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Philippine Veterans Bank and Subsidiaries

Financial Statements December 31, 2009 and 2008 and Independent Auditors Report

SyCip Gorres Velayo & Co.

SyCip Go rres 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 SEC Accreditation No. 0012-FR-2

INDEPENDENT AUDITORS REPORT

The Stockholders and the Board of Directors Philippine Veterans Bank We have audited the accompanying financial statements of Philippine Veterans Bank and Subsidiaries (the Group) and of Philippine Veterans Bank (the Parent Company), which comprise the consolidated and the parent company statements of financial position as at December 31, 2009 and 2008, and the consolidated and parent company statements of income, the consolidated and the parent company statements of comprehensive income, the consolidated and the parent company statements of changes in equity and the consolidated and the parent company statements of cash flows for the years then ended, and a summary of significant accounting policies and other explanatory notes. 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. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. 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 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 consider 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.

A member firm of Ernst & Young Global Limited

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-2Opinion As discussed in Note 28 to the financial statements, in 2008, the Parent Company recognized =1,103.69 million of the required allowance for probable losses on Interbank call loans (IBCL) to a P thrift bank of P =1,138.60 million in 2006. The remaining required allowance and the required provision on the additional IBCL in 2007 totaling to P =565.91 million and the required allowance on accounts receivable amounting to P =19.54 million and P =886.00 million, representing the uninsured deposits assumed in 2009 and 2008, respectively, were deferred over 20 years as approved by the Banko Sentral ng Pilipinas. The Philippine Financial Reporting Standards require that the allowance on the IBCL be charged against 2007 and 2006 operations and the allowance on accounts receivable be charged against 2009 and 2008 operations. Had such allowance been charged to the proper accounting period, the Group and the Parent Companys net income in 2009 and 2008 would have been increased by P =4.43 million and P =152.38 million, net of related deferred income tax, respectively, and both the surplus and total assets would have been decreased by P =1,011.91 million as of December 31, 2009 and P =1,016.34 million as of December 31, 2008. As further discussed in Note 28, management computed that the earnings of the government securities from the special liquidity support will effectively cover the required allowance on the Parent Companys IBCL to the thrift bank and the assumed uninsured deposits. As discussed in Note 7 to the financial statements, the Parent Company sold a non-performing asset (NPA) to a special purpose vehicle (SPV) company on a without recourse basis. In accordance with regulatory accounting policies prescribed by the Bangko Sentral ng Pilipinas for banks and financial institutions availing of the provisions of RA No. 9182, the Special Purpose Vehicle Act of 2002, losses amounting to P =63.4 million from the sale of the NPA to the SPV company were deferred and are being amortized over a ten-year period. Had the loss from the sale of NPA been charged against current operations as required by the Philippine Financial Reporting Standards, the Group and the Parent Companys total assets as of December 31, 2009 and net income in 2009 would have been decreased by P =61.1 million. In our opinion, except for the effects on the 2009 and 2008 consolidated and parent company financial statements of the matters discussed in the preceding paragraphs, the consolidated and the parent company financial statements present fairly, in all material respects, the financial position of the Group and of the Parent Company as of December 31, 2009 and 2008, and their financial performance and their cash flows for the years then ended in accordance with Philippine Financial Reporting Standards. SYCIP GORRES VELAYO & CO.

Janet A. Paraiso Partner CPA Certificate No. 92305 SEC Accreditation No. 0778-A Tax Identification No. 193-975-241 PTR No. 2087360, January 4, 2010, Makati City April 13, 2010

*SGVMC114014*

PHILIPPINE VETERANS BANK AND SUBSIDIARIES STATEMENTS OF FINANCIAL POSITION


Consolidated 2009 ASSETS Cash and Other Cash Items (Notes 14 and 18) Due from Bangko Sentral ng Pilipinas (Notes 14 and 18) Due from Other Banks (Note 18) Interbank Loans Receivable and Securities Purchased Under Resale Agreement net (Note 18) Financial Assets at Fair Value Through Profit or Loss (Notes 6 and 18) Available-for-Sale Financial Assets (Notes 6 and 18) Held-to-Maturity Financial Assets (Notes 6 and 18) Loans and Receivables (Notes 7 and 18) Investment in Subsidiaries (Notes 8 and 19) Investment in an Associate (Note 9) Bank Premises, Furniture, Fixtures and Equipment (Note 10) Investment Properties (Notes 11 and 18) Deferred Tax Assets - net (Notes 18 and 22) Other Assets - net (Notes 12, 18, 20 and 26) P =431,579,978 13,055,098,382 699,457,117 2,633,259,478 890,369,661 3,312,259,618 4,433,330,690 22,245,927,049 6,348,778 637,899,466 2,373,564,938 360,260,761 711,112,333 P =51,790,468,249 Parent Company As of December 31 2008 2008 2009 P =426,279,803 13,055,098,382 685,820,958 2,633,259,478 890,369,661 3,299,416,840 4,433,330,690 22,200,814,995 198,048,737 10,269,688 513,200,938 2,373,564,938 360,260,761 723,376,800 P =51,803,112,669 =372,620,235 P 6,489,794,735 956,265,513 8,295,911,067 249,937,204 2,001,258,060 4,461,745,452 19,127,903,145 197,595,477 345,116,315 2,379,664,444 250,810,778 482,151,767 =45,610,774,192 P

=370,720,413 P 6,489,794,735 970,145,891 8,295,911,067 249,937,204 2,019,011,619 4,461,745,452 19,133,993,885 485,481,760 2,379,664,444 250,810,778 480,070,907 =45,587,288,155 P

LIABILITIES AND EQUITY Liabilities Deposit Liabilities (Notes 14, 18 and 26) Demand Savings Time Bills Payable (Notes 15 and 18) Managers Checks (Note 18) Accrued Taxes, Interest and Other Expenses (Notes 16, 18 and 20) Other Liabilities (Notes 17, 18 and 26) Equity Equity attributable to equity holders of the Parent Company Capital stock (Note 19) Additional paid-in capital (Note 19) Surplus reserves (Notes 23 and 25) Surplus (Notes 19, 23, 25 and 28) Net accumulated unrealized losses on available-for-sale financial assets (Note S6) Minority Interest

P =11,318,854,982 29,527,242,480 2,167,695,730 43,013,793,192 1,559,833,678 54,883,736 382,631,289 1,823,654,072 46,834,795,967

P9,324,564,331 = 26,122,966,920 1,680,084,425 37,127,615,676 1,283,116,309 94,692,098 458,631,307 1,951,704,707 40,915,760,097

P =11,318,854,982 29,527,632,389 2,167,695,730 43,014,183,101 1,559,833,678 54,883,736 398,671,513 1,823,169,641 46,850,741,669

P9,325,147,032 = 26,124,986,828 1,682,175,755 37,132,309,615 1,283,116,309 94,692,098 474,863,521 1,951,420,288 40,936,401,831

2,751,621,268 20,979,000 905,515,475 1,341,812,819

2,751,209,768 20,979,000 820,698,505 1,141,662,214

2,751,621,268 20,979,000 905,515,475 1,338,703,823

2,751,209,768 20,979,000 820,698,505 1,144,697,475

(63,212,387) (63,212,387) (64,448,566) (64,448,566) 4,671,337,100 4,674,372,361 4,955,479,996 4,952,371,000 190,958 192,286 =45,587,288,155 P =45,610,774,192 P =51,790,468,249 P =51,803,112,669 P

See accompanying Notes to Financial Statements.

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PHILIPPINE VETERANS BANK AND SUBSIDIARIES STATEMENTS OF INCOME

Consolidated Parent Company Years Ended December 31 2008 2008 2009 2009 INTEREST INCOME Loans and receivables (Note 7) Trading and investment securities (Note 6) Deposits with banks and others Interbank loans receivable INTEREST EXPENSES Deposit liabilities (Notes 14 and 26) Bills payable and other borrowings (Note 15) NET INTEREST INCOME Day 1 gain (Notes 15 and 28) Gains on sale of acquired assets Service fees and commissions Income from trust operations (Note 25) Foreign exchange gain (losses) net Gains (losses) on asset foreclosures and dacion transactions Trading gains (losses) - net (Note 6) Equity share in net loss in an associate Other operating income (Note 11) TOTAL OPERATING INCOME Provision for impairment and credit losses (Notes 13 and 28) Compensation and fringe benefits (Notes 20 and 26) Taxes and licenses (Note 22) Occupancy (Note 21) Depreciation and amortization (Notes 10 and 11) Insurance Communications Amortization of software costs (Note 12) Litigation and expenses on acquired assets Transportation and traveling expense Advertising and publicity expense Office supplies Bangko Sentral ng Pilipinas supervision fees Entertainment, amusement and representation expense (Note 22) Professional fees Freight expenses Membership fees and dues Finance charges Miscellaneous (Notes 11 and 26) TOTAL OPERATING EXPENSES P =1,742,683,866 490,386,224 406,824,038 114,690,494 2,754,584,622 983,233,190 151,171,520 1,134,404,710 1,620,179,912 150,714,092 119,739,846 29,524,396 9,366,364 (63,887,140) 33,496,321 (3,920,910) 151,480,871 2,046,693,752 160,443,301 516,380,081 208,009,356 188,491,658 81,576,965 72,233,747 37,794,897 43,099,760 34,449,615 29,176,973 26,850,717 14,612,533 13,814,452 9,053,942 10,665,503 3,439,836 1,899,541 93,861 49,643,028 1,501,729,766 =1,490,440,783 P 366,903,025 350,288,915 178,818,070 2,386,450,793 769,968,945 135,743,409 905,712,354 1,480,738,439 1,103,693,778 160,892,090 70,733,186 27,170,407 17,274,936 4,405,265 (22,521,918) 116,679,483 2,959,065,666 1,097,531,979 444,607,850 194,528,525 164,830,020 68,377,676 64,948,981 37,859,475 36,559,198 36,570,087 34,370,337 20,804,557 14,544,482 10,378,930 8,927,864 7,869,336 3,762,648 2,364,890 83,515 101,231,523 2,350,151,873 P =1,741,522,157 490,386,224 406,824,038 114,690,494 2,753,422,913 983,236,510 152,029,318 1,135,265,828 1,618,157,085 147,850,267 101,982,195 29,524,396 7,616,731 (63,887,140) 33,496,321 151,413,307 2,026,153,162 160,443,301 511,440,570 207,809,094 186,271,652 81,496,521 72,146,605 37,610,414 43,099,760 34,449,615 28,547,978 26,850,717 14,450,868 13,814,452 8,775,152 7,861,916 3,434,590 1,899,541 86,018 47,172,127 1,487,660,891 =1,489,490,665 P 366,903,025 350,288,915 178,818,070 2,385,500,675 769,976,064 136,645,016 906,621,080 1,478,879,595 1,103,693,778 159,076,284 70,733,186 27,170,407 15,243,832 4,405,265 (22,521,918) 116,611,965 2,953,292,394 1,097,531,979 442,466,167 194,412,871 165,399,127 68,336,574 64,931,413 37,609,629 36,559,198 36,570,087 33,985,755 20,804,557 14,467,094 10,378,930 8,868,098 6,780,367 3,761,658 2,364,890 79,115 100,003,982 2,345,311,491

(Forward)

*SGVMC114014*

-2Parent Company Consolidated Years Ended December 31 2008 2008 2009 2009 =608,913,793 P =607,980,903 P P =544,963,986 P =538,492,271 120,405,740 P =424,558,246 P =424,556,918 1,328 P =424,558,246 P =15.35 202,552,638 P406,361,155 = =406,358,307 P 2,848 =406,361,155 P =14.92 P 120,079,610 P =418,412,661 202,206,982 P405,773,921 =

INCOME BEFORE INCOME TAX PROVISION FOR INCOME TAX (Note 22) NET INCOME (Notes 23 and 24) Attributable to: Equity holders of the Parent Company Minority interest Basic/Diluted Earnings Per Share (Note 24) See accompanying Notes to Financial Statements.

*SGVMC114014*

PHILIPPINE VETERANS BANK AND SUBSIDIARIES STATEMENTS OF COMPREHENSIVE INCOME

Net Income Other Comprehensive Income: Net unrealized loss on available-for-sale financial assets (Note 6) TOTAL COMPREHENSIVE INCOME Attributable to: Equity holders of the Parent Company Minority interest

Consolidated Parent Company Years Ended December 31 2008 2008 2009 2009 =406,361,155 P =405,773,921 P P =424,558,246 P =418,412,660

(1,236,179) P =423,322,067 P =423,320,739 1,328 P =423,322,067

(107,839,947) P298,521,208 = =298,518,360 P 2,848 =298,521,208 P

(1,236,179) P =417,176,481

(107,839,947) P297,933,974 =

See accompanying Notes to Financial Statements.

*SGVMC114014*

PHILIPPINE VETERANS BANK AND SUBSIDIARIES STATEMENTS OF CHANGES IN EQUITY

Consolidated Equity Attributable to Equity Holders of the Parent Company Net Accumulated Unrealized Gains (Loss) on Available-forSale(AFS) Surplus Financial (Note 19, 23, Assets 25 and 28) (Note 6) Total P =1,142,142,516 (P =63,212,387) P =4,671,337,100 424,556,918 (1,236,179) 423,320,739

Balance at January 1, 2009 Total comprehensive income Transfer to capital stock from surplus representing shares of previously unlocated stockholders Transfer to surplus reserve Distribution to the Board of Trustees of the Veterans of World War II Dividends declared Acquisition during the year of treasury stock Collections on subscriptions of common stock Balance at December 31, 2009 See accompanying Notes to Financial Statements.

Preferred Common Stock Stock (Note 19) (Note 19) P =361,867,100 P =2,394,784,268

Treasury Stock Total (Note 19) Capital Stock (P =5,441,600) P =2,751,209,768

Additional Paid-in Surplus Capital Reserves (Note 19) (Note 23 and 25) P =20,979,000 P =820,218,203

Minority Total Interest Equity P =190,958 P =4,671,528,058 1,328 423,322,067

72,500

535,000

14,800 (323,600)

622,300

P =20,979,000

85,297,272

(614,900) (85,297,272)

7,400

7,400

112,800 P =361,939,600 P =2,395,432,068

(323,600) 112,800 P = (5,750,400) P =2,751,621,268

(60,635,667) (78,338,776) P =905,515,475 P = 1,341,812,819

(60,635,667) (78,338,776) (323,600) 112,800 (P =64,448,566) P =4,955,479,996

(60,635,667) (78,338,776) (323,600) 112,800 P =192,286 P =4,955,672,282

*SGVMC114014*

-2Consolidated Equity Attributable to Equity Holders of the Parent Company Net Accumulated Unrealized Gains (Loss) on Available-forSale(AFS) Surplus Financial (Note 19, 23, Assets 25 and 28) (Note 6) Total =879,614,417 P =44,627,560 = P P4,432,600,582 406,358,307 (107,839,947) 298,518,360

Balance at January 1, 2008 Total comprehensive income Transfer to capital stock from surplus representing shares of previously unlocated stockholders Transfer to surplus reserve Distribution to the Board of Trustees of the Veterans of World War II Acquisition during the year of treasury stock Collections on subscriptions of common stock Balance at December 31, 2008 See accompanying Notes to Financial Statements.

Preferred Common Stock Stock (Note 19) (Note 19) =361,764,600 P P =2,393,825,225

Treasury Stock Total (Note 19) Capital Stock (P =5,036,900) P =2,750,552,925

Additional Paid-in Surplus Capital Reserves (Note 19) (Note 23 and 25) =20,979,000 P =736,826,680 P

Minority Total Interest Equity =188,110 = P P4,432,788,692 2,848 298,521,208

102,500

936,994

(100,800)

938,694

83,391,523

(1,198,400) (83,391,523)

(259,706)

(259,706)

22,049 =361,867,100 P P =2,394,784,268

(303,900) (303,900) 22,049 (P =5,441,600) P =2,751,209,768

=20,979,000 P

(59,240,285) =820,218,203 P P =1,142,142,516

(59,240,285) (303,900) 22,049 (P =63,212,387) P =4,671,337,100

(59,240,285) (303,900) 22,049 =190,958 P P =4,671,528,058

*SGVMC114014*

-3-

Parent Company Net Accumulated Unrealized Gains (Loss) on Available-forSurplus Sale Financial (Note 19, 23, Assets 25 and 28) (Note 6) Total P =1,145,177,777 (P =63,212,387) P =4,674,372,361 418,412,661 (1,236,179) 417,176,482 7,400 (60,635,667) (78,338,776) (323,600) 112,800 (P =64,448,566) P =4,952,371,000

Balance at January 1, 2009 Total comprehensive income Transfer to capital stock from surplus representing shares of previously unlocated stockholders Transfer to surplus reserve Distribution to the Board of Trustees of the Veterans of World War II Dividends declared Acquisition during the year of treasury stock Collections on subscriptions of common stock Balance at December 31, 2009 See accompanying Notes to Financial Statements.

Common Preferred Stock Stock (Note 19) (Note 19) P =361,867,100 P =2,394,784,268 72,500 535,000 112,800 P =361,939,600 P =2,395,432,068

Treasury Stock Total (Note 19) Capital Stock (P =5,441,600) P =2,751,209,768 14,800 622,300 (323,600) (323,600) 112,800 (P =5,750,400) P =2,751,621,268

Additional Paid-in Surplus Capital Reserves (Note 19) (Note 23 and 25) P =20,979,000 P =820,218,203 P =20,979,000

(614,900) 85,297,272 (85,297,272) (60,635,667) (78,338,776) P =905,515,475 P =1,338,703,823

*SGVMC114014*

-4Parent Company Net Accumulated Unrealized Gains (Loss) on Available-forSurplus Sale Financial (Note 19, 23, Assets 25 and 28) (Note 6) Total =883,234,064 P =44,627,560 = P P4,436,220,229 405,773,921 (107,839,947) 297,933,974 (259,706) (59,240,285) (303,900) 22,049 (P =63,212,387) P =4,674,372,361

Balance at January 1, 2008 Total comprehensive income Transfer to capital stock from surplus representing shares of previously unlocated stockholders Transfer to surplus reserve Distribution to the Board of Trustees of the Veterans of World War II Acquisition during the year of treasury stock Collections on subscriptions of common stock Balance at December 31, 2008 See accompanying Notes to Financial Statements.

