCHKL) Foreign Exchange Allied Forex Corporation (AFC) Insurance PNB Life Insurance, Inc. (PLII) Leasing Allied Leasing and Finance Corporation (ALFC) Holding Company Oceanic Holding (BVI) Ltd. (OHBVI) (Note 13)

100.00 100.00 51.00 51.00

100.00 100.00 51.00 51.00

Philippines Philippine Peso United Kingdom Great Britain Pound (GBP) Peoples Republic USD of China Hong Kong Hong Kong Dollar (HKD) Philippines Philippines Philippines British Virgin Islands Philippine Peso Philippine Peso Philippine Peso USD

75.00 57.21 27.78

100.00 75.00 57.21 27.78

Subsidiaries are all entities over which the Parent Company has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Parent Company controls another entity. Subsidiaries are consolidated from the date on which control is transferred to the Parent Company and cease to be consolidated from the date on which control is transferred out of the Parent Company. Control is achieved where the Parent Company has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. The results of subsidiaries acquired or disposed of during the year are included in the consolidated statement of income from the date of acquisition or up to the date of disposal, as appropriate. All intra-group balances, transactions, income and expenses and profits and losses resulting from intragroup transactions with subsidiaries are eliminated in full for consolidation purposes. If the Group losses control over a subsidiary, it: Derecognizes the assets (including goodwill) and liabilities of the subsidiary. Derecognizes the carrying amount of any non-controlling interest. F-221

 Derecognizes the cumulative translation differences, recorded in equity. Recognizes the fair value of the consideration received. Recognizes the fair value of any investment retained. Recognizes any surplus or deficit in profit or loss. Reclassifies the parents share of components previously recognized in other comprehensive income to profit or loss or retained earnings, as appropriate. The Group accounts for its investments in OHBVI as a subsidiary although the Group holds less than 50% of the issued share capital on the basis of the voting rights of 42.78% assigned by certain stockholders to the Parent Company. The Group has the ability to govern the financial and operating policies of OHBVI on the basis of the combined voting rights arising from its direct ownership and assigned voting rights of 70.56%. OHBVI had a wholly-owned subsidiary, Oceanic Bank Holdings, Inc. (OBHI). As of December 31, 2012, the Group has no control over OBHI upon disposal made by OHBVI on September 22, 2012 (see Note 13). Prior to September 22, 2012, the accounts of OBHI are presented as disposal group classified as held-for-sale. In the separate or parent company financial statements, investments in subsidiaries are carried at cost, less accumulated impairment in value. Dividends earned on these investments are recognized in the Parent Companys statement of income as declared by the respective board of directors (BOD) of the subsidiaries. Non-controlling Interests Non-controlling interests (NCI) represent the portion of net income or losses and the net assets not held by the Parent Company and are presented separately in the consolidated statement of income, consolidated statement of comprehensive income and within equity in the consolidated statement of financial position, separately from equity attributable to equity holders of the Parent Company. Any losses applicable to the NCI interests in excess of the non-controlling interests are allocated against the interests of the non-controlling interest even if this results in the non-controlling interest having a deficit balance. Acquisitions of noncontrolling interests are accounted for as equity transactions. Changes in Accounting Policies and Disclosures The accounting policies adopted are consistent with those of the previous financial year except for the following new and amended PAS and PFRS which became effective as of January 1, 2012. Except as otherwise indicated, these changes in the accounting policies did not have any significant impact on the financial position or performance of the Group: PFRS 7, Financial Instruments: DisclosuresTransfers of Financial Assets (Amendments) The amendments require additional disclosures about financial assets that have been transferred but not derecognized to enhance the understanding of the relationship between those assets that have not been derecognized and their associated liabilities. In addition, the amendments require disclosures about continuing involvement in derecognized assets to enable users of financial statements to evaluate the nature of, and risks associated with, the entitys continuing involvement in those derecognized assets. The amendments have no impact on the Groups disclosures, financial position or performance since the Group does not have any continuing involvement in its derecognized assets. PAS 12, Income TaxesDeferred Tax: Recovery of Underlying Assets (Amendment) This amendment to PAS 12 clarifies the determination of deferred tax on investment property measured at fair value. The amendment introduces a rebuttable presumption that the carrying amount of investment property measured using the fair value model in PAS 40, Investment Property, will be recovered through sale and, accordingly, requires that any related deferred tax should be measured on a sale basis. The presumption is rebutted if the investment property is depreciable and it is held within a business model whose objective is to consume substantially all of the economic benefits in the investment property over time (use basis), rather than through sale. Furthermore, the amendment introduces the requirement that deferred tax on non-depreciable assets measured using the revaluation model in PAS 16, Property, Plant and Equipment, always be measured on a sale basis of the asset. The amendments are effective for periods beginning on or after January 1, 2012. F-222

The Group has land properties under PAS 16 carried under the revaluation model. These land properties are classified as ordinary assets for income tax purposes. As the jurisdiction in which the Group operates does not have a different tax charge for sale or use basis of assets classified as ordinary assets for income tax purposes, the amendment has no impact on the financial statements of the Group. Significant Accounting Policies Foreign Currency Translation The consolidated and parent company financial statements are presented in Philippine Peso which is also the Parent Companys functional currency. Transactions and balances The books of accounts of the RBU are maintained in Philippine Peso, while those of the FCDU are maintained in USD. For financial reporting purposes, the monetary assets and liabilities of the FCDU and the foreign currency-denominated monetary assets and liabilities in the RBU are translated in Philippine pesos based on the Philippine Dealing System (PDS) closing rate prevailing at end of the year and foreign currencydenominated income and expenses based on the spot exchange rate at the date of the transaction. Foreign exchange differences arising from restatements of foreign currency-denominated assets and liabilities are credited to or charged against operations in the period in which the rates change. Nonmonetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions. Nonmonetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. FCDU, foreign branches and subsidiaries As at the reporting date, the assets and liabilities of the FCDU, foreign branches and subsidiaries are translated into the Parent Companys presentation currency (Philippine Peso) at the PDS closing rate prevailing at the statement of financial position date, and its income and expenses are translated at the PDS WAR (weighted average rate) for the year. Exchange differences arising on translation of monetary items are taken to other comprehensive income (OCI) under Equity adjustment from translation for FCDU and foreign subsidiaries while under the statement of income for foreign branches. Assigned capital of foreign branches are translated using the original and historial rates upon the transfer of capital and not translated at every reporting date. Upon disposal of or when the Parent Company ceases to have control over the foreign subsidiaries or upon actual remittance of FCDU profits to RBU, the deferred cumulative amount recognized in the statement of comprehensive income is recognized in the statement of income. Financial InstrumentsInitial Recognition and Subsequent Measurement Date of recognition Purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or convention in the marketplace are recognized on the settlement date. Derivatives are also recognized on settlement date basis. Deposits, amounts due to banks and customers and loans are recognized when cash is received by the Group or advanced to the borrowers. Initial recognition of financial instruments All financial instruments are initially recognized at fair value. Except for financial assets and financial liabilities valued at FVPL, the initial measurement of financial instruments includes transaction costs. The Group classifies its financial assets into the following categories: financial assets at FVPL, AFS investments, HTM investments, and loans and receivables. Financial liabilities are categorized as financial liabilities at FVPL and other financial liabilities carried at amortized cost. The classification depends on the purpose for which the investments were acquired and whether they are quoted in an active market. Management determines the classification of its investments at initial recognition and, where allowed and appropriate, reevaluates such designation at every statement of financial position date.

F-223

Reclassification of financial assets A financial asset is reclassified out of the FVPL category when the following conditions are met: the financial asset is no longer held for the purpose of selling or repurchasing it in the near term; and there is a rare circumstance. A financial asset that is reclassified out of the FVPL category is reclassified at its fair value on the date of reclassification. Any gain or loss already recognized in the statement of income is not reversed. The fair value of the financial asset on the date of reclassification becomes its new cost or amortized cost, as applicable. For a financial asset reclassified out of the AFS investments category to loans and receivables or HTM investments, any previous gain or loss on that asset that has been recognized in the OCI is amortized to profit or loss over the remaining life of the investment using the effective interest method. Any difference between the new amortized cost and the expected cash flows is also amortized over the remaining life of asset using effective interest method. If the asset is subsequently determined to be impaired then the amount recorded in the OCI is recycled to the statement of income. Reclassification is at the election of management, and is determined on an instrument by instrument basis. An analysis of reclassified assets is disclosed in Note 7. Determination of fair value The fair value for financial instruments traded in active markets at the statement of financial position date is based on their quoted market price or dealer price quotations (bid price for long positions and ask price for short positions), without any deduction for transaction costs. When current bid and ask prices are not available, the price of the most recent transaction provides evidence of the current fair value as long as there has not been a significant change in economic circumstances since the time of the transaction. If the Group can demonstrate that the last transaction price is not fair value, that price is adjusted. For all other financial instruments not listed in an active market, the fair value is determined by using appropriate valuation methodologies. Valuation methodologies include net present value techniques, comparison to similar instruments for which market observable prices exist, option pricing models, and other relevant valuation models. Day 1 difference Where the transaction price in a non-active market is different to the fair value from other observable current market transactions in the same instrument or based on a valuation technique whose variables include only data from observable market, the Group recognizes the difference between the transaction price and fair value (a Day 1 difference) in the statement of income in Trading and investment securities gainsnet unless it qualifies for recognition as some other type of asset. In cases where nonmarket observable data is used, the difference between the transaction price and model value is only recognized in the statement of income when the inputs become observable or when the instrument is derecognized. For each transaction, the Group determines the appropriate method of recognizing the Day 1 difference amount. Derivatives recorded at FVPL The Group is a party to derivative instruments, particularly, forward exchange contracts, spots, interest rate swap, cross currency and warrants. These contracts are entered into as a service to customers, a means of reducing and managing the Groups foreign exchange risk and for trading purposes, but these are not entered into as accounting hedges. Such derivative financial instruments are initially recorded at fair value on the date at which the derivative contract is entered into and are subsequently remeasured at fair value. Any gains or losses arising from changes in the fair values of derivatives (except those accounted for as hedges) are taken directly to the statement of income and are included under Trading and investment securities gainsnet. Derivatives are carried as assets when the fair value is positive and as liabilities when the fair value is negative. Embedded derivatives The Group has certain derivatives that are embedded in host financial, such as structured notes, insurance contracts and debt investments contracts. These embedded derivatives include credit derivatives, put options and call options. F-224

Embedded derivatives are bifurcated from their host contracts and carried at fair value with fair value changes being reported in the statement of income, when the entire hybrid contracts (composed of both the host contract and the embedded derivative) are not accounted for as financial assets at FVPL, when their economic risks and characteristics are not closely related to those of their respective host contracts, and when a separate instrument with the same terms as the embedded derivatives would meet the definition of a derivative. The Group assesses whether embedded derivatives are required to be separated from the host contracts when the Group first becomes a party to the contract. Reassessment of embedded derivatives is only done when there are changes in the contract that significantly modifies the contractual cash flows. Financial assets and financial liabilities designated at FVPL Financial assets and financial liabilities classified in this category are designated by management on initial recognition when the following criteria are met: The designation eliminates or significantly reduces the inconsistent treatment that would otherwise arise from measuring the assets or liabilities or recognizing gains or losses on them on a different basis; or The assets and liabilities are part of a group of financial assets, financial liabilities or both which are managed and their performance evaluated on a fair value basis, in accordance with a documented risk management or investment strategy; or The financial instrument contains an embedded derivative, unless the embedded derivative does not significantly modify the cash flows or it is clear, with little or no analysis, that it would not be separately recorded. Financial assets and financial liabilities designated at FVPL are recorded in the statement of financial position at fair value. Changes in fair value on financial assets and liabilities designated at FVPL are recorded in Trading and investment securities gainsnet. Interest earned or incurred is recorded in Interest income or expense, respectively, while dividend income is recorded in Dividends under Miscellaneous income according to the terms of the contract, or when the right of the payment has been established. The Group has no financial assets and financial liabilities designated at FVPL as of December 31, 2012 and 2011 and January 1, 2011. Financial assets and financial liabilities held-for-trading (HFT) Financial assets and financial liabilities HFT are recorded in the statement of financial position at fair value. Changes in fair value are recognized in Trading and investment securities gainsnet. Interest earned or incurred is recorded in interest income or expense, respectively, while dividend income is recorded in Dividends under Miscellaneous income when the right to receive payment has been established. Included in this classification are debt and equity securities which have been acquired principally for the purpose of selling or repurchasing in the near term. AFS investments AFS investments include equity investments, money market papers and other debt instruments. Equity investments classified as AFS investments are those which are neither classified as HFT nor designated at FVPL. Debt securities in this category are those which are intended to be held for an indefinite period of time and which may be sold in response to liquidity requirements or changes in market conditions. After initial measurement, AFS investments are subsequently measured at fair value. The effective yield component of AFS debt securities, as well as the impact of restatement on foreign currency-denominated AFS debt securities, is reported in the statement of income. The unrealized gains and losses arising from the fair valuation of AFS investments are excluded, net of tax, from reported income and are reported as Changes in net unrealized gains on AFS investments in the OCI section of the statement of comprehensive income. When the security is disposed of, the cumulative gain or loss previously recognized in OCI is recognized as Trading and investment securities gainsnet in the statement of income. Where the Group holds more than one investment in the same security, these are deemed to be disposed of on a first-in first-out basis. Interest earned on holding AFS debt investments are reported as Interest income using the effective interest method. Dividends earned on holding AFS equity investments are recognized in the statement of income as Dividends under Miscellaneous income when the right of payment has been established. The losses arising from impairment of such investments are recognized as Provision for credit and impairment losses in the statement of income. F-225

HTM investments HTM investments are quoted non-derivative financial assets with fixed or determinable payments and fixed maturities for which the Groups management has the positive intention and ability to hold to maturity. Where the Group sells other than an insignificant amount of HTM investments, the entire category would be tainted and reclassified as AFS investments. After initial measurement, these investments are subsequently measured at amortized cost using the effective interest method, less impairment in value. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees that are an integral part of the effective interest rate (EIR). The amortization is included in Interest income in the statement of income. Gains and losses are recognized in income when the HTM investments are derecognized and impaired, as well as through the amortization process. The losses arising from impairment of such investments are recognized in the statement of income under Provision for credit and impairment losses. The effects of restatement on foreign currencydenominated HTM investments are recognized in the statement of income. Loans and receivables This category includes due from Bangko Sentral ng Pilipinas (BSP), due from other banks, interbank loans receivable and securities purchased under resale agreement (SPURA), and loans and receivables. These are financial assets with fixed or determinable payments and fixed maturities that are not quoted in an active market. They are not entered into with the intention of immediate or short-term resale and are not classified as Financial assets at FVPL or AFS investments. Loans and receivables include receivables arising from transactions on credit cards issued directly by the Parent Company and those credit cards issued through a credit card company which have tie-up arrangements with the Parent Company. Collection of receivables from credit cardholders of other banks is guaranteed by those banks with tie-up arrangements with the Parent Company. Loans and receivables also include ALFCs lease contracts receivable and notes receivable financed which are stated at the outstanding balance, reduced by unearned lease income and unearned finance income, respectively, (included in Unearned interest and discount) and allowance for credit losses. PLIIs insurance receivables are recognized when due and measured on initial recognition at the fair value of the consideration. After initial measurement, Due from BSP, Due from other banks, Interbank loans receivable and SPURA, and Loans and receivables are subsequently measured at amortized cost using the effective interest method, less allowance for credit losses. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees and costs that are an integral part of the EIR. The amortization is included in the Interest income in the statement of income. The losses arising from impairment are recognized in Provision for credit and impairment losses in the statement of income. Other financial liabilities carried at amortized cost This category represents issued financial instruments or their components, which are not designated at FVPL, and comprises Deposit liabilities, Bills payable, Marginal deposits, Managers checks and demand drafts outstanding, Subordinated debt or other appropriate account titles for such borrowed funds, where the substance of the contractual arrangement results in the Group having an obligation either to deliver cash or another financial asset to the holder, or to satisfy the obligation other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of own equity shares. The components of issued financial instruments that contain both liability and equity elements are accounted for separately, with the equity component being assigned the residual amount after deducting from the instrument as a whole the amount separately determined as the fair value of the liability component on the date of issue. After initial measurement, bills payable and other similar financial liabilities are subsequently measured at amortized cost using the effective interest method. Amortized cost is calculated by taking into account any discount or premium on the issue and fees that are an integral part of the EIR.

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Derecognition of Financial Assets and Liabilities Financial assets A financial asset (or, where applicable a part of a financial asset or part of a group of financial assets) is derecognized when: the rights to receive cash flows from the asset have expired; or the Group retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a pass-through arrangement;or the Group has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained the risk and rewards of the asset but has transferred control over the asset. Where the Group has transferred its rights to receive cash flows from an asset or has entered into a passthrough arrangement, and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control over the asset, the asset is recognized to the extent of the Groups continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Group could be required to repay. Financial liabilities A financial liability is derecognized when the obligation under the liability is discharged, cancelled or has expired. Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognized in statement of income. Repurchase and reverse repurchase agreements Securities sold under agreements to repurchase at a specified future date (repos or SSURA) are not derecognized from the statement of financial position. The corresponding cash received, including accrued interest, is recognized in the statement of financial position as SSURA and is considered as a loan to the Group, reflecting the economic substance of such transaction. Conversely, securities purchased under agreements to resell at a specified future date (reverse repos or SPURA) are not recognized in the statement of financial position. The corresponding cash paid including accrued interest, is recognized in the statement of financial position as SPURA, and is considered a loan to the counterparty. The difference between the purchase price and resale price is treated as interest income and is accrued over the life of the agreement using the effective interest method. Offsetting Financial Instruments Financial assets and financial liabilities are offset and the net amount reported in the statement of financial position if, and only if, there is a currently enforceable legal right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the asset and settle the liability simultaneously. This is not generally the case with master netting agreements, and the related assets and liabilities are presented gross in the statement of financial position. Impairment of Financial Assets The Group assesses at each statement of financial position date whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset (an incurred loss event) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the borrower or a group of borrowers is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganization and where there are observable data indicating that there is measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults. F-227

Financial assets carried at amortized cost For financial assets carried at amortized cost which include due from BSP, due from banks, loans and receivables, interbank loans receivable, SPURA and HTM investments, the Group first assesses whether objective evidence of impairment exists for financial assets that are individually significant. If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the assets carrying amount and the present value of the estimated future cash flows (excluding future credit losses that have not been incurred). The carrying amount of the asset is reduced through use of an allowance account and the amount of loss is charged in the statement of income. Interest income continues to be recognized thereafter based on the interest rate used to discount the future cash flows for the purpose of measuring the impairment loss. If, in a subsequent year, the amount of the estimated impairment loss decreases because of an event occurring after the impairment was recognized, the previously recognized impairment loss is reduced by adjusting the allowance account. Loans, together with the associated allowance accounts, are written off when there is no realistic prospect of future recovery and all collateral has been realized. If a future write-off is later recovered, any amounts formerly charged are credited to the Provision for credit and impairment losses account. The present value of the estimated future cash flows is discounted at the financial assets original EIR. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current EIR, adjusted for the original credit risk premium. The calculation of the present value of the estimated future cash flows of a collateralized financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable. If the Group determines that no objective evidence of impairment exists for individually assessed financial asset, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses for impairment. Those characteristics are relevant to the estimation of future cash flows for groups of such assets by being indicative of the debtors ability to pay all amounts due according to the contractual terms of the assets being evaluated. For the purpose of a collective evaluation of impairment, financial assets are grouped on the basis of similar credit risk characteristics such as industry, collateral type, past-due status and term. Future cash flows in a group of financial assets that are collectively evaluated for impairment are estimated on the basis of historical loss experience for assets with credit risk characteristics similar to those in the Group. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the period on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currently. Estimates of changes in future cash flows reflect, and are directionally consistent with changes in related observable data from period to period (such changes in property prices, payment status, or other factors that are indicative of incurred losses in the Group and their magnitude). The methodology and assumptions used for estimating future cash flows are reviewed regularly by the Group to reduce any differences between loss estimates and actual loss experience. For credit card receivables, the Group also uses the Net Flow Rate method to determine the credit loss rate of a particular delinquency age bucket based on historical data of flow-through and flow-back of loans across specific delinquency age buckets. The allowance for credit losses is determined based on the results of the net flow to write-off methodology. Net flow tables are derived from monitoring of monthly peso movements between different stage buckets, from 1-day past due to 180-days past due. The net flow to write-off methodology relies on the last 24 months of net flow tables to establish a percentage (net flow rate) of accounts receivable that are current or in any state of delinquency (i.e., 30, 60, 90, 120, 150 and 180 days past due) as of reporting date that will eventually result in write-off. The gross provision is then computed based on the outstanding balances of the receivables as of statement of financial position date and the net flow rates determined for the current and each delinquency bucket. This gross provision is reduced by the estimated recoveries, which are also based on historical data, to arrive at the required allowance for credit losses. AFS investments For AFS investments, the Group assesses at each statement of financial position date whether there is objective evidence that a financial asset or group of financial assets is impaired. The losses arising from impairment of such investments are recognized as Provision for credit and impairment losses in the statement F-228

of income. In case of equity investments classified as AFS investments, this would include a significant or prolonged decline in the fair value of the investments below its cost. Where there is evidence of impairment, the cumulative lossmeasured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognized in the statement of incomeis removed from OCI and recognized in the statement of income. Impairment losses on equity investments are not reversed through the statement of income. Increases in fair value after impairment are recognized directly in OCI. In the case of debt instruments classified as AFS investments, impairment is assessed based on the same criteria as financial assets carried at amortized cost. Future interest income is based on the reduced carrying amount and is accrued based on the rate of interest used to discount future cash flows for the purpose of measuring impairment loss. Such accrual is recorded as part of Interest income in the statement of income. If, in subsequent year, the fair value of a debt instrument increased and the increase can be objectively related to an event occurring after the impairment loss was recognized in the statement of income, the impairment loss is reversed through the statement of income. Restructured loans Where possible, the Group seeks to restructure loans rather than to take possession of collateral. This may involve extending the payment arrangements and the agreement of new loan conditions. Once the terms have been renegotiated, any impairment is measured using the original EIR as calculated before the modification of terms and the loan is no longer considered past due. Management continuously reviews restructured loans to ensure that all criteria are met and that future payments are likely to occur. The loans continue to be subject to an individual or collective impairment assessment, calculated using the loans original EIR. The difference between the recorded value of the original loan and the present value of the restructured cash flows, discounted at the original EIR, is recognized in Provision for credit and impairment losses in the statement of income. Non-current Assets Classified as Held-for-Sale Non-current assets and disposal groups classified as held-for-sale are measured at the lower of the carrying amount and fair value less costs to sell. Non-current assets and disposal groups are classified as held-for-sale if their carrying amounts will be recovered principally through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the asset or disposal group is available for immediate sale in its present condition. Management must be committed to the sale, which should be expected to qualify for recognition as a completed sale within one year from the date of classification. Events or circumstances may extend the period to complete the sale beyond one year. An extension of the period required to complete a sale does not preclude an asset (or disposal group) from being classified as heldfor-sale if the delay is caused by events or circumstances beyond the entitys control and there is sufficient evidence that the entity remains committed to its plan to sell the asset (or disposal group). In the statement of income of the reporting period, and of the comparable period of the previous years, income and expenses from discontinued operation are reported separate from the income and expense from continuing activities, down to the level of income after taxes. Terminal Value of Leased Assets and Deposits on Finance Leases The terminal value of leased assets, which approximates the amount of guaranty deposit paid by the lessee at the inception of the lease, is the estimated proceeds from the sale of the leased asset at the end of the lease term. At the end of the lease term, the terminal value of the leased asset is generally applied against the guaranty deposit of the lessee when the lessee decides to buy the leased asset. Equity Adjustment from Conversion The conversion of convertible debt requires the carrying value of the liability component at the time of conversion to be transferred into equity, irrespective of the fact that this may not be equivalent to the fair value of the debt at that time. The carrying amount of the liability is transferred to equity. There is no gain or loss on conversion at maturity.

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Revenue Recognition Revenue is recognized to the extent that it is probable that economic benefits will flow to the Group and the revenue can be reliably measured. The Group has concluded that it is acting as a principal in all of its revenue arrangements. The following specific recognition criteria must also be met before revenue is recognized: Interest income For all financial instruments measured at amortized cost and interest-bearing financial instruments classified as AFS investments, interest income is recorded at the EIR, which is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset. The calculation takes into account all contractual terms of the financial instrument, includes any fees or incremental costs that are directly attributable to the instrument and are an integral part of the EIR, but not future credit losses. The adjusted carrying amount is calculated based on the original EIR. The change in carrying amount is recorded as Interest income. Once the recorded value of a financial asset or group of similar financial assets has been reduced due to an impairment loss, interest income continues to be recognized using the original EIR applied to the new carrying amount. Trading and investments securities gainsnet This account includes results arising from trading activities and all gains and losses from changes in fair value of HFT financial assets and financial liabilities. It also includes gains and losses realized from sale of AFS investments and early redemption by the issuer of HTM investments. Dividends Dividend income is recognized when the Groups right to receive payment is established. Service fees and commission income The Group earns fee and commission income from a diverse range of services it provides to its customers. Fee income can be divided into the following two categories: a) Fee income earned from services that are provided over a certain period of time Fees earned for the provision of services over a period of time are accrued over that period. These fees include investment fund fees, custodian fees, fiduciary fees, commission income, credit card related fees, asset management fees, portfolio and other management fees, and advisory fees. Loan commitment fees for loans that are likely to be drawn down are deferred (together with any incremental costs) and recognized as an adjustment to the EIR on the loan. b) Fee income from providing transaction services Fees arising from negotiating or participating in the negotiation of a transaction for a third party, such as underwriting fees, corporate finance fees, commissions and handling charges are recognized on completion of the underlying transaction. Fees or components of fees that are linked to a certain performance are recognized after fulfilling the corresponding criteria. Loan syndication fees are recognized in the statement of income when the syndication has been completed and the Group retains no part of the loans for itself or retains part at the same EIR as for the other participants. Interchange fee and awards revenue on credit cards Discounts lodged under Interchange fees are taken up as income upon receipt from member establishments of charges arising from credit availments by the Groups cardholders. These discounts are computed based on certain agreed rates and are deducted from amounts remitted to the member establishments.

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The Parent Company operates a loyalty points program which allows customers to accumulate points when they purchase from member establishments using the issued card of the Parent Company. The points can then be redeemed for free products subject to a minimum number of points being obtained. Consideration received is allocated between the discounts earned, interchange fee and the points earned, with the consideration allocated to the points equal to its fair value. The fair value is determined by applying statistical analysis. The fair value of the points issued is deferred and recognized as revenue when the points are redeemed. Rental Rental income arising on leased properties is accounted for on a straight-line basis over the lease terms on ongoing leases and is recorded in the statement of income under Miscellaneous income. Income on direct financing leases and receivables financed Income on loans and receivables financed with short-term maturities is recognized using the EIR. Interest and finance fees on finance leases and loans and receivables financed with long-term maturities and the excess of the aggregate lease rentals plus the estimated terminal value of the leased equipment over its cost are credited to unearned discount and amortized over the term of the note or lease using the EIR. Premium income Gross earned recurring premiums from life insurance contracts are recognized as revenue when payable by the policyholder. For gross earned single premium business, revenue is recognized on the date from which the policy is effective. For regular premium contracts, receivables are recorded at the date when payments are due. Other income Income from sale of services is recognized upon rendition of the service. Income from sale of properties is recognized upon completion of the earning process and the collectability of the sales price is reasonably assured. Expense Recognition Expenses are recognized when it is probable that decrease in future economic benefits related to the decrease in asset or an increase in liability has occurred and that the decrease in economic benefits can be measured reliably. Expenses that may arise in the course of ordinary regular activities of the Group include among others the operating expenses on the Groups operation. Cash and Cash Equivalents For purposes of reporting cash flows, cash and cash equivalents include cash and other cash items, amounts due from BSP and other banks, and interbank loans receivable and SPURA with original maturities of three months or less from dates of placements and that are subject to insignificant risk of changes in value. Investments in Subsidiaries Investments in subsidiaries Subsidiaries pertain to all entities over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity (see accounting policy on Basis of Consolidation). In the Parent Company financial statements, investments in subsidiaries are carried at cost, less allowance for impairment losses. Property and Equipment Except for land, property and equipment is stated at cost, less accumulated depreciation and amortization, and any impairment in value. F-231

Land is carried at revalued amounts as determined by an independent firm of appraisers. The appraisal increase resulting from the revaluation was credited to Revaluation increment in landnet shown as part of OCI in the statement of comprehensive income. The revaluation method is used by the Group in accordance with PFRS, which is different from prudential reporting to the BSP which prescribes the cost model. The initial cost of the Groups property and equipment consists of its purchase price, including import duties, taxes and any directly attributable cost to bring the property and equipment to its working condition and location for its intended use. Expenditures incurred after the property and equipment have been put into operation, such as repairs and maintenance, are normally charged against current operations in the year the costs are incurred. In situations where it can be clearly demonstrated that the expenditures have resulted in an increase in the future economic benefits expected to be obtained from the use of an item of property and equipment beyond its originally assessed standard of performance, the expenditures are capitalized as additional costs of property and equipment. Depreciation and amortization is calculated on a straight-line basis over the estimated useful life of the assets. Leasehold improvements are amortized over the shorter of the terms of the covering leases and the estimated useful lives of the improvements. The annual depreciation and amortization rates are as follows: Buildings Leasehold improvements 4.00% 20.00% 33 1/3% or over the period of tenancy, whichever is shorter 20.00% 33 1/3%

Furniture, fixtures and equipment

The residual values, depreciation rates and the depreciation and amortization method are reviewed periodically to ensure that the rates and the method of depreciation and amortization are consistent with the expected pattern of economic benefits from items of property and equipment. The carrying values of property and equipment are reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. If any such indication exists and where the carrying values exceed the estimated recoverable amount, the assets or cash-generating units are written down to their recoverable amount (see accounting policy on Impairment of Nonfinancial Assets). An item of property and equipment is derecognized upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the statement of income in the period the asset is derecognized. Investment Properties Investment properties are initially measured at cost, including certain transaction costs. Investment properties acquired through a nonmonetary asset exchange is measured initially at fair value unless the exchange lacks commercial substance or the fair value of neither the asset received nor the asset given up is reliably measurable. Any gain or loss on the exchange is recognized in Gain on acquisition of investment properties. Foreclosed properties are classified as Investment properties upon: entry of judgment in case of judicial foreclosure; execution of the Sheriffs Certificate of Sale in case of extra-judicial foreclosure; or notarization of the Deed of Dacion in case of dation in payment (dacion en pago). Expenditures incurred after the investment properties have been put into operations, such as repairs and maintenance costs, are normally charged against current operations in the period in which the costs are incurred. Subsequent to initial recognition, depreciable investment properties are stated at cost less accumulated depreciation and any accumulated impairment in value.

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Depreciation is calculated on a straight-line basis using the estimated useful life from the time of acquisition of the investment properties. The estimated useful life of the depreciable investment properties which generally include building and improvements ranges from 25 to 50 years. Investment properties are derecognized when they have either been disposed of or when the investment properties are permanently withdrawn from use and no future benefit is expected from its disposal. Any gains or losses on the retirement or disposal of an investment property are recognized in the statement of income in Miscellaneous income in the year of retirement or disposal. Transfers are made to investment property only when there is a change in use evidenced by cessation of owner-occupation or of construction or development, or commencement of an operating lease to another party. Transfers are made from investment property when, and only when, there is a change in use, evidenced by commencement of owner-occupation or commencement of development with a view to sale. Business Combinations and Goodwill Business combination after January 1, 2010 Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred, measured at acquisition date fair value and the amount of any non-controlling interest in the acquiree. For each business combination, the acquirer measures the non-controlling interest in the acquiree either at fair value or at the proportionate share of the acquirees identifiable net assets. Acquisition costs incurred are expensed and included in administrative expenses. When the Group acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date. This includes the separation of embedded derivatives in host contracts by the acquiree. If the business combination is achieved in stages, the acquisition date fair value of the acquirers previously held equity interest in the acquiree is remeasured to fair value at the acquisition date in the statement of income. Any contingent consideration to be transferred by the acquirer will be recognized at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration which is deemed to be an asset or liability, will be recognized in accordance with PAS 39 either in the statement of income or as a charge to other comprehensive income. If the contingent consideration is classified as equity, it should not be remeasured until it is finally settled within equity. Goodwill is initially measured at cost being the excess of the aggregate of fair value of the consideration transferred and the amount recognized for non-controlling interest over the net identifiable assets acquired and liabilities assumed. If this consideration is lower than the fair value of the net assets of the subsidiary acquired, the difference is recognized in the statement of income. After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Groups cash-generating units that are expected to benefit from the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units. Business combinations prior to January 1, 2010 In comparison to the above-mentioned requirements, the following differences applied: Business combinations were accounted for using the purchase method. However, transaction costs directly attributable to the acquisition formed part of the acquisition costs. The non-controlling interest (formerly known as minority interest) was measured at the proportionate share of the acquirees identifiable net assets. Business combinations achieved in stages were accounted for as separate steps. Any additional acquired share of interest did not affect previously recognized goodwill. F-233

When the Group acquired a business, embedded derivatives separated from the host contract by the acquiree were not reassessed on acquisition unless the business combination resulted in a change in the terms of the contract that significantly modified the cash flows that otherwise would have been required under the contract. Contingent consideration was recognized if, and only if, the Group had a present obligation, the economic outflow was more likely than not and a reliable estimate was determinable. Subsequent adjustments to the contingent consideration were recognized as part of goodwill. Intangible Assets Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is its fair value as at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortization and any accumulated impairment losses. Internally generated intangible assets, excluding capitalized development costs, are not capitalized and expenditure is reflected in the statement of income in the year in which the expenditure is incurred. The useful lives of intangible assets are assessed to be either finite or indefinite. Intangibles assets with finite lives are amortized over the useful or economic life and assessed for impairment whenever there is an indication that the intangible assets may be impaired. The amortization period and the amortization method for an intangible asset with a finite useful life are reviewed at least at each financial year-end. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset is accounted for by changing the amortization period or method, as appropriate, and treated as changes in accounting estimates. The amortization expense on intangible assets with finite lives is recognized in the statement of income in the expense category consistent with the function of the intangible asset. Impairment of Nonfinancial Assets Property and equipment, investment properties, and investments in subsidiaries At each reporting date, the Group assesses whether there is any indication that its non financial assets may be impaired. When an indicator of impairment exists or when an annual impairment testing for an asset is required, the Group makes a formal estimate of recoverable amount. Recoverable amount is the higher of an assets (or cash-generating units) fair value less costs to sell and its value in use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets, in which case the recoverable amount is assessed as part of the cash-generating unit to which it belongs. Where the carrying amount of an asset (or cash-generating unit) exceeds its recoverable amount, the asset (or cash-generating unit) is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset (or cash-generating unit). An impairment loss is charged to operations or to the revaluation increment for assets carried at revalued amount, in the year in which it arises. An assessment is made at each reporting date as to whether there is any indication that previously recognized impairment losses may no longer exist or may have decreased. If such indication exists, the recoverable amount is estimated. A previously recognized impairment loss is reversed only if there has been a change in the estimates used to determine the assets recoverable amount since the last impairment loss was recognized. If that is the case, the carrying amount of the asset is increased to its recoverable amount. That increased amount cannot exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognized for the asset in prior years. Such reversal is recognized in the statement of income unless the asset is carried at a revalued amount, in which case the reversal is treated as a revaluation increase. After such a reversal, the depreciation expense is adjusted in future years to allocate the assets revised carrying amount, less any residual value, on a systematic basis over its remaining life. Goodwill Goodwill is reviewed for impairment, annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. F-234

Impairment is determined for goodwill by assessing the recoverable amount of the cash-generating unit (or group of cash-generating units) to which the goodwill relates. Where the recoverable amount of the cashgenerating unit (or group of cash-generating units) is less than the carrying amount of the cash-generating unit (or group of cash-generating units) to which goodwill has been allocated (or to the aggregate carrying amount of a group of cash-generating units to which the goodwill relates but cannot be allocated), an impairment loss is recognized immediately in the statement of income. Impairment losses relating to goodwill cannot be reversed for subsequent increases in its recoverable amount in future periods. The Group performs its annual impairment test of goodwill at statement of financial position date. Classification of Insurance and Investment Contracts PLII issues contracts that transfer insurance risk or financial risk or both. Insurance contracts are those contracts that transfer significant insurance risk. Such contracts may also transfer financial risk. As a general guideline, PLII defines as significant insurance risk the possibility of having to pay benefits on the occurrence of an insured event that are at least 10.00% more than what would be payable if the policy was surrendered. Investment contracts are those contracts that transfer financial risk with no significant insurance risk. Based on PLII guidelines, all products in the portfolio are considered insurance contracts, including unitlinked products, which contain features that make use of funds specifically segregated for the benefit of unitlinked policyholders. Insurance Contract Liabilities Life insurance liabilities Life insurance liabilities refer to liabilities of the company that are recognized due to the obligations arising from policy contracts issued by PLII. The reserves for life insurance contracts are calculated based on prudent statutory assumptions in accordance with generally accepted actuarial methods that are compliant with existing regulations. Insurance contracts with fixed and guaranteed terms The liability is determined as the expected discounted value of the benefit payments less the expected discounted value of the theoretical premiums that would be required to meet the benefits based on the valuation assumptions used. The liability is based on mortality, morbidity and investment income assumptions that are established at the time the contract is issued. For unpaid claims and benefits, a provision is made for the estimated cost of all claims and dividends notified but not settled at the statement of financial position date less reinsurance recoveries, using the information available at the time. Provision is also made for the cost of claims incurred but not reported (IBNR) until after the statement of financial position date based on the PLIIs experience and historical data. Differences between the provision for outstanding claims at the statement of financial position date and subsequent revisions and settlements are included in the statement of income in later years. Policy and contract claims payable forms part of the liability section of the statement of financial position under Insurance provisions. Aggregate reserve for life policies represents the accumulated total liability for policies in force on the statement of financial position date. Such reserves are established at amounts adequate to meet the estimated future obligations of all life insurance policies in force. The reserves are calculated using actuarial methods and assumptions in accordance with statutory requirements and as approved by the IC, subject to the minimum liability adequacy test. Reserve for Policyholders Dividends A number of insurance contracts are participating and contain a Discretionary Participating Feature (DPF). This feature entitles the policy holder to receive, as a supplement to guaranteed benefits, annual policy dividends F-235

that are credited at each policy anniversary, as long as the policy is in force. These annual policy dividends represent a portion of the theoretical investment and underwriting gains from the pool of contracts. Policy dividends are not guaranteed and may change based on the periodic experience review of PLII. Further, in accordance with regulatory requirements, dividends payable in the following year are prudently set-up as a liability in the statement of financial position. Local statutory regulations and the terms and conditions of these contracts set out the bases for the determination of the annual cash dividends at the time the product is priced. PLII may exercise its discretion to revise the dividend scale in consideration of the emerging actual experience on each block of participating policies. Reserve for dividends to policyholders on contracts with DPF is shown in the statement of financial position under Insurance provisions. There is no statutory requirement as to the level of eligible surplus that may be attributed to participating policyholders. The amount distributed to individual policyholders is at the discretion of PLII, subject to the endorsement of the Chief Finance Officer and approval by the BOD. Liability Adequacy Test At each statement of financial position date, liability adequacy tests are performed following the provisions of PFRS 4, Insurance Contracts, to ensure the adequacy of the contract liabilities. In performing these tests, current best estimates of future contractual cash flows, claims handling and policy administration expenses are used. Any deficiency is immediately charged against the statement of income initially establishing a provision for losses arising from the liability adequacy tests. The adequacy of the liability on insurance contracts is tested based on the pricing assumptions set out at the inception of the contract. When the liability adequacy test requires the adoption of a new set of revised best estimate assumptions, such assumptions are used for the subsequent measurement of these liabilities. Reinsurance PLII cedes insurance risk in the normal course of business. Reinsurance assets represent balances due from reinsurance companies. Recoverable amounts are estimated in a manner consistent with the outstanding claims provision and are in accordance with the reinsurance contract. An impairment review is performed at each reporting date or more frequently when an indication of impairment arises during the reporting year. Impairment occurs when objective evidence exists that PLII may not recover outstanding amounts under the terms of the contract and when the impact on the amounts that PLII will receive from the reinsurer can be measured reliably. The impairment loss is charged to the statement of income. Ceded reinsurance arrangements do not relieve the PLII from its obligations to policyholders. Premiums are presented on a gross basis. Reinsurance assets or liabilities are derecognized when the contractual right is extinguished or expired or when the contract is transferred to another party. Leases The determination of whether an arrangement is, or contains a lease is based on the substance of the arrangement and requires an assessment of whether the fulfillment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset. A reassessment is made after inception of the lease only if one of the following applies: (a) there is a change in contractual terms, other than a renewal or extension of the arrangement; (b) a renewal option is exercised or extension granted, unless the term of the renewal or extension was initially included in the lease term; (c) there is a change in the determination of whether fulfillment is dependent on a specified asset; or (d) there is a substantial change to the asset. Where a reassessment is made, lease accounting shall commence or cease from the date when the change in circumstances gave rise to the reassessment for scenarios (a), (c) or (d) above, and at the date of renewal or extension period for scenario (b). F-236

Group as lessee Finance leases, which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item, are capitalized at the inception of the lease at the fair value of the leased property or, if lower, at the present value of the minimum lease payments and included in Property and equipment account with the corresponding liability to the lessor included in Other liabilities account. Lease payments are apportioned between the finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly to Interest expense. Capitalized leased assets are depreciated over the shorter of the estimated useful lives of the assets or the respective lease terms, if there is no reasonable certainty that the Group will obtain ownership by the end of the lease term. Leases where the lessor retains substantially all the risks and benefits of ownership of the asset are classified as operating leases. Operating lease payments are recognized as an expense in the statement of income on a straight-line basis over the lease term. Contingent rental payable are recognized as expense in the year in which they are incurred. Group as lessor Finance leases, where the Group transfers substantially all the risks and benefits incidental to ownership of the leased item to the lessee, are included in the statement of financial position under Loans and receivables account. A lease receivable is recognized at an amount equivalent to the net investment (asset cost) in the lease. All income resulting from the receivable is included in Interest income in the statement of income. Leases where the Group does not transfer substantially all the risks and benefits of ownership of the assets are classified as operating leases. Initial direct costs incurred in negotiating operating leases are added to the carrying amount of the leased asset and are recognized over the lease term on the same basis as the rental income. Contingent rents are recognized as revenue in the period in which they are earned. Retirement Benefits Defined benefit plan The Group has a non-contributory defined benefit retirement plan. The retirement cost of the Group is determined using the projected unit credit method. Under this method, the current service cost is the present value of retirement benefits payable in the future with respect to services rendered in the current period. The asset recognized in the statement of financial position in respect of defined benefit retirement plan is the fair value of plan assets at the statement of financial position date less present value of the defined benefit obligation, together with adjustments for unrecognized actuarial gains or losses and past service costs. The defined benefit obligation is calculated annually by an independent actuary using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rate on government bonds that have terms to maturity approximating the terms of the related retirement liability. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are credited to or charged against income when the net cumulative unrecognized actuarial gains and losses at the end of the previous period exceeded 10.00% of the higher of the defined benefit obligation or the fair value of plan assets at that date. These gains or losses are recognized over the expected average remaining working lives of the employees participating in the plan. Past service costs, if any, are recognized immediately in statement of income, unless the changes to the retirement plan are conditional on the employees remaining in service for a specified period of time (the vesting period). In this case, the past service costs are amortized on a straight-line basis over the vesting period. The defined benefit asset or liability comprises the present value of the defined benefit obligation less past service costs not yet recognized and less the fair value of plan assets out of which the obligations are to be settled directly. The value of any asset is restricted to the sum of any past service cost not yet recognized and the present value of any economic benefits available in the form of refunds from the plan or reductions in the future contributions to the plan. F-237

Defined contribution plan The Parent Company also contributes to its contributory, defined-contribution type employee investment savings plan based on shortfall in guaranteed return as defined in the plan. The contribution payable to a defined contribution plan is in proportion to the services rendered to the Parent Company by the employees and is recorded as an expense under Compensation and fringe benefits in the statement of income. Unpaid contributions, if any, are recorded as a liability. Debt Issue Costs Issuance, underwriting and other related expenses incurred in connection with the issuance of debt instruments are deferred and amortized over the terms of the instruments using the effective interest method. Unamortized debt issuance costs are included in the measurement of the related carrying value of the debt instrument in the statement of financial position. Borrowing Costs Borrowing costs are recognized as expense in the year in which these costs are incurred. Borrowing costs consists of interest expense calculated using the effective interest method in accordance with PAS 39 that the Group incurs in connection with borrowing of funds. Provisions Provisions are recognized when the Group has a present obligation (legal or constructive) as a result of a past event and it is probable that an outflow of assets embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Where the Group expects some or all of a provision to be reimbursed, for example, under an insurance contract, the reimbursement is recognized as a separate asset but only when the reimbursement is virtually certain. The expense relating to any provision is presented in the statement of income, net of any reimbursement. If the effect of the time value of money is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognized as an Interest expense. Contingent Liabilities and Contingent Assets Contingent liabilities are not recognized in the financial statements but are disclosed unless the possibility of an outflow of assets embodying economic benefits is remote. Contingent assets are not recognized but are disclosed in the financial statements when an inflow of economic benefits is probable. Income Taxes Income tax on profit or loss for the year comprises current and deferred tax. Income tax is determined in accordance with taxing authorities/tax laws. Income tax is recognized in the statement of income, except to the extent that it relates to OCI items recognized directly in the statement of comprehensive income. Current tax Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted at the statement of financial position date. Deferred tax Deferred tax is provided, using the balance sheet liability method, on all temporary differences at the statement of financial position date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax liabilities are recognized for all taxable temporary differences, including asset revaluations. Deferred tax assets are recognized for all deductible temporary differences, carryforward of unused tax credits F-238

from the excess of minimum corporate income tax (MCIT) over the regular corporate income tax (RCIT), and unused net operating loss carryover (NOLCO), to the extent that it is probable that sufficient taxable profit will be available against which the deductible temporary differences and carryforward of unused tax credits from MCIT and unused NOLCO can be utilized. Deferred tax, however, is not recognized on temporary differences that arise from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting income nor taxable income. Deferred tax liabilities are not provided on non-taxable temporary differences associated with investments in domestic subsidiaries. With respect to investments in foreign subsidiaries, deferred tax liabilities are recognized except where the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future. The carrying amount of deferred tax assets is reviewed at each statement of financial position date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilized. Unrecognized deferred tax assets are reassessed at each statement of financial position date and are recognized to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered. Deferred tax assets and liabilities are measured at the tax rates that are applicable to the period when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the statement of financial position date. Current tax and deferred tax relating to items recognized directly in OCI are recognized in the statement of comprehensive income and not in the statement of income. Deferred tax assets and deferred tax liabilities are offset if a legally enforceable right exists to set off current tax assets against current tax liabilities and deferred taxes related to the same taxable entity and the same taxation authority. Earnings Per Share Basic earnings per share (EPS) is computed by dividing net income for the year by the weighted average number of common shares outstanding during the year after giving retroactive effect to stock dividends declared and stock rights exercised during the year, if any. Diluted EPS is calculated by dividing the net income attributable to common equity holders of the Parent Company by the weighted average number of common shares outstanding during the year adjusted for the effects of dilutive convertible preferred shares. Dividends on Common Shares Dividends on common shares are recognized as a liability and deducted from equity when approved by the respective BOD of the Parent Company and its subsidiaries, and the BSP, in the case of cash dividends; and the BOD, shareholders of the Parent Company and the BSP in the case of stock dividends. Dividends for the year that are approved after the statement of financial position date are dealt with as a subsequent event. Events after the Statement of Financial Position Date Any post year-end event that provides additional information about the Groups position at the statement of financial position date (adjusting event) is reflected in the financial statements. Post year-end events that are not adjusting events, if any, are disclosed in the financial statements when material. Related Party Relationships and Transactions Related party relationship exists when one party has the ability to control, directly, or indirectly through one or more intermediaries, the other party or exercises significant influence over the other party in making financial and operating decisions. Such relationship also exists between and/or among entities which are under common control with the reporting enterprise, or between, and/or among the reporting enterprise and its key management personnel, directors, or its shareholders. In considering each possible related party relationship, attention is directed to the substance of the relationship, and not merely the legal form. F-239

Segment Reporting The Groups operating businesses are organized and managed separately according to the nature of the products and services provided, with each segment representing a strategic business unit that offers different products and serves different markets. Financial information on business segments is presented in Note 29. Fiduciary Activities Assets and income arising from fiduciary activities together with related undertakings to return such assets to customers are excluded from the financial statements where the Parent Company acts in a fiduciary capacity such as nominee, trustee or agent. Standards Issued but not yet Effective Standards issued but not yet effective up to the date of issuance of the Groups financial statements are listed below. This listing of standards and interpretations issued are those that the Group reasonably expects to have an impact on disclosures, financial position or performance when applied at a future date. The Group intends to adopt these standards when they become effective. PFRS 7, Financial instruments: DisclosuresOffsetting Financial Assets and Financial Liabilities These amendments require an entity to disclose information about rights of set-off and related arrangements (such as collateral agreements). The new disclosures are required for all recognized financial instruments that are set off in accordance with PAS 32. These disclosures also apply to recognized financial instruments that are subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are set-off in accordance with PAS 32. The amendments require entities to disclose, in a tabular format unless another format is more appropriate, the following minimum quantitative information. This is presented separately for financial assets and financial liabilities recognized at the end of the reporting period: a) b) c) d) The gross amounts of those recognized financial assets and recognized financial liabilities; The amounts that are set off in accordance with the criteria in PAS 32 when determining the net amounts presented in the statement of financial position; The net amounts presented in the statement of financial position; The amounts subject to an enforceable master netting arrangement or similar agreement that are not otherwise included in (b) above, including: i. ii. e) Amounts related to recognized financial instruments that do not meet some or all of the offsetting criteria in PAS 32; and Amounts related to financial collateral (including cash collateral); and

The net amount after deducting the amounts in (d) from the amounts in (c) above.