Common Preferred Stock Stock (Note 19) (Note 19) =361,764,600 P P =2,393,825,225 102,500 936,994 22,049 =361,867,100 P P =2,394,784,268

Treasury Stock Total (Note 19) Capital Stock (P =5,036,900) P =2,750,552,925 (100,800) 938,694 (303,900) (303,900) 22,049 (P =5,441,600) P =2,751,209,768

Additional Paid-in Surplus Capital Reserves (Note 19) (Note 23 and 25) =20,979,000 P =736,826,680 P =20,979,000 P

(1,198,400) 83,391,523 (83,391,523) (59,240,285) =820,218,203 P P =1,145,177,777

*SGVMC114014*

PHILIPPINE VETERANS BANK AND SUBSIDIARIES STATEMENTS OF CASH FLOWS

Consolidated Parent Company Years Ended December 31 2008 2008 2009 2009 CASH FLOWS FROM OPERATING ACTIVITIES Income before income tax Adjustments for: Provision for impairment and credit losses (Notes 13 and 28) Gain on sale of acquired assets Accretion on impaired loans Depreciation and amortization (Notes 10 and 11) Gain on asset foreclosures and dacion transactions Amortization of software costs (Note 12) Amortization of premium Accretion of interest on bills payable Equity share in net loss of an associate Trading loss on reclassification of financial assets Day-1 gain (Note 15) Changes in operating assets and liabilities: Decrease (increase) in amounts of: Financial assets at fair value through profit or loss Loans and receivables Other assets Increase (decrease) in amounts of: Deposit liabilities Accrued taxes and other expenses Managers checks Accrued interest payable Other liabilities Net cash generated from operations Income taxes paid Net cash provided by operating activities CASH FLOWS FROM INVESTING ACTIVITIES Investment in an associate (Note 9) Purchases of: Available-for-sale financial assets Held-to-maturity financial assets Proceeds from sale/maturities of: Available-for-sale financial assets Additions to bank premises, furniture, fixtures and equipment (Note 10) Proceeds from sale of bank premises, furniture, fixtures and equipment Proceeds from disposal of investment properties Additions to software costs (Note 12) Net cash used in investing activities (Forward)

P =544,963,986 160,443,301 (150,714,092) (124,128,467) 81,386,519 63,887,140 43,099,760 28,414,762 18,946,567 3,920,910

=608,913,793 P 1,097,531,979 (160,892,090) (65,346,169) 68,377,676 (4,405,265) 36,559,198 6,510,087 10,339,840 2,727,477 (1,103,693,778)

P =538,492,271 160,443,301 (147,850,267) (124,128,467) 81,386,519 63,887,140 43,099,760 28,414,762 18,946,567

=607,980,903 P 1,097,531,979 (159,076,284) (65,346,169) 68,336,574 (4,405,265) 36,559,198 6,510,087 10,339,840 2,727,477 (1,103,693,778)

(637,109,890) (3,125,704,690) (214,668,535) 5,886,177,516 (103,980,802) (39,808,362) (32,797,666) (192,816,046) 2,209,511,910 (229,386,811) 1,980,125,099

(304,095,611) (5,236,551,811) (199,413,281) 7,503,004,351 (80,274,343) 36,399,460 49,553,053 157,348,865 2,422,593,431 (209,697,162) 2,212,896,269

(637,109,890) (3,086,683,376) (217,950,245) 5,881,873,486 (104,172,792) (39,808,362) (32,797,666) (200,045,086) 2,225,997,655 (229,386,811) 1,996,610,844

(304,095,611) (5,236,551,811) (210,776,675) 7,503,946,068 (79,322,393) 36,399,460 49,553,053 169,913,509 2,426,530,162 (208,865,512) 2,217,664,650

(10,269,688) (4,278,271,496) 2,974,988,042 (308,583,494) 86,948,123 82,872,490 (67,302,655) (1,519,618,678)

(5,357,472,547) (2,327,008,268) 3,070,395,256 (72,425,885) 16,790,606 233,313,024 (54,191,282) (4,490,599,096)

(10,269,688) (4,278,271,496) 2,970,077,262 (308,109,437) 70,807,149 80,008,665 (67,302,655) (1,543,060,200)

(5,359,235,368) (2,327,008,268) 3,070,395,256 (72,425,885) 11,905,601 231,497,218 (54,191,282) (4,499,062,728)

*SGVMC114014*

-2Consolidated Parent Company Years Ended December 31 2008 2008 2009 2009 CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from bills payable Payments of bills payable Acquisitions of treasury shares Collections on subscriptions of capital stock Dividends paid (Note 19) Net cash provided by financing activities NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS AT BEGINNING OF THE YEAR Cash and other cash items Due from Bangko Sentral ng Pilipinas Due from other banks Interbank loans receivable (Note 29) CASH AND CASH EQUIVALENTS AT END OF THE YEAR Cash and other cash items Due from Bangko Sentral ng Pilipinas Due from other banks Interbank loans receivable (Note 29)

P = 284,501,250 (26,730,448) (308,800) 720,301 258,182,303 718,688,724

=2,300,000,000 P (20,889,293) (303,900) 22,049 (13,077,070) 2,265,751,786 (10,413,971)

P = 284,501,250 (26,730,448) (308,800) 720,301 258,182,303 711,732,946

=2,300,000,000 P (20,889,293) (303,900) 22,049 (13,077,070) 2,265,751,786 (15,646,292)

370,720,413 6,489,794,735 970,145,891 7,730,004,845 15,560,665,884

518,025,327 7,528,133,219 629,204,779 6,895,716,530 15,571,079,855

372,620,235 6,489,794,735 956,265,513 7,730,004,845 17,218,285,328

521,425,254 7,528,133,219 619,056,617 6,895,716,530 15,564,331,620

431,579,978 13,055,098,382 699,457,117 2,093,219,131 P =16,279,354,608

370,720,413 6,489,794,735 970,145,891 7,730,004,845 =15,560,665,884 P

426,279,803 13,055,098,382 685,820,958 2,093,219,131 P =17,930,018,274

372,620,235 6,489,794,735 956,265,513 7,730,004,845 =15,548,685,328 P

OPERATIONAL CASH FLOWS FROM INTERESTS Consolidated Parent Company Years Ended December 31 2008 2008 2009 2009 =856,159,301 P =857,068,027 P P =1,167,202,376 P =1,168,063,494 2,575,450,920 2,574,186,922 2,533,727,023 3,228,507,613

Interest paid Interest received

See accompanying Notes to Financial Statements.

*SGVMC114014*

PHILIPPINE VETERANS BANK AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS

1. Corporate Information Philippine Veterans Bank (the Parent Company) operates as a domestic commercial bank and provides services such as deposit-taking, loans and trade finance, domestic and foreign fund transfers, treasury, foreign exchange and trust services. The subsidiaries are engaged primarily in real estate and insurance business. Principal place of business is of the Parent Company at 101 V.A. Rufino corner Dela Rosa Streets, Legaspi Village, Makati City. On June 18, 1963, the Philippine Veterans Bank was created with the enactment of Republic Act No. 3518, which became its charter. On October 30, 2003, the Board of Directors (BOD) approved the merger of Monarch Properties, Inc. (MPI), a wholly owned subsidiary, with the Parent Company. The merger was subsequently approved by the Parent Companys stockholders on May 30, 2005. As of December 31, 2009, the approval of the merger is still pending with the SEC and BSP. 2. Summary of Significant Accounting Policies Basis of Preparation The accompanying financial statements have been prepared on a historical basis except for financial assets at fair value through profit or loss (FVPL) and available-for-sale (AFS) financial assets that are measured at fair value. The accompanying financial statements of the Parent Company include the accounts maintained in the Regular Banking Unit (RBU) and Foreign Currency Deposit Unit (FCDU). For financial reporting purposes, FCDU accounts and foreign currency denominated accounts in the RBU are translated into their equivalents in Philippine Peso (see accounting policy on Foreign currency translation). The financial statements of these units are combined after eliminating interunit accounts. The consolidated financial statements are presented in Philippine Peso (P =) which is also the Parent Companys functional currency. Statement of Compliance The Group and the Parent Company prepared its financial statements in accordance with Philippine Financial Reporting Standards (PFRS), except for the recognition in 2008 of the allowance for credit losses on interbank call loans (IBCL) to a thrift bank required in 2007 and 2006, and the staggered recognition of the remaining required allowance for credit losses on IBCL and the required allowance for credit losses on accounts receivable over 20 years approved by BSP as discussed in Note 28 and the deferral of loss on sale of non-performing assets to a Special Purpose Vehicle as discussed in Note 7. Basis of Consolidation The financial statements which include the financial statements of the Parent Company and its subsidiaries (collectively referred to as the Group) are prepared for the same reporting year as the Parent Company, using consistent accounting policies.

*SGVMC114014*

-2The Parent Company has the following wholly and majority owned subsidiaries:
Country of Incorporation Philippines Philippines Philippines Effective Percentage of Ownership 100.00 100.00 60.00

Subsidiary Vetgroup Intervest Projects, Inc. Monarch Properties, Inc. Veterans Venture Capital Corporation

Principal Activities Real estate Real estate Financing

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 year are included in the consolidated statement of income from the date of acquisition or up to the date of disposal, as appropriate. Minority Interest Minority interest represents the portion of profit or loss and the net assets not held by the Group and is presented separately in the consolidated statement of income and within equity in the consolidated statement of financial position, separately from Parent Companys equity. Acquisitions of minority interest are accounted for using the entity concept method, whereby the difference between the consideration and the book value of the share of the net assets acquired is recognized as an equity transaction. Minority interest represents the equity interest in Veterans Venture Capital Corporation, a 60% owned subsidiary. Changes in Accounting Polices The accounting policies are consistent with the previous year except for the adoption of the following amendments to PFRS and Philippine Interpretations starting January 1, 2009: New Standards and Interpretations PAS 1, Presentation of Financial Statements effective January 1, 2009 PAS 23, Borrowing Cost (Revised) effective January 1, 2009 PFRS 8, Operating Segments effective January 1, 2009 Philippine Interpretation IFRIC 13, Customer Loyalty Programmes effective July 1, 2008 Philippine Interpretation IFRIC 16, Hedges of a Net Investment in a Foreign Operations effective October 1, 2008 Philippine Interpretation IFRIC 18, Transfer of Assets from Customers effective July 1, 2009 Amendments to Standards PAS 1 and PAS 32 Amendments, Puttable Financial Instruments and Obligations Arising on Liquidation effective January 1, 2009 PFRS 1 and PAS 27 Amendments, Cost of an Investment in a Subsidiary, Joint Controlled Entity or Associate effective January 1, 2009 PFRS 2 Amendment, Vesting Conditions and Cancellations effective January 1, 2009 PFRS 7 Amendment, Improving Disclosures about Financial Instruments effective January 1, 2009

*SGVMC114014*

-3 Philippine Interpretation IFRIC 9 and PAS 39 Amendments, Embedded Derivatives effective June 30, 2009 Improvements to PFRSs (2008) Improvements to PFRSs (2009), with respect to the amendment to the Appendix to PAS 18, Revenue

New and amended standards that have been adopted and that have impact on the financial statements and disclosures of the Group are described below: Philippine Accounting Standards (PAS) 1, Presentation of Financial Statements The revised standard separates owner and non-owner changes in equity. The statement of changes in equity includes only details of transactions with owners, with non-owner changes in equity presented in a reconciliation of each component of equity. In addition, the standard introduces the statement of comprehensive income: it presents all items of recognized income and expense, either in one single statement, or in two linked statements. The Group has elected to present two linked statements. Amendments to Standards PFRS 7 Amendments - Improving Disclosures about Financial Instruments The amendments to PFRS 7, Financial Instruments: Disclosures, require additional disclosures about fair value measurement and liquidity risk. Fair value measurements related to items recorded at fair value are to be disclosed by source of inputs using a three level fair value hierarchy, by class, for all financial instruments recognized at fair value. In addition, a reconciliation between the beginning and ending balance for level 3 fair value measurements is now required, as well as significant transfers between levels in the fair value hierarchy. The amendments also clarify the requirements for liquidity risk disclosures with respect to derivative transactions and financial assets used for liquidity management. The fair value measurement disclosures are presented in Note 5. The liquidity risk disclosures are not significantly impacted by the amendments and are presented in Note 4. Improvements to PFRS 2008 The omnibus amendments to PFRSs issued in 2008 were issued primarily with a view to remove inconsistencies and clarify wordings. There are separate transitional provisions for each standard. The adoption of the amendments resulted in changes in accounting policies but did not have any impact on the financial position or performance of the Group. 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. For financial reporting purposes, foreign currency-denominated monetary assets and liabilities of the RBU are translated in Philippine peso based on the Philippine Dealing and Exchange Corporation (PDEx) closing rate prevailing at end of the year. Transactions denominated in foreign currencies are recorded using the exchange rates prevailing at the transaction dates. Foreign exchange differences are recognized in the statement of income. 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. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined.

*SGVMC114014*

-4FCDU As at the reporting date, the assets and liabilities of FCDU are translated into the Parent Companys presentation currency (the Philippine peso) at PDEx closing rate prevailing at the statement of financial position date, and their income and expenses are translated at PDEx weighted average rates for the period. Exchange differences arising on translation are taken to statement of comprehensive income. Financial Instruments - Initial 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 the date that an asset is delivered to or by the Group. Securities transactions 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 assets and financial liabilities are initially recognized at fair value. Except for financial assets and financial liabilities at FVPL, the initial measurement of financial assets and financial liabilities includes transaction costs. The Group classifies its financial assets in the following categories: financial assets at FVPL, HTM financial assets, AFS financial assets, and loans and receivables. The financial liabilities, on the other hand, are classified into (a) financial liabilities at FVPL and (b) other financial liabilities. The classification depends on the purpose for which the financial assets were acquired and whether they are quoted in an active market and for HTM financial assets, the ability and intention to hold the investment until maturity. Management determines the classification of its investments at initial recognition and, where allowed and appropriate, re-evaluates such designation at every reporting date. 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 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 financial assets reclassified out of the AFS category to held-to-maturity investments, any previous gain or loss on that asset that has been recognized under other comprehensive income in the statement of comprehensive income is amortized to profit or loss over the remaining life of the investment using the effective interest rate (EIR) method. Any difference between the new amortize cost and the expected cash flows is also amortized over the remaining life of asset using EIR method. If the asset is subsequently determined to be impaired then the amount recorded under other comprehensive income is recycled to the statement of income.

*SGVMC114014*

-5Determination 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 asking 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 techniques. Valuation techniques include net present value techniques, comparison to similar instruments for which market observable prices exist, options 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 based on 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 (Day 1 difference) in the statement of income unless it qualifies for recognition as some other type of assets. In cases where use is made of data which 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. Financial assets or financial liabilities held for trading Financial assets or financial liabilities held for trading 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 gains (losses) - net. Interest earned or incurred is recorded in Interest income or expense, respectively, while dividend income is recorded in Other operating 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. As of December 31, 2009 and 2008, the Group does not have financial liabilities held for trading. Financial assets or financial liabilities designated at FVPL Financial assets or 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.

*SGVMC114014*

-6Designated 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 gains(losses) - net on financial assets and liabilities designated at FVPL. Interest earned or incurred is recorded in interest income or expense, respectively, while dividend income is recorded in Other operating income according to the terms of the contract, or when the right of the payment has been established. As of December 31, 2009 and 2008, the Group has no existing financial assets or financial liabilities designated at FVPL. HTM financial assets HTM financial assets 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 would sell other than an insignificant amount of HTM financial assets, the entire category would be tainted and reclassified as AFS financial assets. After initial measurement, these investments are subsequently measured at amortized cost using the effective interest rate (EIR) method, less any 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. Gains and losses are recognized in the statement of income when the HTM financial assets 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 impairment and credit losses. The effects of restatement on foreign currency denominated HTM financial assets are recognized in the statement of income. Loans and receivables, amounts due from BSP and other banks, and interbank loans receivables and SPURA This accounting policy relates to the statement of financial position captions Due from BSP, Due from other banks, Interbank loans receivables and SPURA, Securities purchased under resale agreement and Loans and receivables. These are non derivative 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 held for trading, designated as AFS financial assets or financial assets designated at FVPL. After initial measurement, Loans and receivables, Due from BSP, Due from other banks and Interbank loans receivables and SPURA are subsequently measured at amortized cost using the EIR method, less allowance for impairment. 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 impairment and credit losses in the statement of income. AFS financial assets AFS financial assets are those which are designated as such or do not qualify to be classified as designated as financial assets at FVPL, HTM financial assets 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 equity investments and other debt instruments.

*SGVMC114014*

-7After initial measurement, AFS financial assets 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 statement of income. The unrealized gains and losses arising from the fair valuation of AFS financial assets are excluded, net of tax, from reported income and are reported as Net unrealized gains (losses) on AFS financial assets under other comprehensive income in the statement of comprehensive income. When the security is disposed of, the cumulative gain (losses) or loss previously recognized in equity is recognized as Trading gains (losses) - net 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 specific identification. Interests earned on holding AFS financial assets are reported as interest income using the EIR. Dividends earned on holding AFS financial assets are recognized in the statement of income as Other operating income when the right to receive payment has been established. The losses arising from impairment of such investments are recognized as Provisions for impairment and credit losses in the statement of income. Bills payable and other borrowed funds Issued financial instruments or their components, which are not designated as financial liabilities at FVPL, are classified as liabilities under Bills payable or 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, bills payable and similar financial liabilities not qualified as and not designated as FVPL, are subsequently measured at amortized cost using the EIR 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 assets A financial asset (or, where applicable, a part of a financial asset or part of a group of financial assets) is derecognized where: 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 the control of the asset.

Where the Group has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of 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.

*SGVMC114014*

-8Financial liabilities 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 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. Securities purchased under resale agreements (SPURA) are recorded as loans and advances to banks or 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 EIR. 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 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 at amortized cost which includes HTM financial assets, Loans and receivables, Due from BSP, Interbank loans receivables SPURA and due from other banks, 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). 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.

*SGVMC114014*

-9The 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 effective interest rate of the asset. 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, 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 credited to Provision for credit and impairment losses in the statement of income and the allowance account is reduced. If a future write-off is later recovered, any amounts formerly charged are credited to the Provision for credit and impairment losses in the statement of income. The estimated future cash flows are discounted at the financial assets original effective interest rate. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate, 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. 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 Parent Company. 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 Bank and their magnitude). The methodology and assumptions used for estimating future cash flows are reviewed regularly by the Parent Company to reduce any differences between loss estimates and actual loss experience. AFS Financial Assets For AFS 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. In case of equity investments classified as AFS financial assets, 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 loss measured 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 income is removed from statement of comprehensive income 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 as other comprehensive income in the statement of comprehensive income. In the case of debt instruments classified as AFS financial assets, impairment is assessed based on the same criteria as financial assets carried at amortized cost. Future interest income is based on the reduced amount an is accrued 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.

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- 10 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 Provisions for impairment and credit losses in the statement of income. Loss on sale of non-performing asset (NPA) to a special purpose vehicle (SPV) company Loss on sale of NPA to an SPV company on a without recourse basis is deferred over a ten-year period in accordance with regulatory accounting policies prescribed by the Bangko Sentral ng Pilipinas for banks and financial institutions availing of the provisions of RA No. 9182, the Special Purpose Vehicle Act of 2002. 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 therefore, the related assets and liabilities are presented gross in the statement of financial position. 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 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 and financial assets, 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, 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 Loan commitment fees are recognized as earned over the terms of the credit lines granted to each borrower. Loan syndication fees are recognized upon completion of all syndication activities and where the Group does not have further obligations to perform under the syndication agreement. Service charges and penalties are recognized only upon collection or accrued where there is a reasonable degree of certainty as to their collectibility.

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- 11 Rental income Rental income arising on investment properties is accounted for on a straight-line basis over the lease terms on ongoing leases. Dividend income Dividend income is recognized when the Groups right to receive payment is established. Trading gains (losses) - net Results arising from trading activities including all gains and losses from changes in fair value for financial assets and financial liabilities held for trading and gains and losses from disposal of financial assets held for trading and AFS financial assets. 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. 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 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 and Associate Investment in subsidiaries Subsidiaries are all entities over which the Group has the power to govern the financial and operating policies, which generally accompanies 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. Investments in subsidiaries are carried at cost, less impairment in value, in the separate or parent company financial statements (see accounting policy on Basis of Consolidation). Investment in an Associate Associates are entities which the Group has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. In the consolidated financial statements, investment in associates is accounted for under the equity method of accounting. Under the equity method, the investment in the associate is carried in the statement of financial position at cost plus post acquisition changes in the Groups share of net assets of the associate. The consolidated statement of income reflects the share of the results of operations of the associate. The investment in an associate is in the Parent Companys financial statement is carried at cost less accumulated impairment, if any. Bank Premises, Furniture, Fixtures and Equipment Land is stated at cost less any impairment in value and depreciable properties including buildings, leasehold improvements, and furniture, fixtures and equipment are stated at cost less accumulated depreciation and amortization, and any impairment in value. Such cost includes the cost of replacing part of the plant and equipment when that cost is incurred, if the recognition criteria are met but excludes repairs and maintenance costs.

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- 12 Depreciation is calculated on the straight-line method over the estimated useful life of the depreciable assets. The estimated useful lives of the property and equipment follow: Buildings Furniture, fixtures and equipment Leasehold improvements 20 years 5 years 5 years or lease term, whichever is shorter

The depreciation and amortization method and useful life are reviewed at least at each reporting date to ensure that the method and period of depreciation and amortization are consistent with the expected pattern of economic benefits from items of property and equipment. 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 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. Foreclosed properties are classified under Investment properties upon; (a) entry of judgment in case of juridical foreclosure; (b) execution of the Sheriffs Certificate of sale in case of extra-judicial foreclosure; or (c) notarization of the Deed of Dacion in case of dation in payment (dacion en pago). Subsequent to initial recognition, depreciable investment properties are carried at cost less accumulated depreciation and any impairment in value. 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 in Gain (Loss) on sale of acquired assets in the year 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 current operations in the period in which the costs are incurred. Depreciation is calculated for buildings and improvement on a straight-line basis over the estimated useful life of 10 years from the time of acquisition. 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. Computer Software Costs Software costs are capitalized on the basis of the cost incurred to acquire and bring to use the specific software. These costs, included in Other assets, are amortized over five years on a straight-line basis.

*SGVMC114014*

- 13 Costs associated with maintaining the computer software programs are recognized as expense when incurred. Impairment of Bank Premises, Furniture, Fixtures and Equipment, Investment Properties and Computer Software Costs At each reporting date, the Group assesses whether there is any indication that its nonfinancial 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 against operations 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. 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).

*SGVMC114014*

- 14 Group as lessee (Finance leases) Finance leases, which transfer to the Parent Company substantially all the risks and benefits incidental to the 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 Bank premise, furniture, fixtures and equipment with the corresponding liability to the lessor included in Accrued taxes, interest and other expenses. 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 charged directly to Interest expense. Capitalized leases 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 Parent Company will obtain ownership by the end of the lease term. Group as lessor (Operating leases) Leases where the Group does not transfer substantially all the risk 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 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. Group as lessee (Operating leases) Leases where the lessor retains substantially all the risk and benefits of ownership of the assets 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. Retirement Cost The Parent Company is covered by a noncontributory defined benefit retirement plan (the Plan). The retirement cost of the Parent Company 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 the defined benefit pension plan is the present value of the defined benefit obligation at the statement of financial position 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 10.00% of the higher of the defined benefit obligation and 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 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 straightline basis over the vesting period.

*SGVMC114014*

- 15 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. 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 resources 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 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 resources 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. Borrowing Costs Borrowing costs are recognized as expense in the year in which these costs are incurred. Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset are capitalized as part of the cost of that asset. Income Taxes Current taxes 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 the tax laws used to compute the amount are those that are enacted or substantially enacted at the statement of financial position date. Deferred taxes 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 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 carry forward of unused 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 or loss.

*SGVMC114014*

- 16 Deferred tax liabilities are not provided on non-taxable temporary differences associated with investments in domestic subsidiaries and associates. 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 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 equity are also recognized in equity 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 attributable to common shareholders 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. The Group does not have dilutive potential common shares. Dividends on Common Shares Dividends on common shares are recognized as a liability and deducted from equity when approved by the BOD of the Parent Company. Dividends declared after the statement of financial position date are dealt with as an event after the statement of financial position date. Subsequent Events Any post-year-end events that provide additional information about the Groups position at the statement of financial position date (adjusting events) are reflected in the financial statements. Post-year-end events that are not adjusting events, if any, are disclosed in the notes when material to the financial statements. 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. When the Parent Company issues more than one class of stock, a separate account is maintained for each class of stock and the number of shares issued. When the shares are sold at a premium, the difference between the proceeds and the par value is credited to Additional Paid-in Capital account. When shares are issued for a consideration other than cash, the proceeds are measured by the fair value of the consideration received. In case the shares are issued to extinguish or settle the liability of the Parent Company, the shares shall be measured either at the fair value of the shares issued or fair value of the liability settled, whichever is more reliably determinable.

*SGVMC114014*

- 17 Expense Recognition Expenses are recognized in the statement of income when decrease in future economic benefit related to a decrease in an asset or an increase in a liability has arisen that can be measured reliably. Expenses are recognized in the statement of income: On the basis of a direct association between the costs incurred and the earning of specific items of income; On the basis of systematic and rational allocation procedures when economic benefits are expected to arise over several accounting periods and the association can only be broadly or indirectly determined; or Immediately when expenditure produces no future economic benefits or when, and to the extent that, future economic benefits do not qualify or cease to qualify, for recognition in the statements of financial position as an asset. Future Changes in Accounting Policies The Group will adopt the following 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 and Philippine Interpretations to have significant impact on its financial statements. PFRS 3, Business Combinations (Revised) and PAS 27, Consolidated and Separate Financial Statements (Amended) The revised standards are effective for annual periods beginning on or after July 1, 2009. PFRS 3 (Revised) introduces significant changes in the accounting for business combinations occurring after this date. Changes affect the valuation of non-controlling interest, the accounting for transaction costs, the initial recognition and subsequent measurement of a contingent consideration and business combinations achieved in stages. These changes will impact the amount of goodwill recognized, the reported results in the period that an acquisition occurs and future reported results. PAS 27 (Amended) requires that a change in the ownership interest of a subsidiary (without loss of control) is accounted for as a transaction with owners in their capacity as owners. Therefore, such transactions will no longer give rise to goodwill, nor will it give rise to a gain or loss. Furthermore, the amended standard changes the accounting for losses incurred by the subsidiary as well as the loss of control of a subsidiary. The changes by PFRS 3 (Revised) and PAS 27 (Amended) will affect future acquisitions or loss of control of subsidiaries and transactions with non-controlling interests. PFRS 3 (Revised) will be applied prospectively while PAS 27 (Amended) will be applied retrospectively with few exceptions. Philippine Interpretation IFRIC 17, Distributions of Non-Cash Assets to Owners This Interpretation is effective for annual periods beginning on or after July 1, 2009 with early application permitted. It provides guidance on how to account for non-cash distributions to owners. The interpretation clarifies when to recognize a liability, how to measure it and the associated assets, and when to derecognize the asset and liability. Philippine Interpretation IFRIC 15, Agreement for Construction of Real Estate This Interpretation, effective for annual periods beginning on or after January 1, 2012, 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 a 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. Contract 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.

*SGVMC114014*

- 18 Amendments to Standards PAS 39 Amendment - Eligible Hedged Items The amendment to PAS 39, Financial Instruments: Recognition and Measurement, effective for annual periods beginning on or after July 1, 2009, clarifies that an entity is permitted to designate a portion of the fair value changes or cash flow variability of a financial instrument as a hedged item. This also covers the designation of inflation as a hedged risk or portion in particular situations. PFRS 2 Amendments - Group Cash-settled Share-based Payment Transactions The amendments to PFRS 2, Share-based Payments, effective for annual periods beginning on or after January 1, 2010, clarify the scope and the accounting for group cash-settled share-based payment transactions. Improvements to PFRS 2009 The omnibus amendments to PFRS issued in 2009 were issued primarily with a view to remove inconsistencies and clarify wording. The amendments are effective for annual periods financial years January 1, 2010 except otherwise stated. The Group has not yet adopted the following amendments and anticipates that these changes will have no material effect on the financial statements. PFRS 2, Share-based Payment, clarifies that the contribution of a business on formation of a joint venture and combinations under common control are not within the scope of PFRS 2 even though they are out of scope of PFRS 3, Business Combinations (Revised). The amendment is effective for financial years on or after July 1, 2009. PFRS 5, Non-current Assets Held for Sale and Discontinued Operations, clarifies that the disclosures required in respect of non-current assets and disposal groups classified as held for sale or discontinued operations are only those set out in PFRS 5. The disclosure requirements of other PFRS only apply if specifically required for such non-current assets or discontinued operations. PFRS 8, Operating Segment Information, clarifies that segment assets and liabilities need only be reported when those assets and liabilities are included in measures that are used by the chief operating decision maker. PAS 1, Presentation of Financial Statements, clarifies that the terms of a liability that could result, at anytime, in its settlement by the issuance of equity instruments at the option of the counterparty do not affect its classification. PAS 7, Statement of Cash Flows, explicitly states that only expenditure that results in a recognized asset can be classified as a cash flow from investing activities. PAS 17, Leases, removes the specific guidance on classifying land as a lease. Prior to the amendment, leases of land were classified as operating leases. The amendment now requires that leases of land are classified as either finance or operating in accordance with the general principles of PAS 17. The amendments will be applied retrospectively. PAS 36, Impairment of Assets, clarifies that the largest unit permitted for allocating goodwill, acquired in a business combination, is the operating segment as defined in PFRS 8 before aggregation for reporting purposes.

*SGVMC114014*

- 19 PAS 38, Intangible Assets, clarifies that if an intangible asset acquired in a business combination is identifiable only with another intangible asset, the acquirer may recognize the group of intangible assets as a single asset provided the individual assets have similar useful lives. Also clarifies that the valuation techniques presented for determining the fair value of intangible assets acquired in a business combination that are not traded in active markets are only examples and are not restrictive on the methods that can be used. PAS 39, Financial Instruments: Recognition and Measurement, clarifies the following: - that a prepayment option is considered closely related to the host contract when the exercise price of a prepayment option reimburses the lender up to the approximate present value of lost interest for the remaining term of the host contract. - that the scope exemption for contracts between an acquirer and a vendor in a business combination to buy or sell an acquiree at a future date applies only to binding forward contracts, and not derivative contracts where further actions by either party are still to be taken. that gains or losses on cash flow hedges of a forecast transaction that subsequently results in the recognition of a financial instrument or on cash flow hedges of recognized financial instruments should be reclassified in the period that the hedged forecast cash flows affect profit or loss.

Amendment to Philippine Interpretation IFRIC 9, Reassessment of Embedded Derivatives, clarifies that it does not apply to possible reassessment at the date of acquisition, to embedded derivatives in contracts acquired in a business combination between entities or businesses under common control or the formation of joint venture. Amendment to Philippine Interpretation IFRIC 16, Hedge of a Net Investment in a Foreign Operation, states that, in a hedge of a net investment in a foreign operation, qualifying hedging instruments may be held by any entity or entities within the group, including the foreign operation itself, as long as the designation, documentation and effectiveness requirements of PAS 39 that relate to a net investment hedge are satisfied.

3.

Significant Accounting Judgments and Estimates The preparation of the financial statements in accordance with PFRS requires the Group to make estimates and assumptions 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 judgments and 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.

*SGVMC114014*

- 20 Judgments (a) Operating lease commitment - the Group as lessor The Group has entered into commercial property leases on its investment properties. Based in the evaluation of the terms and condition of the agreements, the Group has determined that it retains all the significant risks and rewards of ownership over these properties which are leased out as operating leases. In determining whether or not there is indication of operating lease treatment, the Group considers retention of ownership title to the leased property, period of lease contract relative to the estimated useful economic life of the leased property, bearer of executory costs, and among others. (b) Operating lease commitment - the Group as lessee The Group has entered into property leases as a lessee for its office premises. The Group has determined that the lessor retained all the significant risks and rewards of ownership over this property. In determining whether or not there is indication of operating lease treatment, the Group considers retention of ownership title to the leased property, period of lease contract relative to the estimated useful economic life of the leased property, bearer of executory costs, and among others. (c) Finance lease commitment - the Parent company as lessee The Parent Company has entered into property leases as a lessee for its head office. The Parent Comapny has determined that the lessor has transferred substantially all the significant risks and rewards of ownership over this property to the Parent Company and the lease is accounted for as finance lease. In determining whether or not there is indication of operating lease treatment, the Parent Company considers retention of ownership title to the leased property, period of lease contract relative to the estimated useful economic life of the leased property, bearer of executory costs, and among others. (d) Fair value of financial instruments Where the fair values of financial assets and financial liabilities recorded on 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. 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. The valuation of financial instruments is described in more detail in Note 5. (e) HTM financial assets The classification to HTM financial assets 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 circumstances - for example, selling an insignificant amount close to maturity - it 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. (f) 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.

*SGVMC114014*

- 21 (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) 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) b) the currency in which funds from financing activities are generated; and c) the currency in which receipts from operating activities are usually retained. The Group determined that its functional currency is Philippine peso. Estimates (a) Credit losses on loans and receivables The Group reviews its loan portfolios and receivables to assess impairment at each reporting date with updating provisions made during the intervals as necessary based on the continuing analysis and monitoring of individual accounts by credit officers. In determining whether an impairment loss should be recorded in the statement of income, the Group makes judgments as to whether there is any observable data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of loans before the decrease can be identified with an individual loan in that portfolio. This evidence may include observable data indicating that there has been an adverse change in the payment status of borrowers in a group, or national or local economic conditions that correlate with defaults on assets in the group. Management uses estimates in 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 to future changes in 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 is based on any deterioration in the internal rating of the loan or investment since it was granted or acquired. These internal ratings take into consideration factors such as any deterioration in country risk, industry, and technological obsolescence, as well as identified structural weaknesses or deterioration in cash flows. As of December 31, 2009 and 2008, allowance for credit losses on loans and receivables amounted to P =1.27 billion and P =1.07 billion, respectively, both for the Group and Parent Company. Loans and receivables are carried at P =22.25 billion and P =22.20 billion by the Group and Parent Company, respectively, as of December 31, 2009 and P =19.13 billion and =19.13 billion by the Group and Parent Company respectively, as of December 31, 2008 (see P Note 7). (b) Fair value of financial instruments The fair values of financial instruments that are not quoted in active markets are determined by 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 practical, 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 Note 5 for the information on the carrying amounts of these instruments.

*SGVMC114014*

- 22 Valuation of unquoted equity investments are normally based on one of the following: recent arms length market transactions; current fair value of another instrument that is substantially the same; the expected cash flows discounted at current rates applicable for terms with similar terms and risk characteristics; or other valuation models.

The determination of the cash flows and discount factors for unquoted equity investments requires significant estimation. The Parent Company calibrates the valuation techniques periodically and tests them for validity using either prices from observable current market transactions in the same instrument or from other available observable market data. Unquoted equity instruments are carried at cost less any impairment if (a) the range of reasonable fair value estimate is significant and (b) the probabilities of the various estimates cannot be reasonably assessed. As of December 31, 2009 and 2008, unquoted AFS equity securities amounted to =39.27 million and P P =45.95 million, respectively, for the Group and P =13.42 million and =13.42 million, respectively, for the Parent Company. (see Note 6) P (d) 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% 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. In addition, impairment may be appropriate when there is evidence of deterioration in the financial health of the investee, industry and sector performance, changes in technology, and operational and financing cash flows. As of December 31, 2009 and 2008, allowance for impairment losses on AFS equity investments amounted to P =138.97 million and =140.73 million, respectively, for the Group and P P =125.96 million and P =125.45 million, respectively, for the Parent Company and (see Note 6). As of December 31, 2009 and 2008, AFS equity investments amounted to P =39.85 million and =59.68 million, respectively, for the Group and P P =40.42 million and P =41.93 million, respectively, for the Parent Company (see Note 6). (e) 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. The expected rates of return on plan assets of 6.50% and 6.00% in 2009 and 2008, respectively, were based on the average historical premium of the fund assets. 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 statement of financial position dates.

*SGVMC114014*

- 23 As of December 31, 2009 and 2008, the present value of the retirement obligation for both the Group and the Parent Company amounted to P =114.17 million and P =44.92 million, respectively (see Note 20). (f) Recognition of deferred income taxes Deferred tax assets are recognized for all unused tax losses to the extent that it is probable that taxable profit 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 profits together with future tax planning strategies. As of December 31, 2009 and 2008, the recognized deferred tax assets - net for the Group amounted to P =356.29 and P =250.60 million, respectively, and for the Parent Company amounted to P =360.26 and P =250.81 million (see Note 22). (g) Impairment of bank premises, furniture, fixtures and equipment and investment 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 and the Parent Company consider 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 computed using the value in use approach. Recoverable amounts are estimated for individual assets or, if it is not possible, for the cash-generating unit to which the asset belongs. As of December 31, 2009 and 2008, the carrying value of the bank premises, furniture, fixtures and equipment and investment properties amounted to P =637.90 million and =2.38 billion and, P P =485.48 million and P =2.38 billion, respectively, for the Group and =513.20 million and P P =2.38 billion and, P =345.12 million and P =2.38 billion, respectively, for the Parent Company. (h) Contingencies The Group is currently involved in various legal proceedings. The estimate of the probable costs for the resolution of these claims has been developed in consultation with outside counsel handling the Groups defense in these matters and is based upon an analysis of potential results. The Group currently does not believe that these proceedings will have a material adverse effect on its financial position. It is possible, however, that future results of operations could be materially affected by changes in the estimates or in the effectiveness of the strategies relating to these proceedings (see Note 27).

*SGVMC114014*

- 24 4. Financial Risk Management Introduction The Group has exposure to the following risks from its use of financial instruments: Credit risk Liquidity risk Market risk

Risk Management Framework Risk is an inherent part of the Parents Company business activities. The Parents Company risk management framework and governance structure are intended to provide comprehensive controls and ongoing management of these risks. The risk management process is an ongoing identification, measurement, monitoring or control and reporting. It is critical to the Banks soundness and profitability as it is continually exposed to credit risk, liquidity risk and market risk. Risk identification: The Parents Company exposure to risk through its daily business dealings, including lending, trading and capital market activities, is identified and aggregated through the Parent Companys risk management infrastructure. Risk measurement: The Parents Company measures risk using a variety of methodologies, including calculating potential liquidity outflows, Earnings-at-Risk (EAR) and Value-at-Risk (VaR), and by performing sensitivity and scenario analyses (stress testing) on strategic portfolios in the Parent Companys statement of financial position. Risk monitoring or control: The Parents Company risk management policies and procedures incorporate risk mitigation strategies and include approval limits by customer, product and industry. These limits are monitored on a regular basis. Risk reporting: Risk reporting is executed on a per type of risk basis. This information is reported to Senior Management, Risk and Compliance Committee (RCCom) and BOD on a regular basis. Risk Governance The BOD has the ultimate responsibility for understanding the nature and the level of risks taken by the Parent Company. The BOD has created various committees such as the Credit Committee (CreCom), Audit Committee (AC), and RCCom to assist in the performance of its responsibilities for the management of risk. These committees are composed of members of the board supported by the Risk Management Department, Compliance Department and Audit Department. The RCCom sets risk limits, policies and standards for risk identification, analysis and control especially credit, market, liquidity and operational risks. The RCCom monitors the sensitivity of the Parent Companys portfolios to changes in the market, such as price, banking regulations and the effects on the profitability of the Parent Company. The AC reviews and recommends approval to the BOD for the internal audit programs, policies and procedures and oversees proper implementation and adherence of such. The risk management system of the Parent Company is annually reviewed by both internal and external auditors to ensure its effectiveness and adequacy relative to the Banks risk taking activities. The CreCom of the BOD reviews, approves or recommends approval to the Executive Committee (ExCom) and/or to the BOD credit and credit related proposals, policies and procedures, loan products and lending programs.

*SGVMC114014*

- 25 In the transactional level, Senior Management has created various management committees to oversee the management of the various risks of the business. The Asset and Liability Committee (ALCO) is responsible for ensuring market and liquidity risks are adequately managed both on long term and day-to-day bases. The Presidents CreCom has been delegated with credit authority limits and recommends credit proposals and policies to the CreCom of the BOD for proposals beyond its credit authority limit. The Operations Committee reviews operational policies and procedures and recommends the same for approval by the BOD. The Remedial Management Committee monitors the status and performance of the non-performing loans of the Parent Company. All other aspects of the business are managed by the Management Committee to ensure that all risk activities are in line with the business objectives of the Parent Company. Excessive Risk Concentration Concentrations arise when a number of counterparties are engaged in similar business activities, or activities in the same geographic region, or have similar economic features that would cause their ability to meet contractual obligations to be similarly affected by changes in economic, political or other conditions. Concentrations indicate the relative sensitivity of the Parent Companys performance to developments affecting a particular industry or geographical location. In order to avoid excessive concentrations of risk, the Parent Company's policies and procedures include specific guidelines focusing on maintaining a diversified portfolio. Identified concentrations of credit risks are controlled and managed accordingly. Selective hedging is used within the Parent Company to manage risk concentrations at both the relationship and industry levels. Credit Risk Credit risk is the risk of financial loss due to default of a counterparty to perform its financial obligation to the Parent Company. The Parent Company has developed policies and practices that are designed to preserve the independence and integrity of decision-making and ensure credit risks are assessed accurately, approved properly, monitored regularly and managed actively at both the transaction and portfolio levels. The policy framework establishes credit approval authorities, concentration limits, risk-rating methodologies, portfolio-review parameters and guidelines for management of distressed exposure. Credit risk is managed by the Parent Company by setting and monitoring limits for individual counterparties, and groups of counterparties as well as periodically assessing the credit worthiness of its counterparties. In addition, the Parent Company obtains collateral where appropriate and collateral agreements with counterparties, and limits the duration of exposure. Credit risk is overseen by BOD through its CreCom and RCC. The BOD sets credit policies and delegates credit authority limits to Management to facilitate the approval of credit transactions. All credit proposals prior to BOD approval or confirmation goes thru the scrutiny of the Presidents CreCom and the CreCom of the BOD. The Remedial Management Committee manages and monitors the performance and collection of distressed accounts. For purposes of assessing credit risk, the Parent Company established an Internal Credit Risk Rating System (ICRRS). There are three internal credit risk rating systems of the Parent Company. The first ICRRS covers all corporate borrowers including small and medium enterprise (SME) regardless of asset size, requiring corporates with assets of P =15 million and above to submit financial statements that are audited by SEC-accredited auditing firms. The second ICRRS covers financial institutions. This is used for establishment of counterparty credit lines for the Parent Companys treasury transactions. Lastly, the Parent Company also adopted a ICRRS for local government borrowers.

*SGVMC114014*

- 26 The ICRRS assesses two main aspects of the borrower, namely, the Borrower Risk Rating (BRR) and the Loan Exposure Rating (LER). The BRR provides an assessment of the creditworthiness of the borrower, without considering the proposed facility and security arrangements. The LER presents an assessment of the proposed facilities with the corresponding security arrangements if available. The Parent Company sets industry exposure limits to monitor credit risk concentration per industry type. It also establishes the credit risk tolerance of the company to the various industry sectors. Moreover, a periodic review is conducted on credit concentration on large exposures. Per BSP definition, large exposures are those credit exposures with an outstanding balance of 5% or more of the total qualifying capital. A limit is also applied on the maximum aggregate loan the Bank can expose itself vis--vis its total assets. It further sets a limit on the maximum capital it can utilize to cover loan exposures. As of December 31, 2009 and 2008, all industry exposures are within approved limit. Moreover, there were ten (10) large exposures with a combined total of =5.08 billion of which P P =1.35 billion is sovereign guaranteed. The ICRRS contains the following: a. BRR - The BRR is an assessment of the credit worthiness of the borrower (or guarantor) without considering the type or amount of the facility and security arrangements. It is an indicator of the probability that a borrower cannot meet its credit obligations in foreseen manner. The assessment is described below: Component Financial Condition Description Refers to the financial condition of the borrower as indicated by certain financial ratios. The Financial Factor Evaluation shall be conducted manually. Refers to the prospects of the industry as well as the companys performance and position in the industry. Refers to the managements ability to run the company successfully. Refers to the companys business relationship with banks, suppliers and even its customers and the public as a whole. Refers to the existing business relationship. Refers to number of years company has been existing. Credit Factor Weight 40%

Industry Analysis

15%

Management Quality Credit Dealings

15% 15%

Collateral Business with the Bank Existence

5% 10%

b. LER - The LER is determined for each individual facility considering the term of the facility, security arrangement and quality of documentation. This factor can downgrade or upgrade the BRR based on the elements relating to cover (collateral including pledged cash deposits and guarantee), quality of documentation and structure of transactions.