The amendments to PFRS 7 are to be retrospectively applied for annual periods beginning on or after January 1, 2013. The amendments affect disclosures only and have no impact on the Groups financial position or performance. PFRS 10, Consolidated Financial Statements PFRS 10 replaces the portion of PAS 27, Consolidated and Separate Financial Statements that addresses the accounting for consolidated financial statements. It also includes the issues raised in SIC-12, Consolidation Special Purpose Entities. PFRS 10 establishes a single control model that applies to all entities including special purpose entities. The changes introduced by PFRS 10 will require management to exercise significant judgment to determine which entities are controlled, and therefore, are required to be consolidated by a parent, compared with the requirements in PAS 27. This standard becomes effective for annual periods beginning on or after January 1, 2013. The standard has no impact on the Groups financial position or performance. PFRS 11, Joint Arrangements PFRS 11 replaces PAS 31, Interests in Joint Ventures and SIC-13, Jointly-controlled EntitiesNon-monetary Contributions by Venturers. PFRS 11 removes the option to account for jointly controlled entities (JCEs) using proportionate consolidation. Instead, JCEs that meet the definition of a joint venture (JV) must be accounted for using the equity method. This standard becomes effective for annual periods beginning on or after January 1, 2013. The standard has no impact on the Groups financial position or performance since the Group currently has no interests in JV. F-240

PFRS 12, Disclosure of Interests with Other Entities PFRS 12 includes all of the disclosures that were previously in PAS 27 related to consolidated financial statements, as well as all of the disclosures that were previously included in PAS 31 and PAS 28. These disclosures relate to an entitys interests in subsidiaries, joint arrangements, associates and structured entities. A number of new disclosures are also required. This standard becomes effective for annual periods beginning on or after January 1, 2013. The adoption of PFRS 12 will affect disclosures only and have no impact on the Groups financial position or performance. PFRS 13, Fair Value Measurement PFRS 13 establishes a single source of guidance under PFRSs for all fair value measurements. PFRS 13 does not change when an entity is required to use fair value, but rather provides guidance on how to measure fair value under PFRS when fair value is required or permitted. This standard should be applied prospectively as of the beginning of the annual period in which it is initially applied. Its disclosure requirements need not be applied in comparative information provided for periods before initial application of PFRS 13. The standard becomes effective for annual periods beginning on or after January 1, 2013. The Group is currently assessing the impact that this standard will have on the financial position and performance. PAS 1, Financial Statement PresentationPresentation of Items of Other Comprehensive Income (OCI) (Amendments) The amendments to PAS 1 changed the grouping of items presented in OCI. Items that could be reclassified (or recycled) to profit or loss at a future point in time (for example, upon derecognition or settlement) would be presented separately from items that will never be reclassified. The amendment has no impact on the Groups disclosures, financial position or performance since the Group currently has no OCI items which will never be reclassified to profit or loss. The amendment becomes effective for annual periods beginning on or after July 1, 2012. PAS 19, Employee Benefits (Amendment) Amendments to PAS 19 range from fundamental changes such as removing the corridor mechanism and the concept of expected returns on plan assets to simple clarifications and rewording. The revised standard also requires new disclosures such as, among others, a sensitivity analysis for each significant actuarial assumption, information on asset-liability matching strategies, duration of the defined benefit obligation, and disaggregation of plan assets by nature and risk. The amendments become effective for annual periods beginning on or after January 1, 2013. Once effective, the Group has to apply the amendments retroactively to the earliest period presented.

F-241

The Group reviewed its existing employee benefits and determined that the amended standard has significant impact on its accounting for retirement benefits. The Group obtained the services of an external actuary to compute the impact to the financial statements upon adoption of the standard and effect the remeasurement to other comprehensive income. The effects are detailed below:
December 31, 2012 December 31, 2011 January 1, 2011

Increase (decrease) in the consolidated statement of financial position: Net defined benefit liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-controlling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Increase (decrease) in consolidated statement of income: Net retirement expense (included in Compensation and fringe benefits) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Profit for the year Attributable to the owners of the Parent Company . . . . . . . . . . . . . . Attributable to non-controlling Interests. . . . . . . . . . . . . . . . . . . . . . . Increase (decrease) in the consolidated statement of comprehensive income: Remeasurement of retirement obligation. . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Increase (decrease) in the Parent Company statement of financial position: Net defined benefit liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Increase (decrease) in the Parent Company statement of income: Net retirement expense (included in Compensation and fringe benefits) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Profit for the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Increase (decrease) in the Parent Company statement of comprehensive income: Remeasurement of retirement obligation. . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PAS 27, Separate Financial Statements (as revised in 2011)

P 937,302 P1,513,403 P1,215,884 (277,984) (448,257) (364,139) (444,663) (896,581) (507,538) (68,925) (280,562) (498,109) (838) (2,075) (1,741)

(223,542) (37,066) 186,767 (109)

(89,472) (26,821) 62,789 (206)

468,301 (130,965)

389,892 (109,543)

929,175 (278,752) (433,743) (80,952)

1,504,885 (451,465) (886,168) (280,506)

1,216,650 (364,995) (508,651) (495,599)

(223,284) (36,985) 186,299

(89,283) (26,785) 62,498

452,425 (135,728)

377,518 (113,255)

As a consequence of the new PFRS 10, Consolidated Financial Statement and PFRS 12, Disclosure of Interests in Other Entities, what remains of PAS 27 is limited to accounting for subsidiaries, jointly controlled entities, and associates in separate financial statements. The adoption of the amended PAS 27 will not have a significant impact on the separate financial statements of the entities in the Group. The amendment becomes effective for annual periods beginning on or after January 1, 2013. PAS 28, Investments in Associates and Joint Ventures (as revised in 2011) As a consequence of the new PFRS 11, Joint Arrangements and PFRS 12, PAS 28 has been renamed PAS 28, Investments in Associates and Joint Ventures, and describes the application of the equity method to investments in JV in addition to associates. The amendment becomes effective for annual periods beginning on or after January 1, 2013. The adoption of the amended PAS 28 will not have a significant impact on the Groups financial position or performance. F-242

Philippine Interpretation International Financial Reporting Interpretations Committee (IFRIC) 20, Stripping Costs in the Production Phase of a Surface Mine This interpretation applies to waste removal costs (stripping costs) that are incurred in surface mining activity during the production phase of the mine (production stripping costs). If the benefit from the stripping activity will be realized in the current period, an entity is required to account for the stripping activity costs as part of the cost of inventory. When the benefit is the improved access to ore, the entity should recognize these costs as a non-current asset, only if certain criteria are met (stripping activity asset). The stripping activity asset is accounted for as an addition to, or as an enhancement of, an existing asset. After initial recognition, the stripping activity asset is carried at its cost or revalued amount less depreciation or amortization and less impairment losses, in the same way as the existing asset of which it is a part. The Group expects that this interpretation will not have any impact on its financial position or performance. This interpretation becomes effective for annual periods beginning on or after January 1, 2013. PAS 32, Financial Instruments: PresentationOffsetting Financial Assets and Financial liabilities (Amendments) These amendments to PAS 32 clarify the meaning of currently has a legally enforceable right to set-off and also clarify the application of the PAS 32 offsetting criteria to settlement systems (such as central clearing house systems) which apply gross settlement mechanisms that are not simultaneous. While the amendments are expected not to have any impact on the net assets of the Group, any changes in offsetting is expected to impact leverage ratios and regulatory capital requirements. The amendments to PAS 32 are to be retrospectively applied for annual periods beginning on or after January 1, 2014. As the impact of the adoption depends on the Groups examination of the operational procedures applied by the settlement systems it deals with to determine if they meet the new criteria, it is not practical to quantify the effects. PFRS 9, Financial Instruments: Classification and Measurement PFRS 9, as issued, reflects the first phase on the replacement of PAS 39 and applies to the classification and measurement of financial assets and liabilities as defined in PAS 39, Financial Instruments: Recognition and Measurement. Work on impairment of financial instruments and hedge accounting is still ongoing, with a view to replacing PAS 39 in its entirety. PFRS 9 requires all financial assets to be measured at fair value at initial recognition. A debt financial asset may, if the fair value option (FVO) is not invoked, be subsequently measured at amortized cost if it is held within a business model that has the objective to hold the assets to collect the contractual cash flows and its contractual terms give rise, on specified dates, to cash flows that are solely payments of principal and interest on the principal outstanding. All other debt instruments are subsequently measured at fair value through profit or loss. All equity financial assets are measured at fair value either through other comprehensive income (OCI) or profit or loss. Equity financial assets held for trading must be measured at fair value through profit or loss. For FVO liabilities, the amount of change in the fair value of a liability that is attributable to changes in credit risk must be presented in OCI. The remainder of the change in fair value is presented in profit or loss, unless presentation of the fair value change in respect of the liabilitys credit risk in OCI would create or enlarge an accounting mismatch in profit or loss. All other PAS 39 classification and measurement requirements for financial liabilities have been carried forward into PFRS 9, including the embedded derivative separation rules and the criteria for using the FVO. The adoption of the first phase of PFRS 9 will have an effect on the classification and measurement of the Groups financial assets, but will potentially have no impact on the classification and measurement of financial liabilities. PFRS 9 is effective for annual periods beginning on or after January 1, 2015. Philippine Interpretation IFRIC 15, Agreements for the Construction of Real Estate This interpretation covers accounting for revenue and associated expenses by entities that undertake the construction of real estate directly or through subcontractors. The interpretation requires that revenue on construction of real estate be recognized only upon completion, except when such contract qualifies as construction contract to be accounted for under PAS 11, Construction Contracts, or involves rendering of services in which case revenue is recognized based on stage of completion. Contracts involving provision of services with the construction materials and where the risks and reward of ownership are transferred to the buyer F-243

on a continuous basis will also be accounted for based on stage of completion. The SEC and the Financial Reporting Standards Council have deferred the effectivity of this interpretation until the final Revenue standard is issued by International Accounting Standards Board and an evaluation of the requirements of the final Revenue standard against the practices of the Philippine real estate industry is completed. Since the Group is currently not engaged into any construction contracts, adoption of the interpretation when it becomes effective will not have any impact on the financial statements of the Group. Annual Improvements to PFRSs (2009-2011 cycle) The Annual Improvements to PFRSs (2009-2011 cycle) contain non-urgent but necessary amendments to PFRSs. The amendments are effective for annual periods beginning on or after January 1, 2013 and are applied retrospectively. Earlier application is permitted. PFRS 1, First-time Adoption of PFRSBorrowing Costs The amendment clarifies that, upon adoption of PFRS, an entity that capitalized borrowing costs in accordance with its previous generally accepted accounting principles, may carry forward, without any adjustment, the amount previously capitalized in its opening statement of financial position at the date of transition. Subsequent to the adoption of PFRS, borrowing costs are recognized in accordance with PAS 23, Borrowing Costs. The amendment does not apply to the Group as it is not a first-time adopter of PFRS. PAS 1, Presentation of Financial StatementsClarification of the Requirements for Comparative Information The amendments clarify the requirements for comparative information that are disclosed voluntarily and those that are mandatory due to retrospective application of an accounting policy, or retrospective restatement or reclassification of items in the financial statements. An entity must include comparative information in the related notes to the financial statements when it voluntarily provides comparative information beyond the minimum required comparative period. The additional comparative period does not need to contain a complete set of financial statements. On the other hand, supporting notes for the third balance sheet (mandatory when there is a retrospective application of an accounting policy, or retrospective restatement or reclassification of items in the financial statements) are not required. The Group had early adopted this annual improvement due to retrospective restatement and reclassification of HTM to AFS investments as discussed in Note 35. Accordingly, the Group made comparative information and supporting notes to the financial statements (see Note 35). PAS 16, Property, Plant and EquipmentClassification of Servicing Equipment The amendment clarifies that spare parts, stand-by equipment and servicing equipment should be recognized as property, plant and equipment when they meet the definition of property, plant and equipment and should be recognized as inventory if otherwise. The amendment will not have any significant impact on the Groups financial position or performance. PAS 32, Financial Instruments: PresentationTax Effect of Distribution to Holders of Equity Instruments The amendment clarifies that income taxes relating to distributions to equity holders and to transaction costs of an equity transaction are accounted for in accordance with PAS 12, Income Taxes. The Group expects that this amendment will not have any impact on its financial position or performance. PAS 34, Interim Financial ReportingInterim Financial Reporting and Segment Information for Total Assets and Liabilities The amendment clarifies that the total assets and liabilities for a particular reportable segment need to be disclosed only when the amounts are regularly provided to the chief operating decision maker and there has been a material change from the amount disclosed in the entitys previous annual financial statements for that reportable segment. The amendment affects disclosures only and has no impact on the Groups financial position or performance. 3. Significant Accounting Judgments and Estimates

The preparation of the consolidated financial statements in accordance with PFRS requires the Group to make judgments and estimates that affect the reported amounts of assets, liabilities, income and expenses and disclosure of contingent assets and contingent liabilities at the reporting date. Future events may occur which will cause the judgments and assumptions used in arriving at the estimates to change. The effects of any change in judgments and estimates are reflected in the financial statements as they become reasonably determinable. F-244

Judgments and estimates are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Judgments a) Leases Group as lessor under operating leases The Group has entered into commercial property leases on its investment properties. The Group has determined, based on an evaluation of the terms and conditions of the arrangements (i.e., the lease does not transfer ownership of the asset to the lessee by the end of the lease term, the lessee has no option to purchase the asset at a price that is expected to be sufficiently lower than the fair value at the date the option is exercisable, and the lease term is not for the major part of the assets economic life), that the Group retains all significant risks and rewards of ownership of the properties it leased out on operating leases. Group as lessee under operating leases The Group has entered into property leases as a lessee for certain office premises. The Group has determined, based on an evaluation of the terms and conditions of the lease arrangements (i.e., the lease does not transfer ownership of the asset to the lessee by the end of the lease term, the lessee has no option to purchase the asset at a price that is expected to be sufficiently lower than the fair value at the date the option is exercisable, and the lease term is not for the major part of the assets economic life), that all significant risks and rewards of ownership of the properties it leases are not transferred to the Group. Finance lease The Group has determined that based on an evaluation of the terms and conditions of lease arrangements, (i.e., its lessees has the option to purchase the leased assets at a price that is expected to be sufficiently lower than the fair value at the date the option becomes exercisable, the lease term under finance lease is for the major part of the economic life of the asset and at the inception of the lease the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased assets), that it has transferred all significant risks and rewards of ownership of the properties it leases out on finance leases. b) Fair value of financial instruments Where the fair values of financial assets and financial liabilities recorded in the statement of financial position cannot be derived from active markets, they are determined using a variety of valuation techniques that involve the use of mathematical models. The inputs to these models are taken from observable markets where possible. But where this is not feasible, a degree of judgment is required in establishing fair values. These judgments include consideration of liquidity and model inputs such as correlation and volatility for longer dated derivatives (see Note 5). c) HTM investments The classification under HTM investments requires significant judgment. In making this judgment, the Group evaluates its intention and ability to hold such investments to maturity. If the Group fails to keep these investments to maturity other than in certain specific circumstancesfor example, selling an insignificant amount close to maturityit will be required to reclassify the entire portfolio as AFS investments. The investments would therefore be measured at fair value and not at amortized cost. Refer to Note 5 for the information on the fair value and carrying value of HTM investments. In 2011, the Group reclassified all their HTM investments to AFS investments as a result of the Groups participation in the bond exchange program of the Republic of the Philippines (see Notes 2 and 7). d) Financial assets not quoted in an active market The Group classifies financial assets by evaluating, among others, whether the asset is quoted or not in an active market. Included in the evaluation on whether a financial asset is quoted in an active market is the determination on whether quoted prices are readily and regularly available, and whether those prices represent actual and regularly occurring market transactions on an arms length basis. F-245

e)

Embedded derivatives Where a hybrid instrument is not classified as financial assets at FVPL, the Group evaluates whether the embedded derivative should be bifurcated and accounted for separately. This includes assessing whether the embedded derivative has a clear and close economic relationship to the host contract.

f)

Determination of functional currency PAS 21, The Effects of Changes in Foreign Exchange Rates, requires management to use its judgment to determine the entitys functional currency such that it most faithfully represents the economic effects of the underlying transactions, events and conditions that are relevant to the entity. In making this judgment, each entity in the Group considers the following: a) the currency that mainly influences sales prices for financial instruments and services (this will often be the currency in which sales prices for its financial instruments and services are denominated and settled); and the currency in which funds from financing activities are generated; and the currency in which receipts from operating activities are usually retained.

b) c) g)

Contingencies The Group is currently involved in legal proceedings. The estimate of the probable cost for the resolution of claims has been developed in consultation with the aid of the outside legal counsel handling the Groups defense in this matter and is based upon an analysis of potential results. Management does not believe that the outcome of this matter will affect the results of operations. It is probable, however, that future results of operations could be materially affected by changes in the estimates or in the effectiveness of the strategies relating to this proceeding (see Note 32).

h)

Discontinued operation (disposal group) In July 2010, the BOD approved the sale of the Parent Companys 27.78% interest in OHBVI in view of the impending merger with Philippine National Bank (PNB) and, therefore, classified it as a disposal group held for sale. The Parent Company considered the investment/operations to have met the criteria to be classified as held for sale at that date because OHBVI is available for immediate sale and can be sold to a potential buyer in its current condition and expects negotiations to be finalized and the sale to be completed within one year from statement of financial position date. Refer to Note 13 for the details on discontinued operation.

i)

Going concern The Groups management has made an assessment of its ability to continue as going concern. Management believes that it has the adequate resources to continue in business for the foreseeable future. Therefore the financial statements continue to be prepared on a going concern basis.

Estimates a) Credit losses on loans and receivables The Group reviews individually impaired loans and receivables quarterly to assess whether additional provision for credit losses should be recorded in the statement of income. Judgment by management is required in the estimation of the amount and timing of future cash flows when determining the level of allowance required. Such estimates are based on assumptions about a number of factors and actual results may differ, resulting in future changes in allowance. In addition to allowance provided for individually significant loans and receivables over P5.0 million, the Group also provides allowance for credit exposures which are impaired though not yet specifically identified. Collective allowance is based on historical loss experience adjusted by effects of changes in factors that are indicative of incurred losses, based on characteristics of the individual risk groupings. The carrying values of loans and receivables and the related allowances for credit losses of the Group and of the Parent Company are disclosed in Note 8. F-246

b)

Fair values of structured debt instruments and derivatives The fair values of structured debt instruments and derivatives that are not quoted in active markets are determined using internal valuation techniques. These internal valuation techniques uses generally accepted market valuation models. For models requiring inputs other than market observable data, management uses estimates. Changes in assumptions about these factors could affect reported fair value of financial instruments. Refer to Note 5 for the information on the fair values of these investments and Note 7 for the information on the carrying values of these instrument.

c)

Valuation of unquoted equity securities The Groups investment in equity securities that do not have quoted market price in an active market and whose fair value cannot be reliably measured are carried at cost less impairment losses. Details of the carrying value of unquoted AFS equity securities of the Group and the Parent Company are disclosed in Note 7.

d)

Impairment of AFS debt investments The Group reviews its debt investments classified as AFS investments at each statement of financial position date to assess whether they are impaired. This requires similar judgment as applied to the individual assessment of loans and receivables. As of December 31, 2012 and 2011 and January 1, 2011, no allowance for impairment losses was provided on AFS debt investments. Details of the carrying value of AFS debt investments of the Group and the Parent Company are disclosed in Note 7.

e)

Impairment of AFS equity investments The Group treats AFS equity investments as impaired when there has been a significant or prolonged declined in the fair value below its cost or where other objective evidence of impairment exists. The determination of what is significant or prolonged requires judgment. The Group treats significant generally as 20.00% decline of the original cost of investment, and prolonged as greater than 12 months. In addition, the Group evaluates other factors, including normal volatility in share price for quoted equities and the future cash flows and the discount factors for unquoted equities. As of December 31, 2012 and 2011 and January 1, 2011, allowance for credit losses on AFS equity investments of the Group and Parent Company amounted to P64.86 million, P64.82 million and P64.82 million, respectively. Details of the carrying value of the AFS equity investments of the Group and Parent Company are disclosed in Note 7.

f)

Recognition of deferred tax assets Deferred tax assets are recognized for all unused tax losses to the extent that it is probable that taxable income will be available against which the losses can be utilized. Significant management judgment is required to determine the amount of deferred tax assets that can be recognized, based upon the likely timing and level of future taxable income together with future tax planning strategies. The recognized and unrecognized deferred tax assets for the Group and the Parent Company are disclosed in Note 27.

g)

Present value of retirement obligation and other long-term benefits The cost of defined benefit pension plan and other post-employment benefits is determined using actuarial valuations. The actuarial valuation involves making assumptions about discount rates, expected rates of return on plan assets, future salary increases, mortality rates and future pension increases. Due to the long term nature of these plans, such estimates are subject to significant uncertainty. The assumed discount rates were determined using the market yields on Philippine government bonds with terms consistent with the expected employee benefit payout as of the reporting dates. The present values of the retirement obligation of the Group and of the Parent Company are disclosed in Note 24; while present values of the other employee benefits representing accumulated leave absences of the Group and of the Parent Company are disclosed in Note 17. F-247

h)

Impairment of nonfinancial assets Investments in subsidiaries, property and equipment, investment properties and chattel mortgage properties The Group assesses impairment on assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The factors that the Group considers important which could trigger an impairment review include the following: significant underperformance relative to expected historical or projected future operating results; significant changes in the manner of use of the acquired assets or the strategy for overall business; and significant negative industry or economic trends. The Group recognizes an impairment loss whenever the carrying amount of an asset exceeds its recoverable amount. The recoverable amount is determined as the higher between the fair value less costs to sell and value in use. Recoverable amounts are estimated for individual assets or, if it is not possible, for the cash-generating unit to which the asset belongs. The depreciation rates and depreciation and amortization method are reviewed periodically to ensure that the rates and method of depreciation and amortization are consistent with the expected pattern of economic benefits from items of property and equipment, investment properties, and chattel mortgage properties. The carrying values of investment in subsidiaries, property and equipment, investment properties and chattel mortgage properties of the Group and of the Parent Company, as applicable are disclosed in Notes 9, 10, 11, 12 and 13. Goodwill The Parent Companys management conducts an annual review for any impairment in value of the goodwill. Goodwill is written down for impairment where the net present value of the forecasted future cash flows from the business is insufficient to support its carrying value. The Parent Company estimated the discount rate used for the computation of the net present value by reference to its internal cost of capital. Future cash flows from the business are estimated based on the theoretical annual income of the cash generating units. Average growth rate was derived from the average increase in annual income during the last 5 years. As of December 31, 2012 and 2011, goodwill amounted to P88.94 million for the Group (see Note 12).

i)

Aggregate reserves for life policies In determining the aggregate reserves for life policies estimates are made as to the expected number of deaths, illness or injury for each of the years in which PLII is exposed to risk. These estimates are based on standard mortality and morbidity tables as required by the Insurance Code (IC or the Code). The estimated number of deaths, illness or injury determines the value of possible future benefits to be paid out, which will be factored into ensuring sufficient cover by reserves, which in return is monitored against current and future premiums. Estimates are also made as to future investment income arising from the assets backing life insurance contracts. These estimates are based on current market returns, as well as expectations about future economic and financial developments. In accordance with the provision of the Code, estimates for future deaths, illness or injury and investment returns are determined at the inception of the contract and are used to calculate the liability over the term of the contract. The interest rate used to discount future liabilities does not exceed 6.00% as required by the Code. Likewise, no lapse, surrender and expense assumptions are factored in the computation of the liability. The carrying values of aggregate reserves for life policies, of the Group are disclosed in Note 19 and shown as part of the insurance provisions and liabilities account in the statements of financial position.

j)

Revaluation of property and equipment The Group measures land at revalued amount with changes in fair value being recognized in OCI. The Groups internal/external appraisers determine the fair value of the land to be recorded. The carrying value of the land under revaluation method of the Group and the Parent Company are disclosed in Note 10. F-248

k)

Revenue recognition for customer loyalty program The Group estimates the fair value of the points awarded under the customer loyalty program by applying statistical techniques. Inputs to the models include making assumptions about expected redemption rates, the mix of the products that will be available for redemption in the future and customer preferences. Points issued under the program expire and are valid only for one year. The estimated liability for unredeemed points is disclosed in Note 20.

4.

Financial Risk Management Policies and Objectives

Introduction The ability to manage risks effectively is vital for the Group to sustain its growth and continued value creation for its shareholders. Thus, the Group has established a risk management framework and governance structure that are intended to provide comprehensive controls and ongoing management of the major risks inherent in the Groups activities. Given its risk philosophy which defines its conservative risk management culture, juxtaposed with a revenue strategy, the Groups governance structure enables the implementation of the balance between maximizing returns and minimizing risks. The Parent Company monitors the following most material risks the Group is exposed to: Credit Risk Market Risk Credit Concentration Risk Liquidity Risk Interest Rate Risk in Banking Book Operational Risk The Group also has exposures to the following significant risks that are managed as defined in the Banks Internal Capital Adequacy Assessment Process (ICAAP): Information Technology & Information Security Risks Reputational Risk Strategic/Business Risk Compliance Risk Legal&Regulatory Risk Customer Franchise Risk Human Resource Risk The Bangko Sentral ng Pilipinas (BSP) issued Circular No. 639 dated January 15, 2009 about ICAAP and Supervisory Review Process (SRP) setting out guidelines that universal banks and commercial banks, on a group-wide basis, should follow in the design and use of their banks ICAAP. The ICAAP supplements the BSPs Risk-Based Capital Adequacy Framework for the Philippine banking system conforming to Basel II recommendations as contained in Circular No. 538 issued in August 4, 2006. Both circulars require that the Bank must have a process for assessing its capital adequacy relative to its profile. It is the Banks responsibility to set internal capital targets that are consistent with its risk profile, operating environment, and strategic/business plans. The Banks ICAAP and all policies supporting it and including results thereof, are formally documented and reviewed by the Board and Senior Management at least annually, or as often as is deemed necessary notwithstanding the annual independent review. The Banks ICAAP document is submitted to the BSP Central Point of Contact Department I every January 31 of each year. The Bank is committed to comply with the above-cited circulars. Integration of the ERM Framework and Internal Capital Adequacy Assessment Process (ICAAP) Model The integration of the Parent Companys Enterprise Risk Management (ERM) framework and the ICAAP Model ensures that the Group is able to capture all material and significant risks across all its business groups F-249

and subsidiaries. The Banks ICAAP Model embodies the following five (5) key elements of an ICAAP, namely (1) board and senior management oversight, (2) risk assessment, (3) capital assessment and planning, (4) monitoring and reporting, and (5) internal control review. The ICAAP Model, which consists of eight modules, provides the framework for the Board and Senior Management to assess, on an ongoing basis, the inherent risks and other material risks that the Parent Company is exposed to and ensure that the Parent Company maintains an appropriate level and quality of capital relative to these risks. The Groups ERM framework encompasses all the material risks that are not only monitored under their separate and distinct components, but also across the interrelated components. Further, by being fully aware of all material risks, the BOD and Senior Management can proactively manage the risks and adopt mitigating actions as needed. Enterprise Risk Management Framework The Bank has adopted the ERM Framework in assessing and managing its overall risks. This is performed coherently and collaboratively at three (3) levels, namely: 1. Strategic level Where the Board and Management Committees set revenue goals, define strategic plans, define the risk philosophy, mission and vision 2. Transactional level Where the business and operating units determine opportunities and take risks 3. Portfolio level Where the portfolio/position are captured and evaluated by independent third party, other than risk taking personnel All three levels are focused on the four aspects of risk monitoring and form critical and integral components of the entire process which require a top-down processfrom the BOD represented in the Risk Management Committee (RMC), Senior Management, to the different business and operating units, and down to individual risk-takers. Within these levels also exists a feedback mechanism not only to ensure that policies, limits, procedures are complied by all units, but also to guide top management in drawing up and reviewing bank-wide risk management strategies and policies. The ERM framework was established by the Parent Company in full consideration of the need to justify the resources used in carrying out the following processes: 1. 2. 3. 4. Risk Identification Risk Measurement Risk Evaluation and Analysis Risk Monitoring, Control and Reporting

The risk assessment process employed by the Bank has two (2) major parts: (1) qualitative assessment of Pillar 1 and Pillar 2 risks using the Risk Control and Self Assessment (RCSA)Risk Map, and (2) quantitative assessment of Pillar 1 risks (i.e. credit, market and operational risks) using methodologies following BSP Circular 538, and Pillar 2 risks using the RCSA Model. The Group uses a set of principles that describes the risk management culture it wishes to sustain with the objective of maximizing risk-adjusted returns while remaining within its risk limits. The Group uses the allocation-of-risk-taking approach. The process requires qualitative analysis and quantification of the material risks affecting the risk assets of the Group and the allocation of the Groups capital to all its material risks, which encompasses the aforementioned Pillar 1 and Pillar 2 risks. The Risk Management Division (RMD) in coordination with the Internal Audit and Compliance Division reviews the risk limits. The RMD, in conjunction with the business unit, recommends adjustments in the risk limits (upward or downward) as basis of the new or revised overall business strategies. F-250

Information regarding material risk issues and compliance with policies and standards is communicated through the business and functional committees up to the group-level committees, and to the BOD for prompt decision-making on the Banks risk and capital profile. Allied Banking Corporation (ABC) ICAAP Document The ICAAP Document, in its entirety, is the result of the implementation of the detailed assessment of the Groups capital adequacy relative to its risk profile. The ICAAP document, which is aligned to the BSPs Risk-Based Capital Adequacy Framework, is developed taking into consideration the Groups current priorities and is based on data gathered from various business units. The Document contains detailed explanation of the Banks ICAAP methodology as well as the related results and major issues arising from the Groups implementation of the assessment process. The document also serves as overall guidance to the Bank and its Subsidiaries in the implementation of the Banks ICAAP, particularly, in the determination of the amount of capital sufficient to attain its strategic and business plans and cover its risk profile for the next three (3) years. The Document comprises all of the Banks procedures and measures designed to ensure: Identification and measurement of all material risks The appropriate level of internal capital in relation to the Banks risk profile, and The application and further development of suitable risk management systems This document is to be reviewed and approved by the Banks Board of Directors and Senior Management at least on an annual basis, and submitted to the BSP every January 31 of each year. Risk Responsibilities The ERM function is managed through the continuous review, evaluation and agreement between the BOD and Senior Management. The BOD is at the top of the risk management functional organization and has the primary responsibility to understand the nature and materiality of risks that the Bank faces, recommend sound practices, establish checks and balances and prevent conflicts of interest. It is responsible for ensuring good governance of the Group and establishing strategic objectives, policies and procedures that will guide and direct the activities of the Group and the means to attain the same as well as the mechanism for monitoring Managements performance. The following committees and units are tasked to oversee the Groups risk management processes in accordance with the BODs directives. The Risk Management Committee (RMC) approves the risk management process, framework, policies, risk limits and infrastructure and is responsible for establishing and maintaining adequate risk management policy. The RMC is composed of designated members of the BOD and is tasked to ensure that the enterprise-wide risk management is properly executed and complied with by the Group. It shall oversee the identification, measurement, control and monitoring of credit, market, operational, and other risks the Group is exposed to. It is tasked to monitor the risk environment of the Group and provides direction for the activities to mitigate, to an acceptable level, the risks that may adversely affect the Groups ability to achieve its goals. The RMD, which is headed by the Chief Risk Officer (CRO), directly supports the RMC. The Audit and Compliance Committee provides oversight function to the independent functions of Internal Audit and Compliance Divisions. The BOD authorizes the Audit and Compliance Committee to seek any information it requires from any employee (and all employees are directed to cooperate with any request made by the Committee) and external parties; to review and approve the annual compliance plan and audit plan and all major changes in the plan; and to review the effectiveness of the internal audit and compliance programs. The Corporate Governance Committee (CGC) assists the BOD in fulfilling its corporate governance responsibilities. The CGC is responsible for providing oversight to the performance management and the conduct of good governance by the Group towards its stakeholders. The CGC ensures that written policies are promulgated to outline clear standard of performance. F-251

The ICAAP Management Committee is chaired by the President and includes the ICAAP Core Team and all Profit and major Cost Centers Heads. The Committee meets on a quarterly basis, or as often as needed and is empowered to invite the head of any division/department, or subsidiary to deliberate on significant risks identified and the adequacy of controls undertaken to mitigate the risks. The organizational structure includes a smaller body of experts, comprising of the Senior Management and/or Head of the Profit/Cost Centers and who reports to the President, and covers various areas of the Groups operations. Their responsibilities include understanding and evaluating the risk profile, ensuring that strategic directions and risk tolerance are effectively implemented, and ensuring appropriate risk mitigation are undertaken within their part of the business. The Risk Management Division reviews risk exposures versus regulatory and approved internal limits, drafts risk policies, and assists line management in the formulation of risk reduction strategies compatible with the stipulated goals. Risk managers provide functional support for each major risk categories: credit risk, market risk, liquidity risk, operational risk, and other aforementioned material risks. The management of the Group reviews the policies for managing each risk which are summarized as follows: Management of Credit Risk Credit risk is the risk to earnings or capital arising from a counterpartys failure to perform and meet the terms of its contract with the Group, subjecting the Group to a financial loss. Credit risk may last for the entire tenor and may approximate to the full amount of a transaction and in some cases may exceed the original principal exposure. Credit risk is inherent in the Groups lending, trading, investments and other activities and the Group manages it in accordance with a credit risk management framework that spans from risk identification, measurement, control, monitoring and reporting. The Group undertakes credit risk management at the strategic, transaction and portfolio levels. At the strategic level, the BOD sets annual revenue goals, target market and acceptance criteria and defines a credit risk philosophy to create a credit risk culture. Revenue goals are detailed in the business plan to include the amount of potential risks inherent in the identified revenue generation activities and corresponding measures that would address them. At the transaction level, the Account Officers (AOs) engage in credit risk taking. They determine opportunities and decide on which to take amidst risks identified. They align their risk taking activities with the Groups revenue goals, ensure its compliance to standard credit risk policies and procedures and maintain its exposure within set limits. The Credit Policy & Evaluation Department supports AOs with credit evaluation reports, credit risk rating, collateral appraisals, gathering of credit information, account profiling and valuation. On the other hand, the RMD monitors credit portfolio risks by developing risk tools/metrics and using them to measure and monitor credit portfolio risk. They monitor and report significant exposures on a borrower, group of borrowers and portfolio level as well as other critical credit risk matters for the information and further instruction of the RMC / BOD. The Group adopts a two-pronged approach to credit risk management employing both qualitative and quantitative techniques to measure and monitor credit quality and risk. Assessment of individual credit exposures adopts the following two classification systems: 1. 2. Internal Credit Risk Rating System BSP System of Loan Classification

Internal Credit Risk Rating (ICRR) System The ICRR is integrated in the loan approval process as well as in the periodic credit review. The ICRR consists of the Borrowers Risk Rating, which indicates the probability of default based on the borrowers credit worthiness, and the Facility Risk Factor, which measures the severity of an expected loss in case of the default of the borrower considering the different security arrangements (i.e. collateral, guarantees, etc.) and other risks relative to the facility. F-252

The ICRR System is a 14-grade rating system, which first ten grades correspond to pass-ratings and last four corresponds to unfavorable quality ratings. The ICRR assigned at the time of approval determines the appropriate terms and conditions and subsequently, provides the basis for the decision on the loan application. As an inherent output of the credit review, the downward migration in ICRR prompts the implementation of corrective actions necessary to improve credit quality. The following table shows the description of the ICCRS grade:
Credit Quality CCRS Grade Description

Satisfactory

Acceptable

Watchlist

1 2 3 4 5 6 7 8 9 10 11 12 13 14

Excellent Superior Strong Very Good Good Satisfactory Average Acceptable Fair Watchlist Especially Mentioned SubstandardSecured/Unsecured Doubtful Loss

The ICRRs of the Parent Companys business loans and receivables are defined below: CRR 1Excellent Exposure risk to a borrower with this rating is very minimal in view of its very low probability of going into default in the coming year. Borrowers under this category exhibit very high degree of stability, substance, and diversity and these characteristics merit them access to raise substantial amount of funds through the public market. These borrower-companies have management that has demonstrated competence under current business model and have profitability and debt-servicing capacity that is excellent and untainted. These borrowers are of the highest quality in the market under virtually alleconomic conditions. CRR 2Superior This borrower differs from the highest rated borrower only to a small degree such that profitability and debtservicing capacity are superior. CRR 3Strong Exposure risk to a borrower under this rating is low in view of nil default probability during the year. Borrowers with this rating exhibit strong income earning and debt servicing capacity. Their financial performance has been consistently favorable as shown by its conservative financial ratios. However, compared to the higher rated borrowers, this borrower would have easy access to the public market to raise funds only under normal economic conditions. Typical borrowers under this category are the established multinationals or local corporations which are well capitalized. CRR 4Very good Exposure risk to this borrower is still low based on its low default probability during the year. Borrowers with this rating exhibit very good income earning and debt servicing capacity. Their financial performance has been consistently favorable as shown by its conservative financial ratios. However, compared to the higher rated borrowers, this borrower would have good access to the public market to raise funds only under normal economic conditions. Typical borrowers under this category are the quality multinationals or local corporations which are well capitalized. CRR 5Good Exposure risk to this borrower is still quite low. Borrowers with this rating continue to exhibit good income earning and debt servicing capacity. Their financial performance remained favorable as shown by its F-253

conservative financial ratios. However, compared to the higher rated borrowers, this borrower would have good access to the public market to raise funds only under normal economic conditions. Typical borrowers under this category are local companies which are adequately capitalized. CRR 6Satisfactory Exposure risk to this borrower remains low on the basis of low default probability. Market and financial position is predicted to be favorable in the coming year based on the preceding three years performance. Debt paying capacity shall continue to be satisfactory as shown by favorable financial performance ratios. This is generally considered as a satisfactory credit characterized by high qualitative, very good borrowing base or a first mortgage lien on very good quality assets. CRR 7Average Exposure risk is classified normal with clear indication of risk elements and moderate probability of default. These indicators are further established by the borrowers volatility of earnings, overall performance and limited access to public financial markets. It can withstand normal business cycles and adequately service its debt under the positive outlook of profit after tax in the current year. However, its capitalization is lower than normal in the industry. CRR 8Acceptable Exposure risk to this borrower is generally similar to an average risk rated borrower except that there is more pronounced probability of default and relatively unstable credit quality. Compared to higher rated borrowers, this borrower can only withstand business cycles under normal conditions and any prolonged unfavorable economic period would likely create deterioration beyond acceptable levels. CRR 9Fair Exposure risk is higher than normal because the risk elements for the Group are sufficiently pronounced. Borrower may still withstand normal business cycle; any prolonged unfavorable economic period would create an immediate deterioration beyond acceptable level. Financial strength in terms of balance sheet structure is below a level generally considered desirable for a new customer. However, strong cashflow merits a risk assessment that is acceptable. CRR 10Watchlist This rating refers to a borrower for which unfavorable industry or companyspecific risk factors represent a concern. Its operating and financial performance is marginal and the borrower is generally perceived as not a good credit by financing institutions. Borrower may find it very hard to cope with any significant downturn and default is more than a possibility. Its credit exposure is not at risk of loss at the moment but performance of the borrower has weakened and could lead to losses unless present trends are reversed. Habitual delays in payment of principal and/or interest. This is the minimum risk rating for unclassified accounts. CRR 11Especially mentioned Borrowers are rated as such when its loan repayment is endangered by adverse economic or market conditions that may affect the borrowers ability to meet scheduled repayments. The following indicators of weakening financial position are evident: slow down in operations, weakening liquidity, or increasing leverage in the borrowers financial statements. Credit quality is further weakened by decline in the value of collateral or any other adverse information that impairs the collateral quality or its enforceability. Loans are past due for more than 30 up to 90 days. CRR 12SubstandardSecured/Unsecured This is assigned to borrowers from whom collection of principal or interest becomes questionable regardless of scheduled payment date, by reason of welldefined weaknesses to adverse developments of a financial, managerial, economic, or political nature, or by important weaknesses in cover. Past due and circumstances are such that there is an imminent possibility of foreclosure or acquisition of the collateral because of failure of all collection efforts. Past due loans to borrowers whose properties securing the loan have declined in value materially or have been found with defects as to ownership or other adverse information. Loans past due for more than 90 days. F-254

CRR 13Doubtful This borrower is unable or unwilling to service debt over an extended period of time and near term prospects of orderly debt service are doubtful. Past due loans secured by real estate mortgage, the title of which is subject to an adverse claim rendering settlement of the loan through foreclosure doubtful. Loans wherein the possibility of loss is extremely high but because of certain important and reasonably specific pending factors that may work to the advantage and strengthening of the asset, its classification as an estimated loss is deferred until a more status is determined. CRR 14Loss This borrower is generally classified as bad debt in view of lack of credit worthiness and weak debt servicing capacity. This condition is worsened by the lack of information on the borrowers whereabouts, its insolvency, impaired earning capability, lack of support from co-makers or guarantors and insignificant value of collateral. BSP System of Loan Classification In the BSP System of Loan Classification, existing loans are unclassified or classified based on the following indicators of the borrowers capability of fulfilling its obligation: compliance to terms and conditions, audited financial statements analyses, payment performance, documentation deficiency, collateral inadequacy and other technical defects. Expertise in judgment and discretion in evaluating the loans based on certain credit guidelines are also applied. The classification of the loan is used in the assessment of adequacy of loan loss provision as well as prompts the units handling the loans to correct deficiencies in documentation and collateral or resort to work out strategies before the account further deteriorates. Unclassified loans These are loans that do not have a greater-than normal risk and do not possess the characteristics of classified loans as defined below. The borrower has the apparent ability to satisfy his obligations in full and therefore no loss in ultimate collection is anticipated. Classified loans These are loans which possess the characteristics outlined hereunder. Classified loans are subdivided into (1) loans especially mentioned; (2) substandard; (3) doubtful; and (4) loss. Especially mentioned These are loans and advances that have potential weaknesses that deserve managements close attention. Substandard These are loans or portions thereof which appear to involve a substantial and unreasonable degree of risk to the Group because of unfavorable record or unsatisfactory characteristics. There exists in such loans the possibility of future loss which has a well-defined weakness or weaknesses that jeopardize their liquidation. Such well-defined weaknesses may include adverse trends or development of financial, managerial, economic or political nature, or a significant weakness in collateral. Doubtful These are loans or portions thereof which have the weaknesses inherent in those classified as Substandard, with the added characteristics that existing facts, conditions, and values make collection or liquidation in full highly improbable and in which substantial loss is probable. Loss These are loans or portions thereof which are considered uncollectible or worthless and of such little value that their continuance as bankable assets is not warranted although the loans may have some recovery or salvage value. The amount of loss is difficult to measure and it is not practical or desirable to defer writing off these basically worthless assets even though partial recovery may be obtained in the future. F-255

Credit quality per class of financial assets The following tables show the credit quality of financial assets:
Consolidated December 31, 2012 Derivative Assets and Investment Securities

Loans and Receivables

Loans and Advances to Banks

Others(*)

Total

Neither past due nor impaired. . . . . . . . . . . . . . . . . . Past due but not impaired . . . . . Impaired . . . . . . . . . . . . . . . . . . . . Less unearned interest and discount . . . . . . . . . . . . . . . . . . Capitalized interest . . . . . . Allowance for credit losses . . . . . . . . . . . . . . . .

P 99,572,949 746,589 4,821,877 105,141,415 172,774 696 4,883,491 Q100,084,454

P45,809,395 45,809,395 Q45,809,395

P36,791,673 354,576 37,146,249 68,637 Q37,077,612

P18,257,381 18,257,381 Q18,257,381

P200,431,398 746,589 5,176,453 206,354,440 172,774 696 4,952,128 Q201,228,842

Loans and Receivables

Consolidated December 31, 2011 (As restated - Notes 2 and 35) Financial Assets of Disposal Group Loans and Derivative Assets Classified as Advances to and Investment Held-for-Sale(**) Banks Securities Others(*) (Note 13)

Total

Neither past due nor impaired. . . . . . . . . . P 95,934,606 P41,685,678 P40,814,649 P29,181,095 Past due but not impaired. . . . . . . . . . 571,325 Impaired. . . . . . . . . . . . 4,649,139 279,776 101,155,070 Less unearned interest and discount . . . . . . Capitalized interest. . . . . . . Allowance for credit losses . . 251,070 3,605 3,441,045 41,685,678 41,094,425 64,824 29,181,095

P7,611,645 342,040 206,399 8,160,084 8,812 80,929 P8,070,343

P215,227,673 913,365 5,135,314 221,276,352 259,882 3,605 3,586,798 P217,426,067

P 97,459,350 P41,685,678 P41,029,601 P29,181,095

Consolidated January 1, 2011

Loans and Receivables

Loans and Advances to Banks

Derivative Assets and Investment Securities

Others(*)

Financial Assets of Disposal Group Classified as Held-for-Sale(**) (Note 13)

Total

Neither past due nor impaired . . . . . . . . . . P80,041,147 P38,798,139 P44,856,566 P24,754,538 Past due but not impaired . . . . . . . . . . 223,824 Impaired . . . . . . . . . . . . 4,404,329 170,203 84,669,300 Less unearned interest and discount . . . . . . . Capitalized interest . . . . . . . Allowance for credit losses . . . 238,763 3,328 3,250,295 38,798,139 45,026,769 75,872 24,754,538

P8,108,765 24,112 8,132,877 9,075 85,839 P8,037,963

P196,559,155 223,824 4,598,644 201,381,623 247,838 3,328 3,412,006 P197,718,451

P81,176,914 P38,798,139 P44,950,897 P24,754,538 F-256

Loans and Receivables

Loans and Advances to Banks

Parent Company December 31, 2012 Derivative Assets and Investment Securities

Others(*)

Total

Neither past due nor impaired. . . . . Q90,613,116 Q34,670,735 Past due but not impaired . . . . . . . . 591,308 Impaired . . . . . . . . . . . . . . . . . . . . . . . 4,387,784 95,592,208 Less unearned interest and discount . . . . . . . . . . . . . . . . . . . . . Capitalized interest . . . . . . . . . Allowance for credit losses . . 142,846 552 4,593,962 34,670,735

Q30,782,624 354,576 31,137,200 68,637 Q31,068,563

Q17,790,275 Q173,856,750 591,308 4,742,360 17,790,275 179,190,418 142,846 552 4,662,599

Q90,854,848 Q34,670,735

Q17,790,275 Q174,384,421

Loans and Receivables

Parent Company December 31, 2011 (As restated - Notes 2 and 35) Loans and Derivative Assets Advances to and Investment Banks Securities Others(*)

Total

Neither past due nor impaired. . . . . P86,126,516 P32,400,689 Past due but not impaired . . . . . . . . 327,024 Impaired . . . . . . . . . . . . . . . . . . . . . . . 4,095,863 90,549,403 Less unearned interest and discount . . . . . . . . . . . . . . . . . . . . . Capitalized interest . . . . . . . . . Allowance for credit losses . . 228,130 3,001 3,224,437 32,400,689

P35,549,472 279,776 35,829,248 64,824 P35,764,424

Parent Company January 1, 2011 Derivative Assets and Investment Securities

P28,432,717 P182,509,394 327,024 4,375,639 28,432,717 187,212,057 228,130 3,001 3,289,261

P87,093,835 P32,400,689

P28,432,717 P183,691,665

Loans and Receivables

Loans and Advances to Banks

Others(*)

Total

Neither past due nor impaired. . . . . P70,331,503 P31,302,035 Past due but not impaired . . . . . . . . 130,550 Impaired . . . . . . . . . . . . . . . . . . . . . . . 3,890,156 74,352,209 Less unearned interest and discount . . . . . . . . . . . . . . . . . . . . . Capitalized interest . . . . . . . . . Allowance for credit losses . . 196,719 2,724 3,042,637 31,302,035

P40,742,573 170,203 40,912,776 75,872 P40,836,904

P24,233,307 P166,609,418 130,550 4,060,359 24,233,307 170,800,327 196,719 2,724 3,118,509

P71,110,129 P31,302,035

P24,233,307 P167,482,375

(*) Others include returned checks and other cash items, bond sinking fund, other investments, security deposits and contingent and commitments. (**) Includes commitments. For the ratings of Loans and advances to banks and Derivative assets and Investment securities, the Group depends on external credit ratings like Standard and Poors (S&P). Refer also to Note 2 for the policy on impairment of financial assets of the Group and the Parent Company.