*SGVMC114014*

- 27 c. Risk Asset Acceptance Criteria (RAAC) - the combination of BRR and LER results to RAAC. The current risk grading framework consists of ten grades reflecting varying degrees of risk of default and the availability of collateral or other credit risk mitigation. The following table shows the description of ICRRS grade: Credit Quality High Grade ICRRS Grade AAA AA A BBB Standard Grade BB B CCC Substandard Grade CC C Impaired D Loss Superior This rating is given to a borrower with no history of delinquencies or defaults, highly liquid and sustaining strong operating trends, unlikely to be affected by external factors and has a competent management that uses current business models. Strong This rating is given to borrowers with the same characteristics as those rated as superior rating, but is only adequately liquid. Good This rating is given to a borrower with no history of default in the last 12 months. The entitys borrowing base can support its line of credit, and it is meeting performance expectations. It is unlikely to be affected by external factors and has a competent management that uses current business models. Satisfactory This rating is given to a borrower that pays as agreed, but is not necessarily non-delinquent. The entity has adequate to marginal liquidity and generally meets performance expectations. While there are external factors that may affect the entity, these will likely be overcome. A lack of key management experience may be a current problem for the entity, and such could be brought about by a recent departure of a key employee. Acceptable This rating is given to a borrower that is current in its payments while not necessarily paying as agreed. The entity has marginal liquidity and has a declining trend in operations or an imbalanced position in the balance sheet, though not to the point that repayment is jeopardized. There are identified external disruptions though the impact on the entity is uncertain. There may also be some turnover causing key management positions to stay vacant. Substandard Doubtful Acceptable Watchlist Specially mentioned Description Superior Strong Good Satisfactory

*SGVMC114014*

- 28 Watchlist This rating is given to a borrower that may either be current in its payments, or 30 to 60 days past due. The entity has marginal liquidity and may not be meeting performance expectations, even having defaulted on some of its loans. There are identified disruptions that negatively affect the entitys performance, though there are near-term solutions. Management may also have changed its business model with negative implications for the entity. Specially Mentioned The borrower in this rating shows evidence of weakness in its financial condition, having expected financial difficulties. There is a real risk that the entitys ability to pay the interest and principal on time could be jeopardized. The entitys ability or willingness to service debt is in doubt, likely causing a need to reschedule payments. Substandard For a substandard borrower, the debt burden has become too heavy, only to be made worse by weak or negative cash flows and interest coverage. This makes the collection of principal or interest payments questionable, causing an assessment of default at up to 50%. Unless given closer supervision, the institution will likely suffer a future loss. External factors may be causing an adverse trend, or there may be a significant weakness in the entitys collateral. Management has an unfavorable record and lacks managerial capability. Doubtful This rating is given to a nonperforming borrower where a payment default has occurred, due to the borrowers inability or unwillingness to service debt over an extended period of time. Loss is unavoidable and significant, although the extent of probable loss on the loan cannot be exactly quantified at the current time. However, there may be external factors that may strengthen the entitys assets, e.g. merger, acquisition, and capital injection. Management has an unfavorable record and lacks managerial capability. Loss This rating is given to a borrower when debt service or the prospect for re-establishment of credit worthiness, has become remote. This may be due to the fact that the borrower and/or his comakers have become insolvent, thus the lender may already be preparing foreclosure procedures. A full provision is made on that part of the principal which is not fully and adequately covered. While the loan covers basically worthless assets, writing off these loans is neither practical nor desirable for the lender. Maximum exposure to credit risk before collateral held or other credit enhancements An analysis of the maximum exposure to credit risk without taking into account of any collateral held or other credit enhancements is shown below (amounts in thousands):
Consolidated 2008 2009 Credit risk exposures relating to onbalance sheet assets are as follow: Loans and receivables Due from BSP Due from other banks Interbank loans receivable and SPURA Loans and discounts Corporate Individual Government (Forward) Parent Company 2008 2009

P =13,055,098 699,457 3,762,819 10,063,670 2,740,680 5,945,630

=6,489,795 P 970,146 8,295,911 9,147,223 2,936,172 3,747,747

P =13,055,098 685,821 3,762,819 10,063,670 2,740,654 5,945,630

=6,489,795 P 956,266 8,295,911 9,147,223 2,936,139 3,747,747

*SGVMC114014*

- 29 Consolidated 2008 2009 2,744,798 2,902,328 1,082,154 1,151,719 384,535 509,679 166,031 204,248 37,068,206 41,035,328 (2,178,360) (2,401,587) 34,889,846 38,633,741 890,370 3,258,993 39,847 13,420 3,312,260 4,433,331 647,034 P =47,916,736 249,937 1,959,330 13,736 45,945 2,019,011 4,461,745 372,677 =41,993,216 P Parent Company 2008 2009 2,744,798 2,902,328 1,080,474 1,122,878 384,497 509,675 161,691 188,007 37,048,235 40,976,580 (2,178,360) (2,401,587) 34,869,875 38,574,993 890,370 3,258,993 27,004 13,420 3,299,417 4,433,331 647,034 P =47,845,145 249,937 1,959,330 28,508 13,420 2,001,258 4,461,745 372,677 =41,955,492 P

Unquoted debt securities Accounts receivables Accrued interest receivable Sales contract receivable Allowance for credit losses Financial assets at FVPL Held-for-trading Government AFS financial assets - net Government securities Equity securities Quoted Unquoted HTM financial assets - net Government Contingent assets

Concentration of risks of financial assets with credit risk exposure An analysis of concentrations of credit risk at the reporting date is shown below (amounts in thousands):
Consolidated 2009 Loans and advances Investment to banks* securities** P = 17,517,375 17,517,375 P = 8,748,874 160 41 25,851 8,774,926

Loans and Receivables Real estate, renting and business activities Agricultural, hunting and forestry Philippine government Other community, Social and Personal services Household consumption Financial intermediaries Manufacturing (various industries) Wholesale and retail trade Hotel and restaurants Construction Electricity, gas and water Education Transportation, storage and communication Public administration, local government Health and social work Mining and quarrying Others Less allowance for impairment and credit losses P =4,212,354 3,847,414 2,906,438 85,094 778,736 935,073 1,071,297 664,383 69,824 230,607 167,645 196,018 3,571,524 8,825 4,711 4,768,011 23,517,954

Total P =4,212,354 3,847,414 8,748,874 2,906,438 85,094 18,296,111 935,233 1,071,297 664,383 69,824 230,648 167,645 196,018 3,571,524 8,825 4,711 4,793,862 49,810,255

1,129,560 138,966 2,540,553 1,272,027 22,245,927 16,387,815 8,635,960 47,269,702 Contingent assets 647,034 647,034 P =22,892,961 P =16,387,815 P =8,635,960 P =47,916,736 * Comprised of Due from BSP, Due from other banks and Interbank loans receivables and SPURA. ** Comprised of Financial assets at FVPL, AFS and HTM financial assets.

*SGVMC114014*

- 30 Consolidated 2008 Loans and Receivables Real estate, renting and business activities Agricultural, hunting and forestry Philippine government Other community, Social and Personal services Compulsary social securities Financial intermediaries Manufacturing (various industries) Wholesale and retail trade Hotel and restaurants Construction Electricity, gas and water Education Transportation, storage and communication Public administration, local government Health and social work Mining and quarrying Others Less allowance for impairment and credit losses =4,148,589 P 3,600,664 2,839,199 2,243,007 1,792,939 1,166,310 1,005,364 1,004,357 730,337 261,576 220,323 202,895 188,945 12,083 8,201 4,711 779,160 20,208,660 Loans and advances to banks* = P 16,859,545 16,859,545 Investment securities** =4,500 P 6,671,013 8,633 132 581 5,000 181,564 6,871,423 Total =4,153,089 P 3,600,664 9,510,212 2,243,007 1,792,939 18,034,488 1,005,364 1,004,357 730,337 261,576 220,455 202,895 189,526 17,083 8,201 4,711 960,724 43,939,628

(1,074,666) (1,103,694) (140,729) (2,319,089) 19,133,994 15,755,851 6,730,694 41,620,539 Contingent assets 372,677 372,677 =19,506,671 P =15,755,851 P =6,730,694 P =41,993,216 P * Comprised of Due from BSP, Due from other banks and Interbank loans receivables and SPURA. ** Comprised of Financial assets at FVPL, AFS and HTM financial assets. Parent Company 2009 Loans and advances Investment to banks* securities** P = 17,503,739 P = 8,748,874 160 40

Loans and Receivables Real estate, renting and business activities Agricultural, hunting and forestry Philippine government Other community, Social and Personal services Household consumption Financial intermediaries Manufacturing (various industries) Wholesale and retail trade Hotel and restaurants Construction Electricity, gas and water Education P =4,212,354 3,847,414 2,906,439 85,094 778,736 935,073 1,071,297 664,383 69,824 230,607 167,645

Total P =4,212,354 3,847,414 8,748,874 2,906,439 85,094 18,282,475 935,233 1,071,297 664,383 69,824 230,647 167,645

(Forward)

*SGVMC114014*

- 31 Parent Company 2009 Loans and advances Investment to banks* securities** P = 17,503,739 P = 8,749,074

Loans and Receivables Transportation, storage and communication Public administration, local government Health and social work Mining and quarrying Others Less allowance for impairment and credit losses P =196,018 3,571,524 8,825 4,711 4,722,898 23,472,842

Total P =196,018 3,571,524 8,825 4,711 4,722,898 49,725,657

1,272,027 1,129,560 125,957 2,527,544 22,200,815 16,374,179 8,623,117 47,198,111 Contingent assets 647,034 647,034 P =22,847,849 P =16,374,179 P =8,623,117 P =47,845,145 * Comprised of Due from BSP, Due from other banks and Interbank loans receivables SPURA. ** Comprised of Financial assets at FVPL, AFS and HTM financial assets. Parent Company 2008 Loans and Investment advances securities** to banks* = P 16,845,665 16,845,665 =4,500 P 6,671,013 8,633 132 581 5,000 149,038 6,838,897

Loans and Receivables Real estate, renting and business activities Agricultural, hunting and forestry Philippine government Other community, Social and Personal services Compulsary social securities Financial intermediaries Manufacturing (various industries) Wholesale and retail trade Hotel and restaurants Construction Electricity, gas and water Education Transportation, storage and communication Public administration, local government Health and social work Mining and quarrying Others Less allowance for impairment and credit losses =4,148,589 P 3,600,664 2,839,199 2,243,007 1,792,939 1,166,310 1,005,364 1,004,357 730,337 261,576 220,323 202,895 188,945 12,083 8,201 4,711 773,070 20,202,570

Total =4,153,089 P 3,600,664 9,510,212 2,243,007 1,792,939 18,020,608 1,005,364 1,004,357 730,337 261,576 220,455 202,895 189,526 17,083 8,201 4,711 922,108 43,887,132

(1,074,666) (1,103,694) (125,957) (2,304,317) 19,127,904 15,741,971 6,712,940 41,582,815 Contingent assets 372,677 372,677 =19,500,581 P =15,741,971 P =6,712,940 P P41,955,492 = * Comprised of Due from BSP, Due from other banks and Interbank loans receivables SPURA. ** Comprised of Financial assets at FVPL, AFS and HTM financial assets.

*SGVMC114014*

- 32 The following table shows the credit quality of financial assets (amounts in thousands):
Consolidated 2009 Loans and advances Investment to banks* securities** P =15,847,775 P =8,596,456 1,669,600 178,470 17,517,375 8,774,926

Total Neither past due nor impaired P =45,696,526 Past due but not impaired 725,571 Impaired 3,388,158 Gross 49,810,255 Less allowance for impairment and credit losses (1,272,027) (1,129,560) (138,966) (2,540,553) Net P =22,245,927 P =16,387,815 P =8,635,960 P =47,269,702 * Comprised of Due from BSP, Due from other banks and Interbank loans receivables and SPURA. ** Comprised of Financial assets at FVPL, AFS and HTM financial assets.

Loans and Receivables P = 21,252,295 725,571 1,540,088 23,517,954

Total Neither past due nor impaired =41,431,653 P Past due but not impaired 20,317 Impaired 2,487,658 Gross 43,939,628 Less allowance for impairment and credit losses (1,074,666) (1,103,694) (140,729) (2,319,089) Net =19,133,994 P =15,755,851 P =6,730,694 P =41,620,539 P * Comprised of Due from BSP, Due from other banks and Interbank loans receivables and SPURA. ** Comprised of Financial assets at FVPL, AFS and HTM financial assets. Parent Company 2009 Loans and advances Investment to banks* securities** P =15,834,139 P =8,596,456 1,669,600 152,618 17,503,739 8,749,074

Loans and Receivables =19,515,538 P 20,317 672,805 20,208,660

Consolidated 2008 Loans and advances Investment to banks* securities** =15,189,945 P =6,726,170 P 1,669,600 145,253 16,859,545 6,871,423

Total Neither past due nor impaired P =45,637,778 Past due but not impaired 725,571 Impaired 3,362,306 Gross 49,725,655 Less allowance for impairment and credit losses (1,272,027) (1,129,560) (125,957) (2,527,544) Net P =22,200,815 P =16,374,179 P =8,623,117 P =47,198,111 * Comprised of Due from BSP, Due from other banks and Interbank loans receivables and SPURA. ** Comprised of Financial assets at FVPL, AFS and HTM financial assets.

Loans and Receivables P =21,207,183 725,571 1,540,088 23,472,842

*SGVMC114014*

- 33 Parent Company 2008 Loans and advances Investment to banks* securities** =15,176,065 P =6,693,644 P 1,669,600 145,253 16,845,665 6,838,897

Total Neither past due nor impaired =41,379,156 P Past due but not impaired 20,317 Impaired 2,487,658 Gross 43,887,131 Less allowance for impairment and (1,103,694) (125,957) (2,304,317) credit losses (1,074,666) Net =19,127,903 P =15,741,971 P =6,712,940 P =41,582,814 P * Comprised of Due from BSP, Due from other banks and Interbank loans receivables and SPURA. ** Comprised of Financial assets at FVPL, AFS and HTM financial assets.

Loans and Receivables =19,509,447 P 20,317 672,805 20,202,569

Neither Past Due or Impaired Loans and receivables and Investment securities Table below shows credit quality per class of financial assets based on the banks rating system (amounts in thousands):
Consolidated 2009 Neither past due nor impaired Standard Substandard High Grade Grade Grade Unrated Loans and receivables Due from BSP Due from other banks Interbank loans receivable and SPURA Loans and discounts Corporate Individual Government Unquoted debt securities Accounts receivable Accrued interest receivable Sales contract receivable Allowance for credit losses Financial assets at FVPL Held-for-trading Government AFS financial assets Government debt securities Equity securities Quoted Unquoted P = 2,028,263 2,510,392 2,902,328 7,440,983 7,440,983 890,370 3,258,993 343 13,420 13,763 3,272,756 3,272,756 4,433,331 647,034 P =16,684,474 P = 3,824,613 3,410,572 7,235,185 7,235,185 P =7,235,185 P = 1,765,828 1,765,828 1,765,828 P =1,765,828 P =13,055,098 699,457 2,093,219 812,725 2,111,974 19,955 1,151,719 509,679 204248 20,658,074 20,658,074 P =20,658,074

Past Due or Impaired P = 1,669,600 1,632,241 628,706 4,711 3,935,258 (2,401,587) 1,533,671 178,470 178,470 178,470 (138,966) 39,504 P =1,573,175

Total P =13,055,098 699,457 3,762,819 10,063,670 2,740,680 5,945,630 2,902,328 1,151,719 509,679 204248 41,035,328 (2,401,587) 38,633,741 890,370 3,258,993 178,813 13,420 192,233 3,451,226 (138,966) 3,312,260 4,433,331 647,034 P =47,916,736

Allowance for impairment losses HTM financial assets Government Contingent assets

*SGVMC114014*

- 34 Consolidated 2008 Neither past due nor impaired Standard Substandard High Grade Grade Grade Unrated Loans and receivables Due from BSP Due from other banks Interbank loans receivable and SPURA Loans and discounts Corporate Individual Government Unquoted debt securities Accounts receivable Accrued interest receivable Sales contract receivable Allowance for credit losses Financial assets at FVPL Held-for-trading Government AFS financial assets Government debt securities Equity securities Quoted Unquoted = P 1,213,883 2,071,384 2,744,798 6,030,065 6,030,065 249,937 1,959,330 9,212 13,420 22,632 1,981,962 1,981,962 4,461,745 =12,723,709 P = P 3,125,459 1,593,801 4,719,260 4,719,260 =4,719,260 P = P 2,024,027 2,024,027 2,024,027 =6,489,795 P 956,266 7,730,005 761,238 2,112,252 77,851 1,082,154 384,535 166,031 19,760,127 19,760,127

Past Due or Impaired = P 1,669,600 2,022,616 823,887 4,711 4,520,814 (2,178,360) 2,342,454 145,253 32,526 177,779 177,779 (140,729) 37,050 = 2,379,504 P

Total =6,489,795 P 956,266 9,399,605 9,147,223 2,936,139 3,747,747 2,744,798 1,082,154 384,535 166,031 37,054,293 (2,178,360) 34,875,933 249,937 1,959,330 154,465 45,946 200,411 2,159,741 (140,729) 2,019,012 4,461,745 372,677 P =41,979,337

Allowance for impairment losses HTM financial assets Government Contingent assets

372,677 =2,024,027 P P = 20,132,837

Parent Company 2009 Neither past due nor impaired Standard Substandard High Grade Grade Grade Unrated Loans and receivables Due from BSP Due from other banks Interbank loans receivable Loans and discounts Corporate Individual Government Unquoted debt securities Accounts receivable Accrued interest receivable Sales contract receivable Allowance for credit losses P = 2,028,263 2,510,392 2,902,328 7,440,983 P =7,440,983 P = 3,824,613 3,410,572 7,235,185 P =7,235,185 P = 1,765,828 1,765,828 P =1,765,828 P =13,055,098 685,821 2,093,219 812,725 2,111,947 19,955 1,122,878 509,675 188,007 20,599,325 P =20,599,325

Past Due or Impaired P = 1,669,600

Total P =13,055,098 685,821 3,762,819

1,632,241 10,063,670 628,707 2,740,654 4,711 5,945,630 2,902,328 1,122,878 509,675 188,007 3,935,259 40,976,580 (2,401,587) (2,401,587) P =1,533,672 P =38,574,993

(Forward)

*SGVMC114014*

- 35 Parent Company 2009 Neither past due nor impaired Standard Substandard High Grade Grade Grade Unrated Financial assets at FVPL Held-for-trading Government AFS financial assets Government debt securities Equity securities Quoted Unquoted P =890,370 3,258,993 343 13,420 13,763 3,272,756 3,272,756 4,433,331 647,034 P =16,684,476 P = P =7,235,185 P = P =1,765,828 P = P =20,599,325

Past Due or Impaired P = 152,618 152,618 152,618 (125,957) 26,661

Total P =890,370 3,258,993 152,961 13,420 166,381 3,425,374 (125,957) 3,299,417

Allowance for impairment losses HTM financial assets Government Contingent assets

4,433,331 647,034 P =1,560,333 P = 47,845,145

Parent Company 2008 Neither past due nor impaired Standard Substandard High Grade Grade Grade Unrated Loans and receivables Due from BSP Due from other banks Interbank loans receivable Loans and discounts Corporate Individual Government Unquoted debt securities Accounts receivable Accrued interest receivable Sales contract receivable Allowance for credit losses Financial assets at FVPL Held-for-trading Government AFS financial assets Government debt securities Equity securities Quoted Unquoted Allowance for impairment losses HTM financial assets Government Contingent assets = P 1,213,883 2,071,384 2,744,798 6,030,065 6,030,065 249,937 1,959,330 9,212 13,420 22,632 22,632 4,461,745 =12,723,709 P = P 3,125,459 1,593,801 4,719,260 4,719,260 =4,719,260 P = P 2,024,027 2,024,027 2,024,027 =2,024,027 P =6,489,795 P 956,266 7,730,005 761,238 2,112,252 77,851 1,080,474 384,497 161,691 19,754,069 19,754,069 372,677 P =20,126,746

Past Due or Impaired = P 1,669,600 2,022,616 823,887 4,711 4,520,814 (2,178,360) 2,342,454 145,253 145,253 (125,957) 19,296 =2,361,750 P

Total =6,489,795 P 956,266 9,399,605 9,147,223 2,936,139 3,747,747 2,744,798 1,080,474 384,497 161,691 37,048,235 (2,178,360) 34,869,875 249,937 1,959,330 154,465 13,420 167,885 (125,957) 41,928 4,461,745 372,677 P =41,955,492

Past due but not impaired Loans and receivables and Investment securities Loans and receivables and investment securities where contractual interest or principal payments are past due but the Group believes that impairment is not appropriate on the basis of the level of collateral available and or status of collection of amounts owed to the Group.