F-257

Credit ratings from S&P of Due from BSP and other banks, Interbank loans receivable and SPURA, Derivative assets and Investment securities (gross of allowance for credit and impairment losses) follow:
Consolidated December 31, 2012 AAA(**) AA to A BBB Below BBB and Unrated Total

Due from BSP, other banks, Interbank loans receivable and SPURA . . . . . . . . . . . . . . . . P P11,871,813 P 649,281 P33,288,301 P45,809,395 Financial assets at FVPL Derivative assets(*) . . . . . . . . . . . . . . . . . . 53 148,708 148,761 Held-for-trading Debt securitiesgovernment . . . . 6,359,061 6,359,061 Debt securitiesprivate. . . . . . . . . 310,605 510,715 821,320 Equity securities . . . . . . . . . . . . . . . 46,384 46,384 AFS investments Debt securitiesgovernment. . . . . . . . . 4,108 3,321,240 19,129,907 22,455,255 Debt securitiesprivate . . . . . . . . . . . . . 1,870,748 1,351,608 977,911 2,140,641 6,340,908 Equity securitiesquoted. . . . . . . . . . . . 471,114 434,252 905,366 Equity securitiesunquoted . . . . . . . . . 69,194 69,194 Q2,341,862 Q13,538,187 Q4,948,432 Q62,127,163 Q82,955,644
Consolidated December 31, 2011 (As restated - Notes 2 and 35) Below BBB AA to A BBB and Unrated

AAA(**)

Total

Due from BSP, other banks, Interbank loans receivable and SPURA . . . . . . . . . . . . . . . . Financial assets at FVPL Derivative assets(*) . . . . . . . . . . . . . . . . . . Held-for-trading Debt securitiesgovernment . . . . Debt securitiesprivate. . . . . . . . . Equity securities . . . . . . . . . . . . . . . AFS investments Debt securitiesgovernment. . . . . . . . . Debt securitiesprivate . . . . . . . . . . . . . Equity securitiesquoted. . . . . . . . . . . . Equity securitiesunquoted . . . . . . . . . Due from other banks, interbank loans receivable and investment securities included in the disposal group held-forsale (Note 13) . . . . . . . . . . . . . . . . . . . . . . . .

P68,282 29,081 97,363

P 8,630,012 P 112,571 55,380 1,853,671 10,651,634

2,736,312 1,926,211 4,662,523

P32,987,384 P41,685,678 85,702 430,880 18,352 50,264 27,323,285 5,780,802 615,847 76,067 67,368,583 198,273 430,880 18,352 50,264 30,114,977 9,589,765 615,847 76,067 82,780,103

P97,363

2,166,188

2,166,188

P10,651,634 P4,662,523 P69,534,771 P84,946,291

F-258

Consolidated January 1, 2011 AAA(**) AA to A BBB Below BBB and Unrated Total

Due from BSP and other banks, Interbank loans receivable and SPURA . . . . . . . . . . . P3,977,819 P17,515,020 P 542,931 P16,762,369 P38,798,139 Financial assets at FVPL Derivative assets(*) . . . . . . . . . . . . . . . . . . 259,016 259,016 Held-for-trading Debt securitiesgovernment . . . . 798,957 2,027,071 2,826,028 Debt securitiesprivate. . . . . . . . . 349,515 349,515 Equity securities . . . . . . . . . . . . . . . 72,452 72,452 AFS investments Debt securitiesgovernment. . . . . . . . . 251,916 48,612 735,538 14,376,163 15,412,229 Debt securitiesprivate . . . . . . . . . . . . . 1,061,953 358,514 3,375,186 4,795,653 Equity securitiesquoted. . . . . . . . . . . . 269,015 269,015 Equity securitiesunquoted . . . . . . . . . 88,522 88,522 HTM investments Debt securitiesgovernment. . . . . . . . . 13,541,105 13,541,105 Debt securitiesprivate . . . . . . . . . . . . . 27,928 1,460,664 1,344,731 4,579,911 7,413,234 5,056,620 Due from other banks and investment securities included in the disposal group held-for-sale (Note 12) . . . . . . . . . . . . . . . . 20,086,249 2,981,714 55,700,325 83,824,908

1,874,073

1,874,073

P5,056,620 P20,086,249 P2,981,714 P57,574,398 P85,698,981

Parent Company December 31, 2012 AAA(**) AA to A BBB Below BBB and Unrated Total

Due from BSP, other banks, Interbank loans receivable and SPURA . . . . . . . . . . . . . . . . Financial assets at FVPL Derivative assets(*) . . . . . . . . . . . . . . . . . . Held-for-trading Debt securitiesgovernment . . . . Debt securitiesprivate. . . . . . . . . Equity securities . . . . . . . . . . . . . . . AFS investments Debt securitiesgovernment. . . . . . . . . Debt securitiesprivate . . . . . . . . . . . . . Equity securitiesquoted. . . . . . . . . . . . Equity securitiesunquoted . . . . . . . . .

24,798

Q4,243,122 310,605 4,108 1,039,833 Q5,597,668

4,530 Q30,423,083 Q34,670,735 927,860 150,023 6,359,061 510,715 46,384 19,124,662 2,135,715 434,252 69,184 150,023 6,359,061 821,320 46,384 19,128,770 4,128,206 434,252 69,184

Q24,798

Q932,390 Q59,253,079 Q65,807,935

F-259

AAA(**)

Parent Company December 31, 2011 (As restated - Notes 2 and 35) Below BBB AA to A BBB and Unrated

Total

Due from BSP, other banks, Interbank loans receivable and SPURA . . . . . . . . . . . . . . . . Financial assets at FVPL Derivative assets(*) . . . . . . . . . . . . . . . . . . Held-for-trading Debt securitiesgovernment . . . . Debt securitiesprivate. . . . . . . . . Equity securities . . . . . . . . . . . . . . . AFS investments Debt securitiesgovernment. . . . . . . . . Debt securitiesprivate . . . . . . . . . . . . . Equity securitiesquoted. . . . . . . . . . . . Equity securitiesunquoted . . . . . . . . .

29,081

P4,551,000 P 111,655 55,380 1,449,293

1,851,824

P27,849,689 P32,400,689 85,188 430,880 18,352 50,264 26,919,932 4,419,414 331,918 76,067 196,843 430,880 18,352 50,264 26,975,312 7,749,612 331,918 76,067

P29,081

P6,167,328 P1,851,824 P60,181,704 P68,229,937

Parent Company January 1, 2011

AAA(**)

AA to A

BBB

Below BBB and Unrated

Total

Due from BSP, other banks, Interbank loans receivable and SPURA . . . . . . . . . . . . . . . . P P14,690,930 P 1,754 P16,609,351 P31,302,035 Financial assets at FVPL Derivative assets(*) . . . . . . . . . . . . . . . . . . 258,946 258,946 Held-for-trading Debt securitiesgovernment . . . . 798,957 2,027,071 2,826,028 Debt securitiesprivate. . . . . . . . . 349,515 349,515 Equity securities . . . . . . . . . . . . . . . 72,452 72,452 AFS investments Debt securitiesgovernment. . . . . . . . . 251,916 48,612 735,538 12,984,787 14,020,853 Debt securitiesprivate . . . . . . . . . . . . . 484,373 271,450 2,666,796 3,422,619 Equity securitiesquoted. . . . . . . . . . . . 142,588 142,588 Equity securitiesunquoted . . . . . . . . . 88,522 88,522 HTM investments Debt securitiesgovernment. . . . . . . . . 13,501,104 13,501,104 Debt securitiesprivate . . . . . . . . . . . . . 27,928 1,460,664 1,344,732 3,396,825 6,230,149 P1,078,801 P16,684,579 P2,353,474 P52,097,957 P72,214,811 (*) Unrated derivative assets pertain to swaps and forwards. (**) Investment securities under AAA rating relate to nonresident government, private debt and equity securities.

F-260

The tables below show the Group and the Parent Companys neither past due nor impaired loans and receivable (including financial assets of disposal group classified as held-for-sale), gross of allowance for credit losses and unearned interest and discounts and capitalized interest.
Consolidated December 31, 2012 Watchlist

Satisfactory

Acceptable

Unrated

Total

Loans and receivables Corporate . . . . . . . . . . . . . . . . . . . Small business . . . . . . . . . . . . . . . Consumer . . . . . . . . . . . . . . . . . . . Other receivables . . . . . . . . . . . .

Q47,428,543 11,691,342 3,197,559 151,656 Q62,469,100

Q 8,874,977 Q5,791,706 Q 869,045 Q62,964,271 2,027,650 1,916,370 1,014,917 16,650,279 399,060 328,926 6,987,770 10,913,315 528,911 8,364,517 9,045,084 Q11,830,598 Q8,037,002 Q17,236,249 Q99,572,949

Consolidated December 31, 2011 Financial Assets of Disposal Group Classified as Held-for-Sale (Note 13)

Satisfactory

Acceptable

Watchlist

Unrated

Total

Loans and receivables Corporate . . . . . . . . . . P46,444,807 P 8,587,197 P 7,452,419 P 215,014 P4,711,361 P 67,410,798 Small business . . . . . 9,675,112 1,323,151 2,095,163 923,950 14,017,376 Consumer. . . . . . . . . . 4,243,484 309,491 2,994,249 2,152,776 9,700,000 Other receivables . . . 623,893 8,893,900 9,517,793 P60,987,296 P10,219,839 P12,541,831 P12,185,640 P4,711,361 P100,645,967
Parent Company December 31, 2012 Watchlist

Satisfactory

Acceptable

Unrated

Total

Loans and receivables Corporate . . . . . . . . . . . . . . . . . . . Small business . . . . . . . . . . . . . . . Consumer . . . . . . . . . . . . . . . . . . . Other receivables . . . . . . . . . . . .

Q45,347,257 8,423,369 1,127,362 Q54,897,988

Q 8,750,891 Q5,576,872 Q 869,041 Q60,544,061 1,970,151 1,846,336 1,014,917 13,254,773 336,268 236,763 6,987,770 8,688,163 8,126,119 8,126,119 Q11,057,310 Q7,659,971
Parent Company December 31, 2011 Watchlist

Q16,997,847

Q90,613,116

Satisfactory

Acceptable

Unrated

Total

Loans and receivables Corporate . . . . . . . . . . . . . . . . . . . Small business . . . . . . . . . . . . . . . Consumer . . . . . . . . . . . . . . . . . . . Other receivables . . . . . . . . . . . .

P42,432,696 6,320,029 2,547,411 P51,300,136

P 8,587,197 P 7,452,419 P 213,753 P58,686,065 1,323,151 2,003,688 923,950 10,570,818 309,491 2,909,408 2,152,776 7,919,086 8,950,547 8,950,547 P10,219,839 P12,365,515 P12,241,026 P86,126,516

F-261

The tables below show the aging analysis of past due but not impaired loans and receivables per class and the fair value of the collateral:
Consolidated December 31, 2012 181 daysMore than 1 year 1 year

31-90 days

91-180 days

Total

Fair Market Value

Corporate. . . . . . . . . . . . . . . . . . . . . . . . . Small business . . . . . . . . . . . . . . . . . . . . Consumer . . . . . . . . . . . . . . . . . . . . . . . .

Q187,347 133,566 40,543 Q361,456

Q 35,401 56,170 40,720 Q132,291

Q 7,650 Q 22,349 Q252,747 Q 66,730 9,438 151,718 350,892 587,799 28,821 32,866 142,950 461,920 Q45,909 Q206,933 Q746,589 Q1,116,449

31-90 days

91-180 days

Consolidated December 31, 2011 181 daysMore than 1 year 1 year

Total

Fair Market Value

Corporate. . . . . . . . . . . . . . . . . . . . . . . . . Small business . . . . . . . . . . . . . . . . . . . . Consumer . . . . . . . . . . . . . . . . . . . . . . . .

P52,315 18,184 18,036 P88,535

P 48,475 11,789 P60,264

P 6,216 22,034 790 P29,040

P193,221 P251,752 151,787 240,480 48,478 79,093 P393,486 P571,325

P328,807 439,231 80,159 P848,197

Parent Company December 31, 2012 181 daysMore than 1 year 1 year Fair Market Value

31-90 days

91-180 days

Total

Corporate. . . . . . . . . . . . . . . . . . . . . . . . . Small business . . . . . . . . . . . . . . . . . . . . Consumer . . . . . . . . . . . . . . . . . . . . . . . .

Q128,914 122,327 40,189 Q291,430

53,830 21,292

Q 5,000 Q 18,945 Q152,859 Q 59,710 8,447 146,100 330,704 551,991 24,453 21,811 107,745 394,183 Q37,900 Q186,856 Q591,308 Q1,005,884

Q75,122

31-90 days

91-180 days

Parent Company December 31, 2011 181 daysMore than 1 year 1 year

Total

Fair Market Value

Corporate. . . . . . . . . . . . . . . . . . . . . . . . . Small business . . . . . . . . . . . . . . . . . . . . Consumer . . . . . . . . . . . . . . . . . . . . . . . .

P 8,558 P8,558

46,259 11,789

P 49,393 P 49,393 19,606 143,465 217,888 47,954 59,743 P240,812 P327,024

P125,067 415,293 62,707 P603,067

P58,048

P19,606

Credit-related commitment risks Commitment to extend credit represents unused portions of authorizations to extend credit in the form of loans, guarantees, or letters of credit. With these, the Group is potentially exposed to loss in the amount equal to the total unused commitments. However, the likely amount of potential loss is less than the total unused commitments, as most commitments to extend credit are contingent upon customers maintaining specific credit standards. The Group monitors the term to maturity of credit commitments because long-term commitments generally have a greater degree of credit risk than short-term commitments.

F-262

Maximum exposure to credit risk after collateral held or other credit enhancements An analysis of the maximum exposure to credit risk of certain loans and receivables after taking into account any collateral held or other credit enhancements is shown below:
December 31, 2012 Consolidated Carrying Amount Fair Value of Collateral Net Maximum Exposure Carrying Amount Parent Company Fair Value of Collateral Net Maximum Exposure

Credit risk exposure relating to on-balance sheet assets are as follows: SPURA . . . . . . . . . . . . . . . . . . . . Q 142,000 Q 142,000 Q Q Q Q Receivables from customers: Corporate . . . . . . . . . . . . . 25,845,242 38,612,331 5,653,423 23,620,807 36,136,487 5,443,662 Small business . . . . . . . . . 11,782,707 23,069,406 2,157,803 8,965,531 16,607,527 2,037,986 Consumer . . . . . . . . . . . . . 6,310,650 11,201,196 568,880 4,264,665 6,956,192 404,561 43,938,599 72,882,933 8,380,106 36,851,003 59,700,206 7,886,209 Q44,080,599 Q73,024,933 Q8,380,106 Q36,851,003 Q59,700,206 Q7,886,209
December 31, 2011 Consolidated Carrying Amount Fair Value of Collateral Net Maximum Exposure Carrying Amount Parent Company Fair Value of Collateral Net Maximum Exposure

Credit risk exposure relating to on-balance sheet assets are as follows: SPURA. . . . . . . . . . . . . . . . . . . . . P 6,800,000 P 6,800,000 P P 6,700,000 P 6,700,000 P Receivables from customers: Corporate . . . . . . . . . . . . . . 17,727,665 23,263,845 6,748,448 17,138,773 21,999,064 6,733,472 Small business . . . . . . . . . . 7,695,742 16,068,231 114,219 7,459,526 14,942,755 102,079 Consumer . . . . . . . . . . . . . . 3,174,589 5,635,889 95,685 2,989,175 5,205,233 73,819 28,597,996 44,967,965 6,958,352 27,587,474 42,147,052 6,909,370 P35,397,996 P51,767,965 P6,958,352 P34,287,474 P48,847,052 P6,909,370
January 1, 2011 Consolidated Carrying Amount Fair Value of Collateral Net Maximum Exposure Carrying Amount Parent Company Fair Value of Collateral Net Maximum Exposure

Credit risk exposure relating to on-balance sheet assets are as follows: SPURA. . . . . . . . . . . . . . . . . . . . . P12,100,000 P12,100,000 P P12,100,000 P12,100,000 P Receivables from customers: Corporate . . . . . . . . . . . . . . 14,438,524 19,100,481 3,141,203 13,966,527 18,420,888 3,050,117 Small business . . . . . . . . . . 5,491,682 27,227,802 165,172 5,302,141 26,866,850 148,909 Consumer . . . . . . . . . . . . . . 4,632,953 7,062,436 49,849 4,477,245 6,753,039 31,947 24,563,159 53,390,719 3,356,224 23,745,913 52,040,777 3,230,973 P36,663,159 P65,490,719 P3,356,224 P35,845,913 P64,140,777 P3,230,973 The carrying value as of December 31, 2012 and 2011 and January 1, 2011 of the other financial assets represent the maximum exposure to credit risk as at reporting date. Management of Excessive Concentration Risk Concentration of credit risk arise when a number of counterparties belong to a group controlled by a family or a conglomerate or are engaged in similar business activities or economic characteristics that would cause their F-263

ability to meet contractual obligations to be similarly affected by changes in economic and other conditions. Concentrations indicate the relative sensitivity of the Group performance to developments affecting a particular industry or geographical location. The Group manages concentration risk by way of credit limit policies and internal/regulatory limit monitoring and reporting procedures. It implements policies on maximum credit exposure to individual borrowers, group of related borrowers, borrowers under specific industries (like real estate) or in specific countries to develop a diversified portfolio and avoid excessive concentrations of risk. While counterparty limits are set to restrict exposures to banks and other financial institutions covering on-books and off-balance sheet exposures, as well as settlement risk limits in relation to trading transactions, e.g., forward foreign exchange contracts. The Group analyzes the credit risk concentration to an individual borrower, related group of accounts, industry, geographic, internal rating buckets, currency, term and security. Further analysis is undertaken based on breaches to internal and regulatory limits. For risk concentration monitoring purposes, the financial assets are broadly categorized into (1) loans and receivables and (2) trading and financial investment securities. To mitigate risk concentration, the Parent Company constantly checks for breaches in regulatory and internal limits. Clear escalation process and override procedures are in place, whereby any excess in limits are covered by appropriate approving authority to regularize and monitor breaches in limits. Concentration of risks of financial assets with credit risk exposure An industry analysis of concentrations of credit risk at the statement of financial position date is shown below:
Consolidated December 31 2011 (As restated 2012 Notes 2 and 35) Parent Company December 31 2011 (As restated January 1, 2012 Notes 2 and 35) 2011

January 1, 2011

Financial institutions/ intermediaries. . . . . . . . . . . . . . . . P 56,596,820 P 57,911,453 P 46,124,698 P 44,235,382 P 46,461,441 P 38,005,762 Wholesale and retail trade . . . . . . . 25,233,798 21,234,747 17,893,336 23,651,084 19,238,834 15,246,685 Manufacturing (various industries) . . . . . . . . . . . . . . . . . . . 19,797,423 20,233,968 17,323,808 16,674,628 17,499,513 15,103,515 Real estate, renting and business activities . . . . . . . . . . . . . . . . . . . . 20,656,534 19,615,534 13,439,037 16,883,900 16,167,312 10,053,928 Transportation, storage and communication . . . . . . . . . . . . . . 10,121,464 13,352,243 12,117,997 9,899,354 13,111,886 11,925,962 Other community, social and personal activities . . . . . . . . . . . . 11,399,124 8,316,310 6,495,438 9,784,393 7,568,535 5,916,151 Agricultural, hunting and forestry . . . . . . . . . . . . . . . . . . . . . 814,840 1,132,114 7,206,129 670,554 1,101,753 7,195,074 Others(*) . . . . . . . . . . . . . . . . . . . . . . . 61,734,437 71,319,899 72,648,303 57,391,123 66,062,783 67,353,250 206,354,440 Less: Unearned interest and discount. . . . . . . . . . . . . . . . . . Capitalized interest . . . . . . . . Allowance for credit losses . . . . . . . . . . . . . . . . . . Financial assets included in disposal group classified as held-for-sale (Note 13) . . . . . . . . 172,774 696 4,952,128 201,228,842 213,116,268 251,070 3,605 3,505,869 209,355,724 193,248,746 238,763 3,328 3,326,167 189,680,488 179,190,418 142,846 552 4,662,599 174,384,421 187,212,057 228,130 3,001 3,289,261 183,691,665 170,800,327 196,719 2,724 3,118,509 167,482,375

8,070,343

8,037,963

Total Credit Risk Exposure . . . . . . P201,228,842 P217,426,067 P197,718,451 P174,384,421 P183,691,665 P167,482,375 (*) Others include community service and miscellaneous business.

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A geographical analysis of concentration of credit risk at the statement of financial position date is shown below:
Consolidated December 31 2011 (As restated Notes 2 and 35) 2012 Parent Company December 31 2011 (As restated January 1, Notes 2 and 35) 2012 2011

January 1, 2011

Philippines. . . . . . . . . . . . . . . . . . . . . P164,572,652 P157,066,749 P142,468,771 P152,137,477 P146,362,822 P136,547,799 Asia . . . . . . . . . . . . . . . . . . . . . . . . . . 16,265,450 18,204,206 13,194,191 3,637,450 5,515,709 3,350,794 United States. . . . . . . . . . . . . . . . . . . 3,902,595 5,215,610 9,264,162 3,239,387 4,345,145 4,223,360 Europe . . . . . . . . . . . . . . . . . . . . . . . . 3,512,530 3,634,726 3,767,107 2,538,888 2,731,502 2,635,223 188,253,227 Less: Unearned interest and discount. . . . . . . . . . . . . . . . . . Capitalized interest . . . . . . . . Allowance for credit losses . . . . . . . . . . . . . . . . . . Contingent .......... Commitments(**). . . . . . . . . . . . . . . . accounts(*) . 172,774 696 4,952,128 183,127,629 7,016,072 11,085,141 18,101,213 201,228,842 Financial assets included in disposal group classified as held-for-sale (Note 13) . . . . . . . . 184,121,291 251,070 3,605 3,505,869 180,360,747 6,924,683 22,070,294 28,994,977 209,355,724 168,694,231 238,763 3,328 3,326,167 165,125,973 7,035,365 17,519,150 24,554,515 189,680,488 161,553,202 142,846 552 4,662,599 156,747,205 6,577,391 11,059,825 17,637,216 174,384,421 158,955,178 228,130 3,001 3,289,261 155,434,786 6,206,343 22,050,536 28,256,879 183,691,665 146,757,176 196,719 2,724 3,118,509 143,439,224 6,708,639 17,334,512 24,043,151 167,482,375

8,075,343

8,037,963

Total Credit Risk Exposure . . . . . . P201,228,842 P217,431,067 P197,718,451 P174,384,421 P183,691,665 P167,482,375 (*) These include unused commercial letters of credit, inward bills for collection, outward bills for collection, late deposits/ payment received and others (see Note 32). (**) These include unused credit card lines, outstanding guarantees issued and confirmed export letters of credit (see Note 32).

Note 8 shows information on the concentration of credit on loans and receivables from customers. Collateral and other credit risk mitigation The amount and type of collateral required depends on an assessment of the credit risk of the obligor. The Group implements certain requirements regarding the acceptability of types of collateral and valuation. Collateral comes in the form of financial or non-financial assets. The main types of collateral obtained include cash or securities, charges over real estate properties, inventory and trade receivables, and mortgages over residential properties. The Group monitors the market value of collateral, and request for additional collateral in accordance with the underlying agreement, and monitors the market value of collateral obtained during its review of the adequacy of the allowances for credit losses. The collateral consists of cash, securities, letters of guarantee and real and personal properties. It is the Groups policy to dispose of investment properties in an orderly fashion. The proceeds are used to reduce or repay outstanding claim. Management of Market Risk Market risk is the potential loss that may arise from decrease in earnings due to the decline in prices or present value of future cash flows of financial instruments. The value of these financial instruments may change as a result of movements in interest rates, foreign exchange rates, equity prices and other market changes. The Groups market risk originates from its inventory of foreign exchange, debt and equity securities and freestanding derivatives.

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Market Risk in the Trading Book The BOD has set limits on the level of market risk acceptable to the Parent Company that is monitored by the Treasury Group on a daily basis. Exposure to market risk is estimated using the Value-at-Risk (VaR) methodology. VaR is a technique that estimates the potential losses that could occur on risk positions as a result of movements in market rates and prices over a specified time horizon at a given confidence level under normal market conditions. VaR becomes an integral part of the Parent Companys market risk management through the VaR limits, which are established for all trading operations. VaR is calculated and monitored by RMD and reported to Treasury on a daily basis. An approval/ authorization matrix is established to manage results of VaR computation, particularly VaR limit breaches. Computed VaR level for the period, along with the corresponding VaR limits, the VaR limit breaches and corresponding approvals (if there are any) are all being reported to the RMC and BOD on a monthly basis. VaR assumptions/parameters The Parent Company utilizes an automated risk management solution to calculate VaR using a parametric method which assumes that returns follow a normal distribution. The VaR model makes use of a 99.00% confidence level and a one-day holding period for foreign exchange contracts exposures while a ten-day holding period for equity and fixed income exposures. This means that under a normal distribution assumption on asset return, the Parent Companys losses on trading activity will exceed the calculated VaR on 1 out of 100 trading days. As of December 31, 2012 and 2011, the year-end, average, low and high VaR figures for the trading portfolio of the Parent Company are as follows:
Foreign exchange contracts Interest rate fixed income Equity Total

December 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2012Average Daily. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2012Highest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2012Lowest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2011Average Daily. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2011Highest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2011Lowest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P 1,925 6,306 21,075 7,229 30,622 209

P175,509 146,585 341,126 32,451 10,366 96,268 231,149 10,366

P2,116 P179,550 2,105 154,993 2,563 354,268 1,523 37,150 2,338 2,363 2,863 1,900 12,704 105,368 251,923 12,704

The high and low of the total trading portfolio may not equal to the sum of the individual components as the high and low of the individual portfolios may have occurred on different trading days. The Parent Companys total VaR does not consider the correlation among market risk factors. Further, equity VaR is estimated for internal monitoring purposes only. Limitations of the VaR Methodology The use of VaR has limitations because this model makes use of volatilities based on historical market prices and assumes that future price movements will follow a normal distribution. Hence, it may not clearly predict the future changes in risk factors and the effect of large market movements may be underestimated if the changes in risk factors fail to align with the normal distribution assumption. The VaR may also be under or over-estimated due to the use of assumptions on the risk factors. Likewise, the Parent Companys positions throughout the day varies but the VaR calculated only represents the positions as of end-of-day and it does not account for losses that may occur beyond the 99.00% confidence level. Due to these limitations, the actual trading results may differ from the VaR calculations; in particular it does not provide a meaningful indication of possible losses during stressed market conditions. Hence, to determine the reliability of the VaR model, quarterly back-testing is employed. This exercise examines the accuracy of VaR estimates with the given assumptions and parameters. The Bank uses 250 days of observations as prescribed by the Bank for International Settlements (BIS). One-day VaR estimate is compared against unrealized loss (marked-to-market in profit or loss). When unrealized P&L exceeds the VaR estimate, an exception occurs. The Bank uses the traffic light approach to interpret the back-testing results. Back-testing results are quarterly reported to the RMC and the BOD. F-266

The Parent Company also employs stress testing to determine possible decline in the value of the portfolio which may occur under adverse market conditions to supplement the VaR. A more robust set of stress testing scenarios is being implemented by the Bank. These scenarios are as follows:
Scenario Type Risk Factors Scenario

Historical . . . . . . . .

Foreign Exchange (FX), Interest Rate, Equity Price FX, Interest Rate

Asian Financial Crisis historical scenario in 1997 which caused a decline in the USDPHP rate by 15%, a doubling of the interest rates and a decrease in equity price by 25% EDSA 2 historical scenario in Oct 2000 to Jan 2001 which resulted to an adverse movement in USDPHP rate by 10% and a one month increase in domestic interest rates by 480bps Change in Monetary Policyamendments by the BSP in its policies causing variable shifts on prices and/or rates (e.g. adverse movement of the USDPHP by the 260-day volatility of the exchange rate; adverse movement on interest rates based on volatilities of benchmark rates, i.e. PDST-F for Peso-denominated securities and Libor rates for Dollar and other currency denominated securities 2008 Subprime Crisis historical scenario which caused a decline in equity prices by 48% and resulted to an adverse movement in USDPHP rate by 21% Greek Debt Crisis scenario which suffered a drop in equity prices by 47% and government debt yield rose by 120% A hypothetical 30% adverse movement in FX rates A hypothetical 50% adverse movement in FX rates A hypothetical change in interest rates by 100%

Historical . . . . . . . .

Historical . . . . . . . .

Equity, FX

Historical . . . . . . . . Hypothetical . . . . . . Hypothetical . . . . . . Hypothetical . . . . . .

Equity, Interest Rate FX FX Interest Rate

The Parent Company considers periodically whether the stress tests carried out are still adequate within the continuously changing risk environment. In particular, it ensures that assumptions regarding the risk profile and the external environment are still valid over time. Assessment of the adequacy of the stress test is conducted, particularly in the light of changes in portfolio characteristics or in the external environment, at least once a year. The stress testing results are reported monthly to the RMC and the BOD. Back-testing results on the other hand are reported to the same level of management every quarter. Management of Liquidity Risk Liquidity risk is the current and prospective risk to earnings or capital arising from a financial institutions inability to meet its obligations when they come due without incurring unacceptable losses or costs. It includes the inability to manage unplanned decreases or changes in funding sources. Liquidity risk also arises from the failure to recognize or address changes in market conditions that affect the ability to liquidate assets quickly and with minimal loss in value. To limit this risk, management has arranged diversified funding sources in addition to its core deposit base, manages assets with liquidity in mind, and monitors future cash flows and liquidity on a daily basis. This incorporates an assessment of expected cash flows and the availability of high grade collateral which could be used to secure additional funding if required. Liquidity management involves forecasting funding requirements and maintaining sufficient capacity to accommodate fluctuations in asset and liability levels due to changes in the Groups business operations or unanticipated events. Sources of liquidity include deposits and other customer-based funding, and wholesale market-based funding. Liquidity is managed at two levels. The first is the liquidity of the Parent Company, which is the holding company that owns the banking and nonbanking subsidiaries. The second is the liquidity of the banking subsidiaries. The management of liquidity at both levels is essential because the Parent Company and banking subsidiaries have different funding needs and sources, and are subject to certain regulatory guidelines and requirements. The Group undertakes a conservative approach by imposing internal prudential limits that are in addition to regulatory requirements. This also incorporates an assessment of expected cash flows and the availability of high grade collateral which could be used to secure additional funding if required. The Group maintains a portfolio of highly marketable and diverse assets that can be easily liquidated in the event of an unforeseen interruption of cash flow. The Group also has committed borrowing facilities in the form F-267

of commercial paper facilities and other stand-by facilities that it can access to meet liquidity needs. In addition, the Group maintains a statutory deposit with the BSP equal to 10.00% of customer deposits. The liquidity position is assessed and managed under a variety of scenarios, giving due consideration to stress factors relating to both the market in general and specifically to the Group. The most important of these is to maintain limits on the ratio of net liquid asset to customer liabilities, set to reflect market conditions. Net liquid assets consist of cash, short-term bank deposits and liquid debt securities available for immediate sale (i.e., FVPL and AFS investments), less deposits for banks and other issued securities to mature within the next month; while, customer liabilities consist of deposit liabilities and bills payable. The net liquid asset to customer liabilities ratio of the Parent Company are as follows:
2012 2011

Average during the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Highest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lowest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Parent Company uses a set of tools to manage its liquidity risk, as follows:

41.53% 50.61 34.88

38.61% 44.07 35.25

Maximum Cumulative Outflow (MCO) is defined as the amount of prospective funding that the bank will require at pre-specified future dates in normal operating environment. This monetary amount is a measure of liquidity gap (difference) between the maturing liabilities and assets. In an MCO report, accounts are bucketed according to their residual maturity. On and off-balance sheet accounts are incorporated in the MCO analysis. This is prepared on a per currency basis and institutional basis. Subsidiaries and overseas branches prepare their individual MCO, as well. An MCO Gap Limit complements the MCO tool. The MCO limit is set by the BOD to control cumulative net outflows resulting from maturity mismatches. The MCO cumulative gap limit is the maximum tolerable negative gap that the Bank can have at any tenor bucket. This is being monitored on a regular basis to safeguard our access to liquidity. Stress testing, on the other hand, is employed both on the MCO report and the Banks Capital Adequacy Ratio (CAR). Relevant account items of the MCO report are simulated by altering the values/positions in the bucket distributions. This is to determine the funding needs under adverse scenarios as negative liquidity gap increases or positive liquidity gap decreases. Likewise, the CAR report is simulated to determine the resiliency of the Banks CAR and its ability to withstand a range of stress events. The Contingency Funding Plan (CFP), which is approved by the RMC and the BOD, is formulated to ensure that an organized structure for meeting various scenarios of liquidity crisis, which are aligned with the BOD-approved stress testing scenarios, are in place. It is a major requirement to ensure resilience under stressed conditions. This enumerates the events that may trigger contingency funding, the procedures in carrying out the plan, the detailed roles and responsibilities of all personnel in the event of contingencies, quantification of potential funding needs, criteria for selection of funding sources, sources of liquidity, asset-liability management strategies, and mechanism for monitoring potential liquidity crunch. The following table summarizes the maturity profile of the Group and the Parent Companys financial instruments and gross-settled derivatives based on contractual undiscounted cash flows. Financial assets Analysis of equity and debt securities at FVPL into maturity groupings is based on the expected date on which these assets will be realized. For other financial assets, the analysis into maturity grouping is based on the remaining period from the end of the reporting period to the contractual maturity date or if earlier the expected date the assets will be realized.

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Financial liabilities The maturity grouping is based on the remaining period from the end of the reporting period to the contractual maturity date. When counterparty has a choice of when the amount is paid, the liability is allocated to the earliest period in which the Group can be required to pay.
Consolidated December 31, 2012 On Demand Less than 3 months 3-12 months 1-2 years Over 2 years Total

Financial Assets Cash and other cash items . . . . . . . . . . . . . . . Due from BSP . . . . . . . . . . . . . . . . . . . . . . . . . Due from other banks. . . . . . . . . . . . . . . . . . . Interbank loans receivable and SPURA . . . Financial assets at FVPL Derivative assets(*) Bifurcated . . . . . . . . . . . . . . . . . . . . Pay . . . . . . . . . . . . . . . . . . . . . . . . . . Held-for-trading . . . . . . . . . . . . . . . . . . . AFS investments . . . . . . . . . . . . . . . . . . . . . . . Loans and receivables Loans and discounts . . . . . . . . . . . . . . . Unquoted debt securities . . . . . . . . . . . Accrued interest receivable . . . . . . . . . Accounts receivable . . . . . . . . . . . . . . . Sales contracts receivable. . . . . . . . . . . Finance lease receivable . . . . . . . . . . . . Other assets Returned checks & other cash items (RCOCI) . . . . . . . . . . . . . . . . . . . . . . . Bond sinking fund . . . . . . . . . . . . . . . . . Security deposit . . . . . . . . . . . . . . . . . . . Other investments . . . . . . . . . . . . . . . . . Total Financial Assets . . . . . . . . . . . . . . . . . Financial Liabilities Deposit liabilities Demand . . . . . . . . . . . . . . . . . . . . . . . . . . Savings. . . . . . . . . . . . . . . . . . . . . . . . . . . Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Derivative liabilities(*) Bifurcated . . . . . . . . . . . . . . . . . . . . . . . . Pay . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bills payable . . . . . . . . . . . . . . . . . . . . . . . . . . Marginal deposits . . . . . . . . . . . . . . . . . . . . . . Managers checks and demand drafts outstanding. . . . . . . . . . . . . . . . . . . . . . . . . . Accrued interest payable . . . . . . . . . . . . . . . . Subordinated debt . . . . . . . . . . . . . . . . . . . . . . Insurance provision and liabilities . . . . . . . . Other liabilities Accounts payable . . . . . . . . . . . . . . . . . . Domestic bills purchased . . . . . . . . . . . Outstanding acceptances payable . . . . Premium deposit fund . . . . . . . . . . . . . . Due to Philippine Deposit Insurance Corporation (PDIC) . . . . . . . . . . . . . . . . . . . . Due to other banks . . . . . . . . . . . . . . . . . Cash letters of credit . . . . . . . . . . . . . . . Payment orders payable . . . . . . . . . . . . Due to Treasurer of the Philippines . . Total Financial Liabilities . . . . . . . . . . . . .

P 3,885,613 P P P 26,084,728 6,490,421 2,442,833 4,269,441 2,193,725 5,337,696 424,008 9,703 139,005 4,926 4,715,426 66,836 312,854 919,836 14,726 18,348 62,688 53 6,236 1,835,959 38,182,056 49,521 645,030 8,146 21,570 234 50,000 7,220,529 1,343,515 9,137,719 86,531 25,762 1,123 106,421 8,590

2,632,296 8,025,539 2,856,606 100,717 78,360 195,649 49,328 36,622

39,020,436 46,352,431 3,461,303 612,038 8,317 232,987 73,557 6,858

3,885,613 26,084,728 13,202,695 7,955,429 9,703 139,058 7,226,765 44,837,132 106,413,171 6,520,797 1,696,401 1,015,782 571,353 150,057 62,688 50,000 36,622 6,858

Q44,918,835 Q48,579,334 Q22,623,639 Q13,975,117 Q89,767,927 Q219,864,852

Q51,759,063 Q Q Q Q Q 51,759,063 32,990,348 33,725,866 979,332 67,695,546 16,165,091 4,681,006 4,041,213 4,141,188 29,028,498 1,790 103,650 403 34,374 438,543 215,693 4,073,542 1,537,025 1,479,122 134,750 67,481 35,682 20,743 2,324 626 4,493,707 1,697 4,557,868 302,648 560,912 74 270,984 536 23,526 1,790 104,276 5,079,084 34,374 438,543 217,464 4,557,868 4,073,542 1,537,025 1,479,122 302,648 270,984 134,750 67,481 35,682 20,743 2,324

Q92,894,533 Q59,247,503 Q 6,492,308 Q 4,041,749 Q 4,164,714 Q166,840,807

(*) Amounts are translated using spot rate as of December 31, 2012.

F-269

On Demand

Consolidated December 31, 2011 (As restated - Notes 2 and 35) Less than 3 months 3-12 months 1-2 years Over 2 years

Total

Financial Assets Cash and other cash items. . . . . . . . . . . . . . P 4,023,559 P P P P P 4,023,559 Due from BSP. . . . . . . . . . . . . . . . . . . . . . . . 18,292,303 18,292,303 Due from other banks . . . . . . . . . . . . . . . . . 8,580,778 2,240,301 10,821,079 Interbank loans receivable and SPURA . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,800,000 5,725,145 84,849 12,609,994 Financial assets at FVPL Derivative assets(*) Bifurcated . . . . . . . . . . . . . . . . . . 10,362 10,362 Pay . . . . . . . . . . . . . . . . . . . . . . . . 113,671 74,240 187,911 Held-for-trading. . . . . . . . . . . . . . . . . . 505 498,991 499,496 AFS investments . . . . . . . . . . . . . . . . . . . . . 6,368,739 1,925,570 4,521,333 56,470,501 69,286,143 Loans and receivables Loans and discounts . . . . . . . . . . . . . . 14,795,710 33,053,221 5,619,109 4,507,984 46,288,343 104,264,367 Unquoted debt securities . . . . . . . . . . 453,260 89,053 258,508 3,137,050 3,561,543 7,499,414 Accrued interest receivable . . . . . . . . 1,009,488 160,945 679,702 1,850,135 Sales contracts receivable . . . . . . . . . 110,776 10,887 106,266 120,542 469,245 817,716 Accounts receivable . . . . . . . . . . . . . . 99,635 318,700 355,308 773,643 Finance lease receivable. . . . . . . . . . . 1,288 23,613 33,553 113,977 172,431 Other assets RCOCI . . . . . . . . . . . . . . . . . . . . . . . . . 84,621 84,621 Bond sinking fund . . . . . . . . . . . . . . . . 50,000 50,000 Security deposit . . . . . . . . . . . . . . . . . . 47,726 47,726 Other Investments . . . . . . . . . . . . . . . . 3,771 3,771 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial assets included in disposal group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54,250,130 7,466,355 48,082,455 9,551,916 12,442,428 106,967,742 231,294,671 7,466,355

Total Financial Assets . . . . . . . . . . . . . . . . . P 61,716,485 P48,082,455 P 9,551,916 P12,442,428 P106,967,742 P 238,761,026 Financial Liabilities Deposit liabilities Demand . . . . . . . . . . . . . . . . . . . . . . . . . P 45,490,521 P P P Savings . . . . . . . . . . . . . . . . . . . . . . . . . 72,098,581 Time. . . . . . . . . . . . . . . . . . . . . . . . . . . . 406,924 20,683,033 7,362,806 Derivative liabilities(*) Bifurcated . . . . . . . . . . . . . . . . . . . . . . . Pay . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68,843 Bills payable . . . . . . . . . . . . . . . . . . . . . . . . . 1,106,934 230,309 3,224,579 Marginal deposits . . . . . . . . . . . . . . . . . . . . . 13,761 Managers checks and demand drafts outstanding . . . . . . . . . . . . . . . . . . . . . . . . 928,009 Accrued interest payable. . . . . . . . . . . . . . . 259,748 7,658 Subordinated debt. . . . . . . . . . . . . . . . . . . . . 52,547 272,531 Insurance provision and liabilities. . . . . . . 3,074,086 212,631 Other liabilities Accounts payable . . . . . . . . . . . . . . . . 1,353,952 Due to other banks . . . . . . . . . . . . . . . 1,081,700 Domestic bills purchased . . . . . . . . . . 982,035 Premium deposit fund. . . . . . . . . . . . . 265,117 Outstanding acceptances payable . . . 148,294 85,613 Cash letters of credit . . . . . . . . . . . . . . 174,133 Due to PDIC. . . . . . . . . . . . . . . . . . . . . 135,603 Payment orders payable . . . . . . . . . . . 121,463 Due to Treasurer of the Philippines . . . . . . . . . . . . . . . . . . . . 2,984 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial liabilities included in disposal group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127,230,434 6,008,843 21,190,684 11,423,277

P 75,204 9,484 12,084 325,969 422,741 422,741 P

P 45,490,521 72,098,581 3,500,000 32,027,967 10,687 4,552,547 8,063,234 9,484 80,927 4,572,509 13,761 928,009 267,406 5,203,594 3,286,717 1,353,952 1,081,700 982,035 265,117 233,907 174,133 135,603 121,463 2,984 168,330,370 6,008,843

Total Financial Liabilities. . . . . . . . . . . . . . P133,239,277 P21,190,684 P11,423,277 P (*) Amounts are translated using spot rate as of December 31, 2011.

8,063,234 P174,339,.213

F-270

Consolidated January 1, 2011 On Demand Financial Assets Cash and other cash items . . . . . . . . . . . . . . . Due from BSP . . . . . . . . . . . . . . . . . . . . . . . . . Due from other banks . . . . . . . . . . . . . . . . . . . Interbank loans receivable and SPURA. . . . Financial assets at FVPL Derivative assets(*) Bifurcated . . . . . . . . . . . . . . . . . . . . Pay . . . . . . . . . . . . . . . . . . . . . . . . . . Held-for-trading . . . . . . . . . . . . . . . . . . . AFS investments . . . . . . . . . . . . . . . . . . . . . . . HTM investments . . . . . . . . . . . . . . . . . . . . . . Loans and receivables Receivables from customers . . . . . . . . . Unquoted debt securities . . . . . . . . . . . . Accrued interest receivable. . . . . . . . . . Sales contracts receivable . . . . . . . . . . . Accounts receivable . . . . . . . . . . . . . . . . Finance lease receivable . . . . . . . . . . . . Other assets RCOCI . . . . . . . . . . . . . . . . . . . . . . . . . . . Security deposits . . . . . . . . . . . . . . . . . . . Bond sinking fund . . . . . . . . . . . . . . . . . Other investments . . . . . . . . . . . . . . . . . . Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial assets included in disposal group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Financial Assets . . . . . . . . . . . . . . . . . Financial Liabilities Deposit liabilities: Demand . . . . . . . . . . . . . . . . . . . . . . . . . . Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Derivative liabilities(*) Bifurcated. . . . . . . . . . . . . . . . . . . . . . . . . Pay. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bills payable . . . . . . . . . . . . . . . . . . . . . . . . . . . Marginal deposits . . . . . . . . . . . . . . . . . . . . . . Managers checks and demand drafts outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued interest payable . . . . . . . . . . . . . . . . Subordinated debt . . . . . . . . . . . . . . . . . . . . . . Insurance provision . . . . . . . . . . . . . . . . . . . . . Other liabilities. . . . . . . . . . . . . . . . . . . . . . . . . Domestic bills purchased. . . . . . . . . . . . Accounts payable . . . . . . . . . . . . . . . . . . Due to other banks . . . . . . . . . . . . . . . . . Outstanding acceptances payable. . . . . Premium deposit fund . . . . . . . . . . . . . . Cash letters of credit. . . . . . . . . . . . . . . . Payment orders payable. . . . . . . . . . . . . Due to PDIC . . . . . . . . . . . . . . . . . . . . . . Due to Treasurer of the Philippines. . . Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial liabilities included in disposal group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Financial Liabilities . . . . . . . . . . . . . . P 4,636,820 15,932,912 4,372,125 14,198,674 1,647,114 20,993 708,538 93,362 41,610,538 7,271,861 P 48,882,399 Less than 3 months P 316,575 516,502 14,392,735 109,340 2,007,215 11,099,137 8,787,945 25,327,902 58,526 45,593 43,849 1,269 62,706,588 P62,706,588 3-12 months P 51,000 2,607,266 666,589 1,240,780 238,641 629,200 3,929,311 324,198 17,345 192,203 26,956 22,875 9,946,364 P9,946,364 1-2 years P 11,848 127,466 184,569 2,880,790 2,972,777 14,187 58,143 137 30,504 52,702 3,959 6,337,082 P6,337,082 P Over 2 years 10,362 14,053,020 12,702,044 36,147,127 14,342,177 465,514 110,250 50,000 77,880,494 P77,880,494 P Total 4,636,820 16,300,487 7,495,893 15,059,324 22,210 236,806 3,247,995 25,575,367 24,999,979 82,575,791 14,739,088 1,710,052 780,702 735,631 164,898 93,362 52,702 50,000 3,959 198,481,066 7,271,861 P205,752,927

P 41,848,445 68,425,612 37,094 418,184 2,353,957 1,169,294 1,095,489 844,889 294,334 213,119 208,990 136,968 132,208 2,772 117,181,355 6,955,795 P124,137,150

26,892,530 107,702 804,482 1,196 211,410 78,213 28,095,533

1,152,790 799,085 158,181 2,110,056

245,000 625,711 870,711

3,908,333 30,693 12,639 4,782,224 8,733,889

P 41,848,445 68,425,612 32,198,653 30,693 107,702 1,616,206 38,290 418,184 211,410 5,486,148 2,512,138 1,169,294 1,095,489 844,889 294,334 213,119 208,990 136,968 132,208 2,772 156,991,544 6,955,795 P163,947,339

P28,095,533

P2,110,056

P 870,711

P 8,733,889

(*) Amounts are translated using spot rate as of January 1, 2011.

F-271

Parent Company December 31, 2012 On Demand Financial Assets Cash and other cash items . . . . . . . . . . . . . . . . . Due from BSP . . . . . . . . . . . . . . . . . . . . . . . . . . . Due from other banks . . . . . . . . . . . . . . . . . . . . . Interbank loans receivable and SPURA . . . . . Financial assets at FVPL Derivative assets(*) Bifurcated . . . . . . . . . . . . . . . . . . . . . . Pay . . . . . . . . . . . . . . . . . . . . . . . . . . . . Held-for-trading . . . . . . . . . . . . . . . . . . . . . AFS investments . . . . . . . . . . . . . . . . . . . . . . . . . Loans and receivable Receivables from customers. . . . . . . . . . . Unquoted debt securities . . . . . . . . . . . . . . Accrued interest receivable. . . . . . . . . . . . Accounts receivable . . . . . . . . . . . . . . . . . . Sales contracts receivable . . . . . . . . . . . . . Other assets RCOCI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bond sinking fund . . . . . . . . . . . . . . . . . . . Security deposits. . . . . . . . . . . . . . . . . . . . . Other investments. . . . . . . . . . . . . . . . . . . . Total Financial Assets . . . . . . . . . . . . . . . . . . . . Financial Liabilities Deposit liabilities Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Derivative liabilities(*) Bifurcated . . . . . . . . . . . . . . . . . . . . . . . . . . Pay . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bills payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Marginal deposits . . . . . . . . . . . . . . . . . . . . . . . . Managers checks and demand drafts outstanding. . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued interest payable . . . . . . . . . . . . . . . . . . Subordinated debt . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities Accounts payable . . . . . . . . . . . . . . . . . . . . Domestic bills purchased . . . . . . . . . . . . . Outstanding acceptances payable . . . . . . Due to PDIC . . . . . . . . . . . . . . . . . . . . . . . . Due to other banks . . . . . . . . . . . . . . . . . . . Cash letters of credit . . . . . . . . . . . . . . . . . Payment orders payable. . . . . . . . . . . . . . . Due to Treasurer of the Philippines. . . . . Total Financial Liabilities . . . . . . . . . . . . . . . . . Q 3,621,910 25,899,818 3,719,056 2,013,515 9,703 140,320 4,482,733 10,086 295,341 826,242 14,726 62,527 Q41,095,977 Less than 3 months Q 3-12 months 7,220,529 1,165,260 7,723,481 85,204 11,543 1,051 100,046 1-2 years Q 2,282,286 7,358,568 2,806,606 100,717 92 194,952 36,428 Over 2 years Q 29,570,242 42,010,319 3,161,303 612,038 6,194 228,103 4,103 Q Total 3,621,910 25,899,818 3,719,056 5,054,304 9,703 140,320 7,226,765 34,851,104 97,842,531 6,080,054 1,443,520 838,216 559,397 62,527 50,000 36,428 4,103

Q 3,040,789 6,236 1,833,316 36,267,430 16,855 423,881 4,637 21,570 50,000

Q41,664,714 Q16,307,114 Q12,779,649 Q75,592,302 Q187,439,756

Q50,357,692 30,712,497 1,790 104,965 403 34,374 429,530 175,335 1,405,324 1,354,704 134,750 67,481 35,682 20,726 2,296 Q84,837,549

Q Q Q Q 50,357,692 33,725,866 979,332 65,417,695 11,549,689 2,535,533 4,041,213 4,141,188 22,267,623 4,489,210 4,557,868 302,648 504,485 24,984 1,790 104,965 5,019,082 34,374 429,530 175,335 4,557,868 1,405,324 1,354,704 302,648 134,750 67,481 35,682 20,726 2,296

Q54,625,281 Q 4,019,350 Q 4,041,213 Q 4,166,172 Q151,689,565

(*) Amounts are translated using spot rate as of December 31, 2012.

F-272

On Demand

Parent Company December 31, 2011 (As restated - Notes 2 and 35) Less than Over 2 3 months 3-12 months 1-2 years years

Total

Financial Assets Cash and other cash items. . . . . . . . . . . . . . . . . . . . . . . . P 3,719,876 P P P P P 3,719,876 Due from BSP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,180,487 18,180,487 Due from other banks . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,294,150 1,811,855 4,106,005 Interbank loans receivable and SPURA . . . . . . . . . . . . 6,700,000 3,451,896 10,151,896 Financial assets at FVPL Derivative assets(*) Bifurcated . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,362 10,362 Pay. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112,241 74,240 186,481 Held-for-trading. . . . . . . . . . . . . . . . . . . . . . . . . . . . 505 498,991 499,496 AFS investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,074,130 1,748,128 3,633,527 49,730,419 61,186,204 Loans and receivable Receivables from customers . . . . . . . . . . . . . . . . . 9,590,891 31,098,361 3,981,067 3,527,733 43,264,222 91,462,274 Unquoted debt securities . . . . . . . . . . . . . . . . . . . . 10,086 89,053 258,508 3,137,050 3,561,543 7,056,240 Accrued interest receivable . . . . . . . . . . . . . . . . . . 961,138 60,354 8,140 90,448 573,017 1,693,097 Sales contracts receivable . . . . . . . . . . . . . . . . . . . 10,887 106,266 120,542 469,245 706,940 Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . 318,700 341,346 660,046 Other assets RCOCI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84,351 84,351 Bond sinking fund . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000 50,000 Security deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,734 37,734 Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . 3,753 3,753 Total Financial Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . P41,540,979 P43,027,982 P 6,942,446 P10,621,274 P97,662,561 P199,795,242 Financial Liabilities Deposit liabilities Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P45,151,949 P P P Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,063,260 34,634,810 4,068,001 Time. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,989 12,679,855 6,170,740 Derivative liabilities(*) Bifurcated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pay . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75,512 Bills payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,066,934 230,309 3,212,749 Marginal deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,761 Managers checks and demand drafts outstanding . . . 911,382 Accrued interest payable. . . . . . . . . . . . . . . . . . . . . . . . . 257,937 Subordinated debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80,213 240,638 Other liabilities Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . 1,251,311 Due to other banks . . . . . . . . . . . . . . . . . . . . . . . . . 937,801 Domestic bills purchased . . . . . . . . . . . . . . . . . . . . 897,807 Outstanding acceptances payable . . . . . . . . . . . . . 148,294 85,613 Cash letters of credit . . . . . . . . . . . . . . . . . . . . . . . . 174,133 Due to PDIC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135,603 Payment orders payable . . . . . . . . . . . . . . . . . . . . . 114,901 Due to Treasurer of the Philippines . . . . . . . . . . . 2,957 Total Financial Liabilities. . . . . . . . . . . . . . . . . . . . . . . . P80,983,725 P47,848,993 P13,777,741 P (*) Amounts are translated using spot rate as of December 31, 2011.

P P 45,151,949 9,632 580 68,776,283 75,204 3,500,000 22,429,788 9,484 12,084 320,850 22,517 4,500,000 9,484 87,596 4,532,509 13,761 911,382 257,937 5,141,701 1,251,311 937,801 897,807 233,907 174,133 135,603 114,901 2,957

427,254 P 8,023,097 P151,060,810

F-273

On Demand

Less than 3 months

Parent Company January 1, 2011 3-12 months 1-2 years

Over 2 years

Total

Financial Assets Cash and other cash items. . . . . . . . . . . . . . . . . . . . . . . . . P 4,280,874 P P P P P 4,280,874 Due from BSP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,892,789 13,892,789 Due from other banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,938,976 2,938,976 Interbank loans receivable and SPURA . . . . . . . . . . . . . 12,100,000 1,704,440 666,479 14,470,919 Financial assets at FVPL Derivative assets(*) Bifurcated. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,848 10,362 22,210 Pay. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109,269 127,467 236,736 Held-for-trading. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,007,215 69,108 310 2,086,063 4,162,696 AFS investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,198,761 97,739 13,388,033 22,684,533 HTM investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,797,944 629,200 2,880,790 11,568,959 23,876,893 Loans and receivable Receivables from customers . . . . . . . . . . . . . . . . . . 14,417,996 23,326,143 3,036,265 1,709,120 30,783,284 73,272,808 Unquoted debt securities . . . . . . . . . . . . . . . . . . . . . 1,776 320,114 1,280 13,898,465 14,221,635 Accrued interest receivable . . . . . . . . . . . . . . . . . . . 1,575,741 1,575,741 Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . 675,772 675,772 Sales contracts receivable . . . . . . . . . . . . . . . . . . . . 20,993 43,849 182,302 58,143 326,447 631,734 Other assets RCOCI. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91,437 91,437 Bond sinking fund . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000 50,000 Security deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44,778 44,778 Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,941 3,941 Total Financial Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 49,994,578 P45,189,397 P5,001,207 P4,837,677 P72,111,613 P177,134,472 Financial Liabilities Deposit liabilities Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 41,798,506 P P P P P 41,798,506 Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66,533,653 66,533,653 Time. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,557,395 224,311 245,000 3,908,333 25,935,039 Derivative liabilities(*) Bifurcated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,693 30,693 Pay . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106,617 106,617 Bills payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86,863 506,759 799,085 12,639 1,405,346 Marginal deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,077 37,077 Managers checks and demand drafts outstanding . . . . 409,386 409,386 Accrued interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . 199,316 199,316 Subordinated debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78,213 625,711 4,782,224 5,486,148 Other liabilities Domestic bills purchased . . . . . . . . . . . . . . . . . . . . . 1,064,758 1,064,758 Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,023,945 1,023,945 Outstanding acceptances payable . . . . . . . . . . . . . . 294,334 294,334 Cash letters of credit . . . . . . . . . . . . . . . . . . . . . . . . . 208,990 208,990 Payment orders payable . . . . . . . . . . . . . . . . . . . . . . 132,636 132,636 Due to PDIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132,208 132,208 Due to other banks. . . . . . . . . . . . . . . . . . . . . . . . . . . 9,626 9,626 Due to Treasurer of the Philippines . . . . . . . . . . . . 2,744 2,744 Total Financial Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . P111,734,726 P22,448,300 P1,023,396 P 870,711 P 8,733,889 P144,811,022 (*) Amounts are translated using spot rate as of January 1, 2011.

F-274

The table below shows the contractual maturity of the Group and Parent Companys contingent accounts and commitments as of December 31, 2012 and 2011 and January 1, 2011.
Consolidated December 31, 2012 On Demand Less than 3 months 3-12 months Over 1 year Total

Commitments. . . . . . . . . . . . . . . . . . . . . . . . Contingent accounts . . . . . . . . . . . . . . . . . .

Q11,058,799 1,810,607 Q12,869,406

7,802 Q 18,540 1,988,084 3,177,860 Q3,196,400

39,521

Q11,085,141 7,016,072 Q18,101,213

Q1,995,886

Q39,521

Consolidated December 31, 2011 On Demand Less than 3 months 3-12 months Over 1 year Total

Commitments. . . . . . . . . . . . . . . . . . . . . . . . Contingent accounts . . . . . . . . . . . . . . . . . .

P22,003,278 P 65,920 P 1,096 3,019,969 1,776,141 2,063,717 P25,023,247 P1,842,061 P2,064,813

Consolidated January 1, 2011 On Demand Less than 3 months 3-12 months

64,856

P22,070,294 6,924,683 P28,994,977

P64,856

Over 1 year

Total

Commitments. . . . . . . . . . . . . . . . . . . . . . . . Contingent accounts . . . . . . . . . . . . . . . . . .

P17,271,555 3,655,347 P20,926,902

P 227,164 P 20,431 2,063,006 1,271,564 P2,290,170 P1,291,995

45,448

P17,519,150 7,035,365 P24,554,515

P45,448

Parent Company December 31, 2012 On Demand Less than 3 months 3-12 months Over 1 year Total

Commitments. . . . . . . . . . . . . . . . . . . . . . . . Contingent accounts . . . . . . . . . . . . . . . . . .

Q11,058,799 Q 1,026 Q 1,571,631 1,902,975 3,063,264 Q12,630,430 Q1,904,001 Q3,063,264

39,521

Q11,059,825 6,577,391 Q17,637,216

Q39,521

Parent Company December 31, 2011 On Demand Less than 3 months 3-12 months Over 1 year Total

Commitments. . . . . . . . . . . . . . . . . . . . . . . . Contingent accounts . . . . . . . . . . . . . . . . . .

P22,003,278 P 46,162 P 1,096 2,713,255 1,739,476 1,688,756 P24,716,533 P1,785,638 P1,689,852

Parent Company January 1, 2011 On Demand Less than 3 months 3-12 months

64,856

P22,050,536 6,206,343 P28,256,879

P64,856

Over 1 year

Total

Commitments. . . . . . . . . . . . . . . . . . . . . . . . Contingent accounts . . . . . . . . . . . . . . . . . .

P17,271,555 P 62,266 P 691 3,221,063 1,866,495 1,575,631 P20,492,618 P1,928,761 P1,576,322

45,450

P17,334,512 6,708,639 P24,043,151

P45,450

Management of Interest Rate Risk in the Banking Book (IRRBB) Interest rate risk is the current and prospective risk to earnings or capital arising from movements in interest rates. It arises from differences between the timing of rate changes and the timing of cash flows (repricing risk); from changing rate relationships among different yield curves affecting financial institution (FI) activities (basis risk); from changing rate relationships across the spectrum of maturities (yield curve risk); and from interestrelated options embedded in FI products (options risk). The Group follows a set of policies in managing its assets F-275

and liabilities so as to ensure that exposure to fluctuations in interest rates are kept within acceptable limits. The Group uses the risk measurement techniques such as Earnings-at-Risk (EAR) and Scenario Analysis for interest rate risk management. EAR refers to the risk exposure in the Groups accrual books arising from repricing gaps. Since the EAR measures the sensitivity of assets and liabilities to interest rate swings, EAR, a static snapshot of repricing gap position, effectively measures the potential adverse effects on net interest income using preset confidence levels. An EAR is constructed by classifying all rate-sensitive assets and liabilities according to their repricing dates or maturity, whichever is earlier. Repricing gap refers to the difference between rate sensitive assets and liabilities per repricing bucket/column. All repriceable (rate-sensitive) accounts are affected by any rate changes, consequently, affecting the Groups net interest income. For example, if interest rates move against/in favor of the Groups positions, asset yields and liability costs will change. Whether the net interest income will increase or decrease depends on the size of the repricing gap. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. In addition, an EAR limit is set by the BOD to minimize the extent of volatility in the Groups net interest income. EAR limit is effectively the monetary amount of risk (or potential loss) deemed tolerable by top management for the accrual portfolios. An EAR limit system is designed to automatically decrease the size of open risk positions when increases in market volatility occur. EAR calculated from repricing rate gap positions is to be compared against EAR limits. An excess over the limit means that the open gap position, even within its nominal limit, has potential to cause more loss than management can accept, and must be trimmed down. The Parent Company monitors its exposure to fluctuations in interest rates by measuring the impact of interest rate movements on its interest income and on equity. This is done by modeling the impact of various changes in interest rates to the Parent Companys interest-related income and expenses and on equity. Key features of the internal interest rate risk management model are as follows: (a) 99.00% confidence level; (b) one month holding period; (c) EAR utilizes a twelve-month forecast period; (d) rate changes are proportional rather than absolute; (e) historical simulation approach utilizing instantaneous interest rate shocks; (f) static balance sheet (i.e. any new business is assumed to be matched, hedged or subject to immediate repricing; and (g) interest rates of all maturities move by the same amount and, therefore, do not reflect the potential impact on net interest income of some rates changing while others remain unchanged. The following tables demonstrate the potential pre-tax impact of an immediate and sustained 100 basis point and 200 basis point increase or decrease in interest rates on net interest income and economic value of equity of the non-trading portfolio. These measures are based on business assumptions made by senior management and on historically-determined behavioral assumptions.
Consolidated Impact of Changes in Interest Rates on Pre-Tax Income December 31, 2012 Increase (Decrease) in Basis Points -200 -100 +100 +200

PHP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . USD. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(P212,420) (P152,906) P 233,096 P 529,089 513,515 273,988 (268,258) (516,922)

Consolidated Impact of Changes in Interest Rates on Equity December 31, 2012 Increase (Decrease) in Basis Points -200 -100 +100 +200

PHP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . USD. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EUR. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P2,232,934 P1,046,932 (P930,175)(P1,761,745) 1,256,769 644,138 (539,501) (1,059,906) 16,809 7,944 (6,269) (11,319) 322 322 (1,068) (2,085)

F-276

Consolidated Impact of Changes in Interest Rates on Pre-Tax Income December 31, 2011 (As restated - Notes 2 and 35) Increase (Decrease) in Basis Points -200 -100 +100 +200

PHP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . USD. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P236,821 186,579

P117,411 92,664

(P114,184) (P226,742) (89,044) (177,139)

Consolidated Impact of Changes in Interest Rates on Equity December 31, 2011 (As restated - Notes 2 and 35) Increase (Decrease) in Basis Points -200 -100 +100 +200

PHP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . USD. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EUR. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P2,588,655 1,720,571 149,065 788

P380,884 386,201 2,492 390

(P343,523) (P654,812) (351,669) (672,677) (2,371) (4,629) (383) (759)

Consolidated Impact of Changes in Interest Rates on Pre-Tax Income December 31, 2010 Increase (Decrease) in Basis Points -100 -50 +50 +100

PHP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . USD. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . GBP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EUR. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(P80,865) (10,672) (2,694) (349) (1,581)

(P45,818) (5,336) (1,347) (175) (791)

P45,818 5,377 1,347 175 791

P91,637 10,755 2,694 349 1,581

Consolidated Impact of Changes in Interest Rates on Equity December 31, 2010 Increase (Decrease) in Basis Points -100 -50 +50 +100

PHP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . USD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EUR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

561,761 652,845 3,097

274,273 317,913 1,526

(P261,888) (301,869) (1,482)

(P485,422) (588,911) (2,922)

Parent Company Impact of Changes in Interest Rates on Pre-Tax Income December 31, 2012 Increase (Decrease) in Basis Points -200 -100 +100 +200

PHP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . USD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(P498,984) 284,401

(P296,188) P 372,980 P 159,431 (157,404)

808,857 (295,213)

Parent Company Impact of Changes in Interest Rates on Equity December 31, 2012 Increase (Decrease) in Basis Points -200 -100 +100 +200

PHP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . USD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EUR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Others. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P 2,204,501 1,254,536 16,809 322

P 1,032,716 643,022 7,944 322

(P916,053) (538,336) (6,269) (1,068)

(P1,733,501) (1,057,576) (11,319) (2,085)

Parent Company Impact of Changes in Interest Rates on Pre-Tax Income December 31, 2011 (As restated - Notes 2 and 35) Increase (Decrease) in Basis Points -200 -100 +100 +200

PHP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . USD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

39,363 22,483

18,682 10,616

(P16,851) (9,529)

(P32,074) (18,108)

F-277

Parent Company Impact of Changes in Interest Rates on Equity December 31, 2011 (As restated - Notes 2 and 35) Increase (Decrease) in Basis Points -200 -100 +100 +200

PHP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . USD. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EUR. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P2,577,821 1,708,013 149,065 788

P 375,470 379,922 2,492 390

(P338,099) (345,311) (2,371) (383)

(P643,973) (659,960) (4,629) (759)

Parent Company Impact of Changes in Interest Rates on Pre-Tax Income December 31, 2010 Increase (Decrease) in Basis Points -100 -50 +50 +100

PHP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . USD. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . GBP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EUR. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(P91,637) (21,686) (2,694) (349) (1,581)

(P45,818) P (10,843) (1,347) (175) (791)

45,818 10,843 1,347 175 791

91,637 21,686 2,694 349 1,581

Parent Company Impact of Changes in Interest Rates on Equity December 31, 2010 Increase (Decrease) in Basis Points -100 -50 +50 +100

PHP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . USD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EUR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Currency risk

P545,451 P266,120 (Q253,889) (P469,429) 637,111 310,046 (294,061) (573,295) 3,097 1,526 (1,482) (2,922)

Currency risk is the risk that the value of financial instruments will fluctuate due to changes in foreign exchange rates. It is inherent in the Groups books that it holds financial instruments of varied currencies. These exposures are monitored on a daily basis. The Group takes on exposure to effects of fluctuations in the prevailing foreign currency exchange rates on its financial position and cash flows. Foreign currency-denominated liabilities generally consist of foreign currency deposits in the Groups FCDU accounts made in the Philippines or which are generated from remittances to the Philippines by Filipino expatriates and overseas Filipino workers who retain, for their own benefit or for the benefit of a third party, foreign currency deposit accounts with the Group and foreign currency-denominated borrowings appearing in the RBU of the Group. Foreign currency-denominated deposits are generally used to fund the Groups foreign currency-denominated loan and investment portfolio in the FCDU. Banks are required by the BSP to match the foreign currency liabilities with the foreign currency assets held through FCDUs. In addition, the BSP requires a 30.00% liquidity reserve on all foreign currency liabilities held through FCDUs. Outside the FCDU, the Group has additional foreign currency assets and liabilities in its foreign subsidiaries and branch network. The Group policy is to maintain foreign currency exposure within acceptable limits and within existing regulatory guidelines. The Group believes that its profile of foreign currency exposure on its assets and liabilities is within conservative limits for a financial institution engaged in the type of business the Group is engaged with. The Parent Company regularly monitors exposure to currency risks for the entire Group in accordance with the adopted Market Risk Management Manual. The Parent Company is conservative in its approach to managing exposure to foreign exchange risks. It minimizes such risks by complying with internal limits (VaR and FX Position Limits) and BSP Limit on the Ratio of the Net FX Position to Unimpaired Capital (BSP Circular 561 Series of 2007). Daily calculation of the VaR value is done in compliance with the requirements of the Basel II standards (99% confidence level, 260 working days monitoring period, and 1-day holding period) and is based F-278

on the parametric method. Back-testing is performed on a regular basis to verify the accuracy of the model. Stress scenarios, as indicated under Market Risk section, are applied to determine sensitivity of the group-wide foreign exchange position to adverse market fluctuations. The following tables summarize the Group and the Parent Companys exposure to foreign exchange risk as of December 31, 2012 and 2011. Included in the table are the Group and the Parent Companys assets and liabilities at carrying amounts, categorized by currency (in USD):
Consolidated December 31, 2012 USD Others Total

Assets Cash and due from BSP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due from other banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interbank loans receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Derivative assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial assets at FVPL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . AFS investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans and receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Liabilities Deposit liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Derivative liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bills payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued taxes, interest and other expenses . . . . . . . . . . . . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net Exposure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

USD84,407 312,450 112,000 27,103 323,239 153,287 4,743 1,017,229 739,660 5 58,506 1,863 73,618 873,652 USD143,577

USD10,302 21,719 1,068 1 5,420 101,436 12,599 152,545

USD94,709 334,169 113,068 1 27,103 328,659 254,723 17,342 1,169,774

67,019 806,679 11 16 58,506 1,038 2,901 4,691 78,309 72,759 946,411 USD79,786 USD223,363

Consolidated December 31, 2011 (As restated - Notes 2 and 35) USD Others Total

Assets Cash and due from BSP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due from other banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interbank loans receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial assets at FVPL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . AFS investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans and receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign currency denominated assets included in disposal group classified as held-for-sale (Note 13) . . . . . . . . . . . . . . . . . . . . . . . . . Liabilities Deposit liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Derivative liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bills payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued taxes, interest and other expenses . . . . . . . . . . . . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign currency denominated liabilities included in disposal group classified as held-for-sale (Note 13) . . . . . . . . . . . . . . . . . . . Net Exposure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

USD24,291 251,006 40,122 2,887 362,716 231,637 24,983 937,642 169,427 1,107,069 679,243 12,031 1,312 49,342 741,928

USD7,775 44,392 1,134 247 40,070 102,422 13,562 209,602 209,602 62,984 5 17,900 1,187 3,893 85,969

USD32,066 295,398 41,256 3,134 402,786 334,059 38,545 1,147,244 169,427 1,316,671 742,227 5 29,931 2,499 53,235 827,897

137,251 137,251 879,179 85,969 965,148 USD227,890 USD123,633 USD351,523

F-279

USD

Consolidated January 1, 2011 Others

Total

Assets Cash and due from BSP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due from other banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interbank loans receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial assets at FVPL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . AFS investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . HTM investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans and receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign currency denominated assets included in disposal group classified as held-for-sale (Note 13) . . . . . . . . . . . . . . . . . . . . . . . . . Liabilities Deposit liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Derivative liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bills payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued taxes, interest and other expenses . . . . . . . . . . . . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign currency denominated liabilities included in disposal group classified as held-for-sale (Note 13) . . . . . . . . . . . . . . . . . . . Net Exposure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

USD23,846 154,511 45,097 43,396 208,998 187,307 217,580 12,296 893,031 190,145 1,083,176 636,243 10 16,079 1,575 38,881 692,788 158,882 851,670

USD6,748 19,927 13,276 2 4,245 37,227 85,779 11,332 178,536 178,536 56,459 16 16,548 1,475 1,126 75,624 75,624

USD30,594 174,438 58,373 43,398 213,243 224,534 303,359 23,628 1,071,567 190,145 1,261,712 692,702 26 32,627 3,050 40,007 768,412 158,882 927,294

USD231,506 USD102,912 USD334,418

Parent Company December 31, 2012 Others

USD

Total

Assets Cash and due from BSP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due from other banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interbank loans receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial assets at FVPL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . AFS investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans and receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Liabilities Deposit liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bills payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued taxes, interest and other expenses. . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net Exposure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

USD15,694 51,289 109,000 257,138 114,149 440 547,710 486,044 58,506 469 155 545,174

USD1,292 USD16,986 16,701 67,990 1,068 110,068 2,781 259,919 114,149 440 21,842 7,725 1 26 7,752 569,552 493,769 58,506 470 181 552,926

USD2,536 USD14,090 USD16,626

F-280

Parent Company December 31, 2011 (As restated - Notes 2 and 35) USD Others Total

Assets Cash and due from BSP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due from other banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interbank loans receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial assets at FVPL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . AFS investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans and receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Liabilities Deposit liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bills payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued taxes, interest and other expenses . . . . . . . . . . . . . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net Exposure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

USD17,284 60,986 39,819 2,876 318,831 110,170 152,789 23,740 726,495 500,129 11,015 686 11,972 523,802

USD1,837 11,823 1,134 236 37,432 7,395 1,538 61,395 11,341 12,943 14 2,821 27,119

USD19,121 72,809 40,953 3,112 356,263 110,170 160,184 25,278 787,890 511,470 23,958 700 14,793 550,921

USD202,693 USD34,276 USD236,969

Parent Company January 1, 2011 Others

USD

Total

Assets Cash and due from BSP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due from other banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interbank loans receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial assets at FVPL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . AFS investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . HTM investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans and receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Liabilities Deposit liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bills payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued taxes, interest and other expenses . . . . . . . . . . . . . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net Exposure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

USD22,666 16,158 44,698 43,396 192,188 187,307 107,685 117,434 11,951 743,483 526,434 14,307 646 16,440 557,827

USD1,411 11,985 4,218 1,509 37,227 2,625 58,975 9,541 12,173 13 1,056 22,783

USD24,077 28,143 48,916 43,396 193,697 224,534 107,685 120,059 11,951 802,458 535,975 26,480 659 17,496 580,610

USD185,656 USD36,192 USD221,848

F-281

The tables below indicate the currencies to which the Group and the Parent Company had substantial exposures as of December 31, 2012, 2011 and 2010 on its non-trading book. The result calculates the effect of a reasonably possible change in the spot rates on peso against foreign currencies with significant exposures, when all other variables are held constant. Negative values in the table reflect a potential reduction in income and equity while a positive amount reflects a potential increase (amounts in millions).
Consolidated December, 31, 2012 Change in spot rate Effect on income before tax Effect on equity Change in spot rate Effect on income before tax Effect on equity

Currency

USD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Japanese Yen (JPY) . . . . . . . . . . . . . . . . . . . . . . . GBP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Euro (EUR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

0.78% 1.09 0.96 1.24

Q8.13 0.40 2.38 1.84

Q66.88 0.68 0.74

(0.78%) (Q8.13) (Q66.88) (1.09) (0.40) (0.68) (0.96) (2.38) (1.24) (1.84) (0.74)

Currency

Change in spot rate

Consolidated December 31, 2011 (As restated - Notes 2 and 35) Effect Effect on on income Effect Change in income before tax on equity spot rate before tax

Effect on equity

USD. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . JPY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . GBP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EUR. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

0.88% 1.28 1.25 1.75

P14.53 0.81 1.26 1.25

P37.70 0.20

(0.88%) (Q14.53) (Q37.70) (1.28) (0.81) (1.25) (1.26) (1.75) (1.25) (0.20)

Consolidated December 31, 2010 Change in spot rate Effect on income before tax Effect on equity Change in spot rate Effect on income before tax Effect on equity

Currency

USD. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . JPY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . GBP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EUR. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

0.97% 1.94 2.45 2.34

P85.68 0.92 4.18 6.78

P68.76 8.33

(0.97%) (Q85.68) (Q68.76) (1.94) (0.92) (2.45) (4.18) (2.34) (6.78) (8.33)

Parent Company December, 31, 2012 Change in spot rate Effect on income before tax Effect on equity Change in spot rate Effect on income before tax Effect on equity

Currency

USD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . JPY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . GBP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Euro (EUR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

0.78% 1.09 0.96 1.24

Q5.97 0.40 2.38 1.84

Q66.88 0.68 0.74

(0.78%) (Q5.97) (Q66.88) (1.09) (0.40) (0.68) (0.96) (2.38) (1.24) (1.84) (0.74)

Currency

Change in spot rate

Parent Company December 31, 2011 (As restated - Notes 2 and 35) Effect Effect on on income Effect Change in income before tax on equity spot rate before tax

Effect on equity

USD. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . JPY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . GBP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EUR. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

0.88% 1.28 1.25 1.75

P14.05 0.81 1.26 1.25

P37.70 0.20

(0.88%) (Q14.05) (Q37.70) (1.28) (0.81) (1.25) (1.26) (1.75) (1.25) (0.20)

F-282

Parent Company December 31, 2010 Change in spot rate Effect on income before tax Effect on equity Change in spot rate Effect on income before tax Effect on equity

Currency

USD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . JPY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . GBP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EUR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

0.97% 1.94 2.45 2.34

P85.59 0.92 4.18 6.78

P68.76 8.33

(0.97%) (Q85.59) (Q68.76) (1.94) (0.92) (2.45) (4.18) (2.34) (6.78) (8.33)

There is no other effect to equity other than the effect of a reasonably possible change in the spot rates on currencies to income after tax and cumulative translation adjustment. Prepayment risk Prepayment risk in the Parent Company is deemed to be relatively low. The Parent Company projects prepayment ratio by way of using historical data on loan prepayment rate. The Parent Companys loans prepayment rate is less than 1.41%, 1.09% and 1.03% of the total loan portfolio in 2012, 2011 and 2010, respectively. In view of this, management believes that 1.41% is not material enough to warrant a separate set of cash flow analyses. All calculations related to asset and liability management (e.g., as net interest margin analysis) take into account the contractual terms of the financial instrument. Capital management and management of insurance and financial risks Although life insurance companies are in the business of taking risks, PLII limits its risk exposure only to measurable and quantifiable risks. The main objective of PLIIs risk management policies is to ensure that PLII remains financially viable and capable in paying its liabilities. There are many risks associated in the life insurance business such as insurance risks, investment risks, asset depreciation and other business risks. These risks are managed separately to ensure that PLII is not exposed to risks that are unnecessary or risks with no commensurate expected benefits or returns. Governance framework PLII has established a risk management function with clear terms of reference and with the responsibility for developing policies on market, credit, liquidity, insurance and operational risks. It also supports the effective implementation of policies at the overall company and individual business unit levels. The chief financial officer (CFO) and Internal Audit Department performs procedures to identify various risks. The results of the procedures are reported to the BOD and necessary actions are taken to mitigate the risks identified. The policies define PLIIs identification of risk and its interpretation, limit structure to ensure the appropriate quality and diversification of assets, alignment of underwriting and reinsurance strategies to the corporate goals and specific reporting requirements. Regulatory framework Regulators are interested in protecting the rights of the policyholders and maintain close vigil to ensure that PLII is satisfactorily managing affairs for their benefit. At the same time, the regulators are also interested in ensuring that PLII maintains appropriate solvency position to meet liabilities arising from claims and that the risk levels are at acceptable levels. The operations of PLII are subject to the regulatory requirements of the Insurance Commission (IC). Such regulations not only prescribe approval and monitoring of activities but also impose certain restrictive provisions (e.g., margin of solvency to minimize the risk of default and insolvency on the part of the insurance companies to meet the unforeseen liabilities as these arise, fixed capitalization requirements, risk-based capital requirements). Capital management PLII manages its capital in accordance with the mandates of the IC being its regulator. Under the requirements of the IC and the Code, PLII should meet the minimum levels set for the following capital requirements: Margin of Solvency (MOS), Minimum Statutory Net Worth and Paid-up Capital, and the F-283

Risk-Based Capital (RBC). PLII regularly monitors its compliance with these capital requirements. Since PLII is now 100.00% Filipino-owned, the capital requirements have reduced significantly and PLIIs current capital now well exceeds the minimum requirements. Further, government bonds amounting to at least 25.00% of the Minimum Paid-up Capital are free from liens and encumbrances, and deposited under the IC, in accordance to Section 203 of the Code. a) MOS Under the Code, a life insurance company doing business in the Philippines shall maintain at all times a MOS equal to P0.50 million or P2.00 per thousand of the total amount of insurance in force as of the preceding calendar year in all policies (except term insurance), whichever is higher. The MOS shall be the excess of the value of its admitted assets as defined under the same Code, exclusive of the minimum paid-up capital, over the amount of its liabilities, unearned premiums, and reinsurance reserves. As of December 31, 2012 and 2011 PLIIs MOS based on its calculations amounted to P341.36 million and P295.88 million, respectively. The final amounts of the MOS can be determined only after the accounts of PLII have been examined by the IC specifically as to admitted and non-admitted assets as defined in the Code. The 2012, 2011 and 2010 MOS are known only after the IC completes its examination of the accounts of PLII. Refer to Note 31 for the estimated amounts of non-admitted assets included in the statement of financial position. If an insurance company fails to meet the minimum required MOS, the IC is authorized to suspend or revoke all certificates of authority granted to such companies, its officers and agents, and no new business shall be done by and for such company until its authority is restored by the IC. b) Minimum statutory net worth and paid up capital Department of Finance issued Order 27-06 provides for the capitalization requirements for life, non-life and reinsurance companies. Under this order, the minimum statutory net worth and minimum paid-up capital requirements vary depending on the level of the foreign ownership in the insurance company. The statutory net worth shall include PLIIs paid-up capital, capital in excess of par value, contingency surplus, retained earnings and revaluation increments as may be approved by the IC. The required minimum statutory net worth and minimum paid-up capital for PLII in 2012, being a whollyowned Filipino life insurance company is P500.00 million and P250.00 million, respectively, and P350.00 million and P175.00 million, respectively, in 2011. PLII has complied with the minimum statutory net worth and paid-up capital requirements based on PLIIs own calculation. c) RBC requirement Insurance Memorandum Circular (IMC) No. 6-2006 provides for the risk-based capital framework for the life insurance industry to establish the required amounts of capital to be maintained by the companies in relation to their investment and insurance risks. Every life insurance company is annually required to maintain a minimum RBC ratio of 100.00% and not fail the trend test. Failure to meet the minimum RBC ratio shall subject the insurance company to the corresponding regulatory intervention which has been defined at various levels. The RBC ratio shall be calculated as net worth divided by the RBC requirement. Net worth shall include PLIIs paid-up capital, contributed and contingency surplus and unassigned surplus. Revaluation and fluctuation reserve accounts shall form part of net worth only to the extent authorized by the IC. The RBC requirement is the ratio of the number of insurers which are able to meet the corresponding RBC Hurdle Rate requirement for a given year to the total number of insurers in the industry. The following table shows how the RBC ratio was determined by PLII based on its calculations:
2012 2011

Net worth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . RBC requirement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . RBC Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q591,359 P472,502 385,645 306,947 153.00% 154.00%

F-284

The final amount of RBC ratio can be determined only after the accounts of PLII have been examined by the IC specifically as to admitted and non-admitted assets as defined under the same Code. d) Consolidated compliance framework IMC 10-2006 integrated the compliance standards for the fixed capitalization and risk-based capital framework. Subsequent to year 2006, the fixed capitalization requirement for a given year may be suspended for insurers that comply with the required RBC hurdle rate, provided that the industry complies with the required Industry RBC Ratio Compliance Rate. The IMC provides the annual schedule of progressive rates for the Industry RBC Ratio Compliance Rates and the RBC Hurdle Rates from 2007 to 2011. For the review year 2012 which shall be based on the 2011 synopsis, the industry RBC Ratio Compliance Rate is 100.0% and the RBC Hurdle Rate is 250.00%. For the review year 2011 which shall be based on the 2010 synopsis, the Industry RBC Ratio Compliance Rate is 90.00% and the RBC Hurdle Rate is 250.00%. Failure to achieve one of the rates will result in the imposition of the fixed capitalization requirement for the year under review. e) Unimpaired capital requirement IMC 22-2008 provided for the purposes of determining compliance with the law, rules and regulations requiring that the paid-up capital should remain intact and unimpaired at all times, the statement of financial position should show that the net worth or stockholders equity is at least equal to the actual paid-up capital. PLII has complied with all of the above capital requirements in 2012 and 2011. Insurance Risk Nature of risk The risk under any one insurance contract is the possibility that the insured event occurs. This event may be death, or in the case of some riders, disability, accidental injury, or contraction of critical illness. By the very nature of an insurance contract, this risk is random and unpredictable. For a portfolio of insurance contracts where the theory of probability is applied to pricing, the principal risk that PLII faces under its insurance contracts is that future claim on death, accident, disability, and critical illness claims exceed the future premiums plus the carrying amount of the insurance liabilities. This could occur if the frequency and magnitude of claims is greater than the assumption used in calculating PLIIs liability. Occurrence of insured events is random and the actual number of claims will vary from year to year from the mortality assumptions made during product pricing. However, the law of large number is expected to be applicable as the pool of risk increases in volume and aggregate claims becomes more predictable. Experience shows that the larger the portfolio of similar insurance contracts, the smaller is the relative variability compared to the expected. Insurance risks generally vary by gender and age of the insured as these factors correlate greatly with the incidence rates of the insured events. Because of this, a more diverse demographic profile of insured lives may be more desirable since a more diverse risk profile reduces variability. To minimize insurance risks, PLII strictly adheres to prudent underwriting standards in assessing insurance applications. These underwriting standards include a schedule of medical and non-medical requirements for specific range of ages and sum assured. Some policyholders are charged with additional premium in the form of flat or multiple extra premiums due to extra risks resulting from the applicants occupation, health and lifestyle. Applications for insurance may be denied or postponed for certain substandard cases. To guard against antiselection, insurance applications that do not establish insurable interest are rejected. Statements of assets and liabilities may also be required from the applicant to justify the sum assured applied for, and his ability to pay the premium. Frequency of claims For contracts where death is the insured risk, the most significant factors that could increase the overall frequency of claims are epidemics or wide spread changes in lifestyle resulting in earlier or more claims than expected. In the Philippines, higher-than-expected claims also arise from typhoons, landslides, and other geologic events. F-285

For contracts with Discretionary Participating Feature (DPF), a portion of the insurance risk is effectively shared with the policy owner, as policy dividends may be reduced due to adverse claims and investment experience. For unit-linked insurance policies where the cost of insurance charges is not guaranteed, insurance risk is borne mostly by the policyholders. PLII has the right to alter these charges based on its mortality experience and hence minimize its exposure to mortality risk. Delays in implementing increases in charges and market or regulatory restraints over the extent of the increases may reduce its mitigating effect. PLII manages these risks through its underwriting strategy and reinsurance arrangements. The underwriting strategy is intended to ensure that the risks underwritten are pooled into a sufficiently large portfolio. Medical selection is also included in the underwriting procedures with premiums varied to reflect the health condition and family medical history of the applicants. PLII has a retention limit of P2.50 million on any standard risk. PLII reinsures the excess of the insured benefit over P2.50 million for standard risks (from a medical point of view) under an excess of loss reinsurance arrangement. PLIIs risk retention is lower for medically impaired or substandard lives, which involves higher risks. PLII also has a Catastrophe Reinsurance agreement, which protects PLII in case of a catastrophic event resulting to multiple death claims. The tables below present the concentration of individually insured benefits across different bands of insured ages as measured by the face amount (before reinsurance) and net amount at risk (NAAR), after reinsurance:
December 31, 2012 Before reinsurance After reinsurance Concentration Concentration Face amount (%) NAAR (%)

Age bands (in years)

Policy count

0-15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16-25 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26-35 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36-45 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46-55 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56-65 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66-75 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 and above . . . . . . . . . . . . . . . . . . . . . . .

12,343 5,858 7,662 8,172 7,012 2,972 399 7 44,425

Q 3,138,799 2,108,679 2,898,956 3,738,163 3,500,636 1,762,759 352,161 19,000 Q17,519,153

17.91 12.04 16.55 21.34 19.98 10.06 2.01 0.11 100.00

Q 1,687,149 1,340,085 1,946,781 2,408,411 1,959,883 935,520 244,630 18,983 Q10,541,442

16.01 12.71 18.47 22.85 18.59 8.87 2.32 0.18 100.00

Age bands (in years)

Policy count

December 31, 2011 Before reinsurance After reinsurance Concentration Concentration Face amount (%) NAAR (%)

0-15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16-25 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26-35 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36-45 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46-55 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56-65 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66-75 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 and above . . . . . . . . . . . . . . . . . . . . . . . .

10,406 5,116 6,855 6,856 5,287 1,753 165 9 36,447

P 2,510,548 1,672,847 2,347,196 2,746,561 2,421,094 975,754 206,125 19,150 P12,899,275

19.46 12.97 18.20 21.29 18.77 7.56 1.60 0.15 100.00

P1,482,372 1,172,352 1,761,421 1,999,846 1,649,188 649,527 176,142 19,030 P8,909,878

16.64 13.16 19.77 22.44 18.51 7.29 1.98 0.21 100.00

These tables include whole life, endowment, anticipated endowment, and term insurance contracts, thus the insured risk is a mixture of death and continued survival. NAAR is the net amount at risk, which is the difference between the face amount and the policy reserve. It is the net amount that would be payable upon death less liability released. The risk is spread over the younger through middle-aged bands. Sources of uncertainty in the estimation of future benefit payments and premium receipts Uncertainty in the estimation of future benefit payments and premium receipts for long-term insurance contracts arises from the unpredictability of long-term changes in overall levels of mortality and the variability in policyholder behavior. PLII uses appropriate tables of standard mortality for pricing and valuation of liabilities. An investigation into the actual mortality experience of PLII is carried out annually, but the experience is not yet considered statistically significant. F-286

PLII maintains persistency statistics to monitor actual lapse experience against pricing assumptions and performance standards. Statutory reserves are calculated using mortality decrement only, without considering possibility of lapses. This results in a more conservative liability as gains on surrender are not anticipated in the valuation method. 5. are: Cash and other cash items, due from BSP and other banks and interbank loans receivable and SPURAThe carrying amounts approximate fair values, considering the relatively short-term maturities of these investments, including overnight deposits and placements with floating interest rates. Debt securitiesFair values are generally based upon quoted market prices. If the market prices are not readily available, fair values are estimated using adjusted quoted market prices of comparable investments or using the discounted cash flow methodology. Equity securitiesFor publicly traded equity securities, fair values are based on quoted prices published in markets. For unquoted equity securities, the investments are carried at cost less allowance for impairment losses due to the unpredictable nature of future cash flows and the lack of suitable methods of arriving at a reliable fair value. Derivatives instrumentsFair values are estimated based on quoted market prices, prices provided by independent parties, or prices derived using acceptable valuation models. Loans and receivablesFair values of loans and receivables are estimated using the discounted cash flow methodology, using the Groups current incremental lending rates for similar types of loans and receivables. Where the loans and receivables reprice on a quarterly basis or has a relatively short-term maturity, the carrying amounts approximated fair values. Other financial assets included in other assetsQuoted market prices are not readily available for these assets. They are not reported at fair value and are not significant in relation to the Groups total portfolio of securities. Deposit liabilitiesFor demand, savings and short-term time deposits, carrying amounts approximate fair values largely due to short-term maturities and are currently due and demandable. For long-term time deposits, fair values are estimated using the discounted cash flow methodology using the Groups current incremental borrowing rates for similar borrowings with maturities consistent with those remaining for the liability being valued, if any. Bills payable and other liabilitiesFair values of short-term payables approximate their carrying amounts. Fair values of long-term payables are estimated using the discounted cash flow methodology using the Groups current incremental borrowing rates for similar borrowings with maturities consistent with those remaining for the liability being valued. Unsecured subordinated debtFair value was estimated using the discounted cash flow methodology, using the Parent Companys incremental borrowing rate. Other financial liabilities included in other liabilitiesQuoted market prices are not readily available for these liabilities. These liabilities are short-term in nature; hence, carrying amounts approximate fair values. Fair Values of Financial Assets and Liabilities The methods and assumptions used by the Group in estimating the fair value of the financial instruments

F-287

The carrying amounts of financial assets and financial liabilities approximate their fair values except for the following:
Consolidated December 31 2011 (As restated 2012 Notes 2 and 35) Carrying Carrying Value Value Fair Value Fair Value

January 1, 2011 Carrying Value Fair Value

Financial Assets HTM investments: Debt securitiesgovernment. . . . . . P P P P P13,541,105 P14,048,927 Debt securitiesprivate . . . . . . . . . . 7,402,186 8,047,083 Loans and receivables: Receivables from customers: Corporate . . . . . . . . . . . . . . . . . . 63,657,355 63,714,373 63,818,725 63,861,725 53,053,470 51,188,382 Small business . . . . . . . . . . . . . . 16,668,847 16,634,655 14,293,463 14,608,853 10,212,730 10,143,575 Consumer . . . . . . . . . . . . . . . . . . 10,720,007 10,894,659 9,801,271 9,813,015 8,362,374 7,838,217 Other receivables: Unquoted debt securities . . . . . 6,333,958 6,797,238 6,242,344 7,070,649 6,677,136 6,571,598 Sales contract receivable . . . . . 429,070 428,887 647,833 618,803 638,850 603,402 Accounts receivable . . . . . . . . . 747,580 747,580 753,821 564,912 534,296 534,296 Finance lease receivables. . . . . 116,572 131,048 99,182 125,762 93,500 115,594 Financial Liabilities Financial liabilities at amortized cost: Deposit liabilities: Time deposits . . . . . . . . . . . . . . . 27,678,795 28,127,403 31,196,632 31,948,287 31,220,107 31,462,012 Subordinated debt . . . . . . . . . . . . . . . 4,497,306 4,497,306 4,482,791 5,114,721 4,469,369 5,040,400
Parent Company December 31 2011 (As restated 2012 Notes 2 and 35) Carrying Carrying Value Fair Value Value Fair Value

January 1, 2011 Carrying Value Fair Value

Financial Assets HTM investments: Debt securitiesgovernment. . . . . . P P P P P13,501,104 P13,450,631 Debt securitiesprivate . . . . . . . . . . 6,219,101 6,272,961 Loans and receivables: Receivables from customers: . . . . . . Corporate . . . . . . . . . . . . . . . . . . 61,039,275 61,150,540 59,524,519 59,375,797 47,858,528 45,993,440 Small business . . . . . . . . . . . . . . 13,257,658 13,222,067 10,904,352 10,946,936 7,842,589 7,842,889 Consumer . . . . . . . . . . . . . . . . . . 8,447,853 8,597,935 8,033,518 8,217,222 6,581,286 6,057,129 Other receivables: Unquoted debt securities . . . . . 5,951,884 6,461,852 5,953,224 6,664,462 6,257,541 6,796,459 Sales contract receivable . . . . . 417,174 418,268 644,182 613,331 622,668 600,330 Financial Liabilities Financial liabilities at amortized cost: Deposit liabilities: Time deposits . . . . . . . . . . . . . . . 20,954,422 20,872,051 22,352,006 22,664,754 24,956,492 24,956,492 Subordinated debt . . . . . . . . . . . . . . . 4,497,306 4,497,306 4,482,791 5,114,721 4,469,369 5,040,400

Fair value hierarchy The Group uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation technique: Quoted in market prices in active markets for identical assets or liabilities (Level 1); Those involving inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices) (Level 2); and Those with inputs for the asset or liability that are not based on observable market data (unobservable inputs) (Level 3). F-288

As of December 31, 2012 and 2011 and January 1, 2011, the Group held the following financial instruments measured at fair value:
Consolidated December 31, 2012 Level 2 Level 3

Level 1

Total

Financial Assets Financial assets at FVPL: Derivative assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Held-for-trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Debt securities: Government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Private. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . AFS investments: Debt securities: Government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Private . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity securitiesquoted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial Liabilities Derivative liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q 148,761

148,761

6,359,061 821,320 46,384

6,359,061 821,320 46,384

22,238,986 5,264,092 905,366

216,269 1,076,816 106,066

22,455,255 6,340,908 905,366 106,066

Consolidated December 31, 2011 (As restated - Notes 2 and 35) Level 1 Level 2 Level 3 Total

Financial Assets Financial assets at FVPL: Derivative assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Held-for-trading Debt securities: Government . . . . . . . . . . . . . . . . . . . . . . . . . . . . Private . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . AFS investments: Debt securities: Government. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Private . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity securitiesquoted . . . . . . . . . . . . . . . . . . . . . . . . . Financial Liabilities Derivative liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

430,880 18,352 50,264 28,925,846 9,589,765 615,847

P 198,273 1,189,131 90,411

198,273 430,880 18,352 50,264 30,114,977 9,589,765 615,847 90,411

Level 1

Consolidated January 1, 2011 Level 2 Level 3

Total

Financial Assets Financial assets at FVPL: Derivative assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Held-for-trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Debt securities: Government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Private. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . AFS investments: Debt securities: Government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Private . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity securitiesquoted. . . . . . . . . . . . . . . . . . . . . . . . . . . Financial Liabilities Derivative liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2,826,028 349,515 72,452 15,412,229 4,795,653 269,015

P259,016 138,395

259,016 2,826,028 349,515 72,452 15,412,229 4,795,653 269,015 138,395

F-289

Level 1

Parent Company December 31, 2012 Level 2 Level 3

Total

Financial Assets Financial assets at FVPL Derivative assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Held-for-trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Debt securities: Government . . . . . . . . . . . . . . . . . . . . . . . . . . . . Private . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . AFS investments Debt securities: Government. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Private . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity securitiesquoted . . . . . . . . . . . . . . . . . . . . . . . . . Financial Liabilities Derivative liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

6,359,061 821,320 46,384 18,912,501 3,051,390 434,252

P 150,023 216,269 1,076,816 106,755

150,023 6,359,061 821,320 46,384 19,128,770 4,128,206 434,252 106,755

Parent Company December 31, 2011 (As restated - Notes 2 and 35) Level 1 Level 2 Level 3 Total

Financial Assets Financial assets at FVPL Derivative assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Held-for-trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Debt securities: Government . . . . . . . . . . . . . . . . . . . . . . . . . . . . Private . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . AFS investments Debt securities: Government. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Private . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity securitiesquoted . . . . . . . . . . . . . . . . . . . . . . . . . Financial Liabilities Derivative liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P 196,843

196,843

430,880 18,352 50,264

430,880 18,352 50,264

25,786,181 7,749,612 331,918

1,189,131 97,080

26,975,312 7,749,612 331,918 97,080

Level 1

Parent Company January 1, 2011 Level 2 Level 3

Total

Financial Assets Financial assets at FVPL Derivative assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Held-for-trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Debt securities: Government . . . . . . . . . . . . . . . . . . . . . . . . . . . . Private . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . AFS investments Debt securities: Government. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Private . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity securitiesquoted . . . . . . . . . . . . . . . . . . . . . . . . . Financial Liabilities Derivative liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P258,946

258,946

2,826,028 349,515 72,452

2,826,028 349,515 72,452

14,020,853 3,422,619 142,588

137,310

14,020,853 3,422,619 142,588 137,310

When fair values of listed equity and debt securities, as well as publicly traded derivatives at the statement of financial position date are based on quoted market prices or binding dealer price quotations, without any deduction for transaction costs, the instruments are included within Level 1 of the hierarchy.