*SGVMC114014*

- 36 The following past due but not impaired loans and receivables are not over 90 days past due (amounts in thousands): Individual Corporate 2009 P =44,164 154,388 P =198,552 2008 =14,691 P 5,594 =20,285 P

Impaired Loans and receivables and Investment securities Impaired loans and receivables and investment securities are loans and receivables and investment securities for which the Group determines that it is probable that it will be unable to collect all principal and interest due based on the contractual terms of the promissory note and securities agreements. The Group holds collateral against loans and receivables in the form of real estate and chattel mortgages, guarantees, and other registered securities over assets. Estimates of fair value are based on the value of collateral assessed at the time of borrowing and these are updated every two years. Generally, collateral is not held over loans and advances to banks except for reverse repurchase agreements. The Company is not allowed to sell or pledge collateral held for reverse repurchase agreements. Collateral usually is not held against investment securities, and no such collateral was held as of December 31, 2009 and 2008. The following table shows the fair value of collateral held against Loans and receivables both for the Group and the Parent Company (amounts in thousands): 2009 Against individually impaired Real estate Chattel Others Against collectively impaired Real estate Chattel Against past due but not impaired Real estate Chattel Against neither past due nor impaired Real estate Other P =2,958,261 923,737 247,188 9,201,265 82,521 148,025 9,053,240 82,521 P =22,696,758 2008 =2,347,895 P 130,335 120,400 8,553,190 405,467 1,089,069 318,540 7,595,735 405,467 =20,966,098 P

It is the Groups policy to dispose foreclosed properties acquired in an orderly fashion. The proceeds of the sale of the foreclosed assets classified as Investment Properties are used to reduce or repay the outstanding claim.

*SGVMC114014*

- 37 As of December 31, 2009 and 2008, breakdown of restructured loans for the Group and Parent Companys as follow: Corporate Individual 2009 P =133,807 943 P =134,750 2008 =173,670 P 4,708 =178,378 P

Liquidity Risk Management The objective of liquidity risk management is to ensure that all maturing obligations and commitments of the Bank will be paid fully and promptly. Liquidity risk is therefore the risk that the Bank will be unable to meet financial commitment to a customer or market in any location, in any currency, at any time. Remaining liquid then is a precondition for achieving all other business objectives and ranks as one of the core objectives of the Bank. The Asset and Liability Committee (ALCO) oversees the liquidity risk management of the Bank. The Treasury Group executes the funding and liquidity plan after the business strategies of each business unit are approved and consolidated. The Treasury Group shall likewise ensure that liquidity is maintained in the balance sheet and that the Bank shall have the ability to access incremental funding. Risk Management Department prepares a quarterly Maximum Cumulative Outflow (MCO). The liquidity planning process includes the preparation of the liquidity gap reports, the diversification of sources of funds and the Liquidity Contingency Planning. The liquidity gap report or the Maximum Cumulative Outflow (MCO) report shows the mismatch in maturities of sources and uses in the financial position. Assets and liabilities are plotted based on maturity and/or behavioral profile in different tenor buckets. Cumulative gaps are computed through the different tenor buckets. An MCO limit is placed based on the projected balance sheet growth and PVBs funding capacity. Financial assets Analysis of equity and debt securities at fair value into maturity groupings is based on the expected date on which these assets will be realized. 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 the expected date the assets will be realized. 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.

*SGVMC114014*

- 38 The table below summarizes the maturity profile of financial instruments based on contractual undiscounted cash flows (in thousands):
2009 Consolidated 1 to 3 Months 3 to 12 Months 1 to 5 Years Beyond 5 Years

On Demand Financial assets Financial assets at FVPL AFS investments Government Unquoted HTM Investments Loans and receivables Due from BSP Due from other banks Interbank loans receivable Loans and discounts Corporate Individual Government Unquoted debt securities Accounts receivable Accrued interest receivable Sales contract receivable Financial liabilities Deposit liabilities Demand Savings Time Bills Payable Managers checks Accrued interest Accrued other expenses Other liabilities

Total

P =890,370
28,277

P =
66,002

P =
661,751

P =
1,196,965

P =
1,394,803 26,263 7,267,667

P =890,370
3,347,798 26,263 9,708,996 13,577,301 699,457 3,762,819 10,610,465 3,168,971 6,468,747 3,019,944 1,168,230 509,679 218,420 P =57,177,460


13,577,301 704,703 3,769,673 1,692,220 852,751 11,626

2,456,520 81,440 1,304,189


11

1,199,484 904,941 522,568


550,009

2,441,329
2,565,761 559,536 1,911,642 1,766,515


2,696,480 770,303 2,718,722 703,409

1,168,230 262,929

56,031 258 P =3,964,451

185,270 10,622 P =4,034,645

5,449 99,192 P =10,546,389


108,348

P =22,958,080 P =11,318,855
29,527,632

P =15,685,995 P =
2,013,152

P =
21,538,796 2,089,593 23,628,389

P =
2,551,664 80,843 2,632,507

40,846,487

P =
537,234

P =11,318,855
53,618,092 2,170,436 67,107,383 2,550,386 54,884 118,735 147,518 569,676 P =69,558,030

54,884 118,735 147,518 569,676 P =41,737,300

P =23,628,389

P =2,632,507

P =19,094

P =1,540,740

On Demand Financial liabilities Deposit liabilities Demand Savings Time Bills payable Managers checks Accrued interest Accrued other expenses Other liabilities =9,325,147 P 4,565,948 13,891,095 94,692 151,532 146,533 661,622 =14,945,474 P

1 to 3 months = P 19,282,074 1,607,912 20,889,986 49,121 =20,939,107 P

2008 Consolidated 3 to 12 months = P 2,473,810 81,210 2,555,020 2,655 =2,557,675 P

1 to 5 years = P 31,938 =31,938 P

Beyond 5 years = P 1,248,523 101,811 =1,350,334 P

Total P9,325,147 = 26,321,832 1,689,122 37,336,101 1,283,116 94,692 151,532 146,533 812,554 =39,824,528 P

*SGVMC114014*

- 39 2009 Parent Company 1 to 3 Months 3 to 12 Months 1 to 5 Years Beyond 5 Years

On Demand Financial assets Financial assets at FVPL AFS investments Government Unquoted HTM Investments Loans and receivables Due from BSP Due from other banks Interbank loans receivable Loans and discounts Corporate Individual Government Unquoted debt securities Accounts receivable Accrued interest receivable Sales contract receivable Financial liabilities Deposit liabilities Demand Savings Time Bills Payable Managers checks Accrued interest Accrued other expenses Other liabilities

Total

P =890,370
28,277 13,055,098 704,703 3,769,673 1,692,220 852,751 11,626 1,113,140 262,925 P =22,380,783

P =
66,002

P =
661,751

P =
1,196,965 2,441,329 2,565,761 559,536 1,911,642 1,682,395 5,449 93,477 P =10,456,554

P =
1,394,803 7,267,667 2,696,480 770,303 2,718,722 669,913 108,348 P =15,626,236

P =890,370
3,347,798 9,708,996 13,055,098 704,703 3,769,673 10,610,465 3,168,971 6,468,747 2,902,328 1,113,140 509,675 188,007 P =56,437,971

2,456,520 81,440 1,304,189


11 56,031 258 P =3,964,451

1,199,484 904,941 522,568


550,009 185,270 10,622 P =4,034,645

P =11,318,855
29,527,632 40,846,487 54,884 118,735 147,518 553,615 P =41,721,239

P = 21,538,796 2,089,593 23,628,389 P =23,628,389

P = 2,551,664 80,843 2,632,507 P =2,632,507 2008 Parent Company 3 to 12 months = P 2,473,810 81,210 2,555,020 2,655 =2,557,675 P

P =
537,234 P =19,094

P =
2,013,152 P =1,540,740

P =11,318,855
53,618,092 2,170,436 67,107,383 2,550,386 54,884 118,735 147,518 553,615 P =69,541,969

On Demand Non-derivative liabilities Deposit liabilities Demand Savings Time Bills payable Managers checks Accrued interest Accrued other expenses Other liabilities =9,325,147 P 4,565,948 13,891,095 94,692 151,532 146,533 661,622 =14,945,474 P

1 to 3 months = P 19,282,074 1,607,912 20,889,986 49,121 =20,939,107 P

1 to 5 years

Beyond 5 years = P 1,248,523 101,811 =1,350,334 P

Total P9,325,147 = 26,321,832 1,689,122 37,336,101 1,283,116 94,692 151,532 146,533 812,554 =39,824,528 P

= P 31,938 =31,938 P

*SGVMC114014*

- 40 Historically, not all deposit liabilities are withdrawn on their contractual maturities. Based on the historically observed behavior of the Parent Companys deposit liabilities, a significant amount of deposits is retained longer than its contractual maturity. This therefore allows the Parent Company to go into long term investments and lending whose streams of cash flows are sufficient enough to cover cash outflow requirements. Below is the adjusted liquidity gap position of the Parent Company based on a mixture of observed behavior and contractual maturity which is supported by the asset side of the balance sheet (amounts in thousands):
Less than 3 months P = 1,613,456 4,797,149 5,335,836 232,762 11,979,203 17,153,522 266,348 594,112 18,013,982 (6,034,779) 3,008,638 2009 3 to 12 months P = 1,513,751 4,867,979 263,371 465,523 7,110,624 13,761,372 347,238 1,117,547 15,226,157 (8,115,533) (5,106,895) 1 to 5 years P = 6,652,622 1,674,782 8,327,404 117,685 117,685 8,209,719 3,102,824 Over 5 Years P = 1,092,793 4,452,285 4,222,272 4,834,031 14,601,381 9,934,484 3,083,891 13,018,375 5,052,655 (3,469,649) (366,825)

PESO BOOKS Assets Cash in vault Due from BSP Due from banks Loans Investments Other assets Liabilities Deposits Other liabilities Contingent liabilities Equity Gap Cumulative Gap

On Demand P =402,276 8,835,098 282,542 382,521 9,902,437 859,020 859,020 9,043,417 9,043,417

Total P =402,276 13,055,098 282,542 20,770,035 11,878,782 5,532,316 51,921,049 41,708,398 3,815,162 1,711,659 47,235,219 5,052,655

PESO BOOKS Assets Cash in vault Due from BSP Due from banks Loans Investments Other assets Liabilities Deposits Other liabilities Contingent liabilities Equity Gap Cumulative Gap

On Demand =351,412 P 3,819,795 468,477 211,286 4,850,970 =617,857 P 617,857 4,233,113 4,233,113

Less than 3 months = P 496,589 8,634,267 3,763,597 113,824 13,008,277 =12,568,572 P 295,020 281,411 13,145,003 (136,726) 4,096,386

2008 3 to 12 months = P 1,430,534 5,758,833 159,265 227,647 7,576,279 =13,004,858 P 177,055 92,021 13,273,934 (5,697,655) (1,601,268)

1 to 5 years = P 3,843,206 1,812,497 5,655,703 = P 48,799 48,799 5,606,903 4,005,635

Over 5 Years = P 742,877 50,905 4,802,271 4,178,083 3,780,647 13,554,783 =9,934,484 P 3,000,348 12,934,832 4,749,019 (4,129,068) (123,433)

Total =351,412 P 6,489,795 519,382 23,038,577 10,124,728 4,122,118 44,646,012 =36,125,771 P 3,521,223 373,432 40,020,426 4,719,019

*SGVMC114014*

- 41 2009 3 to 12 months = P 3,129 3,129 (3,129) 2,761 2008 3 to 12 months = P 166,786 166,786 (166,786) 206,587

FCDU BOOKS Assets Due from banks Loans Investments Other assets Liabilities Deposits Other liabilities Gap Cumulative Gap

On Demand =1,022 P 245 1,267 289 289 978 978

Less than 3 months =7,707 P 8,077 7,529 553 23,866 18,906 48 18,954 4,912 5,890

1 to 5 Years = P 1,035 1,035 3,103 3,103 (2,068) 693

Over 5 Years = P 3,395 3,395 2,838 1,252 4,090 (695) (2)

Total =8,729 P 8,077 11,959 798 29,563 28,265 1,300 29,565

FCDU BOOKS Assets Due from banks Loans Investments Other assets Liabilities Deposits Other liabilities Gap Cumulative Gap

On Demand =156,577 P 11,129 167,706 14,020 14,020 153,686 153,686

Less than 3 months =280,306 P 295,166 171,413 16,459 763,344 541,105 2,552 543,657 219,687 373,372

1 to 5 Years = P 49,673 49,673 146,978 146,978 (97,305) 109,281

Over 5 Years = P 162,066 162,066 137,651 133,698 271,349 (109,283)

Total =436,883 P 295,166 383,152 27,588 1,142,789 1,006,540 136,250 1,142,790

As of 31 December 2009, of the total assets under the regular books around 40% or P =21.0 billion was in cash assets and other cash items such as due from BSP, cash-in-vault, due from local banks, interbank loans and highly cash convertible government securities booked under HFT, AFS and UDSCL. Moreover, since the Bank is a government depository bank, it is required to maintain legal and liquidity floor reserves equivalent to 50% of total government deposits. For the FCDU books, deposits with other banks, loans and investments were largely short term. Investments were likewise limited to Philippine government guaranteed bonds that can easily be liquidated if the need arises. The Bank has also put in place a liquidity contingency plan in case of liquidity crisis. Depending on the severity of the liquidity problem, the Bank may choose or be forced to use one or more of liquidity sources. The Bank periodically tests its ability to draw on the identified sources of backup liquidity. Moreover, stress test is conducted on a periodic basis in order to assess the Banks ability to meet its liquidity obligations during liquidity crisis. Stress testing is an important tool used to measure the outcome of certain extreme events to the Banks liquidity position. Stress testing may be in the form of simple sensitivity or scenario analysis. Diversification of funding sources is important in managing liquidity risk, specifically funding liquidity risk. Diversification of funds sources means that the bank wants to take money from as many different types of customers in as many different industries as possible. It also means having many types of instruments from which funds can be taken. By offering different instruments, there is a better chance of getting more funds from the same customer. Even though achieving liquidity through instrument diversification has a cost, the bank wants to avoid the danger of using only the lowest costing instrument to take money from the lowest costing source.

*SGVMC114014*

- 42 Any sudden swing in interest rates may entice customers/investors to shift funds to higher yielding instruments, which the Bank might not offer if it is to rely only on low cost funds. For this reason, the Bank offers several deposit instruments whose yields are market competitive. However, in order that there is no over dependence on high yielding deposit funds and wholesale funds, risk limits are set up for overnight interbank borrowings and large funds providers. Maximum interbank borrowing per day is set at P =1.00 billion and USD 2 million for the regular and FCDU books, respectively. Large funds provider limits are set at P700.00 million and USD2.00 million for the peso and dollar term deposits. Any excess to the large funds provider limit is invested at very short term and highly liquid assets. Market Risk Market risk is the potential decline in earnings, either immediately or over time, as a result of adverse fluctuations or changes in the level or volatility of interest rates, foreign exchange rates or commodities or equity prices. The Risk Management Department is responsible for identification, measurement, reporting and mitigation of market risk under the supervision of the BOD through the Risk and Compliance Committee. Measurement of market risk is done by Value-at-Risk (VaR) and Earnings-at-Risk (EaR) methodologies. VaR is a statistical estimate of the maximum amount of loss that an open risk position may diminish during a given time period with a given level of confidence. VaR calculation covers the accounts booked under Held-for-Trading Securities and the Banks overall Foreign Exchange exposure. EaR, on the other hand, is used to measure the impact of volatility of the interest rates to the earning assets and liabilities of the bank. Unlike VaR, EaR reflects the risk exposure of future income of the Parent Company as changes in interest rates may occur. Objectives and limitations of the VaR methodology In calculating the VaR, the Parent Company used the parametric methodology with 99% confidence interval and one (1) day holding period. This means that actual trading losses are expected to exceed VaR estimates of not more than once out of every one hundred trading days. The VaR model assumes that the market conditions follow a normal distribution. The use of VaR has limitations because it is based on historical correlations and 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% confidence level. The Parent Company calculates VaR on a daily basis and sends a report to the Treasurer and President, on a daily basis.

*SGVMC114014*

- 43 Below are the tables showing VaR for the period ended December 31, 2009 and 2008 (amounts in thousands): For Fixed Income - Peso Books As of December 31 Average Highest Lowest For Foreign Exchange Exposure As of December 31 Average Highest Lowest 2009 $3,611 12,890 70,223 1,026 2008 $16,125 28,456 119,592 1,366 2009 P =3,292,718 8,694,390 19,099,261 223

For the Fixed Income trading books, actual VaR reporting commenced only in 2009 after a recalibration and a trial run was conducted in 2008. Moreover, back-testing is periodically done to serve as basis for capital funding requirement for an internal risk-based approach in capital adequacy calculation. Back-testing is the basic analytical tool, where previous-day VaR calculations are compared against the actual day-to-day profit and loss. Back testing is performed on a semi-annual basis and the results are reported to the Asset and Liability Management Committee (ALCO), the Risk and Compliance Committee and the Board of Directors. However, VaR methodology has its own limitations. It assumes a normal distribution of risk factors under normal market condition as such it may tend to under-estimate the possible losses or fail to capture the worst case scenarios. Furthermore, calculations are largely based on historical data of market prices and assume that future price movements will replicate the statistical distribution of the past data. In spite of applying the VaR calculations, the Parent Company adopted the Standardized Approach set by the BSP in calculating capital adequacy covering market risk. The standardized approach employs standard risk weights for both the general and specific market risks. The general market risk classifies market risk according to the instruments coupon rate and the tenor while specific market risk classifies market risk based on the nature or type of security/instrument. Moreover, as a control measure for losses in the trading activities that may arise, market risk limits are put in place such as volume or position limits and stop loss limits. Nominal Position Limits is the maximum amount of open risk positions that can be held within a set time period for each financial instrument that the Parent Company can trade. It is a pre-determined position level set by the Management and approved by the BOD for a specific instrument. Position limits are set for fixed income instruments booked under held-for-trading and for foreign exchange positions of the Bank. For the fixed income instruments, total position limit for the Peso and FCDU are P =1.0 billion and USD15 million, respectively while the foreign exchange position limit is based on the regulatory ceiling of 20% of unimpaired capital ($20.72 million as of end December 31, 2009) or $50 million whichever is lower.