F-290

For all other financial instruments, fair value is determined using valuation techniques. Valuation techniques include net present value techniques, comparison to similar instruments for which market observable prices exist and other revaluation models. As of December 31, 2012, 2011 and 2010, the Group and the Parent Company do not have financial instruments reported within level 3 of the fair value hierarchy. As of December 31, 2012, 2011 and 2010, there were no transfers between level 1 and level 2 fair value measurements, and no transfers into and out of level 3 fair value measurements. 6. Interbank Loans Receivable and Securities Purchased Under Resale Agreements This account consists of:
Consolidated 2012 Parent Company December 31 2011 2012 2011

Interbank loans receivable . . . . . . . . . . . . . . . . . . . . . . . . SPURA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interbank loans receivable included in the disposal group classified as held-for-sale (Note 13). . . . . . . .

Q7,813,042 142,000 7,955,042 Q7,955,042

P 5,778,296 6,800,000 12,578,296 445,371 P13,023,667

Q5,053,986 5,053,986 Q5,053,986

P 3,420,198 6,700,000 10,120,198 P10,120,198

As of December 31, 2012 and 2011, the outstanding balance of SPURA represents overnight placements with the BSP where the underlying securities cannot be sold or repledged. The Groups foreign currency-denominated interbank loans receivable bear nominal interest rates ranging from 0.02% to 4.20%, from 0.08% to 4.95% and from 0.07% to 4.55 % for the years ended December 31, 2012, 2011 and 2010, respectively. The Groups peso-denominated interbank loans receivable bear nominal interest rates ranging from 0.10% to 4.50%, from 0.07% to 4.55% and from 0.10% to 4.75% for the years ended December 31, 2012, 2011 and 2010, respectively. The Groups SPURA bear nominal interest rates from 3.50% to 4.25%, from 4.00% to 4.50% and 4.00% to 4.06% for the years ended December 31, 2012, 2011 and 2010, respectively. The Parent Companys foreign currency-denominated interbank loans receivable bear nominal interest rates ranging from 0.02% to 4.20%, from 0.08% to 4.95% and from 0.07% to 4.55% for the years ended December 31, 2012, 2011 and 2010, respectively. The Parent Companys peso-denominated interbank loans receivable bear nominal interest rates ranging from 3.63% to 4.50%, from 4.00% to 4.75% and from 4.00% to 4.25% for the years ended December 31, 2012, 2011 and 2010, respectively. The Parent Companys SPURA bear nominal interest rates from 3.50% to 4.25%, from 4.00% to 4.50% and from 4.00% to 4.06% for the years ended December 31, 2012, 2011 and 2010, respectively. 7. Trading and Investment Securities This account consists of:
Consolidated December 31 2011 (As restated Notes 2 and 35) 2012

January 1, 2011

Financial assets at FVPL: Derivative assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Held-for-trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . AFS investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . HTM investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trading and investment securities included in the disposal group classified as held-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (Note 13). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

148,761 7,226,765 7,375,526 29,702,086 37,077,612

198,273 499,496 697,769 40,331,832 41,029,601

259,016 3,247,995 3,507,011 20,500,595 20,943,291 44,950,897

Q37,077,612

253,131 P41,282,732

442,302 P45,393,199

F-291

Parent Company December 31 2011 (As restated 2012 Notes 2 and 35)

January 1, 2011

Financial assets at FVPL: Derivative assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Held-for-trading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . AFS investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . HTM investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

150,023 7,226,765

196,843 499,496

258,946 3,247,995

7,376,788 23,691,775 Q31,068,563

696,339 35,068,085 P35,764,424

3,506,941 17,609,758 19,720,205 P40,836,904

Derivative Financial Instruments The table below shows the fair values of derivative financial instruments, recorded as derivative assets or derivative liabilities, together with the notional amounts. The notional amount is the amount of a derivatives underlying asset, reference rate or index and is the basis upon which changes in the value of derivatives are measured. The notional amounts indicate the volume of transactions outstanding as of December 31, 2012 and 2011 and are not indicative of either market risk or credit risk. The embedded derivatives pertain to call and put options on debt securities classified as AFS investments. The tables below shows the fair values of derivative financial instruments for the Group and the Parent Company:
Consolidated Derivative Notional Assets Amount Derivative Liabilities

December 31, 2012

Notional Amount

Derivatives recorded at FVPL Forward exchange contracts USD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EUR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . AUD. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . HKD. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Spots USD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest rate swap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cross currency swap . . . . . . . . . . . . . . . . . . . . . . . . . . Warrants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Embedded derivatives USD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EUR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

USD135,131 Q 66,503 USD325,231 Q 47,323 EUR7,200 2,908 EUR11,181 1,667 AUD7,650 11 AUD500 276 HKD90,672 41 USD30,000 1,000,000 1,000,000 44,890 units USD22,500 840 11,511 53,162 9,703 USD214,000 4,082 USD2,000 EUR1,000 55,010 652 1,138 Q106,066

Q Q

Q148,761
Consolidated Derivative Notional Assets Amount

December 31, 2011

Notional Amount

Derivative Liabilities

Derivatives recorded at FVPL Forward exchange contracts USD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EUR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . JPY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Singapore Dollar (SGD) . . . . . . . . . . . . . . . . . . Spots USD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EUR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest rate swap . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cross currency swap. . . . . . . . . . . . . . . . . . . . . . . . . . Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Embedded derivatives USD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

USD340,513 P 84,161 EUR20,776 20,517 JPY198,000 5,923 SGD107 71 USD48,000 EUR500 P 1,000,000 44,890 units USD22,500

USD278,918 JPY198,000 SGD107

P60,617 5,857 70 2,244 55 12,084 9,484 P90,411

2,940 USD53,000 59 EUR646 56,940 P 1,000,000 10,362 17,300 P198,273 USD7,934

F-292

December 31, 2012

Notional Amount

Parent Company Derivative Notional Assets Amount

Derivative Liabilities

Derivatives recorded at FVPL Forward exchange contracts USD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EUR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Australian Dollars (AUD) . . . . . . . . . . . . . . . . . Spots USD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest rate swap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cross currency swap . . . . . . . . . . . . . . . . . . . . . . . . . . Warrants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Embedded derivatives USD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EUR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

USD135,131 Q 67,835 USD216,770 Q 48,446 EUR7,200 2,890 EUR954 1,233 AUD500 276 Q Q USD30,000 1,000,000 1,000,000 44,890 units USD22,500 840 11,511 53,162 9,703 4,082 Q150,023 USD214,000 USD2,000 EUR1,000 55,010 652 1,138 Q106,755

December 31, 2011

Notional Amount

Parent Company Derivative Notional Assets Amount

Derivative Liabilities

Derivatives recorded at FVPL Forward exchange contracts USD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EUR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . JPY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SGD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Spots USD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EUR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest rate swap . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cross currency swap. . . . . . . . . . . . . . . . . . . . . . . . . . Warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Embedded derivatives USD. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

USD337,913 P 83,715 EUR20,139 19,533 JPY198,000 5,923 SGD107 71 USD48,000 EUR500 P 1,000,000 44,890 units USD22,500

USD278,918 EUR2,146 JPY198,000 SGD107

P60,396 6,890 5,857 70 2,244 55 12,084 9,484 P97,080

2,940 USD53,000 59 EUR646 56,940 P 1,000,000 10,362 17,300 P196,843 USD7,934

The table below shows the rollforward analysis of net derivative assets as of December 31, 2012 and 2011 and January 1, 2011:
Consolidated December 31 January 1, 2011 2012 2011 Parent Company December 31 January 1, 2011 2012 2011

Balance at beginning of year . . . . . . . . . . . . . . . . . . Changes in fair value. . . . . . . . . . . . . . . . . . . . . . . . . Settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance at end of year. . . . . . . . . . . . . . . . . . . . . . . .

Q107,862 P120,621 P 131,370 Q 99,763 P121,636 P127,222 (431) (52,875) 104,446 6,523 (65,996) 89,969 (64,736) 40,116 (115,195) (63,018) 44,123 (95,555) Q 42,695 P107,862 P 120,621 Q 43,268 P 99,763 P121,636

HFT Investments This account consists of the following:

December 31 2012 2011

Debt securities: Government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Private . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q6,359,061 821,320 46,384 Q7,226,765

P430,880 18,352 50,264 P499,496

As of December 31, 2012, 2011 and January 1, 2011, held-for-trading investments have net unrealized gain of P82.65 million, P34.81 million and P11.22 million, respectively, for the Group and the Parent Company. F-293

AFS Investments This account consists of the following:

Consolidated December 31 2011 (As restated Notes 2 and 35) 2012 Parent Company December 31 2011 (As restated Notes 2 and 35) 2012

January 1, 2011

January 1, 2011

Debt securities: Government . . . . . . . . . . . . Private . . . . . . . . . . . . . . . . . Equity securities: Quoted. . . . . . . . . . . . . . . . . Unquoted . . . . . . . . . . . . . .

Q22,455,255 6,340,908 28,796,163 905,366 69,194 974,560 29,770,723

P30,114,977 9,589,765 39,704,742 615,847 76,067 691,914 40,396,656

P15,412,229 Q19,128,770 4,795,653 4,128,206 20,207,882 269,015 88,522 357,537 20,565,419 23,256,976 434,252 69,184 503,436 23,760,412

P26,975,312 7,749,612 34,724,924 331,918 76,067 407,985 35,132,909

P14,020,853 3,422,619 17,443,472 142,588 88,522 231,110 17,674,582

Less allowance for credit lossesequity securities (Note 14) . . . . . . . . . . . . . . . . . AFS investments included in the disposal group classified as held-for-sale (Note 13) . .

68,637 29,702,086

64,824 40,331,832

64,824 20,500,595

68,637 23,691,775

64,824 35,068,085

64,824 17,609,758

Q29,702,086

253,131 P40,584,963

78,342

P35,068,085

P17,609,758

P20,578,937 Q23,691,775

Unquoted equity securities are carried at cost less allowance for impairment losses since its fair value cannot be reliably estimated. There is no market for these investments and the Group does not intend to dispose these securities since these represent investments in allied undertakings which are necessary in its banking operations. The movements of net unrealized gains (losses) (NUGL) on AFS investments for the years ended December 31, 2012, 2011 and 2010 follow:
Consolidated 2011 (As restated Notes 2 and 35) Parent Company 2011 (As restated Notes 2 and 35)

2012

2010

2012

2010

Balance at beginning of year . . . . . . . . . . Unrealized gains for the year recognized in OCI . . . . . . . . . . . . . Realized gains . . . . . . Remaining NUGL on reclassified AFS securities . . . . . . . . Income tax effect . . .

Q 3,380,450

P 778,675

(Q272,134) Q 2,893,283

P 592,797

(Q348,982)

1,457,997 (2,486,548) 2,351,899

3,248,905 (379,228) 3,648,352

2,014,407 (586,191) 1,156,082

1,172,637 (2,418,924) 1,646,996

2,950,969 (378,671) 3,165,095

1,905,500 (586,190) 970,328

(49,384) (10,896) Q 2,291,619

(273,879) 5,977 P3,380,450 P

(343,819) (33,588) 778,675

(49,384) (8,347) Q 1,589,265

(273,879) 2,067 P2,893,283 P

(343,819) (33,712) 592,797

Realized gains are included in Trading and investment securities gainsnet in the statement of income.

F-294

HTM Investments This account consists of the following debt securities as of January 1, 2011:
Consolidated Parent Company

Government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Private . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less allowance for credit lossesprivate debt securities (Note 14) . . . . . . . . . . . . . . HTM investments included in the disposal group classified as held-for-sale (Note 13) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P13,541,105 7,413,234 20,954,339 11,048 20,943,291 363,960 P21,307,251

P13,501,104 6,230,149 19,731,253 11,048 19,720,205 P19,720,205

Foreign currency-denominated HTM investments of the Group and of the Parent Company bear EIR ranging from 0.85% to 13.63% in 2010. Peso-denominated HTM investments of the Group and of the Parent Company bear EIR ranging from 4.32% to 9.11% respectively, in 2010. Interest income on trading and investment securities consists of:
Consolidated 2011 (As restated Notes 2 and 35) Parent Company 2011 (As restated Notes 2 and 35)

2012

2010

2012

2010

Financial assets at FVPL . . . . . Q 284,761 P 209,688 P 240,920 Q 284,627 P 209,651 P 240,920 AFS investments . . . . . . . . . . . . 774,390 1,689,152 1,072,172 736,853 1,456,658 1,031,217 HTM investments . . . . . . . . . . . 1,199,691 829,688 1,718,962 938,211 756,359 1,718,963 2,258,842 Interest income attributable to disposal group (Note 13) . . . 14,333 2,728,528 31,957 3,032,054 13,041 1,959,691 2,422,668 2,991,100

Q2,273,175 P2,760,485 P3,045,095 Q1,959,691 P2,422,668 P2,991,100 Trading and investment securities gainsnet consist of:
Consolidated 2011 (As restated Notes 2 and 35) Parent Company 2011 (As restated Notes 2 and 35)

2012

2010

2012

2010

Financial assets at FVPL Derivative assets and liabilities . . . . . . . . . . . . . . HFT Investments . . . . . . . . . AFS investments . . . . . . . . . HTM investments. . . . . . . . . . . . .

(Q431) 366,159 2,486,548 Q2,852,276

(Q52,875) P104,446 Q 6,523 188,902 211,763 366,159 379,228 586,191 2,418,924 22,371 P 537,626 P902,400 Q2,791,606

(Q65,996) P 89,969 188,902 211,763 378,671 586,190 19,393 P 520,970 P887,922

Reclassification of Financial Assets The Parent Company reclassified financial assets held-for-trading and AFS investments to HTM investments effective July 1, 2008. The details of the reclassification follow: Reclassification from financial assets HFT to HTM investments The year 2008 was characterized by a substantial deterioration in global market conditions, including severe shortage of liquidity and credit availability. These conditions have led to a reduction in the level of market activity for many assets and the inability to sell other than at substantially lower prices. Following the amendments to PAS 39 and PFRS 7, and as a result of the contraction in the market for many classes of assets, the Parent Company undertook a review of assets that were classified as HFT, in order to F-295

determine whether this classification remained appropriate. Where it was determined that the market for an asset was no longer active, and that the Parent Company no longer intended to trade, management reviewed the instrument to determine whether it was appropriate to reclassify such financial assets to HTM investments. This reclassification was performed where the Parent Company, at the reclassification date, had the clear intention and ability to hold the financial asset until maturity. As a result of the determination made by the Parent Company arising from a rare circumstance, certain financial assets HFT were reclassified to HTM investments. The carrying value of financial assets HFT that were reclassified to HTM investments effective July 1, 2008, amounted to P916.13 million at the date of reclassification. Financial assets HFT reclassified to HTM investments effective July 1, 2008 and subsequently reclassified to AFS investments in 2011 (see Note 35), have the following balances as of December 31, 2012 and 2011:
As of December 31, 2012 Carrying /Fair Value Amortization Discount/ (Premium)

Face Value

Original Cost

Amortized Cost

Government . . . . . . . . . . . . . . . . . . . . . . . . . . . . Private . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q 68,759 41,050 Q109,809

Q 66,338 38,297 Q104,635

Q 66,960 39,741 Q106,701

Q 81,089 44,744 Q125,833

(Q622) (1,444) Q(2,066)

As of December 31, 2011 Carrying / Fair Value Amortization Discount/ (Premium)

Face Value

Original Cost

Amortized Cost

Government . . . . . . . . . . . . . . . . . . . . . . . . . . . . Private . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P687,350 65,760 P753,110

P721,302 61,481 P782,783

P722,641 63,080 P785,721

P860,237 69,806 P930,043

(Q1,339) (1,599) P (2,938)

The HTM investments reclassified from financial assets held-for-trading, effective July 1, 2008, have the following balances as of January 1, 2011:
Amortization Discount/ (Premium)

Face Value

Original Cost

Carrying Value

Fair Value

Government . . . . . . . . . . . . . . . . . . . . . . . . . . . . Private . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P691,199 65,760 P756,959

P724,895 61,481 P786,376

P725,845 62,586 P788,431

P865,661 69,620 P935,281

(Q950) (1,105) P(2,055)

As of July 1, 2008, market losses on held-for-trading investments reclassified to HTM investments amounted to P86.18 million. Had these investment securities not been reclassified to HTM investments, market gains of P20.19 million and P82.84 million would have been credited to the statements of income in 2012 and 2011, respectively. For 2010, market gains would have amounted to P84.32 million. EIR on the reclassified financial assets HFT range from 6.41% to 10.06%. The Parent Company expects to recover 100.00% of the principal and interest in the amount of P0.14 billion and no additional impairment loss was recognized for the years ended December 31, 2012, 2011 and 2010 on the reclassified investment. Reclassification from AFS investments to HTM investments As a result of the change of intention, the Parent Company reclassified certain AFS investments to HTM investments. The Parent Company established that it has the positive intention and ability to hold these investments to maturity. The carrying value of AFS investments reclassified to HTM investments amounted to P9.28 billion at the date of reclassification. These HTM investments were subsequently reclassified to AFS investments on July 19, 2011 due to bond exchange transaction (see Notes 2 and 35).

F-296

The HTM investments reclassified from AFS investments have the following balances as of January 1, 2011:
Face Value Original Cost Carrying Value Fair Value Net Unrealized Loss Amortization Discount

Government . . . . . . . . . . Private . . . . . . . . . . . . . . .

P1,625,063 3,656,506 P5,281,569

P1,524,916 3,411,640 P4,936,556

P1,556,070 3,487,438 P5,043,508

P1,744,149 3,722,389 P5,466,538

P140,470 203,349 P343,819

P 78,511 173,858 P252,369

As of July 1, 2008, market losses on AFS investments reclassified to HTM investments amounted to P634.84 million. Had these investment securities not been reclassified to HTM investments, market gain would have amounted to P92.34 million as of January 1, 2011. Among the reclassified securities, total face value amounting to USD100.64 million, equivalent to P4.15 billion matured or redeemed as of December 31, 2012. EIR on the reclassified AFS investments range from 0.92% to 21.30%. The Parent Company expects to recover 100.00% of the principal and interest amounting to P1.54 billion and no impairment loss was recognized for the years ended December 31, 2012, 2011 and 2010. The foregoing reclassifications and the single chosen dates of the rare circumstances in the case of financial assets held-for-trading and the date of change of intention for reclassification of AFS investments to HTM investments were approved by the Parent Companys Audit Committee on November 25, 2008. These reclassifications were compliant with the provision of BSP Circular No. 628 Guidelines on the Reclassification of Financial Assets between Categories. Bond Exchange Transactions On July 19, 2011, the Parent Company and its subsidiary, PNB Life Insurance, Inc., participated in the peso bond exchange program of the Philippine Government, wherein more than an insignificant amount of government securities classified under HTM, were exchanged for 20-year term bonds with minimum coupon rate of 8.00%. The Group accounted for the bond exchange under PFRS, which necessitated the reclassification of the HTM investments to AFS investments in accordance with PAS 39. The Group is prohibited to classify any financial assets as HTM investments in the year of the reclassification and two years thereafter. As of the date of reclassification on July 19, 2011, the amortized cost of HTM investments reclassified to AFS investments amounted to P20.52 billion and P18.60 billion for the Group and the Parent Company, respectively. Reclassified AFS investments are initially measured at its fair value amounting to P22.07 billion and P19.96 billion for the Group and the Parent Company, respectively. Any difference between the amortized cost of HTM investments and its fair value when reclassified is recognized in the statements of comprehensive income. The total gain on bond exchange amounting to P3.53 million and P0.27 million for the Group and the Parent Company, respectively, was recognized in the statements of income.

F-297

8.

Loans and Receivables This account consists of:

Consolidated December 31 2012 2011 Parent Company December 31 January 1, 2012 2011 2011

January 1, 2011

Receivables from customers: Corporate (Note 30) . . . . Q 66,665,946 P 66,402,742 P55,424,460 Q63,889,090 P61,921,051 P50,091,559 Small business . . . . . . . . . 17,489,816 14,689,559 10,640,686 14,027,586 11,205,202 8,196,811 Consumer . . . . . . . . . . . . . 11,313,790 10,277,549 8,710,524 9,014,653 8,462,515 6,922,031 95,469,552 Other receivables: Unquoted debt securities. . . . . . . . . . . . Accrued interest receivable . . . . . . . . . . . Accounts receivable . . . . Sales contract receivable . . . . . . . . . . . Finance lease receivables . . . . . . . . . . Residual value . . . . . . . . . 91,369,850 74,775,670 86,931,329 81,588,768 65,210,401

6,402,714 1,696,401 1,015,782 429,130 127,836 52,483 9,724,346 105,193,898

6,406,484 1,850,135 773,643 649,806 105,152 44,842 9,830,062 101,199,912 (251,070) (3,605) 100,945,237 3,441,045 97,504,192

6,715,597 1,710,052 735,631 638,850 93,500 39,286 9,932,916 84,708,586 (238,763) (3,328) 84,466,495 3,250,295 81,216,200

5,961,970 1,443,520 838,215 417,174 8,660,879 95,592,208 (142,846) (552) 95,448,810 4,593,962 90,854,848

5,963,310 1,693,097 660,046 644,182 8,960,635 90,549,403 (228,130) (3,001) 90,318,272 3,224,437 87,093,835

6,267,627 1,575,741 675,772 622,668 9,141,808 74,352,209 (196,719) (2,724) 74,152,766 3,042,637 71,110,129

Unearned interest and discount . . . . . . . . . . . . . . . . . Capitalized interest. . . . . . . . . . Less allowance for credit losses (Note 14) . . . . . . . . . . Loans and receivables included in disposal group classified as held-for-sale (Note 13) . . . . . . . . . . . . . . . .

(172,774) (696) 105,020,428 4,883,491 100,136,937

5,170,060

5,397,698

Q100,136,937 P102,674,252 P86,613,898 Q90,854,848 P87,093,835 P71,110,129

Credit card receivables (CCR) included in consumer loans and receivables of the Group and Parent Company amounted to P3.86 billion, P2.94 billion and P1.83 billion as of December 31, 2012 and 2011 and January 1, 2011, respectively. Allowance for credit losses includes provision for CCR amounting to P332.95 million, P217.45 million and P132.74 million as of December 31, 2012 and 2011 and January 1, 2011, respectively.

F-298

An analysis of the Groups finance lease receivables as of December 31, 2012 and 2011 and January 1, 2011 is presented as follows:
December 31 2012 2011 January 1, 2011

Gross investment in finance lease receivables Due within one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due beyond one year but not over five years. . . . . . . . . . . . . . . . . . . . . . . . Residual value of leased equipment Due within one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due beyond one year but not over five years. . . . . . . . . . . . . . . . . . . . . . . . Less unearned lease income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net investment in finance lease receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q 21,776 P 11,124 P 8,996 128,279 114,638 106,648 150,055 14,692 37,791 52,483 22,219 Q180,319 125,762 12,131 32,711 44,842 20,610 P149,994 115,644 2,468 36,818 39,286 22,144 P132,786

Loans amounting to P1.34 billion, P3.46 billion and P0.24 billion as of December 31, 2012 and 2011 and January 1, 2011, respectively, have been pledged to the BSP to collateralize the Parent Companys availments under BSP rediscounting privileges included in Bills payable (see Note 16). The pledged loans will be released when the underlying transaction is terminated, but in the event of the Parent Companys default, BSP is entitled to apply the collateral in order to settle the rediscounted bills. Interest income accreted on impaired loans and receivables amounted to P105.04 million, P107.77 million and P145.80 million in 2012, 2011 and 2010, respectively. Unquoted debt securities as of December 31, 2012 and 2011 and January 1, 2011 consist of:
Consolidated December 31 2012 2011 January 1, 2011 Parent Company December 31 January 1, 2012 2011 2011

Government debt securities. . . . Q6,392,628 P6,396,398 P6,702,578 Q5,951,884 P5,953,224 P6,257,541 Private debt securities . . . . . . . . 10,086 10,086 13,019 10,086 10,086 10,086 Q6,402,714 P6,406,484 P6,715,597 Q5,961,970 P5,963,310 P6,267,627 Unquoted government debt securities of the Group and the Parent Company consist mainly of agri-agra loans. The Group and the Parent Company plans to hold on these investments as part of its reserves for deposit liabilities and agri-agra loan requirement. As of December 31, 2012 and 2011 and January 1, 2011, allowance for credit losses on unquoted debt securities amounted to P66.84 million, P46.97 million and P38.46 million, respectively, for the Group, and P10.09 million for the Parent Company. Of the total loans of the Group, 85.98%, 71.04% and 74.28% as of December 31, 2012 and 2011 and January 1, 2011, respectively, are subject to periodic interest repricing. Remaining loans earn annual fixed interest rates ranging from 1.65% to 25.00%, from 3.00% to 37.00% and from 3.50% to 8.20% in 2012, 2011 and 2010, respectively. Of the total loans of the Parent Company, 85.94%, 79.56% and 82.18% as of December 31, 2012 and 2011 and January 1, 2011, respectively, are subject to periodic interest repricing. Remaining loans earn annual fixed interest rates ranging from 1.65% to 15.05%, from 3.00% to 12.00% and from 3.50% to 8.20%, in 2012, 2011 and 2010, respectively. BSP Reporting As of December 31, 2012 and 2011 and January 1, 2011, nonperforming loans (NPLs) follow:
Consolidated December 31 2012 2011 January 1, 2011 Parent Company December 31 2011 2011 January 1, 2011

Secured . . . . . . . . . . . . . . . . . Unsecured. . . . . . . . . . . . . . .

Q3,320,534 1,385,858 Q4,706,392

P3,317,122 1,320,093 P4,637,215

P3,686,746 Q3,108,477 887,620 1,161,706 P4,574,366 Q4,270,183

P3,047,690 1,204,923 P4,252,613

P3,346,654 867,481 P4,214,135

F-299

Current banking regulations allow banks with no unbooked valuation reserves and capital adjustments to exclude from nonperforming classification those loans classified as loss in the latest examination of the BSP, which are fully covered by allowance for credit losses, provided that interest on said loans shall not be accrued. As of December 31, 2012 and 2011 and January 1, 2011, NPLs not fully covered by allowance for credit losses follow:
Consolidated December 31 2012 2011 January 1, 2011 Parent Company December 31 2012 2011 January 1, 2011

Total NPLs . . . . . . . . . . . . . . Less NPLs fully covered by allowance for credit losses. . . . . . . . . . . . . . . . .

Q4,706,392 786,136 Q3,920,256

P4,637,215 639,787 P3,997,428

P4,574,366 686,496 P3,887,870

Q4,270,183 704,640 Q3,565,543

P4,252,613 624,036 P3,628,577

P4,214,135 624,036 P3,590,099

NPLs shall, as a general rule, refer to loan accounts whose principal and/or interest is unpaid for 30 days or more after due date or after they have become past due in accordance with existing rules and regulations. This applies to loans and receivables that are payable in lump sum, quarterly, semi-annual, or annual installments, in which case, the total outstanding balance thereof is considered nonperforming. In the case of receivables that are payable in monthly installments, the total outstanding balance is considered nonperforming when three or more installments are in arrears. In the case of receivables that are payable in daily, weekly, or semi-monthly installments, the total outstanding balance thereof is considered nonperforming at the same time that they become past due in accordance with existing BSP regulations, i.e., the entire outstanding balance of the receivable is considered as past due when the total amount of arrearages reaches ten percent (10.00%) of the total receivable balance. Receivables are classified as nonperforming in accordance with BSP regulations, or when, in the opinion of management, collection of interest or principal is doubtful. Receivables are not reclassified as performing until interest and principal payments are brought current or the loans are restructured in accordance with existing BSP regulations, and future payments appear assured. Restructured loans which do not meet the requirements to be treated as performing receivables are also considered as NPLs. The following table shows the classification of restructured loans of the Parent Company as of December 31, 2012 and 2011 and January 1, 2011:
December 31 2012 2011 January 1, 2011

Corporate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Small business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q159,684 P186,706 P192,397 12,985 46,208 67,418 12,594 78,915 92,367 Q185,263 P311,829 P352,182

The following tables show the breakdown of receivables from customers (gross of unearned interest and discounts and capitalized interest) as to collateral as of December 31, 2012 and 2011 and January 1, 2011:
Consolidated December 31 2012 Amount % 2011 Amount % January 1, 2011 Amount

Secured by: Real estate . . . . . . . . . . . . . . . . . . . . Deposit hold-out. . . . . . . . . . . . . . . Chattel . . . . . . . . . . . . . . . . . . . . . . . Securities . . . . . . . . . . . . . . . . . . . . . Others(*) . . . . . . . . . . . . . . . . . . . . . . Unsecured. . . . . . . . . . . . . . . . . . . . . . . . .

Q34,576,203 2,023,297 1,738,191 287,144 7,793,800 46,418,635 49,050,917 Q95,469,552

36.22 P30,559,875 2.12 1,886,619 1.82 2,762,051 0.30 1,543,813 8.16 6,471,027 48.62 43,223,385 51.38 48,146,465 100.00 P91,369,850

33.45 P27,408,060 36.65 2.07 2,575,528 3.44 3.02 2,396,486 3.20 1.69 1,723,345 2.30 7.08 13,069,151 17.50 47.31 47,172,570 63.09 52.69 27,603,100 36.91 100.00 P74,775,670 100.00

F-300

2012 Amount

Parent Company December 31 2011 % Amount %

January 1, 2011 Amount

Secured by: Real estate . . . . . . . . . . . . . . . . . . . . Chattel . . . . . . . . . . . . . . . . . . . . . . . Deposit hold-out. . . . . . . . . . . . . . . Securities . . . . . . . . . . . . . . . . . . . . . Others(*) . . . . . . . . . . . . . . . . . . . . . . Unsecured. . . . . . . . . . . . . . . . . . . . . . . . .

Q28,744,628 1,677,721 1,321,393 263,674 7,156,950 39,164,366 47,766,963 Q86,931,329

33.07 P24,021,501 1.93 2,390,842 1.52 1,565,043 0.30 1,399,365 8.23 5,480,743 45.05 54.95 34,857,494 46,731,274

29.44 P20,936,419 2.93 2,194,486 1.92 2,340,222 1.71 1,723,345 6.72 11,266,622 42.72 57.28 38,461,094 26,749,307

32.11 3.37 3.59 2.64 17.27 58.98 41.02 100.00

100.00 P81,588,768

100.00 P65,210,401

(*) These include post dated checks and assigned receivables from third parties. As of December 31, 2012 and 2011 and January 1, 2011, information on concentration of receivables from customers (gross of unearned interest and discounts and capitalized interest) as to economic activity follows:
Consolidated December 31 2011 % Amount %

2012 Amount

January 1, 2011 Amount %

Wholesale and retail trade. . . . . . . . . . . . . . . . . . . . . . . . Real estate, renting and business services . . . . . . . . . . Manufacturing (various industries) . . . . . . . . . . . . . . . . Transportation, storage and Communication. . . . . . . . Other community, social and personal activities . . . . Agriculture. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Others(*) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q22,392,803 19,981,754 17,403,105 9,664,263 9,988,796 795,855 15,242,976

23.46 P19,033,974 20.93 18,893,317 18.23 17,541,580 10.12 11,781,366 10.46 7,885,178 0.83 1,071,887 15.97 15,162,548

20.83 P15,900,751 20.68 13,084,126 19.20 14,820,560 12.89 10,513,881 8.63 6,468,050 1.17 6,732,198 16.60 7,256,104

21.26 17.50 19.82 14.06 8.65 9.00 9.71

Q95,469,552 100.00 P91,369,850 100.00 P74,775,670 100.00

Parent Company December 31 2011 % Amount %

2012 Amount

January 1, 2011 Amount %

Wholesale and retail trade. . . . . . . . . . . . . . . . . . . . . . . . Real estate, renting and business services . . . . . . . . . . Manufacturing (various industries) . . . . . . . . . . . . . . . . Transportation, storage and Communication. . . . . . . . Other community, social and personal activities . . . . Agriculture. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Others(*) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q20,849,375 16,269,594 15,670,591 9,467,819 9,233,056 651,568 14,789,326

23.98 P17,093,261 18.72 15,544,172 18.03 14,972,445 10.89 11,597,804 10.62 7,212,788 0.75 1,042,086 17.01 14,126,212

20.95 P13,287,456 19.05 10,331,501 18.35 12,709,662 14.21 9,812,597 8.84 5,888,762 1.28 6,721,143 17.32 6,459,280

20.38 15.84 19.49 15.05 9.03 10.31 9.91

Q86,931,329 100.00 P81,588,768 100.00 P65,210,401 100.00

(*) These include financial intermediation, mining and quarrying, services, miscellaneous business, personal, and social activities. The BSP considers that concentration of credit exists when total loan exposure to a particular industry or economic sector exceeds 30.00% of total loan portfolio.

F-301

Interest income on loans and receivables consists of:

2012 Consolidated 2011 2010 2012 Parent Company 2011 2010

Receivables from customers . . . . . . . . . Unquoted debt securities . . . . . . . . . . . . Interest income attributable to disposal group (Note 13). . . . . . . . . .

Q5,978,248 503,654 6,481,902 203,047 Q6,684,949

P5,546,921 514,953 6,061,874 265,661 P6,327,535

P4,939,898 565,501 5,505,399 315,744 P5,821,143

Q5,505,391 483,222 5,988,613 Q5,988,613

P5,069,032 494,521 5,563,553 P5,563,553

P4,582,081 565,501 5,147,582 P5,147,582

9.

Investments in Subsidiaries

This account consists of the following investments of the Parent Company as of December 31, 2012 and 2011:
2012 2011

Acquisition cost of (Note 2): ACB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PLII . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ASB. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ABUK. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ABCHKL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ALFC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . OHBVI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . AFC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment in subsidiary included in the disposal group classified as held-for-sale (Note 13) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q2,662,423 P2,662,423 517,169 517,169 500,000 500,000 226,181 226,181 129,095 129,095 87,250 87,250 20,500 50,000 4,142,618 Q4,142,618 4,172,118 20,500 P4,192,618

AFC On February 24, 2003, the stockholders and BOD approved the suspension of AFCs operations effective March 1, 2003. On January 28, 2009, the BOD of AFC approved the cessation of the operations. Accordingly, AFC has changed its basis of accounting for periods subsequent to January 28, 2009, from the going concern basis to the liquidation basis. Accordingly, the carrying values of the remaining assets and all liabilities as of December 31, 2011 and 2010 are presented at estimated realizable values and at estimated settlement amounts. On November 18, 2011, the Bureau of Internal Revenue issued a certification which states that the company has no outstanding internal revenue tax liability. The SEC approved the amended articles of incorporation of AFC, shortening the term its existence, thereby dissolving AFC. Subsequently, AFC transferred its remaining assets and liabilities to ABC. OHBVI OHBVI is a bank holding company based in Road Town, British Virgin Islands. As of September 30, 2012, the Parent Company has a 27.78% interest in OHBVI, which in turn wholly-owns OBHI, a U.S. bank holding company which conducts its primary business through its wholly-owned subsidiary, Oceanic Bank. Oceanic Bank is chartered by the State of California and operates two branches in San Francisco, California, and one branch in Guam. Oceanic Bank offers full range of commercial banking services. OHBVIs revenue consists primarily of interest income from its loans and securities portfolio (see Note 13).

F-302

10. Property and Equipment The composition of and movements in this account follow:
Consolidated At Cost Furniture, Fixtures and Leasehold Equipment Improvements

At Appraised Value-Land

Buildings

Total-At Cost

Cost/Appraised value Balance at January 1, 2012 . . . . . . . . . . . . Additions. . . . . . . . . . . . . . . . . . . . . . . . . . . . Disposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reclassification/revaluation/others. . . . . . Foreign exchange difference . . . . . . . . . . . Balance at December 31, 2012 . . . . . . . . Accumulated depreciation and amortization Balance at January 1, 2012 . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . Disposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reclassification/others . . . . . . . . . . . . . . . . Foreign exchange difference . . . . . . . . . . . Balance at December 31, 2012 . . . . . . . . Allowance for impairment losses (Note 14). . . . . . . . . . . . . . . . . . . . . . . . . . Net book value at December 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q2,971,633 Q1,732,609 73,199 396,759 4,035 (15,721) 3,368,392 1,794,122

Q624,615 52,806 (5,364) (10,607) 661,450

Q3,113,595 Q5,470,819 204,876 330,881 (109,094) (109,094) (36,625) (37,954) (4,072) (30,400) 3,168,680 5,624,252

Q3,368,392

836,688 66,629 8,767 (3,793) 908,291 36,644 Q 849,187

494,483 56,343 (9,656) (2,510) (878) 537,782 Q123,668

2,571,306 246,432 (98,837) (21,594) (3,576) 2,693,731 Q 474,949

3,902,477 369,404 (108,493) (15,337) (8,247) 4,139,804 36,644 Q1,447,804

At Appraised Value-Land

Buildings

Consolidated At Cost Furniture, Leasehold Fixtures and Improvements Equipment

Total-At Cost

Cost/Appraised value Balance at January 1, 2011 . . . . . . . . . . . . Additions. . . . . . . . . . . . . . . . . . . . . . . . . . . . Disposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reclassification/revaluation/others. . . . . . Foreign exchange difference . . . . . . . . . . . Balance at December 31, 2011 . . . . . . . . . Accumulated depreciation and amortization Balance at January 1, 2011 . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . Disposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reclassification/others . . . . . . . . . . . . . . . . Foreign exchange difference . . . . . . . . . . . Balance at December 31, 2011 . . . . . . . . . Allowance for impairment losses (Note 14). . . . . . . . . . . . . . . . . . . . . . . . . . Property and equipmentnet book value included in the disposal group classified as held-for-sale (Note 13) . . Net book value at December 31, 2011. . .

P2,958,427 13,206 2,971,633

P1,681,313 42,071 9,015 210 1,732,609

P569,484 57,982 (26,681) 23,872 (42) 624,615

P3,348,388 P5,599,185 198,078 298,131 (373,888) (400,569) (58,939) (26,052) (44) 124 3,113,595 5,470,819

2,971,633

772,046 61,327 3,213 102 836,688 1,272 894,649

438,349 58,081 (26,682) 24,732 3 494,483 130,132

2,683,303 285,373 (361,870) (35,523) 23 2,571,306 542,289

3,893,698 404,781 (388,552) (7,578) 128 3,902,477 1,272 1,567,070

P2,971,633

P 894,649

125 P130,257

620 P 542,909

745 P1,567,815

F-303

At Appraised Value-Land

Buildings

Parent Company At Cost Furniture, Leasehold Fixtures and Improvements Equipment

Total-At Cost

Cost/Appraised value Balance at January 1, 2012 . . . . . . . . . . . . Additions. . . . . . . . . . . . . . . . . . . . . . . . . . . . Disposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reclassification/revaluation/others. . . . . . Balance at December 31, 2012 . . . . . . . . Accumulated Depreciation and amortization Balance at January 1, 2012 . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . Disposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reclassification/others . . . . . . . . . . . . . . . . Balance at December 31, 2012 . . . . . . . . Allowance for impairment losses (Note 14). . . . . . . . . . . . . . . . . . . . . . . . . . Net book value at December 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q2,941,962 Q1,450,711 73,199 396,759 4,035 3,338,721 1,527,945

Q509,285 47,930 (5,364) 551,851

Q2,776,856 Q4,736,852 183,220 304,349 (97,628) (97,628) (36,625) (37,954) 2,825,823 4,905,619

762,135 60,353 8,907 831,395

424,962 42,588 (2,503) 465,047 Q 86,804

2,303,131 221,563 (88,074) (21,528) 2,415,092 Q 410,731

3,490,228 324,504 (88,074) (15,124) 3,711,534 32,741 Q1,161,344

Q3,338,721

32,741 Q 663,809

At Appraised Value-Land

Buildings

Parent Company At Cost Furniture, Leasehold Fixtures and Improvements Equipment

Total-At Cost

Cost/Appraised value Balance at January 1, 2011 . . . . . . . . . . . . Additions. . . . . . . . . . . . . . . . . . . . . . . . . . . . Disposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reclassification/revaluation/others. . . . . . Balance at December 31, 2011 . . . . . . . . . Accumulated Depreciation and amortization Balance at January 1, 2011 . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . Disposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reclassification/others . . . . . . . . . . . . . . . . Balance at December 31, 2011 . . . . . . . . . Allowance for impairment losses (Note 14). . . . . . . . . . . . . . . . . . . . . . . . . . Net book value at December 31, 2011. . .

P2,941,962 2,941,962

P1,400,528 41,168 9,015 1,450,711

P466,759 45,917 (3,391) 509,285

P3,025,933 P4,893,220 174,568 261,653 (364,706) (364,706) (58,939) (53,315) 2,776,856 4,736,852

P2,941,962

703,972 54,950 3,213 762,135 287 P 688,289

384,258 43,235 (2,531) 424,962 P 84,323

2,432,024 259,294 (352,664) (35,523) 2,303,131 P 473,725

3,520,254 357,479 (352,664) (34,841) 3,490,228 287 P1,246,337

F-304

The details of depreciation and amortization recognized in the statements of income follow:
Consolidated 2011 Parent Company 2011

2012

2010

2012

2010

Property and equipment: Buildings . . . . . . . . . . . . . . . . . . . . . Leasehold improvements . . . . . . . Furniture, fixtures and equipment . . . . . . . . . . . . . . . . . . Investment properties (Note 11). . . . . . Other assets (Note 12) . . . . . . . . . . . . . . Depreciation and amortization attributable to disposal group held-for-sale (Note 13) . . . . . . . . . . .

P 66,629 P 61,327 P 54,509 P 60,353 P 54,950 P 53,605 56,343 58,081 50,411 42,588 43,235 39,604 246,432 27,825 110 397,339 285,373 28,009 30 432,820 320,003 35,111 15 460,049 221,563 24,470 110 349,084 259,294 26,814 30 384,323 290,779 33,892 15 417,895

9 P397,348

606 P433,426

595 P460,644

P349,084

P384,323

P417,895

As of December 31, 2012 and 2011, the cost of fully depreciated property and equipment still in use amounted to P2.54 billion and P2.22 billion, respectively, for the Group and P2.42 billion and P2.12 billion, respectively, for the Parent Company. The Group measures land at revalued amount with changes in fair value being recognized in OCI. Fair value has been determined based on valuations made by internal or independent appraisers. Valuations were derived on the basis of recent sales of similar properties in the same area as the land and taking into account the economic conditions prevailing at the time the valuations were made. As of December 31, 2012, had the land been carried at cost, the net book value would have been P886.35 million and P883.93 million, for the Group and the Parent Company, respectively. As of December 31, 2011, had the land been carried at cost, the net book value would have been P853.99 million and P851.57 million, for the Group and the Parent Company, respectively. The Groups gain on sale of property and equipment recognized as Miscellaneous included under Miscellaneous income in the statements of income amounted to P0.71 million, P3.85 million and P8.52 million in 2012, 2011 and 2010, respectively (see Note 23). The Parent Companys gain on sale of property and equipment recognized as Miscellaneous included under Miscellaneous income in the statements of income amounted to P0.71 million, P3.84 million and P8.52 million in 2012, 2011 and 2010, respectively (see Note 23). 11. Investment Properties The composition of and movements in this account follow:
Consolidated Buildings and Improvements

Land

Total

Cost Balance at January 1, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Transfers/disposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign currency difference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance at December 31, 2011. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated depreciation and amortization Balance at January 1, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization (Note 10) . . . . . . . . . . . . . . . . . . . . . . . . . . Transfers/disposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign currency difference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance at December 31, 2012. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allowance for impairment losses (Note 14) . . . . . . . . . . . . . . . . . . . . . . Net book value at December 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . (Forward) F-305

Q4,017,312 (349,546) (650) 3,667,116 228,973 Q3,438,143

Q845,267 84,264 (96,376) (49) 833,106 210,365 27,825 (30,836) (412) 206,942 92,903 Q533,261

Q4,862,579 84,264 (445,922) (699) 4,500,222 210,365 27,825 (30,836) (412) 206,942 321,876 Q3,971,404

Land

Consolidated Buildings and Improvements

Total

Cost Balance at January 1, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Transfers/disposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign currency difference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance at December 31, 2011. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated depreciation and amortization Balance at January 1, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization (Note 10) . . . . . . . . . . . . . . . . . . . . . . . . . . Transfers/disposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign currency difference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance at December 31, 2011. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allowance for impairment losses (Note 14) . . . . . . . . . . . . . . . . . . . . . . . Net book value at December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P4,090,380 P1,092,145 P5,182,525 192,927 21,435 214,362 (266,580) (268,371) (534,951) 585 58 643 4,017,312 232,063 P3,785,249 845,267 252,530 28,009 (70,243) 69 210,365 102,292 P 532,610
Parent Company Buildings and Improvements

4,862,579 252,530 28,009 (70,243) 69 210,365 334,355 P4,317,859

Land

Total

Cost Balance at January 1, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Transfers/disposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance at December 31, 2012. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated depreciation and Amortization Balance at January 1, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization (Note 10) . . . . . . . . . . . . . . . . . . . . . . . . . . Transfers/disposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign currency difference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance at December 31, 2012. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allowance for impairment losses (Note 14) . . . . . . . . . . . . . . . . . . . . . . Net book value as at December 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . .

Q3,734,520 39,351 (284,134) 3,489,737

Q809,624 91,581 (96,374) 804,831 203,638 24,470 (30,836) (407) 196,865 91,810 Q516,156
Parent Company Buildings and Improvements

Q4,544,144 130,932 (380,508) 4,294,568 203,638 24,470 (30,836) (407) 196,865 317,581 Q3,780,122

225,771 Q3,263,966

Land

Total

Cost Balance at January 1, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Transfers/disposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance at December 31, 2011. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated depreciation and Amortization Balance at January 1, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization (Note 10) . . . . . . . . . . . . . . . . . . . . . . . . . . Transfers/disposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign currency difference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance at December 31, 2011. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allowance for impairment losses (Note 14) . . . . . . . . . . . . . . . . . . . . . . . Net book value as at December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . .

P3,848,004 P1,054,325 P4,902,329 128,353 18,252 146,605 (241,837) (262,953) (504,790) 3,734,520 229,636 P3,504,884 809,624 245,392 26,814 (68,637) 69 203,638 101,482 P 504,504 4,544,144 245,392 26,814 (68,637) 69 203,638 331,118 P4,009,388

The Groups investment properties represent mainly real estate properties acquired in settlement of loans and receivables. The difference between the fair value of the asset upon foreclosure and the carrying value of the loan is recognized as Gain on acquisition of investment properties in the statements of income. F-306

Gain on acquisition of investment properties of the Group in 2012, 2011 and 2010 amounted to P27.16 million, P36.60 million and P30.53 million, respectively, of which P22.53 million, P28.79 million and P29.92 million, respectively, pertains to the Parent Company. The Groups gain on sale of investment properties included under Miscellaneous income in the statements of income amounted to P211.53 million, P112.12 million and P228.67 million in 2012, 2011 and 2010, respectively (see Note 23). The Parent Companys gain on sale of investment properties included under Miscellaneous income in the statements of income amounted to P203.23 million, P99.42 million and P222.06 million in 2012, 2011 and 2010, respectively (see Note 23). The aggregate fair value of the Groups investment properties as of December 31, 2012 and 2011 amounted to P5.76 billion and P5.97 billion, respectively, of which P5.43 billion and P5.61 billion, respectively, pertains to the Parent Company. The fair values of the Groups investment properties have been determined by the appraisal method on the basis of recent sales of similar properties in the same areas as the investment properties and taking into account the economic conditions prevailing at the time the valuations were made. Rental income on investment properties included in Miscellaneous income in the statement of income of the Group in 2012, 2011 and 2010 amounted to P32.46 million, P33.53 million and P46.72 million, respectively, of which P25.71 million, P21.79 million and P46.63 million, respectively, pertains to the Parent Company (see Note 23). Carrying values of investment properties for lease amounted to P2.66 billion and P1.56 billion as of December 31, 2012 and 2011, respectively, for the Group, of which P2.53 billion and P1.30 billion, as of December 31, 2012 and 2011, respectively, pertains to the Parent Company. Direct operating expenses on investment properties included under Litigation/assets acquired in Miscellaneous expenses amounted to P29.35 million in 2012, P40.53 million in 2011 and P88.75 million in 2010 for the Group, and P28.11 million in 2012, P38.88 million in 2011 and P85.16 million in 2010 for the Parent Company (see Note 26). As of December 31, 2012 and 2011, the carrying values of foreclosed investment properties still subject to redemption by the borrowers amounted to P17.19 million and P238.74 million, respectively, for the Group of which P17.19 million and P202.74 million, respectively, pertains to the Parent Company.

F-307

12. Other Assets This account consists of:

Consolidated December 31 2012 2011 Parent Company December 31 2012 2011

Investment in Heritage Park. . . . . . . . . . . . . . . . . . . . . . . . . Creditable withholding taxes . . . . . . . . . . . . . . . . . . . . . . . . Retirement asset (Note 24) . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . RCOCI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unused stationery and supplies . . . . . . . . . . . . . . . . . . . . . . Bond sinking fund (Note 22) . . . . . . . . . . . . . . . . . . . . . . . . Intangible asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Documentary stamps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Security deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Chattel mortgage properties . . . . . . . . . . . . . . . . . . . . . . . . . Interoffice float items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . Allowance for impairment losses (Note 14) . . . . . . . . . . . Other assets included in the disposal group classified as held-for-sale (Note 13) . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q1,012,810 P1,034,118 Q1,012,810 P1,034,118 261,798 251,556 260,448 250,019 140,102 184,404 137,670 182,018 88,936 88,936 67,429 109,079 58,430 97,821 62,688 84,621 62,527 84,351 51,797 52,168 47,292 45,311 50,000 50,000 50,000 50,000 49,519 40,550 41,689 40,272 41,501 36,622 47,726 36,428 37,734 16,512 24,829 16,512 24,829 6,858 3,771 4,103 3,753 1,924 1,924 1,924 1,924 347 152,081 59,204 100,688 28,643 2,039,626 1,601 55,991 1,982,034 Q1,982,034 2,034,372 1,601 56,544 1,976,227 50,321 P2,026,548 1,829,104 1,601 55,991 1,771,512 Q1,771,512 1,882,022 1,601 56,544 1,823,877 P1,823,877

As of December 31, 2012 and 2011, miscellaneous assets of the Group also include security fund which is maintained by PLII amounting to P0.15 million, in compliance with Sections 365 and 367 of the Insurance Code. The amount of such fund is determined by and deposited with the IC for the payment of benefit claims against insolvent companies. Investment in Heritage Park represents the Groups portfolio holdings in Heritage Park investment certificates. The fair value of such investment amounted to P1.05 billion and P1.03 billion as of December 31, 2012 and 2011, respectively. As of December 31, 2012 and 2011, accumulated depreciation amounting to P1.60 million, pertains to chattel mortgage properties acquired by the Group and the Parent Company in settlement of loans. 13. Assets and Liabilities of Disposal Group Classified as Held-for-Sale In 2010, the BOD of the Parent Company has approved the sale of 5,000 shares, representing 27.78% interest in OHBVI in view of the impending merger with PNB. OHBVI wholly owns OBHI that owns 100% of the common stock of Oceanic Bank in the U.S. On October 11, 2011, the BOD of the Parent Company in its Special BOD Meeting, has approved the execution by OHBVI, of a Voting Trust Agreement (the Agreement) which was signed among OHBVI, PNB (as successor to the Parent Company upon merger) and another party, as the nominated Trustee. This placed all shares of OBHI in a trust, to be sold to third parties, to facilitate the merger of the Parent Company and PNB. On October 28, 2011, the U.S. Federal Reserve Board approved the Agreement to facilitate the merger of the Parent Company into PNB in a manner that addresses U.S. regulatory concerns.

F-308

PFRS 5 requires assets and liabilities of OBHI, together with the results of operations of a disposal group, to be classified separately from continuing operations. As a result, the Group reclassified all the assets and liabilities to Assets of disposal group classified as held-for-sale and Liabilities of disposal group classified as held-forsale, respectively, in the consolidated statements of financial position. The Parent Company reclassified its investments in subsidiary as Assets of held-for-sale in the Parent Company statements of financial position. On March 31, 2012, a stock purchase agreement was entered into with a First National Bank of Northern California (FNB Bancorp.) to sell OBHI, different from initial plan to sell OHBVI. On September 22, 2012, the Group completed the sale of OBHI to FNB Bancorp. for a gross consideration of P1.11 billion or USD27.75 million on account, resulted in a pre-tax loss of P290.24 million after transaction costs such as legal and consultation fees. The Group received the net consideration or proceeds from FNB Bancorp on October 4, 2012. After the completed sale, the Group ceased to classify assets and liabilities of OHBVI amounting to P1.10 billion and P2.30 million, respectively, as Assets of disposal group classified as held-for-sale and Liabilities of disposal group classified as held-for-sale, and therefore, consolidated in the statement of financial position as of December 31, 2012. The results of operation of OBHI, are presented below:
For the period ended September 22, 2012 For the years ended December 31 2011 (As restated Notes 2 and 35) 2010

INTEREST INCOME ON Loans and receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trading and investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deposits with banks and interbank loans receivable . . . . . . . . . . . . . . INTEREST EXPENSE ON Deposit liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bills payable and other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . NET INTEREST INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commissions and handling charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign exchange gainsnet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TOTAL OPERATING INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . Compensation and fringe benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Occupancy and other equipment-related costs . . . . . . . . . . . . . . . . . . . Provision for credit and impairment losses . . . . . . . . . . . . . . . . . . . . . . Taxes and licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TOTAL OPERATING EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . INCOME BEFORE INCOME TAX . . . . . . . . . . . . . . . . . . . . . . . . . LOSS FROM SALE OF DISPOSAL GROUP . . . . . . . . . . . . . . . . INCOME (LOSS) BEFORE INCOME TAX FROM DISCONTINUED OPERATION . . . . . . . . . . . . . . . . . . . . . . . . . . PROVISION FOR INCOME TAX. . . . . . . . . . . . . . . . . . . . . . . . . . . NET INCOME (LOSS) FROM DISCONTINUED OPERATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

203,047 14,333 9,019 226,399 24,489 10,678 35,167 191,232 7,055 100 3,554 201,941 57,356 25,939 2,360 109 9 30,476 116,249 85,692 (290,242) (204,550) 33,543 (Q238,093)

P265,661 31,957 12,098 309,716 61,903 12,098 74,001 235,715 16,346 5,081 4,036 261,178 82,413 33,461 5,975 5,684 606 42,984 171,123 90,055 90,055 33,864 P 56,191

P315,744 13,041 33,285 362,070 59,439 35,366 94,805 267,265 7,837 5,573 3,973 284,648 89,439 37,417 10,307 9,015 595 83,149 229,922 54,726 54,726 19,636 P 35,090

F-309

The major classes of assets and liabilities classified as held-for-sale of the Group as of December 31, 2011 and January 1, 2011 are as follows:
December 31, 2011 (As restated Notes 2 and 35)

January 1, 2011

Assets Cash and other cash items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due from other banks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interbank loans receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . AFS investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . HTM investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans and receivablesnet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property and equipmentnet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Assets of disposal group classified as held-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . Liabilities Deposit liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bills payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Liabilities of disposal group directly associated with assets classified as held-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net assets directly associated with disposal group. . . . . . . . . . . . . . . . . . . . . . . . . . . . Reserve of disposal group classified as held-for-sale (cumulative translation adjustments). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

35,368 1,467,686 445,371 253,131 5,170,060 745 50,321 7,422,682 5,257,161 740,458 8,241 11,224 6,017,084

P 981,709 1,431,771 78,342 363,960 5,397,698 1,096 81,381 8,335,957 5,546,988 1,401,565 9,592 7,242 6,965,387 P1,370,570 P 97,371

P1,405,598 P 97,569

For the period ended September 22, 2012

For the years ended December 31 2011 (As restated Notes 2 and 35) 2010

The net cash flows directly associated with disposal group: Operating . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash outflow. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q 234,138 (467,261) (740,458) Q(973,581)

P 101,183 858,738 (967,812) P (7,891)

P 49,978 255,149 (64,839) P240,288

As of December 31, 2011 and January 1, 2011, loans and receivables is net of allowance for credit losses amounting to P80.93 million and P85.84 million, respectively. As of December 31, 2011 and January 1, 2011, due from other banks of OBHI considered as not cash and cash equivalents amounted to P974.61 million and P1.43 billion, respectively.

F-310

The following table shows the income (loss) and share data used in the basic and diluted earnings (loss) per share calculations:
For the years ended December 31 For the period ended 2011 (As September 22, restated - Notes 2 2010 2012 and 35) (In thousands, except number of shares and EPS)

a. b.

Net income (loss) from discontinued operation attributable to common equity holders of the Parent Company . . . . . . . . . . . . . Weighted average no. of outstanding common shares . . . . . . . . Add: Weighted average no. of potential common shares (pertaining to convertible preferred shares) . . . . . . . . . . Weighted average no. of outstanding and potential common shares. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(Q66,142) 3,252,495 7,248 3,259,743 (Q20.34) (Q20.34)

15,610 3,252,495 7,528

9,748 3,252,495 8,952 3,261,447

c.

3,260,023 P P 4.80 4.79 P P

Earnings (loss) per share: Basic (a/b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted (a/c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3.00 2.99

For the period ended September 22, 2012, the basic and diluted earnings (loss) per share are equal since the assumed conversion of preferred shares as a result of dividing (a) over (c) is anti-dilutive. The disposal group had outstanding financial commitments whose contractual amount represents the maximum credit risk exposure amounting to P734.10 million and P766.00 million as of December 31, 2011 and 2010, respectively. As OBHI was sold prior to December 31, 2012, the assets and liabilities classified as part of the disposal group held for sale as of December 31, 2011 are no longer included in the consolidated financial statements and segment reporting (see Note 29). 14. Allowance for Credit and Impairment Losses The movements in this account for the years ended December 31, 2012, 2011 and 2010 follow:
Consolidated 2011 (As restatedNotes 2 and 35) Parent Company 2011 (As restatedNotes 2 and 35)

2012

2010

2012

2010

Balance at beginning of year AFS investments Equity securities quoted . . . . . . . . . . . Q 62,205 P 62,205 P 62,205 Q 62,205 P 62,205 P 62,205 Equity securities unquoted . . . . . . . . . 2,619 2,619 2,619 2,619 2,619 2,619 HTM investmentsprivate . . . 11,048 366,940 11,048 366,940 Loans and receivables . . . . 3,441,045 3,250,295 2,260,798 3,224,437 3,042,637 1,990,599 Property and equipment . . . 1,272 4,352 4,352 287 4,352 4,352 Investment properties . . . . . 334,355 393,591 465,292 331,118 390,355 461,749 Other assets . . . . . . . . . . . . . 56,544 56,454 56,454 56,544 56,454 56,454 3,898,040 Provisions charged to operations . . . . . . . . . . . . . . . . . Reversals/others . . . . . . . . . . . . . . 1,783,454 (314,855) 1,468,599 (Forward) F-311 3,780,564 362,334 (244,858) 117,476 3,218,660 3,677,210 3,569,670 350,778 (243,238) 107,540 2,944,918 1,211,263 (586,511) 624,752

1,252,727 1,548,204 (690,823) (156,502) 561,904 1,391,702

2012

Consolidated 2011 (As restatedNotes 2 and 35)

2010

2012

Parent Company 2011 (As restatedNotes 2 and 35)

2010

Balance at end of year AFS investments (Note 7) Equity securities quoted . . . . . . . . . . . Equity securities unquoted . . . . . . . . . HTM investmentsprivate (Note 7) . . . . . . . . . . . . . . Loans and receivables (Note 8) . . . . . . . . . . . . . . Property and equipment (Note 10) . . . . . . . . . . . . . Investment properties (Note 11) . . . . . . . . . . . . . Other assets (Note 12) . . . . Allowance included in the Disposal Group classified as Held-for-Sale (Note 13) . . . . .

62,205 6,432 4,883,491 36,644 321,876 55,991 5,366,639

62,205 2,619 3,441,045 1,272 334,355 56,544 3,898,040

62,205 2,619 11,048 3,250,295 4,352 393,591 56,454 3,780,564

62,205 6,432 4,593,962 32,741 317,581 55,991 5,068,912

62,205 2,619 3,224,437 287 331,118 56,544 3,677,210

62,205 2,619 11,048 3,042,637 4,352 390,355 56,454 3,569,670

80,929

85,839

Q5,366,639 P3,978,969 P3,866,403 Q5,068,912 P3,677,210 P3,569,670 Below is the breakdown of provision for credit and impairment losses:
Consolidated 2011 (As restated Note 35) Parent Company 2011 (As restated Note 35)

2012

2010

2012

2010

AFS investments Equity securitiesunquoted . . Q HTM investmentsprivate. . . . . . . . Loans and receivables Receivables from customers . . Other receivables . . . . . . . . . . . . Property and equipment. . . . . . . . . . . Investment properties . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . Provision for credit losses attributed to disposal group classified as held-for-sale (Note 13) . . . . . . . . .

3,813 P 3,813 1,673,241 58,146

Q 3,215 3,215 1,202,428 4,312 1,206,740 42,772 1,252,727

3,813 P 3,813 1,473,801 22,336 1,496,137 32,197 16,057 1,548,204

317,689 1,803 319,492 12,286 19,000 350,778

3,215 3,215 1,160,153 5,123 1,165,276 42,772 1,211,263

324,260 5,803 330,063 985 12,286 19,000 362,334

1,731,387 32,197 16,057 1,783,454

2,360

5,975

10,307

Q1,785,814 P368,309 P1,263,034 Q1,548,204 P350,778 P1,211,263

F-312

A reconciliation of the allowance for credit losses for loans and receivables by class as of December 31, 2012 and 2011 follows:
Consolidated December 31, 2012 Allowance included in Disposal Group

Corporate

Small Business

Consumer

Other Receivables

Total

Balance at beginning of year . . . . . Provisions during the year . . . . . . . Transfers/disposals . . . . . . . . . . . . . Balance at end of year. . . . . . . . . . . Individual impairment . . . . . . . . . . Collective impairment . . . . . . . . . . Gross amount of loans individually determined to be impaired, before deducting any individually assessed impairment losses . . . . . . . . . . . .

Q2,400,383 Q355,472 Q 447,856 Q237,334 Q 80,929 Q3,521,974 1,186,110 218,255 268,876 58,146 1,731,387 (637,275) 198,726 (188,530) 338,138 (80,929) (369,870) Q2,949,218 Q2,043,693 905,525 Q2,949,218 Q772,453 Q348,261 424,192 Q772,453 Q 528,202 Q633,618 Q4,883,491 Q2,838,978 2,044,513 Q4,883,491 Q 91,072 Q355,952 437,130 277,666 Q 528,202 Q633,618

Q3,448,928

Q488,645

Q 257,525

Q626,779

Q4,821,877

Consolidated December 31, 2011 Allowance included in Disposal Group

Corporate

Small Business

Consumer

Other Receivables

Total

Balance at beginning of year . . . . . Provisions during the year . . . . . . . Transfers/disposals. . . . . . . . . . . . . . Balance at end of year . . . . . . . . . . . Individual impairment . . . . . . . . . . . Collective impairment . . . . . . . . . . . Gross amount of loans individually determined to be impaired, before deducting any individually assessed impairment losses . . . . . . . . . . . .

P2,292,849 P386,789 P328,023 P242,634 P 85,839 P3,336,134 249,298 38,928 36,034 5,803 5,975 336,038 (141,764) (70,245) 83,799 (11,103) (10,885) (150,198) P2,400,383 P2,070,466 329,917 P2,400,383 P355,472 P283,622 71,850 P355,472 P447,856 P190,999 256,857 P447,856 P237,334 P156,573 80,761 P237,334 P 80,929 P 7,277 73,652 P3,521,974 P2,708,937 813,037 P3,521,974

P 80,929

P3,451,553

P431,703

P498,456

P267,427

P206,399

P4,855,538

Parent Company December 31, 2012 Corporate Small Business Consumer Other Receivables Total

Balance at beginning of year. . . . . . . . . . . . . . . . Provisions during the year . . . . . . . . . . . . . . . . . . Transfers/disposals . . . . . . . . . . . . . . . . . . . . . . . . Balance at end of year . . . . . . . . . . . . . . . . . . . . . Individual impairment . . . . . . . . . . . . . . . . . . . . . Collective impairment . . . . . . . . . . . . . . . . . . . . . Gross amount of loans individually determined to be impaired, before deducting any individually assessed impairment allowance losses . . . . . . . . . . . . .

Q2,323,278 Q276,774 Q 405,572 Q218,813 Q3,224,437 987,913 217,051 268,837 22,336 1,496,137 (503,281) 238,343 (171,342) 309,668 (126,612) Q2,807,910 Q1,997,113 810,797 Q2,807,910 Q732,168 Q 503,067 Q550,817 Q4,593,962 Q336,440 Q 81,429 Q282,459 Q2,697,441 395,728 421,638 268,358 1,896,521 Q732,168 Q 503,067 Q550,817 Q4,593,962

P3,192,170 F-313

P442,109

P 218,745

P534,760

P4,387,784

Parent Company December 31, 2011 Corporate Small Business Consumer Other Receivables Total

Balance at beginning of year . . . . . . . . . . . . . . . . Provisions during the year. . . . . . . . . . . . . . . . . . . Transfers/disposals . . . . . . . . . . . . . . . . . . . . . . . . . Balance at end of year . . . . . . . . . . . . . . . . . . . . . . Individual impairment . . . . . . . . . . . . . . . . . . . . . . Collective impairment . . . . . . . . . . . . . . . . . . . . . . Gross amount of loans individually determined to be impaired, before deducting any individually assessed impairment allowance losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P2,179,085 P332,512 P319,615 P211,425 P3,042,637 243,050 38,058 36,581 1,803 319,492 (98,857) (93,796) 49,376 5,585 (137,692) P2,323,278 P2,100,366 222,912 P2,323,278 P276,774 P275,757 1,017 P276,774 P405,572 P187,964 217,608 P405,572 P218,813 P 10,086 208,727 P218,813 P3,224,437 P2,574,173 650,264 P3,224,437

P3,185,593

P416,496

P483,686

P 10,088

P4,095,863

The following is a reconciliation of the individual and collective allowance for credit losses for loans and receivables as of December 31, 2012 and 2011:
December 31, 2012 Consolidated Allowance included in Disposal Group Parent Company

Individual Impairment

Collective Impairment

Total

Individual Impairment

Collective Impairment

Total

Balance at beginning of year . . . . . . . . . . . . . . . Q2,701,660 Q 739,385 Q 80,929 Q3,521,974 Q2,574,173 Q 650,264 Q3,224,437 Provisions during the year . . . . . . . . . . . . . . . 931,749 799,638 1,731,387 878,968 617,169 1,496,137 Transfers/disposals . . . . (794,431) 505,490 (80,929) (369,870) (755,700) 629,088 (126,612) Balance at end of year . . . . . . . . . . . . . . . Q2,838,978 Q2,044,513 Q Q4,883,491 Q2,697,441 Q1,896,521 Q4,593,962

December 31, 2011 Consolidated Allowance included in Disposal Group Parent Company

Individual Impairment

Collective Impairment

Total

Individual Impairment

Collective Impairment

Total

Balance at beginning of year . . . . . . . . . . . . . . . P2,543,791 P706,504 P 85,839 P3,336,134 P2,496,042 P546,595 P3,042,637 Provisions during the year . . . . . . . . . . . . . . . 295,183 34,880 5,975 336,038 280,983 38,509 319,492 Transfers/disposals . . . . (137,314) (1,999) (10,885) (150,198) (202,852) 65,160 (137,692) Balance at end of year . . . . . . . . . . . . . . . P2,701,660 P739,385 P 80,929 P3,521,974 P2,574,173 P650,264 P3,224,437

15. Deposit Liabilities Under existing BSP regulations, non-FCDU deposit liabilities of the Parent Company are subject to liquidity reserves equivalent to 11.00% and statutory reserves equivalent to 10.00%. On the other hand, non-FCDU deposit liabilities of ASB are subject to liquidity and statutory reserves equivalent to 2.00% and 6.00%, respectively. On March 29, 2012, the BSP issued Circular No. 753 mandating the unification of the statutory/legal and liquidity reserves requirement on deposit liabilities and deposit substitutes. As such, effective the reserve week starting April 6, 2012, non-FCDU deposit liabilities of the Parent Company are subject to required reserves F-314

equivalent to 18.0%. On the other hand, non-FCDU deposit liabilities of ASB are subject to required reserves equivalent to 6.0%. In compliance with this Circular, government securities which are used as compliance with the regular and/or liquidity reserve requirements shall continue to be eligible until they mature and cash in vault shall no longer be included as reserve. The required reserves shall be kept in the form of deposits maintained in the Demand Deposit Accounts with the BSP. Further, deposits maintained with the BSP in compliance with the reserve requirement shall no longer be paid interest. The Parent Company and ASB were in compliance with such regulations as of December 31, 2012 and 2011. The total liquidity and statutory reserves maintained by the Group and the Parent Company in the weeks towards the years ended December 31, 2012 and 2011 as reported to BSP follow:
Consolidated 2012 2011 Parent Company 2012 2011

Cash and other cash items . . . . . . . . . . . . . . . . . . . . . . Due from BSP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . AFS investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

17,482,567

P 4,017,506 18,225,057 53,961 P22,296,524

17,292,657

P 3,638,964 18,174,461 P21,813,425

Q17,482,567

Q17,292,657

Of the total interest-bearing deposit liabilities of the Group as of December 31, 2012, 2011 and 2010, 42.50%, 40.41% and 42.15%, respectively, are subject to periodic interest repricing. Remaining foreign currency-denominated deposit liabilities earn annual fixed interest rates ranging from 0.001% to 4.50%, from 0.001% to 4.50% and from 0.001% to 4.50% for the year ended December 31, 2012, 2011 and 2010, respectively, while remaining peso-denominated deposit liabilities earn annual fixed interest rates ranging from 0.65% to 3.625%, from 0.65% to 4.625% and from 1.00% to 4.625% for the years ended December 31, 2012, 2011 and 2010, respectively. Of the total interest-bearing deposit liabilities of the Parent Company as of December 31, 2012, 2011 and 2010, 40.68%, 42.15% and 45.26%, respectively, are subject to periodic interest repricing. Remaining foreign currency-denominated deposit liabilities earn annual fixed interest rates ranging from 0.02% to 1.25%, from 0.1875% to 1.75% and from 0.1875% to 1.75% for the years ended December 31, 2012, 2011 and 2010, respectively, while remaining peso-denominated deposit liabilities earn annual fixed interest rates ranging from 0.25% to 3.625%, from 0.50% to 4.625% and from 0.50% to 4.625% for the years ended December 31, 2012, 2011 and 2010, respectively. On October 22, 2009, the Parent Company issued P3.50 billion Long-Term Negotiable Certificate of Time Deposit (LTNCTD) with an interest rate of 7.00% per annum which shall be payable quarterly, commencing on January 23, 2010 and is included under time deposit. The LTNCTD is insured with PDIC and will mature on October 23, 2014. Interest expense on deposit liabilities follow:
2012 Consolidated 2011 2010 2012 Parent Company 2011 2010

Savings Deposits . . . . . . . . . Time Deposits . . . . . . . . . . . Demand Deposits . . . . . . . . LTNCTD . . . . . . . . . . . . . . . Interest on deposits attributable to the disposal group (Note 13) . . . . . . . . . . . . .

Q1,129,964 428,703 133,999 251,771 1,944,437

P1,476,330 472,573 215,304 250,701 2,414,908

P1,475,293 573,852 165,221 251,689 2,466,055

Q1,095,616 356,762 129,884 251,771 1,834,033

P1,442,907 447,309 204,086 250,701 2,345,003

P1,496,868 490,399 168,654 251,689 2,407,610

24,489 Q1,968,926

61,903 P2,476,811

59,439 P2,525,494

Q1,834,033

P2,345,003

P2,407,610

F-315

16. Bills Payable This account consists of borrowings from:

Consolidated December 31 2012 2011 Parent Company December 31 2012 2011

BSP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bills payable included in the disposal group classified as held-for-sale (Note 13). . . . . . . . . . . . . . . . . . . . . . . . .

Q1,339,117 1,865,750 1,857,837 5,062,704 Q5,062,704

P3,463,844 759,315 54,776 4,277,935 740,458 P5,018,393

Q1,339,117 1,865,750 1,797,837 5,002,704 Q5,002,704

P3,463,844 1,052,563 14,776 4,531,183 P4,531,183

Bills payableBSP mainly represents term borrowings availed through normal open market transactions with the BSP. These are collateralized by eligible loans (see Note 8) and bear annual interest rates ranging from 3.50% to 4.50% in 2012, from 4.00% to 4.50% in 2011 and from 3.50% to 4.00% in 2010. Bills payableforeign banks are short-term foreign currency borrowings bearing annual interest rates ranging from 0.35% to 1.16% in 2012, from 0.40% to 2.76% in 2011 and from 0.25% to 2.19% in 2010. Bills payable included in the disposal group classified as held-for sale represents borrowings of OHBVI from Federal Home Loan Bank (FHLB) amounting to P0.74 billion (US$16.89 million) as of December 31, 2011, which bears average interest rates of 1.78% and 1.93% in 2011. As of December 31, 2011, borrowing from FHLB amounting to P629.98 million (USD14.37 million) is due within one year while P110.48 million (USD2.52 million) is due beyond one year. Bills payableothers mainly represent funding from Government Service Insurance System whereby the Parent Company acts as conduit for certain financing programs of these institutions. These bear annual interest rates ranging from 6.00% to 16.00% in 2012 and from 9.00% to 16.00% in 2011 and 2010. Interest expense on bills payable and other borrowings follow:
Consolidated 2011 Parent Company 2011

2012

2010

2012

2010

Subordinated debt (Note 18) . . . . . . . . . Bills payable . . . . . . . . . . . . . . . . . . . . . . Other borrowings (Note 20) . . . . . . . . . Interest on bills payable and other borrowings attributable to the disposal group (Note 13) . . . . . . . . . .

Q337,241 P332,989 P330,198 Q337,241 P332,989 P330,198 149,497 72,424 37,587 145,927 65,920 42,507 18,779 9,324 7,234 2,254 886 1,148 505,517 414,737 375,019 485,422 399,795 373,853

10,678 Q516,195

12,098 P426,835

35,366 P410,385

Q485,422

P399,795

P373,853

F-316

17. Accrued Taxes, Interest and Other Expenses This account consists of:
Consolidated December 31 2012 2011 Parent Company December 31 2012 2011

Accumulated leave absences . . . . . . . . . . . . . . . . . . . . . . . . Accrued interest payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued legal and litigation expenses . . . . . . . . . . . . . . . . Accrued compensation and fringe benefits . . . . . . . . . . . . Accrued other taxes and licenses. . . . . . . . . . . . . . . . . . . . . Accrued directors dues and committee fees. . . . . . . . . . . Accrued other expenses payable . . . . . . . . . . . . . . . . . . . . . Accrued expenses included in the disposal group classified as held-for-sale (Note 13). . . . . . . . . . . . . . . .

Q 455,954 P 492,086 Q 455,954 P 492,086 217,464 267,406 175,335 257,937 210,760 49,537 210,760 49,537 60,181 47,917 60,181 42,208 33,584 48,394 33,417 45,895 10,094 12,059 10,094 12,021 359,692 250,986 225,017 152,684 1,347,729 Q1,347,729 1,168,385 8,241 P1,176,626 1,170,758 Q1,170,758 1,052,368 P1,052,368

As of December 31, 2012 and 2011, the Parent Company has no plan assets for the accumulated leave absences. Accrued other expenses payable includes accruals for rent, medical, dental and hospitalization fees, repairs and maintenance, representation, traveling and other expenses. 18. Subordinated Debt Lower Tier 2 On July 25, 2007, the BOD of the Parent Company approved and authorized the management to conduct capital raising activity by way of issuance of Lower Tier 2 capital up to the maximum amount of P5.00 billion through a public offering subject to the provisions of BSP Circular No. 280 and BSP Memorandum to all banks and financial institutions dated February 17, 2003. The issuance of the foregoing subordinated debt was approved by the Monetary Board (MB) in its Resolution No. 98 dated January 24, 2008. Relative to this, on March 6, 2008, the Parent Company issued P4.50 billion, 7.13% Subordinated Notes due on 2018, callable with step-up in 2013. Among the significant terms and conditions of the issuance of the subordinated notes are: a) b) Issue price is at 100.00% of the Principal amount. The Subordinated Notes bear interest at 7.13% per annum, payable to the noteholder for the period from and including the issue date up to the maturity date if the call option is not exercised on the call option date. Interest shall be payable quarterly in arrears on March 6, June 6, September 6 and December 6 of each year, commencing June 6, 2008. The Subordinated Notes will mature on March 6, 2018, if not redeemed earlier. The Subordinated Notes will constitute direct, unconditional, unsecured and subordinated obligations of the Parent Company. The Subordinated Notes will, at all times, rank pari passu and without any preference among themselves, but in priority to the rights and claims of holders of all classes of equity securities of the Parent Company, including holders of preferences shares. The Parent Company may redeem the notes in whole, but not in part, at a redemption price equal to 100.00% of the principal amount of the Notes together with accrued and unpaid interest at first banking day after the 20th interest period from issue date subject to at least 30-day prior written notice to noteholders and prior approval of the BSP, subject to the following conditions: (i) the capital adequacy ratio of the Parent Company is at least equal to the required minimum ratio; and (ii) the Subordinated Note is simultaneously replaced with the issues of new capital which are neither smaller in size nor lower in quality than the Subordinated Notes. The Subordinated Note shall not be redeemable or terminable at the instance of any noteholder before maturity date. F-317

c)

d)

e)

The subordinated debt as of December 31, 2012 and 2011 is net of unamortized transaction costs amounting to P2.69 million and P17.21 million, respectively. Amortization of transaction costs included in interest expense amounted to P14.51 million, P13.42 million and P9.57 million in 2012, 2011 and 2010, respectively. 19. Insurance Provisions and Life Insurance Contract Liabilities Insurance Provisions This account consists of:
December 31 2012 2011

Aggregate reserves for life policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Policyholders dividends due and unpaid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provisions for IBNR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Policy and contract claims payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q3,788,346 P3,074,086 213,238 178,276 53,349 24,900 18,609 9,455 Q4,073,542 P3,286,717

Details of the aggregate reserves for life policies (includes unearned charges for unit-linked policies) follow:
December 31 2012 2011

Gross: With fixed and guaranteed terms Fixed and guaranteednonparticipating . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Partially fixed and guaranteedparticipating. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unit-linked . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total gross insurance liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Recoverable from reinsurers: With fixed and guaranteed terms Fixed and guaranteednonparticipating . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Partially fixed and guaranteedparticipating. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total reinsurers share of insurance liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net: With fixed and guaranteed terms Fixed and guaranteednonparticipating . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Partially fixed and guaranteedparticipating. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unit-linked . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q1,208,981 P 860,682 2,578,917 2,213,099 3,854 2,921 3,791,752 3,076,702

2,841 565 3,406

2,115 501 2,616

1,206,140 2,578,352 3,854 Q3,788,346

858,567 2,212,598 2,921 P3,074,086

The aggregate reserves for life policies may be analyzed as follows:

Insurance Contract Liabilities Reinsurers Share of Liabilities

Type

2012 Net

2011 Net

Aggregate reserves for ordinary life policies . . . . . . . . . . . . Aggregate reserves for group life policies . . . . . . . . . . . . . . Aggregate reserves for unit-linked policies . . . . . . . . . . . . .

Q3,673,295 114,603 3,854 Q3,791,752

Q 752 2,654 Q3,406

Q3,672,543 P3,000,827 111,949 70,338 3,854 2,921 Q3,788,346 P3,074,086

F-318

The movements during the year in aggregate reserves follow:

Insurance Contract Liabilities Reinsurers Share of Liabilities

2012 Net

2011 Net

Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . Premiums received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Liability released for payments of death, maturity and surrender benefits and claims . . . . . . . . . . . . . . . . . . . . . . . Exchange rate effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accretion of investment income . . . . . . . . . . . . . . . . . . . . . . . Balance at end of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q3,076,703 815,001 (193,000) (99,713) 192,761 Q3,791,752

Q2,617 637 10 (24) 166 Q3,406

Q3,074,086 P2,353,957 814,364 704,677 (193,010) (99,689) 192,595 Q3,788,346 (122,534) 137,986 P3,074,086

The movements during the years ended December 31, 2012 and 2011 in provisions for IBNR and contract claims payable follow:
December 31 2012 2011

Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Arising during the year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Paid during the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q 34,355 P 15,649 91,071 56,337 (53,468) (37,631) Q 71,958 P 34,355

Life Insurance Contract Liabilities For life insurance contracts with fixed and guaranteed terms (including partially fixed and guaranteed terms), PLII determines assumptions in relation to future deaths and investment returns at inception of the contracts. These assumptions are used for calculating the liabilities during the life of the contract. These assumptions are in compliance with statutory requirements. Key assumptions Assumptions used for product pricing is different from the assumptions used in calculating aggregate reserve for life policies. Pricing assumptions make use of best estimates in relation to future deaths, voluntary terminations, investment returns and administration expenses. These assumptions are used for evaluating the overall profitability of the product and the adequacy of the rates. In calculating the aggregate reserves for life policies, assumptions on mortality and investment include a margin for risk and uncertainty. The effect of voluntary termination is not considered, although the inclusion of which would result in a lower liability due to the gains from surrender charges. Expenses are partially considered through a theoretical first year allowance as a result of the valuation method used by PLII, which is the Commissioners Reserve Valuation Method. The unearned premiums and cost of insurance charges are also held as an additional insurance provision. The assumptions used in calculating the aggregate reserves for life policies follow: Mortality PLIIs assumptions for its developed plans and acquired Mapfre plans are based on the 1980 Commissioners Standard Ordinary (1980 CSO) table, (age last birthday, male/female unismoke) and the Philippine Intercompany Mortality table, respectively. An investigation into PLIIs experience is performed annually, but the number and amount of claims have not reached a statistically significant level. Over the long run, the expected number of deaths is estimated to be 10.00% less than that assumed in the calculation of liabilities. Investment returns Philippine Peso 5.00% for the long-term, participating whole life and endowment plans (2001 Series) 6.00% for the Mapfre whole life and endowment plans (2003 acquired block) F-319

6.00% for the long-term, participating endowment plans (2006 Series) 6.00% for short-term, non-participating endowment plans and long-term participating plans (2010 series) 3.50% for short-term participating endowment plans, version 2 (2012 Series) US Dollar 3.50% for the long-term, participating whole life and endowment plans (2002 Series) 5.00% for the 12-Year Anticipated Endowment (2005 Series) 3.25% for the 12-year Anticipated Endowment, version 2 (2012 Series) Changes in assumptions PLII did not change the valuation assumptions for the insurance contracts. These assumptions are an integral part of the insurance products submitted and approved by the IC. Liability adequacy and sensitivity tests The table below represents the result of the liability adequacy test conducted to determine the sufficiency of the aggregate reserves for life policies to meet future obligations of PLII from traditional policies inforce as of December 31, 2012 and 2011. The test involves the calculation of the discounted cash flows of expenses and guaranteed policy benefits, which were projected based on assumed contingencies as to mortality and withdrawal rates. The table also shows the results of sensitivity tests conducted by assuming different interest rates and mortality assumptions. As each assumption is tested, all other assumptions are unchanged.
Excess of aggregate reserve for life policies 2011 2010

Mortality Assumption

Interest Rates Assumption

2012

1980 CSO (Select Factors: Yr 1 60.00%, Yr 2 80.00%, . . . . . . . . . . . . . . Yr 3+ 790.00%) . . . . . . . . . . . Higher by 20.00%. . . . . . . . . . . . . . . . Lower by 20.00% . . . . . . . . . . . . . . . . 1980 CSO (Select Factors: Yr 1 60.00%, Yr 2 80.00%, Yr 3+ 90.00%). . . . . . . . . . . . . 1980 CSO (Select Factors: Yr 1 60.00%, Yr 2 80.00%, Yr 3+ 90.00%). . . . . . . . . . . . . ReinsuranceAssumptions and Methods

Peso 4.70% to 4.80%, Dollar 3.80% to 4.20% Peso 4.70% to 4.80%, Dollar 3.80% to 4.20% Peso 4.70% to 4.80%, Dollar 3.80% to 4.20%

Q175,585 129,532 239,335

P118,027 71,070 184,163

P195,308 81,836 308,779

Higher by 100.00 basis points

495,899

341,748

394,933

Lower by 100.00 basis points

40,693

(263,947)

21,208

PLII limits its exposure to loss within insurance operations through participation in reinsurance arrangements. Amounts receivable from reinsurers are estimated in a manner consistent with the assumptions used for ascertaining the underlying policy benefits and are presented under the loans and receivables account in the assets section of the statement of financial position. Even though PLII may have reinsurance arrangements, it is not relieved of its direct obligations to its policyholders and thus a credit exposure exists with respect to reinsurance ceded, to the extent that any reinsurer is unable to meet its obligations assumed under such reinsurance agreements. PLII is neither dependent on a single reinsurer nor are the operations of PLII substantially dependent upon any reinsurance contract.

F-320

20. Other Liabilities This account consists of:

Consolidated December 31 2012 2011 Parent Company December 31 2012 2011

Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Domestic bills purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . Outstanding acceptances payable . . . . . . . . . . . . . . . . . . . . Premium deposit fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due to PDIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due to other banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Withholding taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . Cash letters of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payment orders payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due to Treasurer of the Philippines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Miscellaneous (Note 24). . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities included in disposal group classified as held-for-sale (Note 13) . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q1,537,025 P1,353,952 Q1,405,324 P1,251,311 1,479,122 982,035 1,354,704 897,807 302,648 233,907 302,648 233,907 270,984 265,117 134,750 135,603 134,750 135,603 67,481 1,081,700 67,481 937,801 54,174 66,056 53,121 61,615 35,682 174,133 35,682 174,133 20,743 121,463 20,726 114,901 2,324 184,117 4,089,050 Q4,089,050 2,984 176,309 4,593,259 11,224 P4,604,483 2,296 126,720 3,503,452 Q3,503,452 2,957 130,067 3,940,102 P3,940,102

Premium deposit fund pertains to funds held by PLII for policyholding with interest rates ranging from 3.00% to 4.00% in 2012 and 2011. Interest expense amounting to P6.94 million, P8.22 million and P4.52 million for the years ended December 31, 2012, 2011 and 2010, respectively, were charged to statements of income in Bills payable and other borrowings under Interest expenseothers. The carrying amount of premium deposit fund approximates its fair value. As of December 31, 2012 and 2011, miscellaneous liabilities include deferred revenue on annual credit card fees amounting to P38.18 million and P30.09 million, respectively, and customer loyalty programs amounting to P31.61 million and P22.09 million, respectively.

F-321

21. Maturity Profile of Assets and Liabilities The tables below present the assets and liabilities as of December 31, 2012 and 2011 and January 1, 2011 analyzed according to whether they are expected to be recovered or settled within one year or beyond one year from the statements of financial position date:
December 31, 2012 Due Within One Year Consolidated Due Beyond One Year Due Within One Year Parent Company Due Beyond One Year

Total

Total

Financial Assets Cash and other cash items . . . Q 3,885,613 P Q 3,885,613 P 3,621,910 P Q 3,621,910 Due from BSP . . . . . . . . . . . . . 26,082,603 26,082,603 25,897,693 25,897,693 Due from other banks. . . . . . . 11,771,750 11,771,750 3,719,056 3,719,056 Interbank loans receivable and SPURA . . . . . . . . . . . . . 7,955,042 7,955,042 5,053,986 5,053,986 Financial assets at FVPL Derivative assets . . . . . . 148,761 148,761 150,023 150,023 Held-for-trading . . . . . . . 7,226,765 7,226,765 7,226,765 7,226,765 AFS investmentsgross . . . . 1,886,159 27,884,564 29,770,723 1,665,827 22,094,585 23,760,412 Loans and receivablegross (Note 8): Receivables from customers . . . . . . . . . . 52,651,861 42,817,691 95,469,552 49,093,515 37,837,814 86,931,329 Unquoted debt securities . . . . . . . . . . . 143,888 6,258,826 6,402,714 53,144 5,908,826 5,961,970 Accrued interest receivable . . . . . . . . . . 983,646 712,755 1,696,401 730,765 712,755 1,443,520 Accounts receivable . . . 929,105 86,677 1,015,782 831,930 6,285 838,215 Sales contract receivable . . . . . . . . . . 100,781 328,349 429,130 94,407 322,767 417,174 Finance lease receivables . . . . . . . . . 22,763 105,073 127,836 Other assets (Note 12): RCOCI. . . . . . . . . . . . . . . 62,688 62,688 62,527 62,527 Bond sinking fund . . . . . 50,000 50,000 50,000 50,000 Security deposits . . . . . . 2,899 33,723 36,622 2,899 33,529 36,428 Other investments . . . . . 6,858 6,858 4,103 4,103 Nonfinancial Assets Residual value of leased assets . . . . . . . . . . . . . . . . . . Investments in subsidiaries . . . . . . . . . . . . . Property and equipmentat appraised . . . . . . . . . . . . . . . Property and equipmentat cost . . . . . . . . . . . . . . . . . . . . Investment propertiesgross . . . . . . . . Deferred tax asset . . . . . . . . . . Other assetsgross (Note 12): Investment in Heritage Park . . . . . . . . . . . . . . . Creditable withholding taxes. . . . . . . . . . . . . . . Retirement asset . . . . . . . Goodwill . . . . . . . . . . . . . Prepaid expenses . . . . . . Unused stationery and supplies . . . . . . . . . . . . Intangible asset. . . . . . . . Documentary stamps . . . Deferred charges . . . . . . Chattel mortgage properties . . . . . . . . . . Miscellaneous. . . . . . . . .

15,055

37,428 3,368,392 5,624,252 4,500,222 98,012

52,483 3,368,392 5,624,252 4,500,222 98,012

4,142,618 3,338,721 4,905,619 4,294,568

4,142,618 3,338,721 4,905,619 4,294,568

261,798 67,429 51,797 40,550 16,512

1,012,810 140,102 88,936 49,519

1,012,810 261,798 140,102 88,936 67,429 51,797 49,519 40,550 16,512

260,448 58,430 47,292 40,272 16,512

1,012,810 137,670

1,012,810 260,448 137,670 58,430 47,292 40,272 16,512 1,924 100,688 183,532,683

1,924 152,081 Q114,509,546 Q93,156,113

1,924 1,924 152,081 100,688 207,665,659 Q 98,778,089 Q84,754,594

(Forward) F-322

December 31, 2012 Due Within One Year Consolidated Due Beyond One Year Due Within One Year Parent Company Due Beyond One Year

Total

Total

Unearned interest and discount (Note 8) . . . . . . . . Capitalized interest (Note 8) . . . . . . . . . . . . . . . . Accumulated depreciation and amortization: Property and equipment (Note 10). . . . . . . . . . . Investment properties (Note 11). . . . . . . . . . . Other assets (Note 12). . . . . . . . . . . Allowance for impairment and credit losses: AFS investments (Note 7) . . . . . . . . . . . . Loans and receivable (Note 8) . . . . . . . . . . . . Property and equipment (Note 10). . . . . . . . . . . Investment properties (Note 11). . . . . . . . . . . Other assets (Note 12). . . . . . . . . . .

(Q172,774) (696)

(Q142,846) (552)

(4,139,804) (206,942) (1,601)

(3,711,534) (196,865) (1,601)

(68,637) (4,883,491) (36,644) (321,876) (55,991) Q197,777,203

(68,637) (4,593,962) (32,741) (317,581) (55,991) Q174,410,373

Financial Liabilities Deposit liabilities . . . . . . . . . . Q139,970,478 Q 7,101,599 Q147,072,077 Q129,566,897 Q 7,101,599 Q136,668,496 Derivative liabilities . . . . . . . . 106,066 106,066 106,755 106,755 Bills payable . . . . . . . . . . . . . . 5,042,586 20,118 5,062,704 4,982,586 20,118 5,002,704 Marginal deposits . . . . . . . . . . 34,374 34,374 34,374 34,374 Managers checks and demand draft outstanding . . . . . . . . . . . . . 438,543 438,543 429,530 429,530 Accrued interest payable . . . . 217,464 217,464 175,335 175,335 Subordinated debt. . . . . . . . . . 4,497,306 4,497,306 4,497,306 4,497,306 Insurance provision and liabilities . . . . . . . . . . . . . . . 4,073,542 4,073,542 Other liabilities (Note 20): Accounts payable. . . . . . 1,537,025 1,537,025 1,405,324 1,405,324 Domestic bills purchased . . . . . . . . . . 1,479,122 1,479,122 1,354,704 1,354,704 Outstanding acceptances payable . . . . . . . . . . . . 302,648 302,648 302,648 302,648 Premium deposit fund . . . . . . . . . . . . . . . 270,984 270,984 Due to PDIC . . . . . . . . . . 134,750 134,750 134,750 134,750 Due to other banks. . . . . 67,481 67,481 67,481 67,481 Cash letters of credit . . . 35,682 35,682 35,682 35,682 Payment orders payable . . . . . . . . . . . . 20,743 20,743 20,726 20,726 Due to Treasurer of the Philippines . . . . . . . . . 2,324 2,324 2,296 2,296 Nonfinancial Liabilities Accrued taxes, interest and other expenses. . . . . . . . . . . Income tax payable. . . . . . . . . Deferred tax liability . . . . . . . Other liabilities (Note 20): Withholding taxes payable . . . . . . . . . . . . Miscellaneous. . . . . . . . .