*SGVMC114014*

- 44 An Annual VaR limit is also set by the Parent Company to manage trading losses. The annual VaR limit is usually set as a percentage to the budgeted trading income for the year. The Annual VaR limit is the maximum monetary amount for market-related losses for a specified time period that top management deems acceptable for the Parent Company. It is intended to limit the actual financial loss (realized and unrealized) from adverse trading performance of the Parent Company. Before the annual VaR limit is reached, a loss alert limit and a stop loss limit are set as a red flag and cut-loss limit, respectively for significant large losses in trading. Interest Rate Risk The method by which the Parent Company measures the sensitivity to its assets and liabilities to interest rate fluctuation is by way of Earnings-at-Risk (EaR) measurement. EaR measures the Parent Companys susceptibility to changes in interest rates. It calculates the change in income over the next 12 months, given current exposures that will result from a management selected and approved change in interest rate. The Parent Company computes for the EaR for Peso and FCDU books separately. To compute for the EaR, a repricing gap must first be created. The repricing gap is calculated by distributing the assets and liabilities into tenor buckets according to their repricing dates or maturity dates or assumed behavior of payouts or liquidation. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. On the other hand, a gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. After establishing the repricing gap, the resultant gaps on each tenor bucket shall be multiplied by the assumed rate volatility based on the approved standard deviation (SD) of 2.326. The use of 2.326 SD means that there is a 99% probability that actual impact on the earnings of the bank within the projected 12-month period will unlikely exceed the EaR estimates. Below is the repricing gap of interest sensitive assets and liabilities as of December 31, 2009 and 2008 (amounts in thousands):
2 to 3 Months P =8,532,232 9,820,000 980,066 19,332,298 15,161,313 2,516 15,163,829 4,168,469 (15,459) (9,884) 2009 4 to 6 Months P =5,366,734 1,523,694 6,890,428 2,588,430 11,715 2,600,145 4,290,283 (2,874) (12,758) 7 to 12 Months P =1,327,548 1,821,568 3,149,116 11,787 11,787 3,137,329

PESO BOOKS Assets Loans and receivables Due from BSP Due from other banks Investment securities* Liabilities Deposit liabilities Other liabilities Repricing gap EaR (2.326SD) EaR Cumulative

1 Month P =1,650,000 1,650,000 7,479,500 7,479,500 (5,829,500) 5,575 5,575

> 1 Year P =2,467,594 3,235,098 282,542 7,402,535 13,387,769 16,479,155 1,533,815 18,012,970 (4,625,201)

Total P =19,344,108 13,055,098 282,542 11,727,863 44,409,611 41,708,398 1,559,833 43,268,231 1,141,380

* Consisting of financial assets at FVPL, AFS financial assets, HTM financial assets and unquoted debt securities classified as loans

*SGVMC114014*

- 45 In a decreasing interest rate scenario, a positive repricing gap position would normally yield a decrease in earnings due to lowering of interest margin. Within the first two months, a decrease in interest rates may result to a possible reduction of income by P =9.88M (net) at 2.326SD. As more assets than liabilities are due for repricing in the subsequent months, a sustained decreasing trend of interest rates may result to an aggregate potential loss of P =12.76 million at the end of the 12month period at 2.326SD. However, if interest rates should increase at the same confidence interval, the Bank stands to earn additional income of P =12.76 million at the end of the 12-month period.
2 to 3 Months $8,729 3,000 8,077 19,806 21,559 (1,753) 0.27 0.27 2009 4 to 6 Months $ 914 (914) 0.23 0.50 7 to 12 Months $

FCDU BOOKS Assets Placement with other banks Investment securities* Loans and receivables Liabilities Deposit liabilities Repricing Gap EaR (2.326SD) EaR Cumulative

1 Month $

> 1 Year $ 8,959 8,959 6,306 2,653

Total $8,729 11,959 8,077 28,765 28,779 (20,702)

* Consisting of financial assets at FVPL, AFS financial assets, HTM financial assets and unquoted debt securities classified as loans

The FCDU book has a negative repricing gap position. Any sustained decrease in interest rates at 2.326SD may yield additional earnings due to savings in interest expense by as much as $0.50 thousand at the end of the 12-month period. On the other hand, an increase in interest rates at 2.326SD may result to a decrease in earnings of $0.50 thousand.
2 to 3 Months =2,504,848 P 600,000 460,507 3,565,355 2,374,614 7,083 2,381,697 2008 4 to 6 Months =1,628,315 P 75,665 1,703,980 1,231,775 3,558 1,235,333 7 to 12 Months =895,061 P 174,379 1,069,440 669,738 12,116 681,854

PESO BOOKS Assets Loans and receivables Due from BSP Due from other banks Investment securities* Liabilities Deposit liabilities Other liabilities

1 Month =12,823,464 P 3,490,000 254,190 16,567,654 18,264,440 1,042 18,265,482

> 1 Year =4,936,889 P 2,399,795 519,382 9,159,987 17,016,053 13,585,205 1,259,318 14,844,523

Total =22,788,577 P 6,489,795 519,382 10,124,728 39,922,482 36,125,771 1,283,116 37,408,887

Repricing gap (1,697,828) 1,183,658 468,648 387,586 2,171,530 2,513,594 EaR (2.326SD) (19,475) 7,203 2,648 1,9226 EaR Cumulative (19,475) (12,272) (9,625) (7,699) * Consisting of financial assets at FVPL, AFS financial assets, HTM financial assets and unquoted debt securities classified as loans

In a decreasing interest rate scenario, a negative repricing gap position would normally yield a gain due to a possible savings on interest expense. For the Peso book, repriceable liabilities outweigh repriceable assets in the first month. For this matter earnings may increase in the first month of P =19.48 million assuming interest rates decreases at 2.326SD. However, as more assets are due for repricing in the subsequent months, the continued decreasing trend of interest rates may result to lower potential earnings of P =7.70 million at the end of the 12-month period. Conversely, if interest rates would be on an increasing trend, the Bank may lose of up to P =7.70 million at the end of the 12-month period if rates would increase at 2.326SD.

*SGVMC114014*

- 46 -

FCDU BOOKS Assets Placement with other banks Investment securities* Loans and receivables Liabilities Deposit liabilities Repricing Gap EaR (2.326SD) EaR Cumulative

1 Month $9,194 6,211 15,405 11,156 6,211 3.30 3.30

2 to 3 Months $ 4,456 4,456 3,304 (2,259) 0.89 4.20

2008 4 to 6 Months $ 175 (175) (0.18) 4.02

7 to 12 Months $ 109 (109) (0.15) 3.87

> 1 Year $ 3,607 3,607 6,437 (2,830)

Total $9,194 8,063 6,211 23,468 21,181 2,287

* Consisting of financial assets at FVPL, AFS financial assets, HTM financial assets and unquoted debt securities classified as loans

The FCDU book has a positive repricing gap position. Any sustained decrease in interest rates at 2.326SD may reduce earnings by as much as $1.22 thousand at the end of the 12-month period. On the other hand, an increase in interest rates at 2.326SD may result to an increase in earnings of $1.22 thousand. On a decreasing interest rate scenario with a positive repricing gap position, repriceable assets are normally locked in on a longer repricing term to maximize earnings but careful consideration is also taken to its potential impact on the liquidity aspect. The following tables demonstrates the sensitivity to a reasonable possible change in interest rates, with all other variables held constant, of the Parent Companys statement of income (amounts in thousands). The sensitivity of the statement of income is the effect of the assumed changes in interest rates on the net interest income for one year based its effect on the floating rate of financial assets and financial liabilities held at December 31, 2009 and 2008. The sensitivity of equity is calculated by revaluing fixed rate available for sale debt instruments held at December 31, 2009 and 2008.
2009 Increase in Sensitivity of net basis points interest income +50% 39,535 +50% (1,367) Decrease in Sensitivity of net basis points interest income -50% (34,509) -50% 3,836 2008 Sensitivity of net interest income 84,412 179 Sensitivity of net interest income (84,195) (179) Sensitivity of equity (227,045) (1,523) Sensitivity of equity 399,111 1,938

Currency PHP USD

PHP USD

Currency PHP USD

Increase in basis points +50 +50 Decrease in basis points -50 -50

Sensitivity of equity (202,846) (610) Sensitivity of equity 250,987 772

PHP USD

*SGVMC114014*

- 47 The impact on the Parent Companys equity already excludes the impact on transactions affecting the statements of income. 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 financial and cash flows. The Parent Company measures its foreign risk exposures using the VaR methodology. Equity price risk Equity price risk is the risk that the fair values of equity instruments fluctuate as the result of changes in the levels of equity indices and the value of individual stocks. The Parent Companys exposure to this risk is mainly from its quoted golf club shares classified as AFS financial assets. The Parent Companys policies and procedures as well as risk limit structures on its equity investment portfolio are approved by the RMC and BOD. The following table demonstrates the sensitivity to a reasonable possible change in the equity price based on managements best estimate, with all other variables held constant, of the Parent Companys equity as of December 31, 2009 and 2008 (amounts in thousands): Change in share prices +20% 20% 2009 P =4,157 (4,157) Effect on equity 2008 =3,973 P (3,973)

The impact on the Parent Companys equity already excludes the impact on transactions affecting the consolidated statements of income. Regulatory Qualifying Capital The regulatory capital as defined under the BSP Circular No. 538 consists of Tier 1 capital and Tier 2 capital. The Banks Tier 1 capital is comprised of common shares, non - cumulative preferred shares, retained earnings and undivided profits less the deductibles such as deferred income tax and equity investments. The Tier 2 capital is composed of general loan loss provision and unrealized gains on AFS equity securities purchased less the prescribed deductibles. 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. Qualifying capital and risk-weighted assets are computed based on BSP regulations. Riskweighted 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 following table shows that the Parent Company maintained a well-capitalized position based upon Tier 1 and total capital ratios at December 31, 2009 and 2008.

*SGVMC114014*

- 48 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, during 2009 and 2008, the Parent Company was in compliance with the capital adequacy ratio. The capital-to-risk assets ratio of the Parent Company as reported to the BSP as of December 31, 2009 and 2008 are shown in the table below.
2009 Tier 1 capital Tier 2 capital Gross qualifying capital Total Credit risk-weighted assets Total Market risk-weighted assets Total Operational risk-weighted assets Total risk-weighted assets Tier 1 capital ratio Total capital ratio 2008 Required

In Millions P =4,773.28 39.03 4,812.31 21,968.93 271.38 3,752.20 25,992.51 18.364% 18.514%

P = 2,196.90 27.14 3,75.22 2,599.26

In Millions =4,451.40 P 13.00 4,464.40 17,807.93 129.29 2,870.76 20,807.98 21.39% 21.46%

Required = P 1,780.79 12.93 287.05 2,080.77

Per BSP regulation the minimum risk-based capital adequacy ratio that a bank should maintain is at least 10%. The Parent Company maintains a high ratio of 2.4x the regulatory requirement. Between periods the increase in the capital ratio is largely attributed to the increase of the qualified capital. In 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 the BSP Circular No. 538. As required by the BSP, the Parent Company is currently in the process of developing its ICAAP. 5. Fair Value Measurement The methods and assumptions used by the Group in estimating the fair value of the financial instruments are: Cash and other cash items, due from BSP, due from other bank, accounts receivable, accrued interest receivable, sales contract receivable and interbank loans receivable and SPURA Carrying amounts approximate fair values given the short-term nature of the instruments. Trading and investment securities - Fair values of debt securities (FVPL, AFS and HTM investments) and equity investments are generally based on quoted market prices. Where the debt securities are not quoted or the market prices are not readily available, the Group obtained valuations from independent parties offering pricing services, used adjusted quoted market prices of comparable investments, or applied discounted cash flow methodologies. For equity investments that are not quoted, 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. Loans and receivables - Fair values of loans and receivables are estimated using the discounted cash flow methodology, using the Parent Companys current incremental lending rates for similar types of loans and receivables. Deposit liabilities - The estimated fair value of deposit liabilities which include noninterestbearing deposits is the amount repayable on demand.

*SGVMC114014*

- 49 Bills payable - Fair value is computed using the discounted cash flow methodology except for the fair value of short-term liabilities which approximates carrying value. Managers check, accrued interest payable and other liabilities - Carrying amounts approximate fair values given the short-term nature of the instruments. The table below presents a comparison by category of carrying amounts and estimated fair values of the financial instruments as of December 31, 2009 and 2008 (amounts in thousands):
2009 Consolidated Parent Company Carrying Value Fair Value Carrying Value Fair Value Financial Assets Loans and receivables Cash and other cash items Due from BSP Due from other banks Interbank loans receivable and SPURA Loans and receivables - net Loans and discounts Government Corporate Individual Unquoted debt securities Accounts receivable Accrued interest Sales contract receivables Financial assets at FVPL Held for trading Government securities AFS financial assets Government securities Equity Securities Quoted Unquoted HTM financial assets Government Financial Liabilities Financial liabilities at amortized cost Deposit liabilities Demand Savings Time Bills payable Managers checks Accrued interest Other liabilities P =431,580 13,055,098 699,457 2,633,259 5,940,919 9,561,153 1,975,883 2,902,328 1,151,719 509,679 204,248 P =39,065,323 P =3,312,260 3,258,993 27,004 26,262 6,624,519 4,433,331 P =50,123,173 P =431,580 13,055,098 699,457 2,633,259 6,318,195 9,854,817 2,186,543 3,410,796 1,151,719 509,679 204,248 P =40,455,391 P =3,312,260 3,258,993 27,004 26,262 6,624,519 4,143,169 P =51,223,079 P =426,279 13,055,098 685,820 2,633,259 5,940,919 9,561,127 1,975,883 2,902,328 1,122,878 509,675 188,007 P =39,001,273 P =890,370 3,258,993 27,004 13,420 4,189,787 4,433,331 P =47,624,391 P =426,279 13,055,098 685,820 2,633,259 6,318,195 9,854,791 2,186,543 3,410,796 1,122,878 509,675 188,007 P =40,391,341 P =890,370 3,258,993 27,004 13,420 4,189,787 4,143,169 P =48,724,297

P =11,318,855 29,527,242 2,167,696 43,013,793 1,559,834 54,884 118,735 1,198,813 P =45,946,059

P =11,318,855 29,527,242 2,167,696 43,013,793 1,667,506 54,884 118,735 1,198,813 P =46,053,731

P =11,318,855 29,527,632 2,167,696 43,014,183 1,559,834 54,884 118,735 1,208,565 P =45,956,201

P =11,318,855 29,527,632 2,167,696 43,014,183 1,667,506 54,884 118,735 1,208,565 P =46,063,873

*SGVMC114014*

- 50 2008 Consolidated Parent Company Carrying Value Fair Value Carrying Value Fair Value Financial Assets Loans and receivables Cash and other cash items Due from BSP Due from other banks Interbank loans receivable and SPURA Loans and receivables - net Loans and discounts Government Corporate Individual Unquoted debt securities Accounts receivable Accrued interest Sales contract receivables Financial assets at FVPL Held for trading Government securities AFS financial assets Government securities Equity Securities Quoted Unquoted HTM financial assets Government Financial Liabilities Financial liabilities at amortized cost Deposit liabilities Demand Savings Time Bills payable Managers checks Accrued interest Other Liabilities =370,720 P 6,489,795 970,146 8,295,911 3,743,036 8,842,083 2,257,976 2,732,240 1,020,268 372,920 165,471 35,260,566 249,937 1,959,330 13,736 45,945 59,681 4,461,745 =41,991,259 P =370,720 P 6,489,795 970,146 8,295,911 2,878,131 8,962,111 2,177,238 2,732,240 1,020,268 372,920 165,471 34,434,951 249,937 1,959,330 13,731 45,945 59,676 3,743,422 =40,459,874 P =372,620 P 6,489,795 956,266 8,295,911 3,743,036 8,842,083 2,257,943 2,732,240 1,018,587 372,882 161,131 35,242,494 249,937 1,959,330 28,508 13,420 41,928 4,461,745 =41,955,434 P =372,620 P 6,489,795 956,266 8,295,911 2,878,131 8,962,111 2,177,238 2,732,240 1,018,587 372,882 161,131 34,416,912 249,937 1,959,330 28,508 13,420 41,928 3,743,422 =40,423,087 P

P9,324,564 = 26,122,967 1,680,084 37,127,615 1,283,116 94,692 151,532 1,078,374 =39,735,329 P

P9,324,564 = 26,122,967 1,680,084 37,127,615 1,283,116 94,692 151,532 1,078,374 =39,735,329 P

P9,325,147 = 26,124,987 1,682,176 37,132,310 1,283,116 94,692 151,532 1,590,402 =40,252,052 P

P9,325,147 = 26,124,987 1,682,176 37,132,310 1,283,116 94,692 151,532 1,590,402 =40,252,052 P

The following table shows financial instruments recognized at fair value, analyzed between those whose fair value is based on (amounts in thousands): 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).

*SGVMC114014*

- 51 -

Level 1 Financial Assets Financial assets at FVPL (Note 6) Government securities AFS investments (Note 6) Government securities Quoted equity securities

2009 Consolidated Level 2 P =

Level 3 P =

Total

P =890,370 3,258,993 39,504 P =4,188,867

P =890,370 3,258,993 39,504 P =4,188,867

P =
2009 Parent Level 2 P =

P =

Level 1 Financial Assets Financial assets at FVPL (Note 6) Government securities AFS investments (Note 6) Government securities Quoted equity securities

Level 3 P =

Total

P =890,370 3,259,336 26,662 P =4,176,368

890,370 3,259,336 26,662 4,176,368

P =

P =

There were no transfers between Level 1 and Level 2 fair value instruments, and no transfers into and out of Level 3 fair value measurements during the year ended December 31, 2009. 6. Trading and Investments Securities Financial assets at FVPL are investment securities held for trading of the Group and the Parent Company. This account consists of (amounts in thousands): Government bonds BSP Treasury bills 2009 P =140,611 749,759 P =890,370 2008 =17 P 249,920 =249,937 P

The financial assets at FVPL of the Group and the Parent Company include net unrealized loss of =17.20 million and net unrealized gains of P P =0.97 million included in Trading gains - net as of December 31, 2009 and 2008, respectively. AFS financial assets consist of (amounts in thousands):
Consolidated 2008 2009 =1,959,330 P P =3,258,993 152,961 39,272 3,451,226 (138,966) P =3,312,260 154,466 45,945 2,159,741 (140,729) =2,019,012 P Parent Company 2008 2009 =1,959,330 P P =3,258,792 153,161 13,420 3,425,373 (125,957) P =3,299,416 154,465 13,420 2,127,215 (125,957) =2,001,258 P

Government securities Equity securities: Quoted Unquoted Allowance for impairment and credit losses (Note 13)

*SGVMC114014*

- 52 Unquoted equity securities are composed of various bank association membership shares. The Parent Company has no immediate plans to sell these securities and the intention is to hold these on a long-term basis. There were no unquoted equity securities sold in 2009 and 2008. As of December 31, 2009 and 2008, AFS financial assets include accumulated unrealized loss of =64.45 million and P P =63.21 million, respectively. The details of net unrealized gain (loss) on AFS investments of the Group and the Parent Company follow (amounts in thousands): Balance at beginning of year Unrealized gains (losses) Reversal through profit or loss Net change during the year on AFS investments Balance at end of year 2009 (P =63,212) (7,405) 6,168 (1,237) (P =64,449) 2008 P44,628 = (81,201) (26,639) (107,840) (P =63,212)

The peso-denominated government bonds bear nominal annual interest rates ranging from 5.50% to 16.50% and 6.30% to 14.30% in 2009 and 2008, respectively, while US dollar-denominated bonds bear nominal annual interest ranging from 4.25% to 8.25% and 6.50% to 8.40% in 2009 and 2008, respectively. HTM financial assets for the Group and Parent Company consist of government securities amounting to P =4.43 billion and P =4.46 billion as of December 31, 2009 and 2008, respectively. As of December 31, 2008, peso-denominated government bonds bear nominal annual interest rates ranging from 5.80% to 12.40% while US dollar-denominated bonds bear nominal interest ranging from 7.60% to 9.50% both for the Group and the Parent Company. Interest income on trading and investment securities of the Group and Parent Company consists of (amounts in thousands): HTM financial assets AFS financial assets Financial assets at FVPL 2009 P =342,895 127,061 20,430 P =490,386 2008 =206,489 P 150,968 9,446 =366,903 P

Trading gain or (loss) on trading and investment securities of the Group and Parent Company consists of (amounts in thousands): AFS financial assets Financial assets at FVPL 2009 P =6,168 27,328 P =33,496 2008 (P =26,639) 4,117 (P =22,522)

Reclassification of Financial Assets The recent global credit crunch had prompted the International Accounting Standards Board to issue the Amendments to IAS 39 and IFRS 7 which was adopted by Philippine Financial Reporting Standards Council as amendments to PAS 39 and PFRS 7. These amendments permitted the Parent Company to revisit the existing classification of their financial assets. The

*SGVMC114014*

- 53 Parent Company identified financial assets eligible under the amendments, for which reclassification of held-for-trading financial assets, under rare circumstance, to HTM financial assets was made on October 20, 2008. The Parent Company also reclassified AFS financial assets to HTM financial assets on various dates from September 11, 2008 to October 20, 2008, for which it had a clear change of intent to hold the financial assets for the foreseeable future rather than to exit or trade in the short-term. The disclosures below detail the impact of the reclassifications to the Parent Company. On October 20, 2008, the Parent Company reclassified certain government securities from financial assets at FVPL to HTM financial assets. The carrying values of these financial assets as of October 20, 2008 and December 31, 2008 amounted to P =204.77 million and P =204.72 million, respectively, while those other government securities reclassified on various dates from AFS financial assets to HTM financial assets have carrying values of P =1.91 billion and P =1.93 billion from the respective reclassification dates and as of December 31, 2008, respectively. The effective interest rates on the reclassified financial assets range from 6.87% to 7.94%. The HTM financial assets reclassified from held-for-trading financial assets and AFS financial assets have the following balances as of December 31, 2008:
Net Unrealized Fair Value Loss Amortization of Discount/ (Premium)

Face Value Reclassification of government securities from: Financial assets at FVPL to HTM AFS financial assets to HTM

Original Costs Carrying Value

=200,000,000 P

=207,593,541 P

=204,729,729 P

=210,929,050 P

=2,863,812 P 76,225,365 =79,089,177 P

(P =36,333) (6,287,720) (P =6,324,053)

1,776,998,352 2,006,318,851 1,930,093,486 1,924,425,880 =1,976,998,352 = P P2,213,912,392 P =2,134,823,215 P =2,135,354,930

Had these financial assets not been reclassified to HTM financial assets, further market losses that would have been charged against other comprehensive income amounted to P =45.13 million and =11.96 million in December 31, 2009 and 2008 and market loss of million and market gain of P million that would have been recognized against the statement of income amounted to =8.39 million and P P =6.06 million in 2009 and 2008, respectively. As of December 31, 2009 the carrying value and fair value of the reclassified financial assets amounted to P =1.95 billion and =2.19 billion, respectively. P 7. Loans and Receivables This account consists of (amounts in thousands):
Consolidated 2008 2009 Loans and discounts Corporate Individual Government Unquoted debt securities (Forward) P =10,063,670 2,740,681 5,945,630 18,749,981 2,902,328 =9,147,223 P 2,936,172 3,747,747 15,831,142 2,744,798 Parent Company 2008 2009 10,063,670 2,740,654 5,945,630 18,749,954 2,902,328 =9,147,223 P 2,936,139 3,747,747 15,831,109 2,744,798

*SGVMC114014*

- 54 Consolidated 2008 2009 1,082,154 1,151,718 384,535 509,679 166,031 204,248 20,208,660 23,517,954 (1,272,027) P =22,245,927 (1,074,666) =19,133,994 P Parent Company 2008 2009 1,080,474 1,122,878 384,497 509,675 161,691 188,007 20,202,569 23,472,842 (1,272,027) P =22,200,815 (1,074,666) =19,127,903 P

Accounts receivable Accrued interest receivable Sales contract receivable

Allowance for impairment and credit losses (Note 13)

In 2009, the Parent Company completed a sale on a without recourse basis to an SPV of a nonperforming loan with a carrying value of P =129.4 million for P =75.0 million. The sale resulted in a loss of P =63.4 million (inclusive of accretion amounting to P =9.0 million), which was deferred by the Bank and is amortized over 10 years in accordance the policy prescribed by the BSP. Unquoted debt securities issued or guaranteed by the Philippine government amounted to =1.63 billion and P P =1.74 billion as of December 31, 2009 and 2008, respectively. These include PEACE bonds, zero coupon bonds issued by Bureau of Treasury and bonds issued by National Power Corporation (NPC) and National Food Authority (NFA). Interest income on loans and receivables consists of (amounts in thousands):
Consolidated 2008 2009 =1,227,202 P P =1,538,684 207,897 187,391 55,342 16,609 =1,490,441 P P =1,742,684 Parent Company 2008 2009 =1,227,202 P P =1,538,684 207,897 187,391 54,392 15,447 =1,489,491 P P =1,741,522

Loans and discounts Unquoted debt securities Other receivables

Interest income accrued on impaired loans and receivables in 2009 and 2008 (included under interest income on receivables from customers) amounted to P =124.13 million and P =66.39 million, respectively. BSP Reporting As of December 31, 2009 and 2008, the nonperforming loans (NPLs) of the Group and the Parent Company follow (amounts in millions): Total NPLs Less NPLs fully covered by allowance for credit losses 2009 P =2,226 650 P =1,576 2008 =2,599 P 623 =1,976 P

*SGVMC114014*

- 55 As of December 31, 2009 and 2008, secured and unsecured NPLs of the Group and the Parent Company follow (amounts in millions): Secured Unsecured 2009 P =1,490 736 P =2,226 2008 =1,875 P 724 =2,599 P

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 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 receivables 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 receivables 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 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. The following tables show information relating to loans and discounts by security (amounts in thousands):
Consolidated 2009 Amount Secured by: Real estate Republic of the Philippines guarantee Assignment of receivables Deposits hold-out Chattel Others Unsecured loans =3,120,195 P 2,424,727 768,674 357,976 59,128 9,287,897 16,018,597 2,731,384 =18,749,981 P % 16.64 12.93 4.10 1.91 0.32 49.54 85.44 14.56 100.00 2008 Amount =4,429,844 P 4,346,718 2,441,398 371,009 65,187 3,605,445 15,259,601 571,541 =15,831,142 P % 27.98 27.47 15.42 2.34 0.41 22.77 96.39 3.61 100.00

*SGVMC114014*

- 56 Parent Company 2009 Amount Secured by: Real estate Republic of the Philippines guarantee Assignment of receivables Deposits hold-out Chattel Others Unsecured loans P =3,120,195 2,424,727 768,674 357,976 59,128 9,287,870 16,018,570 2,731,384 P =18,749,954 % 16.64 12.93 4.10 1.91 0.32 49.54 85.43 14.57 100.00 2008 Amount =4,429,841 P 4,346,718 2,441,398 371,009 65,187 3,605,445 15,259,598 571,511 =15,831,109 P % 27.98 27.47 15.42 2.34 0.41 22.77 96.39 3.61 100.00

The unsecured loans and receivables pertain mostly to salary loans granted to teachers and non-teaching employees of the Department of Education (DepEd), employees of local government units and veterans of World War II. The loans are covered by agreements, which allow collection of monthly amortizations through salary or pension deductions. The unsecured loans granted to teachers and non-teaching employees of DepEd include loans to members of Region XI Educators Multi-purpose Cooperative (REMCO) under the financial assistance program of DepEd, which amounted to P =327.10 million and P =327.10 million as of December 31, 2009 and 2008, respectively. Under the memorandum of agreement among the Parent Company, DepEd and REMCO, the latter acts as surety for said loans and assumes repayment responsibilities to the Parent Company for the loan availment of its members. As of December 31, 2009 and 2008, information on the concentration of loans and receivables as to industry follows (amounts in thousands):
Consolidated 2009 Amount Real estate, construction, renting and business services Community, social and personal service activities Wholesale and retail trade Financial intermediaries Manufacturing Transport, storage and communication Agriculture, fisheries and forestry Others P =4,896,276 6,706,231 868,458 778,736 1,071,297 196,018 385,524 3,847,441 P =18,749,981 % 26.11 35.77 4.63 4.15 5.71 1.05 2.06 20.52 100.00 2008 Amount =4,073,243 P 2,088,091 990,232 943,396 901,249 156,484 4,711 6,673,736 =15,831,142 P % 25.73 13.19 6.25 5.96 5.69 1.00 0.03 42.15 100.00

Parent Company 2009 Amount Community, social and personal service activities Real estate, construction, renting and business services Manufacturing Financial intermediaries Wholesale and retail trade Transport, storage and communication Public administration and defense Agriculture, fisheries and forestry Others P =4,896,276 6,706,231 868,458 778,736 1,071,297 196,018 385,524 3,847,464 P =18,749,954 % 26.11 35.77 4.63 4.15 5.71 1.05 2.06 20.52 100.00 2008 Amount =2,731,612 P 4,075,798 2,737,176 976,861 1,145,099 162,944 3,037,037 721,349 243,233 =15,831,109 P % 17.25 25.75 17.29 6.17 7.23 1.03 19.18 4.56 1.54 100.00

*SGVMC114014*

- 57 The BSP considers that concentration of credit exists when the total loan exposure to a particular industry or economic sector exceeds 30% of total loan portfolio. Restructured receivables which do not meet the requirements to be treated as performing receivables shall also be considered as NPLs Current banking regulations allow banks with no unbooked valuation reserves and capital adjustments required by BSP 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. Accounts receivable includes claims for tax credits amounting to P =36.82 million both on December 31, 2009 and 2008 resulting from the condonation of the final withholding tax on the Parent Companys income from investments during its closure from October 4, 1985 to August 2, 1992. 8. Investment in Subsidiaries As of December 31, 2009 and 2008, the Parent Companys investments in subsidiaries consist of (amounts in thousands):
Percentage of Ownership Investment in subsidiaries: Vetgroup Intervest Projects, Inc. (VIPI) Monarch Properties, Inc. Veterans Venture Capital Corporation (VVCC) Total acquisition cost Allowance for impairment losses (Note 13) 100% 100% 60% 2009 P =59,355 150,000 3,000 212,355 (14,306) P =198,049 2008 P59,355 = 150,000 3,000 212,355 (14,760) =197,595 P

The balances of VIPI used in 2009 and 2008 consolidation were based on unaudited financial statements. The total asset of this subsidiary represents 0.15% and 0.19% of the total Group assets as of December 31, 2009 and 2008, respectively, and its net income represents 0.01% and 0.27% of the consolidated net income in 2009 and 2008, respectively, and is considered insignificant to the financial statements of the Group. 9. Investment in an Associate The Bank has equity ownership of 49% in PVB Card Corporation (PVBCC), a Company incorporated in February 2009 to engage primarily in the sale and/or patronage of goods, merchandise and services of producers and traders who accept the convenience cards, including but not limited to credit, debit and prepaid cards, issued by the Company to qualified clientele. The Parent Companys investment in PVBCC amounted to P =10.30 million as of December 31, 2009.

*SGVMC114014*

- 58 For the period February 9, 2009 to December 31, 2009, summarized financial information of PVBCC follows (in thousands): Total assets Total liabilities Revenues Loss before income tax Net loss 10. Bank Premises, Furniture, Fixtures and Equipment The composition of and movements of this account are as follows (amounts in thousands):
Consolidated 2009 Furniture, Fixtures and Leasehold Equipment Improvements P =473,254 124,185 (39,165) 558,274 372,583 47,757 (17,493) 402,847 P =155,427 Consolidated 2008 Furniture, Fixtures and Equipment =442,708 P 43,178 (12,632) 473,254 340,824 39,293 (7,534) 372,583 =100,671 P P =116,481 51,572 168,053 58,308 11,142 69,450 P =98,603

2009 P =22,010 8,642 69 11,451 8,002

Land Cost Balance at beginning of year Additions/transfers Disposals/transfers Balance at end of year Accumulated Depreciation and Amortization Balance at beginning of year Depreciation and amortization Disposals Balance at end of year Net Book Value P =194,870 2,618 (5,782) 191,706 P =

Buildings P =212,775 130,208 (61,266) 281,717 81,007 8,594 (48) 89,553 P =192,164

Total P =997,380 308,583 (106,213) 1,199,750 511,898 67,493 (17,541) 561,850 P =637,900

Land Cost Balance at beginning of year Additions Disposals Balance at end of year Accumulated Depreciation and Amortization Balance at beginning of year Depreciation and amortization Disposals Balance at end of year Net Book Value =198,887 P (4,017) 194,870 =194,870 P

Buildings =195,367 P 25,131 (7,723) 212,775 72,946 8,108 (47) 81,007 =131,768 P

Leasehold Improvements =112,364 P 4,117 116,481 49,266 9,042 58,308 =58,173 P

Total =949,326 P 72,426 (24,372) 997,380 463,036 56,443 (7,581) 511,898 =485,482 P

*SGVMC114014*

- 59 Parent Company 2009 Furniture, Fixtures and Leasehold Buildings Equipment Improvements P =194,472 130,208 (48,369) 276,311 81,007 8,594 (48) 89,553 P =186,758 P =471,381 123,711 (39,165) 555,927 370,905 47,677 (17,493) 401,089 P =154,838 P =116,551 51,572 168,123 58,378 11,142 69,520 P =98,603

Land Cost Balance at beginning of year Additions Disposals Balance at end of year Accumulated Depreciation and Amortization Balance at beginning of year Depreciation and amortization Disposals Balance at end of year Net Book Value P =73,002 2,618 (2,618) 73,002 P =73,002

Total P =855,406 308,109 (90,152) 1,073,363 510,290 67,413 (17,541) 560,162 P =513,201

Land Cost Balance at beginning of year Additions Disposals Balance at end of year Accumulated Depreciation and Amortization Balance at beginning of year Depreciation and amortization Disposals Balance at end of year Net Book Value =73,002 P 73,002 =73,002 P

Parent Company 2008 Furniture, Fixtures and Buildings Equipment =176,148 P 25,131 (6,807) 194,472 72,946 8,108 (47) 81,007 =113,465 P =440,594 P 43,178 (12,391) 471,381 338,898 39,252 (7,245) 370,905 =100,476 P

Leasehold Improvements =112,434 P 4,117 116,551 49,336 9,042 58,378 =58,173 P

Total =802,178 P 72,426 (19,198) 855,406 461,180 56,402 (7,292) 510,290 =345,116 P

11. Investment Properties The composition of and movements in the Groups and Parent Companys investment properties follow (amounts in thousands):
2009 Buildings and Improvements P =123,771 14,780 (32,033) 106,518 44,836 10,648 (9,320) 46,164 15,100 (154) 14,946 45,408

Land Cost Balance at beginning of year Additions/reclassifications Disposals/reclassifications Balance at end of year Accumulated Depreciation and Amortization Balance at beginning of year Depreciation and amortization Disposals/reccalssifications Balance at end of year Allowance for Impairment Losses (Note 13) Balance at beginning of year Additions/reclassifications Balance at end of year Net Book Value P =2,451,029 803,546 (819,186) 2,435,389 135,200 (27,969) 107,231 2,328,158

Total P =2,574,800 818,326 (851,219) 2,541,907 44,836 10,648 (9,320) 46,164 150,300 (28,122) 122,178 2,373,565

*SGVMC114014*

- 60 2008 Buildings and Improvements =121,509 P 22,071 (19,809) 123,771 35,611 11,934 (2,709) 44,836 21,726 (6,626) 15,100 =63,835 P

Land Cost Balance at beginning of year Additions Disposals Balance at end of year Accumulated Depreciation and Amortization Balance at beginning of year Depreciation and amortization Reclassifications Balance at end of year Allowance for Impairment Losses (Note 13) Balance at beginning of year Additions/reclassifications Balance at end of year Net Book Value =2,520,945 P 97,354 (167,270) 2,451,029 115,538 19,662 135,200 =2,315,829 P

Total =2,642,454 P 119,425 (187,079) 2,574,800 35,611 11,934 (2,709) 44,836 137,264 13,036 150,300 =2,379,664 P

The Groups investment properties consist mostly of real estate properties acquired in settlement of loans and receivables. The aggregate fair value of the investment properties both for the Group and the Parent Company amounted to P =4.60 billion and P =7.06 billion as of December 31, 2009 and 2008, respectively. The fair values of the Group and Parent Companys investment properties have been determined 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. Details of the rental income and direct operating expense, included in Other operating income and Miscellaneous expense, respectively, on the investment properties of the Group and of the Parent Company follow (amounts in thousands): Rent income on investment properties Direct operating expenses from investment properties generating rent income Direct operating expenses from investment properties not generating rent income 12. Other Assets This account consists of (amounts in thousands):
Consolidated 2008 2009 =167,290 P P =191,493 38,045 93,484 17,610 11,244 315,453 439,005 538,398 735,226 24,114 P =711,112 58,327 =480,071 P Parent Company 2008 2009 =167,290 P P =191,493 37,434 92,486 17,565 11,244 318,189 452,268 540,478 747,491 24,114 P =723,377 58,327 =482,151 P

2009 P =11,823 (5,346) (2,929)

2008 =9,212 P (3,589) (2,865)

Software costs net Prepaid expenses Stationery and supplies Miscellaneous Less allowance for impairment losses (Note 13)

*SGVMC114014*

- 61 Changes in software costs of the Group and of the Parent Company are as follows (amounts in thousands): Balance at beginning of year Additions Amortization Balance at end of year 2009 P =167,290 67,303 (43,100) P =191,493 2008 =149,658 P 54,191 (36,559) =167,290 P

13. Allowance for Impairment and Credit Losses Changes in the allowance for impairment and credit losses of the Group are summarized as follows (amounts in thousands): 2009 Balances at beginning of year: Loans and receivables (Note 7) Interbank loans and receivables AFS financial assets (Note 6) Investment properties (Note 11) Investment in subsidiaries Other assets (Note 12) Provision for credit and impairment losses during the year Recovery from written off accounts (Accounts written off) Balances at end of year: Loans and receivables (Note 7) Interbank loans and receivable and SPURA AFS financial assets (Note 6) Investment properties (Note 11) Investment in subsidiaries Other assets (Note 12) P =1,074,666 1,103,694 125,957 150,300 14,760 58,327 2,527,704 160,443 1,272,027 1,129,560 125,957 122,178 14,306 24,119 P =2,688,147 2008 =1,095,845 P 125,446 137,264 12,997 58,440 1,429,992 1,097,532 180 1,074,666 1,103,694 125,957 150,300 14,760 58,327 =2,527,704 P

With the foregoing level of allowance for impairment and credit losses, management believes that the Group has sufficient allowance to cover for significant losses that may be incurred from the noncollection or nonrealization of its loans and receivables and other risk assets. As of December 31, 2009 and 2008, the Parent Company allowance for impairment and credit losses of the Parent Company include allowance for impairment losses for the investment in subsidiaries of P =14.31 million and P =14.76 million, respectively.

*SGVMC114014*

- 62 A reconciliation of the allowance for impairment losses by class of loans and receivables of the Parent Company is as follows:
Individual P =716,743 37,585 10,444 764,772 61,388 560,377 621,765 2009 Government P =4,711 4,711 4,711 4,711 Corporate P =353,212 149,332 502,544 366,292 279,259 645,551 Total P =1,074,666 186,917 10,444 1,272,027 432,391 839,636 1,272,027

Balance at January 1 Reallocation Charge for the year Balance at December 31 Individual Impairment Collective Impairment Balance at December 31 Gross amount of loans individually determined to be impaired, before deducting any individually assessed impairment losses

P =128,456

P =4,711

P =2,064,236

P =2,197,403

Balance at January 1 Reallocation Charge for the year Recovery from written off accounts Balance at December 31 Individual Impairment Collective Impairment Balance at December 31 Gross amount of loans individually determined to be impaired, before deducting any individually assessed impairment losses

Individual =691,860 P 9,300 15,403 180 716,743 690,470 26,273 716,743

2008 Government =4,711 P 4,711 4,711 4,711

Corporate =399,274 P (46,062) 353,213 315,934 37,278 353,213

Total =1,095,845 P (36,762) 15,403 180 1,074,666 1,011,115 63,551 1,074,666

=58,677 P

=4,711 P

=1,602,282 P

=1,665,670 P

The following is the breakdown of provision for impairment and credit losses: Loans and receivables Interbank Loans Receivable 2009 P =134,577 25,866 P =160,443 2008 =15,403 P 1,082,129 =1,097,532 P

During 2009 and 2008, the Parent Company took possession of P =320.91 million and =108.06 million collateral with an estimated value of P P =344.390 million and P =192.36 million, respectively, which the Parent Company is in the process of selling.

*SGVMC114014*

- 63 14. Deposit Liabilities Out of the total deposit liabilities of the Group as of December 31, 2009 and 2008, 59.00% and 60.97% respectively, are subject to periodic interest repricing. The remaining peso deposit liabilities earn annual fixed interest rates of 0.50% and 0.50% in 2009 and 2008, respectively, while foreign currency-denominated deposit liabilities earn annual interest rates of 0.25% and 0.50% in 2009 and 2008, respectively. Under existing BSP regulations, non-FCDU deposit liabilities of the Parent Company are subject to the following requirements: Liquidity reserve Statutory reserve Liquidity floor (additional for government deposits only) 2009 11.00% 8.00% 31.00% 2008 11.00% 8.00% 31.00%

As of December 31, 2009 and 2008, the Parent Company is in compliance with such regulations. The total liquidity and statutory reserves of the Parent Company based on the latest report to the BSP in December 2009 and 2008 are as follows (amounts in thousands): Cash and other cash items Due from BSP Government securities 2009 P =396,847 3,235,098 13,033,048 P =16,664,993 2008 P374,409 = 6,489,795 5,447,521 =12,311,725 P

15. Bills Payable This account consists of borrowings from local banks and non-bank financial intermediaries amounting to P =1.56 billion and P =1.28 billion, with interest rates ranging from 4.49% to 9.00% and from 8.95% to 9.26% as of December 31, 2009 and 2008, respectively. On February 07, 2008, the Monetary Board (MB) approved a 90-day special liquidity support amounting to P =2.30 billion and bears annual interest rate of 9.00%. Subsequently, on May 29, 2008, such support was restructured with lower interest rate equivalent to 4.49% and extended term of 20 years resulting to a day 1 gain of P =1.10 billion in 2008. Interest expense on bills payable (included in the Interest expense on bills payable and other borrowings) in 2009 and 2008 amounted to P =151.17 million and P =135.63 million, respectively, for the Group and Parent Company. As of December 31, 2009 and 2008, bills payable are unsecured.