1,130,265 38,985

510,430

1,130,265 38,985 510,430

995,423 434

509,722

995,423 434 509,722

54,174 54,174 53,121 53,121 184,117 184,117 126,720 126,720 Q159,638,659 Q 7,632,147 Q167,270,806 Q144,292,092 Q 7,631,439 Q151,923,531

F-323

Due Within One Year

December 31, 2011 (As restatedNotes 2 and 35) Consolidated Parent Company Due Beyond Due Within Due Beyond One Year Total One Year One Year

Total

Financial Assets Cash and other cash items . . . P 4,023,559 P P 4,023,559 P 3,719,876 P P 3,719,876 Due from BSP . . . . . . . . . . . . . 18,286,303 18,286,303 18,174,486 18,174,486 Due from other banks. . . . . . . 10,821,079 10,821,079 4,106,005 4,106,005 Interbank loans receivable and SPURA . . . . . . . . . . . . . 12,578,296 12,578,296 10,120,198 10,120,198 Financial assets at FVPL Derivative assets . . . . . . 113,671 84,602 198,273 112,241 84,602 196,843 Held-for-trading . . . . . . . 499,496 499,496 499,496 499,496 AFS investmentsgross . . . . 3,635,234 36,761,422 40,396,656 3,428,177 31,704,732 35,132,909 Loans and receivablegross (Note 8): Receivables from customers . . . . . . . . . . 51,114,017 40,255,833 91,369,850 47,312,832 34,275,936 81,588,768 Unquoted debt securities . . . . . . . . . . . 3,357 6,403,127 6,406,484 3,357 5,959,953 5,963,310 Accrued interest receivable . . . . . . . . . . 1,850,135 1,850,135 1,693,097 1,693,097 Accounts receivable . . . 773,643 773,643 660,046 660,046 Sales contract receivable . . . . . . . . . . 90,319 559,487 649,806 84,695 559,487 644,182 Finance lease receivables . . . . . . . . . 9,301 95,851 105,152 Other assets (Note 12): RCOCI. . . . . . . . . . . . . . . 84,621 84,621 84,351 84,351 Bond sinking fund . . . . . 50,000 50,000 50,000 50,000 Security Deposits . . . . . . 47,726 47,726 37,734 37,734 Other investments . . . . . 3,771 3,771 3,753 3,753 Nonfinancial Assets Residual value of leased assets . . . . . . . . . . . . . . . . . . Investments in subsidiaries . . . . . . . . . . . . . Property and equipmentat appraised . . . . . . . . . . . . . . . Property and equipmentat cost . . . . . . . . . . . . . . . . . . . . Investment propertiesgross . . . . . . . . Deferred tax asset . . . . . . . . . . Other assetsgross (Note 12): Investment in Heritage Park . . . . . . . . . . . . . . . Creditable withholding taxes. . . . . . . . . . . . . . . Retirement asset . . . . . . . Prepaid expenses . . . . . . Goodwill . . . . . . . . . . . . . Unused stationery and supplies . . . . . . . . . . . . Documentary stamps . . . Deferred charges . . . . . . Chattel mortgage properties . . . . . . . . . . Interoffice float items . . Miscellaneous. . . . . . . . .

12,131

32,711 2,971,633 5,470,819 4,862,579 33,572

44,842 2,971,633 5,470,819 4,862,579 33,572

4,172,118 2,941,962 4,736,852 4,544,144

4,172,118 2,941,962 4,736,852 4,544,144

251,556 109,079 52,168 41,689 24,829 347 59,204

1,034,118 184,404 88,936 1,924

1,034,118 251,556 184,404 109,079 88,936 52,168 41,689 24,829 1,924 347 59,204

250,019 97,821 45,311 41,501 24,829 28,643

1,034,118 182,018 1,924

1,034,118 250,019 182,018 97,821 45,311 41,501 24,829 1,924 28,643 180,776,314

P104,434,034 P98,942,515

203,376,549 P 90,486,981 P90,289,333

(Forward) F-324

Due Within One Year

December 31, 2011 (As restatedNotes 2 and 35) Consolidated Parent Company Due Beyond Due Within Due Beyond One Year Total One Year One Year

Total

Unearned interest and discount (Note 8) . . . . . . . . . . . . . . . . . . Capitalized interest (Note 8). . . Accumulated depreciation and amortization: Property and equipment (Note 10). . . . . . . . . . . . . Investment properties (Note 11). . . . . . . . . . . . . Other assets (Note 12) . . . Allowance for impairment and credit losses: AFS investments (Note 7). . . . . . . . . . . . . . Loans and receivable (Note 8). . . . . . . . . . . . . . Property and equipment (Note 10). . . . . . . . . . . . . Investment properties (Note 11). . . . . . . . . . . . . Other assets (Note 12) . . . Assets of disposal group classified as held-for-sale (Note 13) . . . . . . . . . . . . . . . . .

(Q251,070) (3,605)

(Q228,130) (3,001)

(3,902,477) (210,365) (1,601)

(3,490,228) (203,638) (1,601)

(64,824) (3,441,045) (1,272) (334,355) (56,544) 195,109,391 7,422,682 P 202,532,073

(64,824) (3,224,437) (287) (331,118) (56,544) 173,172,506 20,500 P 173,193,006

Financial Liabilities Deposit liabilities . . . . . . . . . . . . P143,536,928 P3,572,670 P 147,109,598 P132,520,029 P3,582,549 P 136,102,578 Derivative liabilities. . . . . . . . . . 68,843 21,568 90,411 75,512 21,568 97,080 Bills payable . . . . . . . . . . . . . . . . 4,215,466 62,469 4,277,935 4,508,714 22,469 4,531,183 Marginal deposits . . . . . . . . . . . . 13,761 13,761 13,761 13,761 Managers checks and demand draft outstanding . . . . . . . . . . 928,009 928,009 911,382 911,382 Accrued interest payable . . . . . . 267,406 267,406 257,937 257,937 Subordinated debt. . . . . . . . . . . . 4,482,791 4,482,791 4,482,791 4,482,791 Insurance provision and liabilities . . . . . . . . . . . . . . . . . 3,286,717 3,286,717 Other liabilities (Note 20): Accounts payable. . . . . . . . 1,353,952 1,353,952 1,251,311 1,251,311 Due to other banks. . . . . . . 1,081,700 1,081,700 937,801 937,801 Domestic bills purchased . . . . . . . . . . . . 982,035 982,035 897,807 897,807 Premium deposit fund. . . . 265,117 265,117 Outstanding acceptances payable . . . . . . . . . . . . . . 233,907 233,907 233,907 233,907 Cash letters of credit . . . . . 174,133 174,133 174,133 174,133 Due to PDIC . . . . . . . . . . . . 135,603 135,603 135,603 135,603 Payment orders payable . . . . . . . . . . . . . . 121,463 121,463 114,901 114,901 Due to Treasurer of the Philippines . . . . . . . . . . . 2,984 2,984 2,957 2,957 Nonfinancial Liabilities. . . . . . . Accrued taxes, interest and other expenses . . . . . . . . . . . . 900,979 900,979 794,431 794,431 Income tax payable . . . . . . . . . . 21,412 21,412 Deferred tax liability . . . . . . . . . 417,470 417,470 408,750 408,750 Other liabilities (Note 20): Withholding taxes payable . . . . . . . . . . . . . . 66,056 66,056 61,615 61,615 Miscellaneous. . . . . . . . . . . 144,503 31,806 176,309 130,067 130,067 P157,800,974 P8,588,774 166,389,748 P143,021,868 P8,518,127 151,539,995 Liabilities of disposal group classified as held-for-sale (Note 13) . . . . . . . . . . . . . . . . .

6,017,084 P 172,406,832

P 151,539,995

F-325

January 1, 2011 Due Within One Year Consolidated Due Beyond One Year Due Within One Year Parent Company Due Beyond One Year

Total

Total

Financial Assets Cash and other cash items . . . . . . . . . . P 4,636,820 P P 4,636,820 P 4,280,874 P P 4,280,874 Due from BSP . . . . . . . . . . . . . . . . . . . . 16,297,912 16,297,912 13,892,789 13,892,789 Due from other banks . . . . . . . . . . . . . . 7,442,201 7,442,201 2,938,976 2,938,976 IBCL and SPURA. . . . . . . . . . . . . . . . . 15,058,026 15,058,026 14,470,270 14,470,270 Financial assets at FVPL Derivative assets. . . . . . . . . . . . . . 121,148 137,868 259,016 121,148 137,798 258,946 Held-for-trading . . . . . . . . . . . . . . 3,247,995 3,247,995 3,247,995 3,247,995 AFS investmentsgross . . . . . . . . . . . 10,043,271 10,522,148 20,565,419 9,825,518 7,849,064 17,674,582 HTM investmentsgross . . . . . . . . . . 5,370,457 15,583,882 20,954,339 5,370,456 14,360,797 19,731,253 Loans and receivablegross (Note 8): Receivables from customers. . . . 46,148,465 28,627,205 74,775,670 41,586,324 23,624,077 65,210,401 Unquoted debt securities. . . . . . . 356,407 6,359,190 6,715,597 310,816 5,956,811 6,267,627 Accrued interest receivable . . . . 1,710,052 1,710,052 1,575,741 1,575,741 Accounts receivable. . . . . . . . . . . 735,631 735,631 675,772 675,772 Sales contract receivable. . . . . . . 257,045 381,805 638,850 238,078 384,590 622,668 Finance lease receivables . . . . . . 7,273 86,227 93,500 Other assets (Note 12): RCOCI . . . . . . . . . . . . . . . . . . . . . . 93,362 93,362 91,437 91,437 Bond sinking fund . . . . . . . . . . . . 50,000 50,000 50,000 50,000 Security Deposits . . . . . . . . . . . . . 52,702 52,702 44,778 44,778 Other investments. . . . . . . . . . . . . 3,959 3,959 3,941 3,941 Nonfinancial Assets Residual value of leased assets . . . . . . 2,468 36,818 39,286 Investments in subsidiaries . . . . . . . . . 4,172,118 4,172,118 Property and equipmentat appraised . . . . . . . . . . . . . . . . . . . . . . 2,958,427 2,958,427 2,941,962 2,941,962 Property and equipmentat cost . . . . 5,599,185 5,599,185 4,893,220 4,893,220 Investment propertiesgross . . . . . . . 5,182,525 5,182,525 4,902,329 4,902,329 Deferred tax asset . . . . . . . . . . . . . . . . . 41,130 41,130 Other assetsgross (Note 12): Investment in Heritage Park . . . . 1,106,852 1,106,852 1,106,639 1,106,639 Creditable withholding taxes . . . 196,989 196,989 195,928 195,928 Retirement asset . . . . . . . . . . . . . . 174,061 174,061 171,650 171,650 Prepaid expenses . . . . . . . . . . . . . 79,459 79,459 66,585 66,585 Goodwill . . . . . . . . . . . . . . . . . . . . 88,936 88,936 Unused stationery and supplies . . . . . . . . . . . . . . . . . . . 44,197 44,197 39,782 39,782 Documentary stamps . . . . . . . . . . 44,330 44,330 44,330 44,330 Deferred charges. . . . . . . . . . . . . . 32,032 32,032 32,032 32,032 Chattel mortgage properties . . . . 1,601 1,601 1,601 1,601 Interoffice float items . . . . . . . . . 201,886 201,886 201,445 201,445 Miscellaneous . . . . . . . . . . . . . . . . 163,389 163,389 144,059 144,059 P112,290,815 P76,994,521 Unearned interest and discount (Note 8) Capitalized interest (Note 8) . . . . . . . . Accumulated depreciation and amortization: Property and equipment (Note 10) . . . . . . . . . . . . . . . . . . Investment properties (Note 11) . . . . . . . . . . . . . . . . . . Other assets (Note 12) . . . . . . . . . 189,285,336 P 99,350,355 P70,601,375 (238,763) (3,328) 169,951,730 (196,719) (2,724)

(3,893,698) (252,530) (1,601)

(3,520,254) (245,392) (1,601)

(Forward) F-326

January 1, 2011 Due Within One Year Consolidated Due Beyond One Year Due Within One Year Parent Company Due Beyond One Year

Total

Total

Allowance for impairment and credit losses: AFS investments (Note 7) . . . . . HTM investments. . . . . . . . . . . . . Loans and receivable (Note 8). . . . . . . . . . . . . . . . . . . . . . . . . Property and equipment (Note 10) . . . . . . . . . . . . . . . . . . Investment properties (Note 11) . . . . . . . . . . . . . . . . . . Other assets (Note 12) . . . . . . . . . Assets of disposal group classified as held-for-sale (Note 13) . . . . . . . . . .

(P64,824) (11,048) (3,250,295) (4,352) (393,591) (56,454) 181,114,852 8,335,957 P189,450,809

(P64,824) (11,048) (3,042,637) (4,352) (390,355) (56,454) 162,415,370 20,500 P162,435,870

Financial Liabilities Deposit liabilities . . . . . . . . . . . . . . . . . P137,994,164 P 3,500,000 P141,494,164 P129,788,651 P 3,500,000 P133,288,651 Derivative liabilities . . . . . . . . . . . . . . . 106,617 31,778 138,395 106,617 30,693 137,310 Bills payable. . . . . . . . . . . . . . . . . . . . . . 1,596,332 12,639 1,608,971 1,385,473 12,639 1,398,112 Marginal deposits . . . . . . . . . . . . . . . . . 38,290 38,290 37,077 37,077 Managers checks and demand draft outstanding. . . . . . . . . . . . . . . . . . . . . 418,184 418,184 409,386 409,386 Accrued interest payable . . . . . . . . . . . 211,410 211,410 199,316 199,316 Subordinated debt . . . . . . . . . . . . . . . . . 4,469,369 4,469,369 4,469,369 4,469,369 Insurance provision and liabilities . . . 2,512,138 2,512,138 Other liabilities (Note 20): Accounts payable . . . . . . . . . . . . . 1,095,489 1,095,489 1,023,945 1,023,945 Due to other banks . . . . . . . . . . . . 844,889 844,889 9,626 9,626 Domestic bills purchased . . . . . . 1,169,294 1,169,294 1,064,758 1,064,758 Premium deposit fund . . . . . . . . . 213,119 213,119 Outstanding acceptances payable. . . . . . . . . . . . . . . . . . . . 294,334 294,334 294,334 294,334 Cash letters of credit . . . . . . . . . . 208,990 208,990 208,990 208,990 Due to PDIC . . . . . . . . . . . . . . . . . 132,208 132,208 132,208 132,208 Payment orders payable . . . . . . . 136,968 136,968 132,636 132,636 Due to Treasurer of the Philippines. . . . . . . . . . . . . . . . . 2,772 2,772 2,744 2,744 Nonfinancial Liabilities Accrued taxes, interest and other expenses . . . . . . . . . . . . . . . . . . . . . . . 901,248 901,248 804,463 804,463 Income tax payable . . . . . . . . . . . . . . . . 16,614 16,614 1,440 1,440 Deferred tax liability. . . . . . . . . . . . . . . 410,897 410,897 406,682 406,682 Other liabilities (Note 20): Withholding taxes payable . . . . . 64,435 64,435 63,088 63,088 Miscellaneous . . . . . . . . . . . . . . . . 145,620 39,286 184,906 134,790 134,790 P148,103,115 P 8,463,969 P 56,567,084 P135,799,542 P 8,419,383 Liabilities of disposal group classified as held-for-sale (Note 13) . . . . . . . . . . . . . . . . . . . . . . 144,218,925

6,965,387 P163,532,471

P144,218,925

F-327

22. Equity Capital stock as of December 31, 2012 and 2011 and January 1, 2011 consists of: Preferred Authorized, issued and outstanding 50,000 shares, P1,000 par value . . . . . . . . . . . . . . . . . . . . . . . Common Authorized11,450,000 shares, P1,000 par valueP11.45 billion Issued and outstanding3,252,495 shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

50,000

3,252,495

On February 26, 1981, the BOD of the Parent Company authorized the issuance and public offering of 50,000 preferred shares in the amount of P50.00 million. This was approved and ratified by the stockholders on March 26, 1981 and was subsequently approved by the BSP and SEC on November 12, 1981 and November 25, 1981, respectively. The preferred shares were fully subscribed to and paid for by two shareholders at par value. The Parent Companys preferred shares have the following features: a. b. nonvoting, cumulative and entitled to guaranteed dividends of 15.00% per annum; convertible into common stock in case of nonpayment of dividends for three consecutive years. The conversion value of the preferred stock is at the rate of peso for peso of its par value to prevailing book value of the common stock at the time of conversion; and redeemable in whole or in part at the option of the Parent Company, upon 30-day notice at par value plus accrued dividends at the time of redemption.

c.

On January 29, 2003, the BOD approved the establishment of a sinking fund of P50.00 million, equal to the outstanding preferred shares redeemable at their maturity dates. As of December 31, 2012 and 2011, the fund is shown as Bond sinking fund included under Other assets in the statements of financial position (see Note 12). On December 16, 2011, the BOD in a special meeting approved the declaration and payment of accumulated cash dividend on the preferred shares as of December 31, 2011 covering the period from January 1, 2008 to December 31, 2011 at the rate of P600.00 per preferred share. This was subsequently approved by the BSP on February 6, 2012 and was paid by the Parent Company on May 8, 2012. Dividend in arrears on the preferred shares amounted to P7.50 million. Equity Adjustment from Conversion In 2008, as a result of the conversion of US$50.00 million worth of Upper Tier 2 subordinated debt to capital stock, the Parent Company recognized an adjustment from conversion charged to equity amounting to P592.15 million. Capital Management The primary objectives of the Groups capital management are to ensure that it complies with externally imposed capital requirements and it maintains strong credit ratings and healthy capital ratios in order to support its business and to maximize shareholders value. The Group manages its capital structure and makes adjustments to it in the light of changes in economic conditions and the risk characteristics of its activities. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividend payment to stockholders, return capital to stockholders, or issue capital securities. No changes were made in the objectives, policies and processes from the previous years. The Group and its individual regulatory operations have complied with all externally imposed capital requirements throughout the period.

F-328

Regulatory capital The following table sets the regulatory capital per CAR Report as submitted to BSP as at December 31, 2012, 2011 and 2010 (amounts in billions):
2012 Consolidated 2011 2010 2012 Parent Company 2011 2010

Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Surplus. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cumulative foreign currency translation . . . . . . . . . . . . Undivided profit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-controlling interest . . . . . . . . . . . . . . . . . . . . . . . . . . Tier 1 (core) capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unsecured DOSRI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deduction from Tier 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Tier 1 capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deductions from Tier 1 and Tier 2 . . . . . . . . . . . . . . . . . Net Tier 1 capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . General loan loss provision . . . . . . . . . . . . . . . . . . . . . . . Upper Tier 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lower Tier 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Tier 2 capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deductions from Tier 1 and Tier 2 . . . . . . . . . . . . . . . . . Net Tier 2 capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total qualifying capital . . . . . . . . . . . . . . . . . . . . . . . . . Capital ratios Tier 1 capital ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tier 2 capital ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Risk Based CAR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q 3.25 P 3.25 P 3.25 Q 3.25 P 3.25 P 3.25 14.10 12.66 11.37 14.10 12.66 11.37 0.41 0.66 0.66 2.08 1.55 1.38 1.99 1.33 1.27 4.72 5.17 5.02 24.56 0.00 0.39 0.39 24.17 0.18 23.99 0.05 1.13 1.18 4.50 5.68 0.18 5.50 Q29.49 23.29 0.00 0.39 0.39 22.90 0.16 22.74 0.05 1.10 1.15 4.49 5.64 0.16 5.48 Q28.22 21.68 0.09 0.41 0.50 21.18 0.16 21.02 0.05 0.95 1.00 4.47 5.47 0.16 5.31 Q26.33 19.34 0.00 0.31 0.31 19.03 2.93 16.10 0.05 0.98 1.03 4.49 5.52 2.93 2.59 Q18.69 17.24 0.00 0.31 0.31 16.93 2.86 14.07 0.05 1.00 1.05 4.49 5.54 2.86 2.68 Q16.75 15.89 0.09 0.31 0.40 15.49 2.80 12.69 0.05 0.80 0.85 4.47 5.32 2.80 2.52 Q15.21

17.07% 15.77% 15.51% 13.56% 12.11% 11.91% 3.91% 3.80% 3.91% 2.19% 2.31% 2.36% 20.98% 19.57% 19.42% 15.75% 14.42% 14.27%

F-329

The risk-weighted assets per CAR Report submitted to BSP by the Group and Parent Company as of December 31, 2012, 2011 and 2010 are as follows (amounts in billions):
2012 Consolidated 2011 2010 2012 Parent Company 2011 2010

Risk-weighted on balance sheet assets: . . . . . . 20% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Off-balance sheet assets:. . . . . . . . . . . . . . . . . . . 20% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75% . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150%. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest / exchange rate-related . . . . . . . . . . . . . Securitization exposures . . . . . . . . . . . . . . . . . . . Assets covered by Mitigants. . . . . . . . . . . . . . . . Deduction on credit risk-weight GLLP (in excess of amount UT2) . . . . . . . . . . . . . . . . . . Total credit risk-weighted assets . . . . . . . . . . . . Market risk-weighted assets . . . . . . . . . . . . . . . . Operational risk-weighted assets . . . . . . . . . . . . Total risk weighted assets . . . . . . . . . . . . . . . . . .

Q109.25 3.29 2.66 11.08 86.27 5.95 3.45 0.41 3.04 0.28 6.14 0.49 112.49 11.60 16.43 Q140.52

P119.50 2.13 4.23 9.74 94.03 9.37 3.16 0.42 2.74 0.49 8.69 123.15 6.03 14.99 P144.17

P105.36 3.22 3.68 7.38 81.41 9.67 3.10 0.41 2.69 0.54 5.45 109.00 12.62 13.94 P135.56

Q 93.85 2.38 1.77 10.75 73.10 5.85 3.08 0.41 2.67 0.27 5.68 0.57 96.63 7.54 14.61 Q118.78

P 96.48 1.29 3.09 9.44 75.22 7.44 2.92 0.43 2.49 0.48 8.43 99.88 3.00 13.25 P116.13

P 84.98 2.10 2.72 7.23 65.03 7.90 2.80 0.41 2.39 0.55 5.21 88.33 6.16 12.19 P106.68

Under existing BSP regulations, the determination of the Parent Companys compliance with regulatory requirements and ratios is based on the amount of the Parent Companys unimpaired capital (regulatory net worth) as reported to the BSP, which is determined on the basis of regulatory accounting policies which differ from PFRS in some respects. Specifically under existing BSP regulations, the risk-based capital adequacy ratio of a bank, expressed as a percentage of qualifying capital to risk-weighted assets, should not be less than 10.00% for both solo basis (head office and branches) and consolidated basis (the Parent Company and subsidiaries engaged in financial allied undertakings but excluding insurance companies). Qualifying capital and risk-weighted assets are computed based on BSP regulations. Credit risk-weighted assets consist of total assets less cash on hand, due from BSP, loans covered by hold-out on or assignment of deposits, loans or acceptances under letters of credit to the extent covered by margin deposits and other non-risk items determined by the Monetary Board of the BSP. Under BSP Circular No. 360, effective July 1, 2003, the capital-to-risk assets ratio (CAR) is to be inclusive of a market risk charge. In August 2006, the BSP issued Circular No. 538 which contains the implementing guidelines for the revised risk-based capital adequacy framework to conform to Basel II recommendations. Under the revised framework, capital requirements for operational risk, credit derivatives and securitization exposures are to be included in the calculation of the Parent Companys capital adequacy. The revised framework also prescribes a more granular mapping of external credit ratings to the capital requirements and recognizes more types of financial collateral and guarantees as credit risk mitigants. Changes in the credit risk weights of various assets, such as foreign currency denominated exposures to the Philippine National Government, non-performing exposures and investment properties, were also made. Exposures shall be risk-weighted based on third party credit assessment of the individual exposure given by eligible external credit assessment institutions. Credit risk-weights range from 0.00% to 150.00% depending on the type of exposure and/or credit assessment of the obligor. The new guidelines took effect last July 1, 2007. The Parent Company embarked on a comprehensive program to update existing products, policies and procedures manuals incorporating new bank policies, laws and regulations and BSP requirements to further strengthen the management and operations of the Parent Company including its branches, affiliates and subsidiaries. In addition, the Parent Company has been implementing continuous enhancements in the areas of risk management, internal controls, technology and strategic planning to streamline management oversight and F-330

performance monitoring of its head office, branches, affiliates and subsidiaries. This is in preparation for more competitive business environment and much tougher requirements of Basel II, the international banking standards adopted by BSP. The BSP issued Circular No. 639 dated January 15, 2009, ICAAP and Supervisory Review Process (SRP) setting out guidelines that universal banks and commercial banks, on a group-wide basis, should follow in the design and use of their banks ICAAP. The ICAAP supplements the BSPs Risk Based Capital Adequacy Framework for the Philippine banking system conforming to Basel II recommendations as contained in Circular No. 538 issued in August 4, 2006. The Parent Company created an ICAAP Task Force consisting of Profit Center and Cost Center Heads. The ICAAP Task Force has developed the ABC ICAAP Model which is a consistent approach of the Groups implementation of a robust process for the assessment of its capital adequacy in relation to its risk profiles as well as the Groups overall business strategy and its capital levels. On February 23, 2011, the BOD has approved the reconstitution of the ICAAP Task Force into an ICAAP Management Committee. The Committee is chaired by the President and includes the ICAAP Core Team (formerly ICAAP Project Team) and Heads of all Profit and Major Cost Centers. The Parent Company ICAAP Model diagrams the process flow of the eight (8) different components modules of the ICAAP activity namely: (1) Strategic Planning; (2) Asset Management; (3) Risk Management; (4) Tax Planning; (5) Loss Management; (6) CAR Management; (7) Capital Planning; and (8) Contingency Planning with the main objective of establishing the linkage between Strategic Planning, Risk Management and Capital Planning. Each module has specific manuals and operations memoranda detailing the description of the processes, the role and the responsibilities of the key players, and the major activities of each division directly involved which must be fully understood by all parties involved. For every module in the ICAAP Model, there may be several functional business operations groups, Management Committees, and Board Committees providing insight on a regular basis given that each of the modules is subject to periodic independent monitoring and reviews by the responsible committees. Moreover, these committees conduct a comprehensive evaluation of the policies and procedures, processes and reports. On January 31, 2011, the Parent Company submitted the 2011 ICAAP Document to BSP. This was subjected by BSP to series of assessment as well as on site validation in March 2011. The Internal Audit and Compliance Divisions conducted an independent validation and compliance review of the ICAAP in December 2011. On January 31, 2012, the Parent Company submitted to BSP the updates and amendments to the 2011 ICAAP document. On August 2, 2012, the BSP, as part of the merger incentive, extended the submission of the merged banks ICAAP for 2013 from January 31, 2013 to August 9, 2013. Surplus Reserves The surplus reserves consist of:
December 31 2012 2011

Reserve for trust business (Note 28). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reserve for self-insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reserve for contingencies and other accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q144,146 P136,207 18,000 18,000 51,000 51,000 Q213,146 P205,207

Reserve for self-insurance, contingencies and other account represents the amount set aside to cover losses due to fire, defalcation by and other unlawful acts of the Parent Companys personnel or third parties.

F-331

PLIIs Fixed capitalization requirements Department of Finance (DOF) issued Order 27-06 which provides for the capitalization requirements for life, non-life and reinsurance companies. Under this order, the minimum statutory net worth and minimum paidup capital requirements vary depending on the level of the foreign ownership in the insurance company. The statutory net worth shall include the companys paid-up capital, capital in excess of par value, contingency surplus, retained earnings and revaluation increments as may be approved by the IC. On June 1, 2012, the DOF issued Order 15-2012 which serves as a supplement to Order 27-06 which provides capitalization requirements beyond December 31, 2012. On October 29, 2008, the IC issued Circular Letter No. 26-2008, which recalls that in view of the compliance of insurance companies with the requirement of Insurance Memorandum Circular (IMC) No. 102006, the scheduled increases due December 31, 2007 (i.e. P150 million) have been deferred for a year. Hence, the IMC reiterates that by December 31, 2008, insurance companies should comply with the increase previously scheduled for December 31, 2007. As of December 31, 2012 and 2011, the required minimum statutory net worth and minimum paid-up capital for PLII, being a wholly-owned Filipino life insurance company, is P500 million and P250 million, respectively, in 2012 and P350 million and P175 million, respectively, in 2011. PLII has complied with the minimum statutory net worth and paid-up capital requirements as of December 31, 2012 and 2011 based on PLIIs own calculation. 23. Miscellaneous Income This account consists of:
2012 Consolidated 2011 2010 2012 Parent Company 2011 2010

Premiumsnet of reinsurance . . . . . . . . Q1,416,953 P1,179,474 P 805,309 Q P P Interchange fees and awards revenue on credit cards . . . . . . . . . . . . . . . . . . . . . . . 255,422 161,199 119,749 255,422 161,199 119,749 Gain on sale of investment properties (Note 11). . . . . . . . . . . . . . . . . . . . . . . . . 211,527 112,118 228,667 203,228 99,416 222,058 Rental (Notes 11, 25 and 30) . . . . . . . . . . 142,504 118,803 115,943 135,752 107,012 115,847 Credit cards and ATM transaction fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84,127 51,201 38,757 84,127 51,201 38,757 Penalty charges . . . . . . . . . . . . . . . . . . . . . 80,033 70,316 111,524 80,033 70,316 111,524 Income from trust operations. . . . . . . . . . 79,450 59,916 46,598 79,450 59,916 46,598 Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . 1,801 3,692 1,567 5,583 3,692 2,988 Miscellaneous (Note 10) . . . . . . . . . . . . . 298,072 235,065 380,155 208,836 164,049 261,591 2,569,889 Miscellaneous income attributed to disposal group classified as held-forsale (Note 13). . . . . . . . . . . . . . . . . . . . . 1,991,784 1,848,269 1,052,431 716,801 919,112

3,554

4,036

3,973

Q2,573,443 P1,995,820 P1,852,242 Q1,052,431 P716,801 P919,112 The details of net premiums on insurance contracts are shown below:
2012 2011 2010

Ordinary life insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Group life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unit-linked . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Life insurance premiums revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ordinary life insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Group life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Reinsurers share of life insurance contracts premiums revenue. . . Total net insurance premiums. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q1,109,287 P 956,227 P732,205 206,385 194,230 60,887 112,030 38,629 18,498 1,427,702 485 10,264 10,749 Q1,416,953 1,189,086 4,816 4,796 9,612 P1,179,474 811,590 1,465 4,816 6,281 P805,309

F-332

24. Retirement Plan Defined benefit plan The Parent Company and its local subsidiaries have funded non-contributory defined benefit retirement plan covering all their respective permanent and full-time employees. The retirement fund is administered by the Parent Companys Trust and Investments Division which acts as the trustee under the plan. Qualified employees of the Parent Company which have been seconded to its subsidiaries are covered by the Parent Companys Plan. Under this Plan, the employees receive a defined amount of pension benefit upon retirement dependent on one or more factors such as age, years of service and salary. A full actuarial valuation of the Plan is carried out by a qualified independent actuary at least once every two years. The Parent Companys annual contribution to the retirement plan consists of a payment covering the current service cost, amortization of the unfunded actuarial accrued liability and interest on such unfunded actuarial liability. The principal actuarial assumptions used in determining the retirement liability for the Parent Company and certain subsidiaries retirement plan are shown below:
As of January 1, 2012 Parent Company ASB ALFC PLII

Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected rate of return on assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Future salary increases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average remaining working life . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4.90% 5.00% 5.00% 11

6.00% 6.75% 5.00% 5.00% 7.00% 5.00% 12 10

6.80% 6.00% 6.00% 12

PLII

As of January 1, 2011 Parent Company ASB ALFC

Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected rate of return on assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Future salary increases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average remaining working life . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

6.75% 7.00% 5.00% 11

10.13% 7.00% 11.02% 6.00% 7.00% 7.00% 5.00% 5.00% 7.00% 9 10 12

PLII

As of January 1, 2010 Parent Company ASB ALFC

Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected rate of return on assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Future salary increases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average remaining working life . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

9.14% 7.00% 7.00% 11

10.13% 7.00% 11.02% 6.00% 7.00% 7.00% 5.00% 5.00% 7.00% 9 10 12

Discount rates used in computing the present value of the obligation of the Parent Company and significant subsidiaries as of December 31, 2012 and 2011 are as follows:
Parent Company ASB ALFC PLII

2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The summary of the valuation results for the Plan follows:

4.90% 5.70% 6.75%

4.00% 4.90% 4.00% 7.40% 6.75% 7.25% 10.13% 7.00% 11.02%

Consolidated December 31 2012 2011

Parent Company December 31 2012 2011

Present value of the obligation . . . . . . . . . . . . . . . . . . . . . Fair value of plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . Deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrecognized actuarial losses. . . . . . . . . . . . . . . . . . . . . . Unrecognized past service costnonvested benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net retirement asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q1,648,060 859,813 (788,247) 927,626 10 Q 139,389

P 2,082,715 763,970 (1,318,745) 1,503,138 11 P 184,404

Q1,595,404 806,456 (788,948) 926,618 Q 137,670

P 2,038,889 716,023 (1,322,866) 1,504,884 P 182,018

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Net retirement assets and liabilities included under Other assets and Miscellaneous under Other liabilities, respectively, in the statements of financial position follow:
Consolidated December 31 2012 2011 Parent Company December 31 2012 2011

Net retirement asset (Note 12) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net retirement liability (Note 20) . . . . . . . . . . . . . . . . . . . . . . . . . . . Net retirement asset. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q140,102 P184,404 (713) Q139,389 P184,404

Q137,670 Q137,670

P182,018 P182,018

The movements in the present value of obligations of the Plan follow:

Consolidated 2012 2011 Parent Company 2012 2011

Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . Past service costvested . . . . . . . . . . . . . . . . . . . . . . . . . . . Current service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Actuarial losses (gains) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q2,082,715 P2,098,220 Q2,038,889 P2,064,897 34,724 33,825 137,853 109,261 131,140 105,256 118,960 141,821 116,217 139,381 (439,834) 394,150 (442,475) 382,801 (251,634) (695,461) (248,367) (687,271) Q1,648,060 P2,082,715 Q1,595,404 P2,038,889

The movements in the fair value of the assets of the Plan follow:
Consolidated 2012 2011 Parent Company 2012 2011

Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . Contribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Actuarial gains (losses). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance at end of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q 763,970 P1,065,831 Q 716,023 P1,019,897 38,315 73,801 35,801 71,393 291,494 317,159 285,480 309,270 (251,634) (695,461) (248,367) (687,271) 17,668 2,640 17,519 2,734 Q 859,813 P 763,970 Q 806,456 P 716,023

The Group and the Parent Company expects to contribute P285.90 million and P285.48 million, respectively, to defined benefit plan in 2013. Actual return on plan assets of the Group amounted to P55.98 million and P76.44 million in 2012 and 2011, respectively, and P53.32 million and P74.13 million in 2012 and 2011, respectively, for the Parent Company. The overall expected rate of return on plan assets is determined based on the market prices prevailing on that date applicable to the period over which the obligation is to be settled. The major categories of plan assets as a percentage of the fair value of total plan assets follow:
Consolidated December 31 2012 2011 Parent Company December 31 2012 2011

Deposits in BSP and banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Debt instruments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

43.45% 53.20 3.35

50.15% 47.40 2.45

37.55% 55.76 6.69

39.63% 51.29 9.08

100.00% 100.00% 100.00% 100.00%

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The amounts included in Compensation and fringe benefits in the statements of income follow:
2012 Consolidated 2011 2010 2012 Parent Company 2011 2010

Interest cost . . . . . . . . . . . . . . . . . . . . . . . Current service cost . . . . . . . . . . . . . . . . Actuarial loss recognized during the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . Past servicecost vested. . . . . . . . . . . . Expected return on plan assets . . . . . . . Curtailment gain . . . . . . . . . . . . . . . . . . .

Q118,960 P141,821 P181,731 Q116,217 P139,381 P178,116 137,853 109,261 106,911 131,140 105,256 103,053 118,010 1 (38,315) Q336,509 90,950 34,724 (73,801) P302,955 51,851 (96,714) (825) P242,954 118,272 (35,801) Q329,828 91,833 33,825 (71,393) P298,902 54,176 (93,694) P241,651

Movements in the net retirement asset included in Other assets follow:

Consolidated December 31 2012 2011 Parent Company December 31 2012 2011

Balance at the beginning of year. . . . . . . . . . . . . . . . . . . . . . . . . Retirement expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Contribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance at the end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q 184,404 P 170,200 Q 182,018 P 171,650 (336,509) (302,955) (329,828) (298,902) 291,494 317,159 285,480 309,270 Q 139,389 P 184,404 Q 137,670 P 182,018

Movements in the accumulated unrecognized actuarial losses of the Plan follow:

2012 Consolidated 2011 Parent Company 2012 2011

Balance at beginning of year . . . . . . . . . . . . . . . . . . . Actuarial gains (losses) on the present value of the defined benefit obligations . . . . . . . . . . . . . . . . . . . Actuarial gain on plan assets . . . . . . . . . . . . . . . . . . . Actuarial loss recognized during the year . . . . . . . . Balance at the end of the year. . . . . . . . . . . . . . . . . . .

Q(1,503,138) (P1,202,578) 439,834 17,668 118,010 (394,150) 2,640 90,950

(Q1,504,884) (P1,216,650) 442,475 17,519 118,272 (382,801) 2,734 91,833

Q (927,626) (P1,503,138) Q

(926,618) (P1,504,884)

Amounts for the current and previous years follow:

2012 2011 Consolidated 2010 2009 2008

Present value of obligations . . . . . . . . . . . . . . . . P1,648,060 P 2,082,715 P 2,098,220 P1,984,819 P1,539,529 Fair value of plan assets . . . . . . . . . . . . . . . . . . . 859,813 763,970 1,065,831 1,385,335 1,335,552 Deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (788,247) (1,318,745) (1,032,389) (599,484) (203,977) Change in assumptions on plan liabilities . . . . (162,667) 452,213 265,895 221,685 (441,645) Experience adjustment on plan liabilities. . . . . (276,045) (79,576) 208,874 288,503 212,696 Experience adjustment on plan assets . . . . . . . . (17,728) 2,640 (7,443) (15,120) (282,601)
2012 2011 Parent Company 2010 2009 2008

Present value of obligations . . . . . . . . . . . . . . . . P1,595,404 P 2,038,889 P 2,064,897 P1,948,750 P1,507,169 Fair value of plan assets . . . . . . . . . . . . . . . . . . . 806,456 716,023 1,019,897 1,338,492 1,292,735 Deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (788,948) (1,322,866) (1,045,000) (610,258) (214,434) Change in assumptions on plan liabilities . . . . (162,667) 452,213 263,957 221,685 (437,564) Experience adjustment on plan liabilities. . . . . (279,808) (69,412) 208,057 293,800 212,696 Experience adjustment on plan assets . . . . . . . . 17,519 2,734 (7,992) (19,595) (284,879) Defined contribution plan For maximum benefits under the Plan, the Parent Company also provides an Employee Investment and Savings Program (EISP) wherein an employee may invests monthly during his employment with the Parent F-335

Company an amount not less than 1.00% of monthly salary but not more than 50.00% of his net monthly salary in the EISP. Upon retirement, an employee who has also availed of the EISP shall receive an additional benefit from the Plan plus a return of his investment in EISP plus related interests. The Parent Company made additional contributions amounting to P12.66 million and P12.77 million to the EISP in 2012 and 2011, respectively. This amount was included in Compensation and fringe benefits. 25. Lease Contracts The Parent Company leases the premises occupied by some of its branches including those of its subsidiaries for periods ranging from 2 to 10 years, renewable upon mutual agreement of the parties. Various lease contracts include escalation clauses, most of which bear an annual rent increase of 5.00% to 10.00%. Rent expense charged against current operations (included in Occupancy and other equipment-related costs in the statements of income) amounted to P270.67 million in 2012, P244.01 million in 2011 and P255.19 million in 2010 for the Group, of which P231.17 million in 2012, P208.43 million in 2011 and P218.62 million in 2010, was incurred by the Parent Company. As of December 31, 2012 and 2011, the Group had no lease arrangements with contingent provisions. Future minimum rentals payable under non-cancellable operating leases follow:
Consolidated December 31 2012 2011 Parent Company December 31 2012 2011

Within one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Beyond one year but not more than five years . . . . . . . . . . . . . . . . . . . . . . . . . . Beyond five years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q183,272 282,657 10,787 Q476,716

P210,613 370,600 20,476 P601,689

Q156,303 248,855 7,479 Q412,637

P177,324 323,149 12,238 P512,711

The Group has entered into commercial property leases on its investment properties and available office spaces. Rental income included in Miscellaneous income in the statements of income of the Group in 2012, 2011 and 2010 amounted to P142.50 million, P118.80 million and P115.94 million, respectively, of which P135.75 million, P107.01 million and P115.85 million, respectively, pertain to the Parent Company (see Note 23). Future minimum rentals receivable under non-cancellable operating leases follow:
Consolidated December 31 2012 2011 Parent Company December 31 2012 2011

Within one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Beyond one year but not more than five years . . . . . . . . . . . . . . . . . . . . . . . . . .

Q 47,637 61,373 Q109,010

P 70,710 114,211 P184,921

Q 46,529 61,373 Q107,902

P 63,619 105,937 P169,556

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26. Miscellaneous Expenses This account consists of:

2012 Consolidated 2011 2010 2012 Parent Company 2011 2010

Increase in aggregate reserve for life policies . . . Q 805,884 P 717,007 P 513,858 Q P P Commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400,074 306,880 181,683 107,633 79,621 55,107 Advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 359,334 172,311 122,459 356,814 167,983 112,189 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 321,952 312,616 330,569 314,435 305,589 323,224 Policyholder benefits and claim benefits . . . . . . . 285,050 203,884 198,441 Information technology expenses (Note 30) . . . . 203,773 151,490 113,858 202,561 150,197 111,137 Management and professional fees . . . . . . . . . . . . 187,282 131,116 108,761 139,042 116,192 98,380 Repairs and maintenance . . . . . . . . . . . . . . . . . . . . 132,969 228,844 238,481 106,465 206,877 225,281 Stationery and office supplies . . . . . . . . . . . . . . . . 121,458 124,474 86,769 110,652 85,320 78,194 Legal/litigation/assets acquired (Note 11) . . . . . . 111,821 40,527 88,751 110,579 38,876 85,155 Fuel and lubricants . . . . . . . . . . . . . . . . . . . . . . . . . . 78,044 89,161 75,858 75,990 85,569 74,506 Postage, telephone, cable . . . . . . . . . . . . . . . . . . . . 75,871 67,521 57,552 58,429 50,901 46,363 Entertainment, amusement and recreation (EAR) (Note 27). . . . . . . . . . . . . . . . . . . . . . . . . . 72,043 76,387 84,323 61,264 67,812 73,172 Traveling expenses. . . . . . . . . . . . . . . . . . . . . . . . . . 65,203 50,476 42,141 48,501 36,914 26,530 Brokers fees and charges. . . . . . . . . . . . . . . . . . . . . 43,582 38,462 38,418 43,566 30,730 8,091 Donations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,182 30,776 8,168 34,137 36,914 26,530 Philippine Clearing House Corporation processing fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,476 21,159 19,909 19,490 20,470 19,857 Membership fees . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,695 13,957 12,442 16,205 10,586 9,827 Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 346,740 119,048 69,456 206,074 83,832 54,134 3,685,433 Miscellaneous expense attributable to the disposal group (Note 13) . . . . . . . . . . . . . . . . . . 30,476 2,896,096 42,984 2,391,897 83,149 2,011,837 1,574,383 1,427,677

Q3,715,909 P2,939,080 P2,475,046 Q2,011,837 P1,574,383 P1,427,677

Other expenses include finance charges, periodicals and magazines, fees on cash card, other occupancy expenses, other equipment expenses, freight expenses, and appraisal expenses. 27. Income and Other Taxes Under Philippine tax laws, the RBU of the Parent Company and its domestic banking subsidiary are subject to percentage and other taxes (presented as Taxes and licenses in the statements of income) as well as income taxes. Percentage and other taxes paid consist principally of gross receipts tax (GRT) and documentary stamp taxes. Income taxes include the corporate income tax, discussed below, and final tax paid at the rate of 20.00%, which represents final withholding tax on gross interest income from government securities and other deposit substitutes. These income taxes, as well as the deferred tax benefits and provisions, are presented as Provision for income tax in the statements of income. Provision for income tax consists of:
2012 Consolidated 2011 2010 2012 Parent Company 2011 2010

Current RCIT/MCIT . . . . . . . . . . . . . . . . . . Final . . . . . . . . . . . . . . . . . . . . . . . . . Deferred . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for income tax attributable to the disposal group (Note 13) . . . .

Q134,937 P127,237 P 95,556 Q 56,644 P 40,708 P 38,405 456,543 336,985 513,656 423,418 325,987 503,914 (70,178) 4,949 113 521,302 33,543 Q554,845 469,171 33,864 P503,035 609,325 19,636 P628,961 480,062 Q480,062 366,695 P366,695 542,319 P542,319

F-337

Current tax regulations provides that the RCIT rate shall be 30.00%. In addition, the allowable interest expense shall be reduced by 33.00% of interest subjected to final tax. RA No. 9337 also provides for the change in GRT rate from 5.00% to 7.00%. Under the regulations, FCDU offshore income (income from nonresidents) is tax-exempt while gross onshore income (income from residents) is subject to 10.00% income tax. In addition, interest income on deposit placements with other FCDUs and offshore banking units (OBUs) is taxed at 7.50%. Income derived by the FCDU from foreign currency transactions with nonresidents, OBUs and local commercial banks including branches of foreign banks authorized by the BSP to transact business with FCDUs and other depository banks under the expanded foreign currency deposit system is tax-exempt while interest income on foreign currency loans from residents other than OBUs or other depository banks under the expanded system is subject to 10.00% gross income tax. The Parent Companys foreign subsidiaries are subject to income and other taxes based on enacted laws of the countries where they operate. Current tax regulation provides that starting July 1, 2008, the optional standard deduction (OSD) equivalent to 40.00% of gross income may be claimed as an alternative deduction in computing for the RCIT. From 2010 to 2012 RCIT computation, the Parent Company elected to claim itemized expense deductions instead of the OSD. Current tax regulations provide for the ceiling on the amount of EAR expense that can be claimed as a deduction against taxable income. Under the regulation, EAR expense allowed as a deductible expense for a service company like the Parent Company is limited to the actual EAR paid or incurred but not to exceed 1.00% of net revenue. EAR expenses are included under Miscellaneous expense in the statement of income (see Note 26). An MCIT of 2.00% on modified gross income is computed and compared with the RCIT. Any excess of the MCIT over the RCIT is deferred and can be used as a tax credit against future income tax liability for the next three years. In addition, NOLCO is allowed as a deduction from taxable income in the next three years from the date of inception. NOLCO is broken down as follows:
Inception Year Amount Consolidated Used/Expired Balance Expiry Year

2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P1,373,146 P1,373,146 342,814 20,336 161,020 75,408 P1,952,388 P1,393,482

322,478 161,020 75,408

2012 2013 2014 2015

P558,906

Inception Year

Amount

Parent Company Used/Expired Balance

Expiry Year

2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P1,195,308 P1,195,308 204,752 76,201 P1,476,261 P1,195,308

204,752 76,201

2012 2013 2014

P280,953

Details of the MCIT follow:

Consolidated Inception Year Amount Used/Expired Balance Expiry Year

2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P 20,396 39,612 42,553 58,854 P161,415

P20,396 1,240 1,642 P23,278

38,372 40,911 58,854

2012 2013 2014 2015

P138,137

F-338

Inception Year

Amount

Parent Company Used/Expired Balance

Expiry Year

2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P 16,215 38,032 39,794 56,466 P150,507

P16,215 P16,215

38,032 39,794 56,466

2012 2013 2014 2015

P134,292

The components of net deferred tax liability of the Group follow:

Consolidated December 31 2012 2011 Parent Company December 31 2012 2011

Deferred tax liability on: Revaluation increment on property and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Excess of fair value over book value of investment properties upon initial measurement at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Positive fair value of derivatives . . . . . . . . . . . . . . . . Net retirement asset . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrealized gains on AFS investments. . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax asset on: Allowance for credit and impairment losses . . . . . . NOLCO. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated depreciationinvestment property. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Negative fair value of derivatives . . . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q 736,436 433,916 42,096 41,301 597 42,322 1,296,668 552,779 84,286

P 635,293 477,240 55,944 54,605 8,917 21,268 1,253,267 743,814

Q 736,436 432,403 42,096 41,301 570 40,256 1,293,062 550,193 84,286

P 627,116 477,240 55,944 54,605 8,918 20,724 1,244,547 743,814

59,059 61,091 59,059 61,091 31,490 26,279 31,490 26,279 58,624 4,613 58,312 4,613 786,238 835,797 783,340 835,797 Q 510,430 P 417,470 Q 509,722 P 408,750

Components of net deferred tax assets of the Group follow:

Consolidated December 31 2012 2011

Deferred tax asset on: Allowance for credit and impairment losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . NOLCO. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated depreciationinvestment property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unamortized past service costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . MCIT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax liability on: Excess of fair value over book value of investment properties upon initial measurement at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Revaluation increment on property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrealized gain on AFS investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net retirement asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Leasing income differential between finance and operating lease method. . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net deferred tax asset from continuing operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net deferred tax asset attribute to disposal group classified as held-for-sale included in other asset (Note 13) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net deferred tax assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-339

Q 86,586 P32,608 30,559 25,299 2,362 2,018 1,049 1,315 2,532 498 335 121,054 64,107

12,580 14,046 8,177 1,622 4,198 663 337 1,819 10,135 23,042 30,535 Q 98,012 P33,572 Q 98,012 36,957 P70,529

Movements in deferred tax liability pertaining to revaluation increment on property and equipment and unrealized gains on AFS investments were charged directly to OCI. The Group and Parent Company did not recognize deferred tax assets on the following temporary differences:
Consolidated December 31 2012 2011 Parent Company December 31 2012 2011

NOLCO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allowance for credit and impairment losses . . . . . . . . . . . Unamortized past service cost . . . . . . . . . . . . . . . . . . . . . . . MCIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrealized foreign exchange loss . . . . . . . . . . . . . . . . . . . . Accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Negative fair value of derivatives . . . . . . . . . . . . . . . . . . . . Unrealized loss on AFS investments . . . . . . . . . . . . . . . . . Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q 9,320 3,282,854 828,178 138,137 Q4,258,489

P1,803,605 Q P1,544,288 1,217,799 3,214,776 1,185,047 666,278 828,178 664,637 97,101 134,292 91,958 14,537 25,817 P3,825,137 Q4,177,246 P3,485,930

The Group believes that it is highly probable that these temporary differences will not be realized in the future. A reconciliation of the applicable statutory income tax to the effective income tax rate follows:
2012 Consolidated 2011 2010 2012 Parent Company 2011 2010

Statutory income tax rate . . . . . . . . . . . . . . . . . . . . . . Tax effects of: Tax-exempt and tax-paid income . . . . . . . . . . . Nondeductible expenses. . . . . . . . . . . . . . . . . . . Unrecognized deferred tax assets . . . . . . . . . . . FCDU income before tax . . . . . . . . . . . . . . . . . . Othersnet. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Effective income tax rate . . . . . . . . . . . . . . . . . . . . . . Tax effect of income from disposal group classified as held-for-sale . . . . . . . . . . . . . . . . . . . .

30.00% 30.00% (25.02) 20.72 9.93 (15.49) 2.45 22.59 1.45 (28.53) 20.20 11.91 (9.15) (1.11) 23.32 1.68

30.00% (23.89) 35.02 4.32 (13.34) 0.50 32.61 1.02 33.63%

30.00% 30.00% (22.46) 19.74 8.28 (15.16) 20.40 (26.85) 20.12 10.81 (9.90) 0.52 24.70

30.00% (27.86) 43.03 6.21 (17.72) 0.40 33.70 33.70%

24.04% 25.00%

20.40% 24.70%

28. Trust Operations Securities and other assets (other than deposits) held by the Parent Company in fiduciary or agency capacity for its customers are not included in the statements of financial position since these are not assets of the Group and the Parent Company. Government securities included under AFS investments with face value of P449.37 million, P360.61 million and P250.00 million as of December 31, 2012, 2011 and 2010, respectively, are deposited with the BSP in compliance with the current banking regulations relative to the Parent Companys trust functions (see Note 7). An appropriation of 10.00% of the Parent Companys income from trust operations is set aside annually as surplus reserve to absorb any losses that may arise from its trust functions. The accumulated reserve should not exceed 20% of authorized capital stock. Prior to 2008, surplus reserve for trust operations reached 20.00% of the Parent Companys authorized capital stock thus, no reclassification to reserve was made from 2005 to 2007. However, due to the increase in the authorized capital stock of the Parent Company in 2008, an appropriation of 10.00% of the Parent Companys income from trust operations were made in 2012 and 2011.

F-340

29. Segment Information For management purposes, the Group is organized into three business segments based on their products and services. Management, especially the chief operating decision-makers, monitors the operating results of business segments separately for the purpose of making decisions about resources to be allocated and of assessing performance. Segment performance is evaluated based on operating profit or loss in the consolidated financial statements. The Group does not experience any seasonality in its business segments. The Groups reportable segments follow: Banking a) b) Commercialhandles services that relate to lending, deposit-taking, treasury operations, corporate and consumer banking, credit cards, special assets and cash management, fund and clearing services. Thriftcaters the needs of individual consumers and small and middle-market businesses which include key products such as deposit taking, investments, payment and remittances.

Insuranceprovides services through life insurance policies on which premiums are earned. Othersmanages revenues principally generated from holding and leasing services provided by the Group. Segment assets are those operating assets that are employed by a segment in its operating activities and that either are directly attributable to the segment or can be allocated to the segment on a reasonable basis. Segment liabilities are those operating liabilities that result from the operating activities of a segment and that either are directly attributable to the segment or can be allocated to the segment on a reasonable basis.

F-341

Operating Segments Transactions between the reportable segments are carried out at internally agreed rates or at arms length and are reflected in the performance of each segment. The following tables present revenue and income information of operating segments presented in accordance with PFRS for the years ended December 31, 2012, 2011 and 2010 and segment assets and liabilities as of December 31, 2012 and 2011 and January 1, 2011:
For the year ended December 31, 2012 Banking Commercial China and Philippines Hong Kong Operating segment attributed to disposal group held-for-sale (Note 13) Operating segment including disposal group held-for-sale

Thrift

Insurance

Others

Eliminations

Consolidated

Interest income Third party . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inter-segment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . Compensation and fringe benefits . . . . . . . . . . . . . . . . . . Provision for credit and impairment losses . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss on sale of OBHI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . Income before income tax . . . . . . . . . . . . . . . . . . . . . . . . . Provision for income tax . . . . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

8,191,431 8,191,431 2,319,455 5,871,976 4,240,215 10,112,191 2,237,010 1,548,204 349,084 3,624,837 7,759,135 2,353,056 480,062

487,792 8146 495,938 90,420 405,518 138,905 544,423 167,205 174,709 10,229 178,482 530,625 13,798 (7,395)

Q 234,546 462 235,008 39,069 195,939 83,930 279,869 80,605 57,474 23,177 100,113 261,369 18,500 13,663 Q 4,837

Q 290,588 210 290,798 6,944 283,854 1,478,967 1,762,821 117,372 13,161 1,501,172 1,631,705 131,116 27,546 Q 103,570

27,865 102 27,967 3,125 24,842 56,063 80,905 27,598 3,067 1,688 53,068 85,421 (4,516) 7,426

(8,920) (8,920) (9,059) 139 (26,371) (26,232) (26,749) (26,749) 517

9,232,222 9,232,222 2,449,954 6,782,268 5,971,709 12,753,977 2,629,790 1,783,454 397,339 5,430,923 10,241,506 2,512,471 521,302

Q 226,399 226,399 35,167 191,232 10,709 201,941 57,356 2,360 9 56,524 290,242 406,491 (204,550) 33,543 Q(238,093)

9,458,621 9,458,621 2,485,121 6,973,500 5,982,418 12,955,918 2,687,146 1,785,814 397,348 5,487,447 290,242 10,647,997 2,307,921 554,845

F-342

1,872,994

21,193

Q (11,942)

517

1,991,169

1,753,076

As of December 31, 2012

Segment assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Segment liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q174,410,373 Q151,923,531

Q16,306,505 Q 8,501,892

Q4,208,076 Q3,224,485

Q9,856,043 Q8,315,982

Q2,202,643 Q 476,752

Q(9,206,437) Q(5,171,836)

Q197,777,203 Q167,270,806

Q Q

Q197,777,203 Q167,270,806

For the year ended December 31, 2011 (As restatedNotes 2 and 35) Banking Commercial Philippines China and Hong Kong Thrift Insurance Others Eliminations Consolidated Operating segment attributed to disposal group held-for-sale (Note 13) Operating segment including disposal group held-for-sale

Interest income Third party . . . . . . . . . . . . . . . . . . . . . Inter-segment. . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . . . Net interest income . . . . . . . . . . . . . . . . . . Non-interest income . . . . . . . . . . . . . . . . . Total operating income. . . . . . . . . . . . . . . Compensation and fringe benefits . . . . . Depreciation and amortization . . . . . . . . Provision for credit and impairment losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . Total operating expenses . . . . . . . . . . . . . Income before income tax . . . . . . . . . . . . Provision for income tax . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . .

8,479,087 22,965 8,502,052 2,744,798 5,757,254 1,998,876 7,756,130 2,456,034 384,323 350,778 3,080,413 6,271,548 1,484,582 366,695

462,112 1,041 463,153 63,257 399,896 178,806 578,702 164,972 9,677 (2,844) 85,967 257,772 320,930 54,759

P 213,448 502 213,950 37,407 176,543 53,996 230,539 81,275 25,215 16,859 94,649 217,998 12,541 11,357 P 1,184

P 251,215 251,215 8,224 242,991 1,207,108 1,450,099 96,503 12,172 1,255,347 1,364,022 86,077 22,410 P 63,667

24,509 521 25,030 1,000 24,030 59,002 83,032 28,262 1,433 (2,459) 29,208 56,444 26,588 13,950

P (25,044) (25,044) (25,041) (3) (24,831) (24,834) (16,296) (16,296) (8,538)

9,430,371 P 309,701 (15) 15 9,430,356 2,829,645 6,600,711 3,472,957 10,073,668 2,827,046 432,820 362,334 4,529,288 8,151,488 1,922,180 469,171 1,453,009 P 309,716 74,001 235,715 25,463 261,178 82,413 606 5,975 82,129 171,123 90,055 33,864 56,191

9,740,072 9,740,072 2,903,646 6,836,426 3,498,420 10,334,846 2,909,459 433,426 368,309 4,611,417 8,322,611 2,012,235 503,035

F-343

1,117,887

266,171

12,638

(8,538) P

1,509,200

As of December 31, 2011 (As restatedNotes 2 and 35)

Segment assets . . . . . . . . . . . . . . . . . . . . . . Segment liabilities . . . . . . . . . . . . . . . . . . .

P173,193,006 P151,539,995

P18,511,532 P10,199,330

P3,955,544 P2,947,872

P6,177,255 P5,057,374

P1,012,928 P 290,954

P(7,740,874) P195,109,391 P(3,645,779) P166,389,746

P7,422,682 P6,017,084

P202,532,073 P172,406,832

For the year ended December 31, 2010 Banking Commercial China and Philippines Hong Kong Operating segment attributed to disposal group held-for-sale (Note 13) Operating segment including disposal group held-for-sale

Thrift

Insurance

Others

Eliminations

Consolidated

Interest income Third party. . . . . . . . . . . . . . . . . . . . . . . Inter-segment . . . . . . . . . . . . . . . . . . . . Interest expense. . . . . . . . . . . . . . . . . . . . . . . Net interest income. . . . . . . . . . . . . . . . . . . . Non-interest income . . . . . . . . . . . . . . . . . . . Total operating income . . . . . . . . . . . . . . . . Compensation and fringe benefits . . . . . . . Provision for credit and impairment losses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . Total operating expenses . . . . . . . . . . . . . . . Income before income tax . . . . . . . . . . . . . . Provision for income tax . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . .

8,870,898 421 8,871,319 2,781,463 6,089,856 2,544,450 8,634,306 2,429,226 1,211,263 417,895 2,966,783 7,025,167 1,609,139 542,319

344,920 13,280 358,200 30,311 327,889 122,686 450,575 150,292 21,988 10,774 40,809 223,863 226,712 32,569

P 199,616 1,118 200,734 41,841 158,893 36,228 195,121 67,596 13,098 18,964 81,434 181,092 14,029 10,790 P 3,239

P 208,500 41 208,541 4,520 204,021 857,512 1,061,533 93,055 11,191 945,803 1,050,049 11,484 19,496 P

P 10,069 558 10,627 10,627 62,342 72,969 27,962 6,378 1,225 27,319 62,884 10,085 4,151 5,934

P (17,061) (17,061) (17,061) (14,542) (14,542) (15,730) (15,730) 1,188

9,634,003 P 360,427 (1,643) 1,643 9,632,360 2,841,074 6,791,286 3,608,676 10,399,962 2,768,131 1,252,727 460,049 4,046,418 8,527,325 1,872,637 609,325 362,070 94,805 267,265 17,382 284,647 89,439 10,307 594 129,581 229,921 54,726 19,636 P 35,090

9,994,430 9,994,430 2,935,879 7,058,551 3,626,058 10,684,609 2,857,570 1,263,034 460,643 4,175,999 8,757,246 1,927,363 628,961

F-344

1,066,820

194,143

(8,012) P

1,188

1,263,312

1,298,402

As of January 1, 2011

Segment assets. . . . . . . . . . . . . . . . . . . . . . . . Segment liabilities . . . . . . . . . . . . . . . . . . . .

P162,435,870 P144,218,925

P15,821,807 P 7,767,769

P3,508,331 P2,526,010

P3,528,431 P2,852,498

P884,480 P172,103

P(5,064,067) P181,114,852 P (970,221) P156,567,084

P8,335,957 P6,965,387

P189,450,809 P163,532,471

Management further evaluates operating businesses under Commercial BankingPhilippines according to the nature of services provided and the different markets served with segment representing a strategic business unit. The Parent Companys business segments follow: Consumer bankingprincipally handling individual customers deposits, and providing consumer type loans, overdrafts and fund transfer facilities; Corporate bankingprincipally handling loans and other credit facilities and deposit and current account for corporate and institutional customers; Treasuryprincipally providing money market, trading and treasury services, as well as the management of the Parent Companys funding operations by use of treasury bills, government securities and placements and acceptances with other banks, through treasury and wholesale banking; Credit cards departmentprincipally providing individual customers credit card services and facilities; and Special assets groupprincipally managing real and other properties acquired from loan settlement and other foreclosure processes.
Consumer Banking Corporate Banking 2012 Special Assets Credit Cards Group Department

Treasury

Others

Total

Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Q383,447 Q4,753,011 Q2,336,857 Q 59,476 Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85,852 1,067,800 988,402 13,317 Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Compensation and fringe benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for credit and impairment losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 297,595 5,046 302,641 66,950 9,715 112,740 189,405 3,685,211 881,926 4,567,137 1,010,338 1,496,137 146,611 1,660,194 4,313,280 1,348,455 2,769,188 4,117,643 910,901 36,010 132,181 1,419,196 2,498,288 46,159 258,609 304,768 67,421 16,057 34,253 100,521 218,252 F-345

Q537,919 Q120,721 Q 8,191,431 120,438 43,646 2,319,455 417,481 152,397 569,878 126,068 18,294 204,958 349,320 77,075 173,049 250,124 55,332 8,030 127,228 190,590 5,871,976 4,240,215 10,112,191 2,237,010 1,548,204 349,084 3,624,837 7,759,135 2,353,056 480,062 Q 1,872,994

Income before income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Q113,236 Q 253,857 Q1,619,355 Q 86,516

Q220,558 Q 59,534

Consumer Banking

Corporate Banking

2011 (As restatedNotes 2 and 35) Credit Cards Special Assets Treasury Department Group

Others

Total

Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P471,874 P4,074,037 P3,410,024 P313,271 Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130,372 1,125,778 1,338,021 86,405 Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Compensation and fringe benefits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for credit and impairment losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for income tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-346 341,502 6,249 347,751 110,121 16,030 852 139,832 266,835 2,948,259 311,776 3,260,035 1,032,265 150,260 213,789 1,297,689 2,694,003 2,072,003 1,001,563 3,073,566 973,300 141,677 7,529 1,207,418 2,329,924 226,866 303,907 530,773 168,079 24,466 114,989 198,190 505,724

P 87,398 P145,448 P8,502,052 24,106 40,116 2,744,798 63,292 178,178 241,470 76,466 37,945 12,878 88,102 215,391 105,332 197,203 302,535 95,803 13,945 741 149,182 259,671 5,757,254 1,998,876 7,756,130 2,456,034 384,323 350,778 3,080,413 6,271,548 1,484,582 366,695 P1,117,887

Income before income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 80,916 P 566,032 P 743,642 P 25,049

P 26,079 P 42,864

Consumer Banking

Corporate Banking

Treasury

2010 Credit Cards Special Assets Department Group

Others

Total

Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P252,962 P3,887,229 P4,440,612 P242,458 Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69,068 1,057,193 1,576,320 65,833 Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Compensation and fringe benefits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for credit and impairment losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for income tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 183,894 114,008 297,902 78,090 38,937 13,433 95,371 225,831 2,830,036 81,777 2,911,813 844,587 421,129 145,293 1,031,484 2,442,493 2,864,292 1,768,585 4,632,877 1,321,290 658,823 227,299 1,613,675 3,821,087 176,625 93,057 269,682 71,396 35,600 12,282 87,195 206,473

P 48,058 P 13,049 35,009 275,870 310,879 68,931 34,370 11,858 84,184 199,343

P8,871,319 2,781,463 211,153 211,153 44,932 22,404 7,730 54,874 129,940 6,089,856 2,544,450 8,634,306 2,429,226 1,211,263 417,895 2,966,783 7,025,167 1,609,139 542,319 P1,066,820

Income before income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 72,071 P 469,320 P 811,790 P 63,209

P111,536 P 81,213

Non-interest income consists of commission and handling charges, trading and investment securities gain, gain on acquisition of investment properties, foreign exchange gains-net, among others. Miscellaneous expenses consist of commissions, advertising, insurance, occupancy, taxes and licenses among others (see Notes 25, 26 and 27). Geographical Information The following details refer to revenues (interest income) from external customers for the years ended December 31, 2012, 2011 and 2010, and other non-current assets held in the Group and the Parent Companys country of domicile and foreign countries as of December 31, 2012 and 2011 and January 1, 2011:
For year ended December 31, 2012 China and United United States Hong Kong Kingdom of America

Philippines

Total

Revenues from external customers. . . . . . . . . . . .

Q8,717,847

Q495,938

Q8,474

Q236,362

Q9,458,621

As of December 31, 2012

Property and equipment . . . . . . . . . . . . . . . . . . . . . Investment properties . . . . . . . . . . . . . . . . . . . . . . .

Q4,625,903 3,827,636 Q8,453,539

Q188,090 137,872 Q325,962

Q1,893 Q1,893

Q 310 5,896 Q6,206

Q4,816,196 3,971,404 Q8,787,600

Philippines

For year ended December 31, 2011 China and United United States Hong Kong Kingdom of America

Total

Revenues from external customers. . . . . . . . . . . .

P8,949,827

P463,153

P8,696

P318,396

P9,740,072

As of December 31, 2011

Property and equipment . . . . . . . . . . . . . . . . . . . . . Investment properties . . . . . . . . . . . . . . . . . . . . . . .

P4,334,519 4,061,009 P8,395,528

P202,116 256,850 P458,966

P3,068 P3,068

P745 P745

P4,540,448 4,317,859 P8,858,307

Philippines

For year ended December 31, 2010 China and United United States Hong Kong Kingdom of America

Total

Revenues from external customers. . . . . . . . . . . .

P9,257,537

P358,200

P7,228

P371,465

P9,994,430

As of January 1, 2011

Property and equipment . . . . . . . . . . . . . . . . . . . . . Investment properties . . . . . . . . . . . . . . . . . . . . . . .

P4,446,061 4,311,352 P8,757,413

P209,367 225,052 P434,419

P3,931 P3,931

P1,299 P1,299

P4,660,658 4,536,404 P9,197,062

In 2012, 2011 and 2010, the Group and the Parent Company did not receive 10.00% of the total revenues from a single customer. 30. Related Party Transactions Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions or if they are subjected to common control or common significant influence such as subsidiaries or other related parties. Related parties may be individuals or corporate entities. The Group has several business relationships with related parties. Transactions with such parties are made in the ordinary course of business and on substantially same terms, including interest and collateral, as those prevailing at the time for comparable transactions with other parties. These transactions also did not involve more than the normal risk of collectability or present other unfavorable conditions.

F-347

In the ordinary course of business, the Group has loan transactions, credit accommodations and guarantees with investees, and with certain directors, officers, stockholders and related interests (DOSRI). Under the existing policies of the Group, these DOSRI transactions are made substantially on the same terms as loans to other individuals and businesses of comparable risks. The amount of DOSRI transactions to individual DOSRI, of which 70.00% must be secured, should not exceed the amount of their respective unencumbered deposits and book value of their investments in the Parent Company and/or any of its subsidiaries, subject to the same regulations. In the aggregate, loans to DOSRI exclusive of nonrisk accounts generally should not exceed the respective equity or 15.00% of the total loan portfolio, whichever is lower, of the Parent Company and/or any of its subsidiaries subject to the same regulations; provided that the total unsecured DOSRI transactions shall not exceed the lower of 30.00% of aggregate ceiling or outstanding DOSRI transactions. Other transactions with associates consist of purchase of insurance premiums, purchase and sale of investment securities, lease of office premises, and use of certain facilities. BSP Circular No. 423 dated March 15, 2004 amended the definition of DOSRI accounts. The Group considers any of the following as related interest: Spouse or relative within the first consanguinity or affinity of a director, officer or stockholder of the Group; Partnership of which a director, officer or stockholder of the Group or a general partner. The following table shows information relating to the loans, other credit accommodations and guarantees classified as DOSRI accounts under regulations existing prior to said circular, and new DOSRI loans, other credit accommodations granted under said circular as of December 31, 2012, 2011 and 2010:
2012 Consolidated 2011 2010 2012 Parent Company 2011 2010

Total Outstanding DOSRI Accounts . . . . . . . . . . . . . . . . . . . Q2,065,642 P3,640,304 P4,192,062 Q2,065,642 P3,640,304 P4,192,062 Percent of DOSRI accounts granted prior to effectivity of BSP Circular No. 423 to total loans. . . . . . . . . . . . . . . . . . . . . . . 1.83% 3.05% 3.98% 2.05% 3.62% 4.72% Percent of DOSRI accounts granted after effectivity of BSP Circular No. 423 to total loans. . . . . . . . . . . . . . . . . . . . . . . 1.83% 3.05% 3.98% 2.05% 3.62% 4.72% Percent of DOSRI accounts to total loans . . . . . . . . . . . . . . . . . . 1.83% 3.05% 3.98% 2.05% 3.62% 4.72% Percent of unsecured DOSRI accounts to total DOSRI accounts . . . . . . . . . . . . . . . . . . . 0.04% 0.10% 2.07% 0.04% 0.10% 2.07% Percent of past due DOSRI accounts to total DOSRI accounts . . . . . . . . . . . . . . . . . . . 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Percent of nonaccruing DOSRI accounts to total DOSRI accounts . . . . . . . . . . . . . . . . . . . 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% On January 31, 2007, BSP Circular No. 560 was issued providing the rules and regulations that govern loans, other credit accommodations and guarantees granted to subsidiaries and affiliates of banks and quasi-banks. Under the said circular, the total outstanding exposures to each of the Parent Companys subsidiaries and affiliates shall not exceed 10.00% of banks net worth, the unsecured portion of which shall not exceed 5.00% of such net worth. Further, the total outstanding exposures to subsidiaries and affiliates shall not exceed 20.00% of the net worth of the lending bank. BSP Circular No. 560 is effective February 15, 2007. As of December 31, 2012, DOSRI loans amounting to P0.12 billion and P0.25 billion are secured by hold-out on deposits and government securities, respectively, and as of December 31, 2011, DOSRI loans amounting to P0.90 billion are secured by government securities. These loans are therefore considered as non-risk assets. Non-risk DOSRI loans are not covered by the ceiling on DOSRI prescribed by the BSP. F-348

Transactions with subsidiaries have been eliminated in the consolidated financial statements. Other related parties include those transactions with entities under common control. These are conducted in the normal course of business, will be settled in cash and at arms-length transactions. Details on related party transactions follow.
December 31, 2012 Category Amount / Volume Outstanding Balances Terms and Conditions/Nature

Subsidiaries: Deposit liabilities. . . . . . . . . . . . . . . . Q1.04 billion With annual fixed interest rates ranging from 0.65% to 1.93% including time deposits with maturities from 30 days to 365 days 931.85 million With annual fixed interest rates ranging from 0.01% to 4.50% which includes time deposits with maturities of up to 90 days 1.32 million Outstanding forward transactions with maturities of up to 5 months Income from leasing agreements with various lease terms (see Note 25) Interest expense on deposit liabilities Positive fair value of derivative financial instruments Share in information technology expense of subsidiaries Interest income on due from other banks

Due from other banks . . . . . . . . . . . .

Derivative assets (Financial assets at FVPL) . . . . . Rental income . . . . . . . . . . . . . . . . . . Q15.37 million Interest expense . . . . . . . . . . . . . . . . . Unrealized trading gains . . . . . . . . . Information technology expense. . . Interest income. . . . . . . . . . . . . . . . . .
Category

5.42 million 1.35 million Q1.20 million 0.38 million

Amount / Volume

December 31, 2012 Outstanding Balances Terms and Conditions/Nature

Other related parties: Receivables from customers. . . . . . . . . . . . . Q5.56 billion P1.97 billion secured by hold-out on deposit, government securities, real estate and mortgage trust indenture and P3.59 billion unsecured, no impairment with interest rate ranging from 3.23% to 10.00% with maturities from 1 year to 6 years 5.54 billion With annual fixed interest rates ranging from 0.65% to 1.93% including time deposits with maturities from 30 days to 365 days Q526.43 million 137.19 million 33.85 million Interest income on receivables from customers Interest expense on deposit liabilities Income from leasing agreements with various lease terms (see Note 25)

Deposit liabilities . . . . . . . .

Interest income . . . . . . . . . . Interest expense . . . . . . . . . Rental income . . . . . . . . . . . Gain on sale on investments properties. . . . . . . . . . . . . Rent expense . . . . . . . . . . . . Loan releases. . . . . . . . . . . . Loan collections . . . . . . . . .

14.20 million 4.12 million 2.08 billion 3.11 billion

Gain on sale of investment property transaction Expense from leasing agreements with various lease terms (see Note 25) Loan drawdowns Settlement of loans and interest

F-349

Category

Amount /Volume

December 31, 2011 (As restated - Notes 2 and 35) Outstanding Balances Terms and Conditions/Nature

Subsidiaries: Deposit liabilities . . . . . . . . P1.68 billion With annual fixed interest rates ranging from 0.65% to 1.75% including time deposits and maturities from 30 days to 365 days 342.42 million With annual fixed interest rates ranging from 0.01% to 4.50% which includes time deposits with maturities of up to 90 days 248.77 million With annual fixed interest rate of 0.40% with maturities up to 90 days 44.45 million With annual fixed interest rate of 0.40% with maturities of 91 days, unsecured 6.89 million Outstanding forward transactions with maturities of up to 5 months P23.66 million 23.45 million 9.55 million 6.81 million 6.61 million Interest income on interbank loans receivable Interest expense on bills payable Income on commissions and transactional fees Negative fair value of derivative financial instruments Income from leasing agreements with various lease terms (see Note 25)
December 31, 2011 (As restated - Notes 2 and 35) Outstanding Balances Terms and Conditions/Nature

Due from other banks . . . .

Interbank loans receivable . . . . . . . . . . . . Bills payables . . . . . . . . . . . Derivative liabilities. . . . . . Interest income . . . . . . . . . . Interest expense . . . . . . . . . Service charges, fees and commissions . . . . . . . . . . Unrealized trading loss . . . Rental income . . . . . . . . . . .

Category

Amount /Volume

Interest expense . . . . . . . . . Information technology expense . . . . . . . . . . . . . . Interest income . . . . . . . . . . Other related parties: Receivables from customers. . . . . . . . . . . . .

P1.35 million 1.20 million 0.28 million

Interest expense on deposit liabilities Share in information technology expense of subsidiaries Interest income on due from other banks

P6.58 billion P4.37 billion secured by government securities, real estate and mortgage trust indenture and P2.21 billion unsecured, no impairment, with interest rates ranging from 5.81% to 11.32% with maturities of up to 7 years 4.95 million With annual fixed interest rates ranging from 0.65% to 1.75% including time deposits with maturities from 30 days to 365 days 280.12 million 8.95 million 1.46 billion 1.53 billion Interest income on receivables from customers Interest expense on deposit liabilities Loan drawdowns Settlement of loans and interest

Deposit liabilities . . . . . . . .

Interest income . . . . . . . . . . Interest expense . . . . . . . . . Loan releases. . . . . . . . . . . . Loan collections . . . . . . . . .

F-350

Category

Amount /Volume

December 31, 2010 Outstanding Balances Terms and Conditions/Nature

Subsidiaries: Deposit liabilities . . . . . . . . P730.30 million With annual fixed interest rates ranging from 0.65% to 1.75% including time deposits and maturities from 30 days to 365 days 253.52 million With annual fixed interest rates ranging from 0.01% to 4.50% which includes time deposits with maturities of up to 90 days 247.51 million With annual fixed interest rate of 4% with maturities up to 90 days 42.75 million With annual fixed interest rate of 0.50% with maturities of 91 days, unsecured P17.06 million 1.64 million 5.02 million P0.20 million 2.44 million 6.81 million 6.05 million Interest expense on deposit liabilities Interest expense on bills payable Interest income on interbank loans receivable Interest income on due from other banks Income on commissions and transactional fees Negative fair value of derivative financial instruments Income from leasing agreements with various lease terms (see Note 25) Share in information technology expense of subsidiaries
December 31, 2010 Outstanding Balances Terms and Conditions/Nature

Due from other banks . . . .

Interbank loans receivable . . . . . . . . . . . . Bills payable . . . . . . . . . . . . Interest expense . . . . . . . . . Interest expense . . . . . . . . . Interest income . . . . . . . . . . Interest income . . . . . . . . . . Service charges, fees and commissions . . . . . . . . . . Unrealized trading loss . . . Rental income . . . . . . . . . . . Information technology expense . . . . . . . . . . . . . .

1.20 million

Category

Amount /Volume

Other related parties:

Receivables from customers. . . . . . . . . . . . . P6.61 billion P4.40 billion secured by hold-out on deposit, government securities, real estate and mortgage trust indenture and P2.21 billion unsecured, no impairment, with interest rates ranging from 6.50% to 11.32% with maturities of up to 7 years 7.14 billion With annual fixed interest rates ranging from 0.65% to 1.75% including time deposits with maturities from 30 days to 365 days 374.55 million 156.87 million 2.13 billion 497.65 million Interest income on receivables from customers Interest expense on deposit liabilities Loan drawdowns Settlement of loans and interest

Deposit liabilities . . . . . . . .

Interest income . . . . . . . . . . Interest expense . . . . . . . . . Loan releases. . . . . . . . . . . . Loan collections . . . . . . . . .

The remuneration of directors and other members of key management personnel follow:
2012 Consolidated 2011 2010 2012 Parent Company 2011 2010

Short-term employee benefits. . . . . . . . Post-employment benefits . . . . . . . . . . .

Q203,806 P235,185 P210,946 Q123,472 P127,290 P154,277 248,659 643,943 686,886 248,659 643,526 685,129 Q452,465 P879,128 P897,832 Q372,131 P770,816 P839,406

Transactions with retirement plans Management of the retirement funds of the Group and the Parent Company is handled by the Parent Companys Trust and Investments Division. As of December 31, 2012, the fair value of the plan assets in the retirement funds amounted to P859.81 million and P806.46 million for the Group and for the Parent Company, respectively. F-351

Relevant information on statement of financial position at carrying values of the Group and of the Parent Companys retirement funds as of December 31, 2012 are as follows:
Consolidated Parent Company

Investment securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deposits in other bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deposit in the Parent Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans and other receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Fund Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P492,530 325,997 757 40,529 P859,813

Consolidated

P465,789 302,093 742 37,832 P806,456

Parent Company

Trust Fees Payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Fund Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P P

90 90

P P

As of December 31, 2012, the retirement funds of the Group and the Parent Company have no investment in any equity or debt instruments issued by the Group. As of December 31, 2012, investment securities include government, private debt and equity securities. Deposits with other bank pertain to Special Deposits (SDA) placement with BSP and other bank amounting to P276.00 million and P50.00 million, respectively, for the Group, and P252.09 million and P50.00 million, respectively, for the Parent Company. Interest income on deposit with the Parent Company amounted to P0.03 million, both for the Group and the Parent Company. Trust fees earned by the Parent Company from the retirement funds amounted to P0.09 million and P0.01 million for the Group and the Parent Company, respectively, in 2012. Investments are approved by an authorized fund manager or officer of the Parent Company. 31. Margin of Solvency Under the Insurance Code, a life insurance company doing business in the Philippines shall maintain at all times a margin of solvency equal to P0.50 million or P2.00 per thousand of the total amount of insurance in force as of the preceding calendar year in all policies (except term insurance), whichever is higher. The margin of solvency shall be the excess of the value of its admitted assets as defined under the same Code, exclusive of the minimum paid-up capital, over the amount of its liabilities, unearned premiums, and reinsurance reserves. The final amounts of the margin of solvency can be determined only after the accounts of PLII have been examined by the IC specifically as to admitted and non-admitted assets as defined in the Insurance Code. The estimated amounts of non-admitted assets included in the statements of financial position, which are subject to final determination by the IC follow:
2012 2011 2010

Market revaluation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property and equipmentnet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans and receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q567,178 P366,916 P224,331 21,645 26,271 28,700 8,148 12,376 7,174 3,427 4,001 4,231 10,776 8,129 8,670 Q611,174 P417,693 P273,106

32. Commitments and Contingent Assets and Liabilities In the normal course of business, the Group has various commitments and contingent liabilities that are not presented in the accompanying financial statements. The Group does not anticipate any material losses as a result of these commitments and contingent liabilities.

F-352

The following is a summary of commitments and contingent accounts at their equivalent peso contractual amounts:
2012 Consolidated 2011 2010 2012 Parent Company 2011 2010

Trust department accounts (Note 28) . . . . . . . . . . . . . Q41,838,182 P35,062,944 P24,807,793 Q41,838,182 P35,062,944 P24,807,793 Unused credit card lines. . . 10,759,728 21,755,220 17,013,472 10,759,728 21,755,220 17,013,472 Deficiency claims receivable . . . . . . . . . . . . . 5,536,733 5,520,941 5,513,953 5,536,733 5,520,941 5,513,953 Unused commercial letters of credit . . . . . . . . . . . . . . 5,576,364 5,320,202 5,026,571 5,506,718 5,143,931 4,943,691 Inward bills for collection . . . . . . . . . . . . . 353,180 309,033 961,198 353,180 302,597 934,635 Late deposits/payment received . . . . . . . . . . . . . . 278,187 314,222 489,455 266,627 305,485 475,053 Outward bills for collection . . . . . . . . . . . . . 264,894 371,750 315,340 30,414 78,367 109,492 Outstanding guarantees issued . . . . . . . . . . . . . . . . 323,157 313,978 338,589 299,071 294,220 318,848 Confirmed export letters of credit . . . . . . . . . . . . . . . . . 2,256 1,096 167,089 1,026 1,096 2,192 Others . . . . . . . . . . . . . . . . . . 543,447 609,476 557,197 420,452 375,963 245,768 There are pending cases for and against the Parent Company and certain subsidiaries arising from normal business activities. Management believes that these actions are without merit or that the ultimate liability, if any, resulting from these cases will not adversely affect the financial position or results of operation of the Parent Company and certain subsidiaries.

F-353

33. Earnings Per Share The basis of calculation for earnings per share attributable to equity holders of the Parent Company follows:
2011 (As restated 2012 Notes 2 and 35) 2010 (In thousands, except number of shares and EPS)

TOTAL EARNINGS PER SHARE Net income attributable to equity holders of the Parent Company. . . . Less dividends to preferred shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a. b. c. Net income applicable to common shares . . . . . . . . . . . . . . . . . . . Add dividends to preferred shares. . . . . . . . . . . . . . . . . . . . . . . . . . Net income applicable to common and potential common shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Weighted average number of outstanding common shares (Note 22) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Add weighted average number of potential common shares (pertaining to convertible preferred shares) . . . . . . . . . . . . . . . Weighted average number of outstanding and potential common shares. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q1,901,581 7,500 1,894,081 7,500 Q1,901,581 3,252,495 7,248 3,259,743 Q 582.35

P1,318,494 7,500 1,310,994 7,500 P1,318,494 3,252,495 7,528 3,260,023 P 403.07

P1,177,462 7,500 1,169,962 7,500 P1,177,462 3,252,495 8,952 3,261,447 P 359.71

d.

Basic EPS (a/c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . EARNINGS PER SHARE FROM CONTINUING OPERATIONS Net income attributable to equity holders of the Parent Company. . . . Less dividends to preferred shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . a. b. c. Net income applicable to common shares . . . . . . . . . . . . . . . . . . . Add dividends to preferred shares. . . . . . . . . . . . . . . . . . . . . . . . . . Net income applicable to common and potential common shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Weighted average number of outstanding common shares (Note 22) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Add weighted average number of potential common shares (pertaining to convertible preferred shares) . . . . . . . . . . . . . . . Weighted average number of outstanding and potential common shares. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Q1,967,723 7,500 1,960,223 7,500 Q1,967,723 3,252,495 7,248 3,259,743 Q 602.68

P1,302,884 7,500 1,295,384 7,500 P1,302,884 3,252,495 7,528 3,260,023 P 398.27

P1,167,714 7,500 1,160,214 7,500 P1,167,714 3,252,495 8,952 3,261,447 P 356.72

d.

Basic EPS (a/c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The change in accounting policy as discussed in Note 35 resulted in increase in EPS of P0.59 in 2011. The assumed conversion of preferred shares as a result of dividing (b) and (d) is anti-dilutive. Thus, diluted EPS is the same with basic EPS. 34. Financial Performance The following basic ratios measure the financial performance of the Group:
2011 (As restated Notes 2 and 35)

2012

2010

Where average equity and average asset include revaluation increment Return on average equity (ROE) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Return on average assets (ROA) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net interest margin (NIM) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Where average equity and average asset exclude revaluation increment ROE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ROA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . NIM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5.78% 0.88 3.60 6.11 0.88 3.60

5.39% 0.77 3.74 5.69 0.78 3.74

5.19% 0.69 3.98 5.52 0.69 3.98

F-354

35. Restatement of Items in the 2011 Consolidated and Parent Financial Statements In 2011, the Group made certain adjustments to apply the change in accounting policy on the accounting for bond exchange in accordance with PFRS. In accordance with PAS 39, if the Group were to sell more than an insignificant amount of HTM investments before maturity (other than in certain specific circumstances), the entire category would be tainted and will then have to be reclassified as AFS investments and measured at fair value (see Notes 2 and 7). The tables below summarize the reconciliation of previously reported and restated balances of consolidated and parent company financial statement accounts affected by the restatement as of and for the year ended December 31, 2011:
As previously reported Restatements/ reclassifications As restated

Consolidated statements of financial position Assets AFS investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Assets of disposal group classified as held-for-sale (Note 13) . . . . HTM investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Liabilities Deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity Equity holders of the Parent Company Surplus . . . . . . . . . . . . . . . . . Net unrealized gains on AFS investments . . . . . . . . . . . . . . . . . Non-controlling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P16,733,191 P 23,598,641 P40,331,832 7,427,680 (4,998) 7,422,682 21,161,409 (21,161,409) 35,070 (1,498) 33,572 P45,357,350 P 409,062 P 2,430,736 P 8,408 P47,788,086 P 417,470

P16,331,157 P 1,926 P16,333,083 1,013,860 2,366,590 3,380,450 5,404,733 53,812 5,458,545 P22,749,750
As previously reported

P 2,422,328
Restatements/ reclassifications

P25,172,078
As restated

Consolidated statement of income Interest income on trading and investment securities . . . . . . . . . . . . . Trading and investment securities gainsnet . . . . . . . . . . . . . . . . . . . Foreign exchange gainsnet. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

P 2,731,327 534,100 185,509 P 3,450,936 P

(P2,799) P 2,728,528 3,526 537,626 1,752 187,261 2,479 P 3,453,415

Consolidated statement of other comprehensive income Changes in net unrealized gain on available-for-sale investments . . P Equity adjustment from translation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . P Parent company statement of financial position Assets AFS investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . HTM investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

250,875 P 2,437,000 P 2,687,875 17,022 (12,153) 4,869 267,897 P 2,424,847 P 2,692,744

P12,928,495 P 22,139,590 P35,068,085 19,939,638 (19,939,638) P32,868,133 P 2,199,952 P35,068,085

Liabilities Deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P Equity Surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net unrealized gains on AFS investments . . . . . . . . . . . . . . . . . . . . . . . Parent company statement of income Trading and investment securities gainsnet . . . . . . . . . . . . . . . . . . .

400,340 P

8,410 P

408,750

P14,421,435 P 267 P14,421,702 702,008 2,191,275 2,893,283 P15,123,443 P 2,191,542 P17,314,985 P 520,703 P 267 P 520,970

Parent company statement of other comprehensive income Changes in net unrealized gain on available-for-sale investments . . P F-355

109,211 P 2,191,275 P 2,300,486

Details of restatement in 2011 on the Groups net income attributable to equity holders of the Parent Company in the consolidated statement of income and net income in the Parent Companys statement of income are as follows:
As previously reported Restatements/ reclassifications As restated

Net income attributable to equity holders of the Parent Company in the consolidated statement of income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income in the Parent Companys statement of income . . . . . . . .

P1,316,568 1,117,620

P1,926 267

P1,318,494 1,117,887

36. Other Matters and Events After Statement of Financial Position Date Merger of the Parent Company and PNB On April 30, 2008 and subsequently on June 24, 2008, in a special meeting, the BOD and the stockholders owning at least two thirds (2/3) of the outstanding capital stock, respectively, of the Parent Company approved the following: a. Merger of the Parent Company and PNB under the following terms:

Share swap of 140 common shares of PNB for each common share of the Parent Company Share swap of 30.73 common shares of PNB for each preferred shares of the Parent Company PNB will be the surviving entity b. c. d. e. Issue price of the new common shares at P55 per share subject to BOD approval Issuance of 456,885,800 common shares from the PNBs authorized but unissued capital stock Plan of Merger of the Parent Company and PNB Articles of Merger of the Parent Company and PNB

On December 16, 2011 and subsequently on March 6, 2012, in a special meeting, the BOD and the Stockholders owning at least two thirds (2/3) of the outstanding capital stock, respectively, of the Parent Company approved the amendments to the Plan of Merger between PNB and the Parent Company, which are as follows: a. The exchange ratio between PNB and the Parent Company is at 130 PNB common shares for each issued common shares and 22.763 PNB common shares for each preferred shares issued by the Parent Company; The PNB common shares to be issued pursuant to the merger will be at a price of seventy pesos per share (P70.00); and The effective date of the merger was set to be the first day of the month following the issuance of the Securities and Exchange Commission (SEC) of the Certificate of Merger.

b. c.

The Plan of Merger will be subject to the approval of the regulators, and the tax-free merger under Section 40 (c) 2 of the National Internal Revenue Code of 1997 as a pre-condition to the effectivity of the merger be deferred provided that filing of an application for such ruling be retained. On July 16, 2012, the PDIC Board, per Resolution No. 2012-17-177, has granted consent to the proposed merger of PNB and the Parent Company, with PNB as the surviving entity, pursuant to Sec. 21c of Republic Act 3591, as amended (PDIC Charter), subject to the following conditions: a. b. Approval by the Monetary Board of the BSP and the SEC of the proposed merger; The consent shall be valid for a period of six (6) months reckoned from the date the proponent banks shall have fully obtained both PDIC and BSP approvals, after which if not implemented, the proponent banks would have to secure PDICs consent again; PNB and the Parent Company shall submit a certification to PDIC, at least ten (10) banking days prior to actual date of merger, that their respective depositors and creditors have been fully notified of the (i) approved merger (ii) full implication of merger on the deposit liabilities of PNB and the Parent Company; and (iii) depositors option to either withdraw or maintain their accounts with the merged bank; F-356

c.

d.

PNB and the Parent Company shall submit a sworn certification to PDIC, at least ten (10) banking days prior to actual date of merger, that they have set aside sufficient funds to cover possible withdrawals by depositors upon their actual merger; and Upon the conversion of the Parent Companys shares claimed by the Presidential Commission on Good Government (PCGG) or the National Government (NG) into PNB shares, the resulting PNB shares shall be identified. Upon the request of the PCGG or the NG, the claim of the PCGG or the NG shall be recorded in the stock and transfer book of PNB after the merger becomes effective.

e.

On August 2, 2012, the BSP Monetary Board, in its Resolution No. 1270, approved the Plan of Merger and Articles of Merger of the PNB and the Parent Company, with PNB as the surviving entity, subject to the following conditions: a. b. c. d. The merger shall take effect within 6 months form date of receipt of BSP approval; PNB shall submit a copy of the Articles of Merger and the Plan of Merger duly registered with the SEC within 5 days from the date of registration; PNB shall announce the merger in a newspaper of general circulation and the same shall be posted conspicuously in all of the Banks premises; and Upon the conversion of the Parent Company shares claimed by the PCGG or the NG into PNB shares, the resulting PNB shares shall be identified. Upon the request of the PCGG or the NG, the claim of the PCGG or the NG shall be recorded in the stock and transfer book of PNB after the merger.

On March 26, 2012, PNB submitted to the BSP and PDIC an application for PDICs consent to the merger. On April 12, 2012, the application for the merger was filed with the SEC. On July 25, 2012, PNB received notice that the PDIC had given its consent to the merger, and on August 2, 2012, the Monetary Board of the BSP issued a resolution also giving its consent to the merger. On November 5, 2012, the Hong Kong Monetary Authority has pursuant to Section 70 of the Banking Ordinance granted approval to PNB to become a majority shareholder controller of ABCHKL after the merger with the Parent Company. On January 17, 2013, the SEC granted its approval to the merger. In addition, with respect to its overseas branches, PNB has also filed notices in relation to the merger with various relevant foreign regulatory agencies; and as of January 17, 2013 had received all necessary approvals to effectuate the merger. On February 9, 2013, PNB completed its planned merger with the Parent Company. The respective shareholders of PNB and the Parent Company, representing at least two-thirds of the outstanding capital stock of both banks, approved the amended terms of the Plan of Merger of the two banks on March 6, 2012. The original Plan of Merger was approved by the affirmative vote of PNB and the Parent Companys respective shareholders on June 24, 2008, representing at least two-thirds of the outstanding capital stock of both banks. LT Group, Inc. On July 31, 2012, the BOD of Tanduay Holdings, Inc. (THI) approved the acquisition of 27.62% of the Parent Company through the purchase of 100% of the outstanding capital stock of the following 2 holding companies:
Company Name % Equity in the Parent Company

Solar Holdings Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Caravan Holdings Corporation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

13.81% 13.81 27.62%

No change in the management or board line-up of the Parent Company will result from this transaction. 37. Notes to Statements of Cash Flows As of December 31, 2012, 2011 and January 1, 2011, included in the Groups amount of due from other banks with original maturities of more than three months, hence considered as not cash and cash equivalents, F-357

amounted to P5.25 billion, P974.61 million and P1.43 billion respectively. While the amount of interbank loans receivable with original maturities of more than three months, hence considered as not cash and cash equivalents, amounted to P1.38 billion and P84.85 million, respectively, as of December 31, 2012 and 2011. Noncash activities include reclassification of the tainted HTM investments to AFS investments amounting to P19.14 billion for the year ended December 31, 2011 as a result of the Groups participation in the bond exchange. 38. Approval of the Release of the Financial Statements The accompanying comparative financial statements of the Group and of the Parent Company were authorized and approved for issue by the BOD in accordance with its resolution on February 22, 2013.

F-358

Parties to the Offer The Bank Philippine National Bank PNB Financial Center Pres. Diosdado Macapagal Blvd. Pasay City Joint International Lead Managers and International Underwriters Credit Suisse (Singapore) Limited (Credit Suisse) 1 Raffles Link #03-01 South Lobby Singapore 039393 Deutsche Bank AG, Hong Kong Branch (Deutsche Bank) Level 52, International Commerce Centre 1 Austin Road West Kowloon, Hong Kong Sole Domestic Underwriter

PNB Capital and Investment Corporation 9/F PNB Financial Center Diosdado Macapagal Blvd. Pasay City

Legal Counsel to the Bank as to Philippine law Roxas De Los Reyes Laurel Rosario & Leagogo 19/F, BDO Plaza, 8737 Paseo de Roxas 1226 Makati City, Philippines Legal Counsel to the Joint International Lead Managers and International Underwriters as to Philippine law Picazo Buyco Tan Fider & Santos 18, 19 & 17/F Liberty Center 104 H.V. dela Costa Street Salcedo Village Makati City, Philippines Receiving Agent Philippine National Bank-Trust Banking Group 4th Floor, PNB Building 6754 Ayala Avenue Makati City, Philippines

Legal Counsel to the Bank as to U.S. law

Milbank, Tweed, Hadley & McCloy 30/F Alexandra House 18 Chater Road Central, Hong Kong Legal Counsel to the Joint International Lead Managers and International Underwriters as to U.S. law Sidley Austin 39/F, Two International Finance Centre Central, Hong Kong

Stock Transfer Agent Philippine National Bank Trust Banking Group Allied Bank Center, 6754 Ayala Avenue cor. Legaspi st., Makati City

Independent Auditors SyCip, Gorres, Velayo & Co. 6760 Ayala Avenue Makati City, Philippines Investor Relations Office 9/F PNB Financial Center Pres. Diosdado Macapagal Blvd. Pasay City

(a universal banking corporation organized under Philippine law)