*SGVMC114014*

- 64 16. Accrued Taxes, Interest and Other Expenses This account consists of (amounts in thousands):
Consolidated 2008 2009 =281,822 P P =250,202 151,532 118,735 25,266 13,541 11 154 =458,631 P P =382,632 Parent Company 2008 2009 =298,065 P P =266,253 151,532 118,735 25,266 13,541 142 =474,863 P P =398,671

Accrued other expenses (Notes 4 and 20) Accrued interest (Note 4) Accrued taxes Income tax payable

17. Other Liabilities This account consists of (amounts in thousands):


Consolidated 2008 2009 =511,970 P P =586,848 330,628 276,001 150,932 205,763 139,771 33,906 21,927 32,005 10,455 3,974 786,022 685,157 =1,951,705 P P =1,823,654 Parent Company 2008 2009 =511,970 P P =586,848 339,143 278,724 150,932 205,763 138,771 33,906 21,808 31,657 10,455 777,341 686,272 =1,950,420 P P =1,823,170

Dividends payable (Notes 4 and 19) Accounts payable (Note 4) Marginal deposits and letters of credit (Note 4) Payment order payable (Note 4) Withholding tax payable Due to BSP (Note 4) Miscellaneous

18. Maturity Analysis of Financial and Nonfinancial Assets and Liabilities The following tables show an analysis of assets and liabilities analyzed according to whether they are expected to be recovered or settled in less than twelve months and over twelve months from statement of financial position date (amounts in thousands):
2009 Consolidated Less than Over Twelve Twelve Months Months Financial Assets Cash and other cash items Due from Bangko Sentral ng Pilipinas Due from other banks Interbank loans receivable Financial assets at FVPL AFS financial assets HTM financial assets Loans and receivables - gross (Note 7) Unquoted debt securities classified as loans (Note 7) Nonfinancial Assets Investment in subsidiaries Investment in associate (Forward) P =431,580 13,055,098 699,457 2,093,219 890,370 735,172 4,433,331 18,636,765 550,020 P = 1,669,600 2,716,054 1,978,862 2,352,308 6,349 Less than Twelve Months P =426,280 13,055,098 685,821 2,093,219 890,370 735,172 4,433,331 18,636,765 550,020 Parent Company Over Twelve Months P = 1,669,600 2,690,202 1,933,750 2,352,308 222,625

Total P =431,580 13,055,098 699,457 3,762,819 890,370 3,451,226 4,433,331 20,615,627 2,902,328 6,349

Total P =426,280 13,055,098 685,821 3,762,819 890,370 3,425,374 4,433,331 20,570,515 2,902,328 222,625

*SGVMC114014*

- 65 2009 Consolidated Less than Over Twelve Twelve Months Months Bank premises- furniture, fixtures and equipment (Note 10) Investment property (Note 11) Deferred Tax Assets Other assets - gross (Note 12) Less allowance for impairment and credit losses (Note 13) Financial liabilities Deposit liabilities Bills payable Managers checks Accrued interest and other liabilities (Notes 16 and 17) Other liabilities Nonfinancial liabilities Accrued taxes and other liabilities (Notes 16 and 17)* Other liabilities 189,502 533,789 202,094 42,450,397 P =42,450,397 43,013,793 54,884 321,219 518,392 43,908,288 360 355,305 355,665 P =44,263,953 448,397 1,961,954 360,261 533,136 12,026,921 2,686,850 P =9,340,071 1,559,834 47,717 680,421 2,287,972 13,293 269,536 282,829 P =2,570,801 Less than Twelve Months 189,502 533,789 202,094 42,431,461 P =42,431,461 43,013,793 54,884 337,260 518,392 43,924,329 391 345,069 345,460 P =44,269,789 Parent Company Over Twelve Months 323,699 1,961,954 360,261 544,210 12,058,609 2,688,147 P =9,370,462 1,559,834 47,728 690,173 2,297,735 13,293 269,536 282,829 P =2,580,564

Total 637,899 2,495,743 360,261 735,230 54,477,318 2,686,850 P =51,790,468 43,013,793 1,559,834 54,884 368,936 1,198,813 46,196,260 13,653 624,841 638,494 P =46,834,754

Total 513,201 2,495,743 360,261 746,304 54,490,070 2,688,147 P =51,801,923 43,013,793 1,559,834 54,884 384,988 1,208,565 46,222,064 13,684 614,605 628,289 P =46,850,353

* includes income tax payable, withholding taxes payable and other tax payable

2008 Less than Twelve Months Financial Assets Cash and other cash items Due from Bangko Sentral ng Pilipinas Due from other banks Interbank loans receivable Financial assets at FVPL AFS financial assets HTM financial assets Loans and receivables - gross (Note 7) Unquoted debt securities classified as loans (Note 7) Nonfinancial Assets Investment in subsidiaries Bank premises- furniture, fixtures and equipment (Note 9) Investment property (Note 11) Deferred Tax Assets Other assets - gross (Note 12) Less allowance for impairment and credit losses (Note 13) Financial liabilities Deposit liabilities Bills payable Managers checks Accrued interest and other liabilities (Notes 16 and 17) Nonfinancial liabilities Accrued taxes and other liabilities (Notes 16 and 17)* =370,720 P 6,489,795 970,146 330,005 249,937 128,313 15,779,571 566 94,969 24,414,022 =24,414,022 P =37,127,616 P 94,692 979,880 38,202,188 46,486 =38,248,674 P Consolidated Over Twelve Months = P 9,069,600 2,031,428 4,461,745 1,684,292 2,744,798 485,482 2,529,964 250,245 443,429 23,700,983 2,527,716 P =21,173,267 = P 1,283,116 1,383,252 2,666,368 719 =2,667,087 P Less than Twelve Months =372,620 P 6,489,795 956,266 330,005 249,937 128,313 15,773,480 566 97,050 24,398,032 P =24,398,032 P =37,132,310 94,692 995,131 38,222,133 46,357 P =38,268,490 Parent Company Over Twelve Months = P 9,069,600 1,998,902 4,461,745 1,684,292 2,744,798 212,355 345,116 2,529,964 250,245 443,429 23,740,446 2,527,704 P =21,212,742 = P 1,283,116 1,384,078 2,667,194 718 =2,667,912 P

Total =370,720 P 6,489,795 970,146 9,399,605 249,937 2,159,741 4,461,745 17,463,862 2,744,798 485,482 2,529,964 250,811 538,398 48,115,004 2,527,716 P =45,587,288 =37,127,615 P 1,283,116 94,692 2,363,132 40,868,555 47,205 P =40,915,760

Total =372,620 P 6,489,795 956,266 9,399,605 249,937 2,127,215 4,461,745 17,457,772 2,744,798 212,355 345,116 2,529,964 250,811 540,479 48,138,478 2,527,704 P =45,610,774 P =37,132,310 1,283,116 94,692 2,379,209 40,889,327 47,075 P =40,936,402

* includes income tax payable, withholding taxes payable and other tax payable

*SGVMC114014*

- 66 19. Equity The Parent Companys capital stock consists of (amounts in thousands):
2009 Shares Preferred stock - P =100 par value Authorized Issued Treasury stock Common stock - = P100 par value Authorized Issued Subscribed Treasury stock 4,900 3,619 (8) 45,100 23,954 1,921 (49) Amount P =490,000 361,940 (809) 4,510,000 2,395,432 50,894 (4,941) Shares 4,900 3,619 (8) 45,100 23,440 1,921 (47) 2008 Amount =490,000 P 361,867 (769) 4,510,000 2,344,003 50,781 (4,673)

Preferred shares are nonredeemable, nonvoting, entitled to dividends of 8.00% annually from net income subject to the declaration of the BOD and have priority in case of liquidation or insolvency. 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, determined on the basis of regulatory accounting policies which differ from PFRS in some respects. Under existing BSP regulations, the combined capital accounts of the Parent Company should not be less than an amount equal to 10% of its risk assets. Risk 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 nonrisk items as determined by the Monetary Board of the BSP. Under the BSP Circular No. 360, effective July 1, 2003, the capital-to-risk asset ratio (CAR) is to be inclusive of market risk charge. Using this formula, the CAR of the Parent Company as of December 31, 2009 and 2008 is 21.46% and 23.76%, respectively, which is in compliance with the minimum requirement of the BSP. As of December 31, 2009 and 2008, surplus is restricted for the payment of dividends to the extent of the cost of shares held in treasury amounting to P = 5.75 million and P =5.44 million, respectively. Details of the Parent Companys dividend distribution follow:
Date of Declaration April 10, 2007 April 8, 2008 April 14, 2009 Type of Share Preferred Common Preferred Common Preferred Common Per Share =8.00 P 1.00 8.00 2.00 8.00 2.00 Dividend Total Amount =28,884,344 P 25,296,127 28,424,240 49,929576 28,417,712 49,921,064 Date of BSP Approval September 26, 2008 September 26, 2008 September 26, 2008 September 26, 2008 Record Date March 31, 2006 March 31, 2006 March 31, 2007 March 31, 2007 March 31, 2008 March 31, 2008 Payment Date December 31, 2006 December 31, 2007

As of December 31, 2009 and 2008, dividend payable amounted to P =586.85 million and =511.97 million, respectively. P

*SGVMC114014*

- 67 Capital Management The objective of the Parent Companys capital management framework is to ensure that there is sufficient capital enough to support the underlying risks of its business activities and to maintain an adequately capitalized status under regulatory requirements. The sufficiency of capital is measured using the rules and ratio established by the BSP which is also aligned to the requirements of the new Basel II Accord of the Basel Committee on Banking Supervision, which took effect with the issuance of BSP Circular No.538 on July 1, 2007. 20. Retirement Plan The Parent Company has a funded noncontributory defined benefit retirement plan (the Plan) covering substantially all its officers and regular employees. Under the Plan, all covered officers and employees are entitled to cash benefits after satisfying certain age and service requirements. The latest actuarial valuation study of the Plan was made on December 31, 2008. The principal actuarial assumptions used in determining retirement liability of the Parent Company under the Plan are shown below: 2009 Discount rate At January 1 At December 31 Expected return on plan assets Future salary increases 18.84% 10.26% 6.50% 9.00% 2008 7.46% 18.84% 6.00% 10.00%

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 amounts recognized in the statements of financial position are as follows: Fair value of plan assets Present value of retirement obligation Surplus (deficit) Unrecognized actuarial loss (gain) Net retirement asset (liability) 2009 P =127,861 114,165 13,696 (2,840) P =10,856 2008 P92,417 = (44,915) 47,502 (58,866) (P =11,364)

The movements in the present value of retirement obligation (PVO) of the Parent Company are as follows (amounts in thousands): Balance at beginning of year Interest cost Current service cost Actuarial losses(gains) Benefits paid Balance at end of year 2009 =44,915 P 8,462 5,730 59,608 (4,550) 114,165 2008 =118,462 P 8,719 16,571 (95,826) (3,011) =44,915 P

*SGVMC114014*

- 68 The movements in the fair value of plan assets of the Parent Company are as follows (amounts in thousands): Balance at beginning of year Expected return Contributions paid during the year Benefits paid Actuarial losses Balance at as of end of year 2009 P =92,417 5,545 34,685 (4,550) (236) P =127,861 2008 =70,196 P 4,914 21,798 (3,011) (1,480) =92,417 P

The actual return on plan assets amounted to P =5.31 million and P =3.43 million in 2009 and 2008, respectively. The amounts included in compensation and fringe benefits of the Parent Company in the statement of income are as follows (amounts in thousands): Current service cost Interest cost Expected return on plan assets Actuarial loss recognized during the year 2009 P =5,730 8,462 (5,545) 3,817 P =12,464 2008 =16,571 P 8,719 (4,914) 1,688 =22,064 P

The major categories of plan assets as a percentage of the fair value of total plan assets are as follows Cash in bank and investments in special savings Investment in government securities Others 2009 25.09% 74.69% 0.22% 100.00% 2008 88.28% 11.36% 0.36% 100.00%

Amounts for the current and prior years (in thousands): Present value of pension benefit obligation Fair value of plan assets Surplus (Deficit) Experience adjustments on plan liabilities Experience adjustments on plan assets 2009 P = 114,165 127,861 13,696 59,608 2008 =44,915 P 92,417 47,502 95,824 (1,480) 2007 =118,462 P 70,196 (48,257) (960) 2006 =100,918 P 50,095 50,823 6,354 (3,117)

*SGVMC114014*

- 69 21. Leases The Parent Companys branches and its subsidiaries lease their respective office premises under operating lease agreements except the home office which is under finance lease arrangements. Rentals on home office premises charged against current operations included under Occupancy expense in the statement of income amounted to P =1.32 million as of December 31, 2009 and 2008. As of December 31, 2009 and 2008, the future minimum rentals payable under finance leases are as follows (amounts in thousands): Within one year After one year but not more than five years More than five years 2009 P =511 1,876 5,938 P =8,325 2008 P462 = 2,386 5,938 =8,786 P

22. Income and Other Taxes Under Philippine tax laws, the RBU of the Parent Company and its domestic 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 or GRT, documentary stamp taxes and value added tax. Income taxes include corporate income tax, as discussed below, and final taxes paid at the rate of 20%, which is a final withholding tax on gross interest income from government securities and other deposit substitutes. Starting November 1, 2005 regular corporate income tax (RCIT) is 35%. Interest expense allowed as deduction is reduced by an amount equivalent to 42% (starting November 1, 2005) of interest income subjected to final tax. Republic Act (RA) No. 9337, An Act Amending the National Internal Revenue Code, provides that effective July 1, 2005, the RCIT rate shall be 35% until December 31, 2008. Starting January 1, 2009 the RCIT rate shall be 30% and interest expense allowed as deductible expense shall be reduced by an amount equivalent to 33% of interest income subject to final taxes.. It also provides for the change in Gross Receipts Tax (GRT) rate from 5% to 7%. However, such amendments have been subject to temporary restraining order by the Supreme Court. On October 8, 2005, the Supreme Court has ruled that RA No. 9337 is constitutional and will take effect on November 1, 2005. Current tax regulations also provide for the ceiling on the amount of entertainment, amusement and recreation (EAR) expense that can be claimed as a deduction against taxable income. Under the regulations, EAR expense allowed as a deductible expense is limited to the actual EAR paid or incurred but not to exceed 1% of the Parent Companys net revenue.

*SGVMC114014*

- 70 FCDU offshore income (income from non-residents) is tax-exempt while gross onshore income (income from residents) is subject to 10% 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 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% income tax. Provision for income tax consists of (amounts in thousands):
Consolidated 2008 2009 Current: Final taxes RCIT MCIT Deferred P =223,345 298 6,047 229,690 (109,284) P =120,406 = 204,848 P 729 6,769 212,346 (9,793) =202,553 P Parent Company 2008 2009 P =223,265 218 6,047 229,530 (109,450) P =120,080 =204,798 P 650 6,761 212,209 (10,002) =202,207 P

The components of the deferred tax assets - net as of December 31, 2009 and 2008 follow (amounts in thousands):
Consolidated 2008 2009 Deferred Tax Assets on: Allowance for impairment and credit losses NOLCO MCIT Depreciation of acquired assets Unamortized past service cost net Others Deferred Tax Liability (DTL) on: Gains on asset foreclosures and dacion transactions Unrealized foreign exchange losses (gains) P =245,266 107,577 12,807 16,401 2,666 16,274 400,991 (43,368) (1,337) P =356,286 =155,954 P 55,978 22,079 14,182 9,016 72,177 329,386 (75,373) (3,411) =250,602 P Parent Company 2008 2009 P =245,266 107,577 12,807 16,401 2,666 20,248 404,965 (43,368) (1,337) P =360,260 =197,133 P 55,978 22,079 14,182 9,016 31,207 329,595 (75,373) (3,411) =250,811 P

Details of the Groups and Parent Companys unrecognized deferred tax assets are as follows (amounts in thousands): 2009 Tax effects of: Allowance for impairment and credit losses MCIT P =331,108 P =331,108 2008 =331,108 P =331,108 P

Management believes that it is not probable that sufficient taxable income will be available in the near foreseeable future against which the tax benefits from the foregoing temporary differences could be realized.

*SGVMC114014*

- 71 Details of the Parent Companys NOLCO follow (in thousands): Inception Year 2007 2008 Amount 70,508 116,086 =186,594 P Used/Expired = P Balance 70,508 116,086 =186,594 P Expiry Year 2010 2011

Details of the Groups and Parent Companys MCIT follow (amounts in thousands): Inception Year 2009 2008 2007 2005 Amount =6,047 P 6,761 15,318 10 =28,136 P Used/Expired = P 10 =10 P Balance =6,047 P 6,761 15,318 =28,126 P Expiry Year 2012 2011 2010 2008

The reconciliation of the provision for income tax computed at statutory tax rate to the provision for income tax presented in the statement of income follows (amounts in thousands):
Consolidated 2008 2009 =213,120 P P =182,674 204,848 223,279 Parent Company 2008 2009 =212,793 P P =161,548 204,798 223,254

Statutory income tax Final taxes Tax effects of: Interest income subjected to final tax (net of nondeductible expense) Change in unrecognized deferred tax assets Interest income on tax-exempt investments FCDU income Effect of change in tax rates Others Effective income tax

(335,146) (21,571) (13,363) 84,533 P =120,406

(196,722) 331,108 (48,033) (15,042) 58,518 (345,244) =202,553 P

(335,146) (21,571) (13,363) 105,359 P =120,081

(196,722) 331,108 (48,033) (15,042) 58,518 (345,213) =202,207 P

23. Disposition of Net Income As provided for in the Parent Companys by-laws, the profit distributable to common shares shall be the Parent Companys net income reduced by the following: (a) Transfer to the surplus reserves account (20% of net income) until the surplus reserves is equal to the Parent companys authorized capital stock; (b) Guaranteed earnings of the preferred shares; and (c) Appropriation of 20% of net income, after deducting (a) and (b) above, for the Board of Trustees of the Veterans of World War II, as provided in Section 23 of R. A. No. 3518. Also, as required by the BSP, the Parent Company transfers 10% of its income from trust operations to surplus reserves (see Note 25).

*SGVMC114014*

- 72 24. Financial Performance The basic EPS of the Group is computed as follows (amounts in thousands except earnings per share): a. Net income b. Cumulative preferred dividends c. Weighted average number of outstanding common shares d. Basic earnings per common share [(a-b)/c] 2009 P =424,557 28,890 25,775 P =15.35 2008 =406,361 P 28,888 25,306 =14.92 P

There were no dilutive potential common shares in 2009 and 2008. The following basic ratios measure the financial performance of the Parent Company: Return on average equity Return on average assets Net interest margin 25. Trust Operations Securities and other properties held by the Parent Company in fiduciary or agency capacities for clients and beneficiaries amounting to P =8.01 billion and P =9.73 billion as of December 31, 2009 and 2008, respectively are not included in the accompanying statement of financial position since these are not assets of the Parent Company (see Note 27). Government securities with total face value of P =179.18 million and P =120.99 million as of December 31, 2009 and 2008, respectively, are deposited with the BSP in compliance with existing banking regulations relative to the Parent Companys trust functions. Also, as required by the BSP, the Parent Company transfers 10% of income from trust operations to surplus reserves until it amounts to 20% of the Parent Companys authorized capital stock and no part of such surplus reserves shall at any time be paid out in dividends, but losses in the course of its business may be charged against such surplus. 26. Related Party Transactions In the ordinary course of business, the Group has loan transactions with certain directors, officers, stockholders and related interests (DOSRI) within limits prescribed by the BSP. These loans are made substantially on the same terms as with other individuals and businesses of comparable risks. Existing banking regulations limit the amount of individual loans to DOSRI, 70% of which must be secured, to the total of their respective deposits and book values of their respective investments in the Group. In the aggregate, loans to DOSRI generally should not exceed the lower of the total capital funds or 15% of the total loan portfolio. These limits do not apply to loans secured by assets considered as non-risk as defined in the regulations. As of December 31, 2009 and 2008, the Group is in compliance with these regulatory requirements. 2009 8.69% 0.86% 8.32% 2008 9.05% 1.01% 7.60%

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- 73 The following table shows information relating to the loans, other credit accommodations and guarantees classified as DOSRI accounts (amounts in thousands): Total outstanding DOSRI accounts 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 nonperforming DOSRI accounts to total DOSRI accounts 2009 P =56,199 0.25% 0.37% 2008 =24,792 P 0.10%

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 banks subsidiaries and affiliates shall not exceed 10% of 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 starting February 15, 2007. The transactions of the Parent Company with its subsidiaries consist mainly of regular banking transactions and advances for payment of various operating expenses. The Parent Company financial statements include the following amounts resulting from the above transactions with subsidiaries (amounts in thousands): 2009 As of December 31 Other assets Deposit liabilities Other liabilities For the Years Ended December 31 Interest expense Service fees (included in Miscellaneous expense) P = 390 20,431 861 2008 = P 4,310 25,934 902 1,777

The intercompany transactions and outstanding balances of the Group were eliminated in the consolidation. Compensation of Key Management Personnel The remuneration of directors and other members of key management of the Group are as follows (amounts in thousands): Short-term benefits Post-employment benefits 2009 P =107,824 1,995 P =109,819 2008 =88,937 P 2,661 =91,598 P

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- 74 27. Commitments and Contingent Liabilities In the normal course of business, the Group enters into various commitments and incurs certain contingent liabilities that are not presented in the accompanying financial statements. The Group does not anticipate material unreserved losses as a result of these transactions. The Parent Company and its subsidiaries are defendants in legal actions arising from normal business activities. Management believes that these actions are without merit or that the ultimate liability, if any, resulting from these will not materially affect the Groups financial position and operating results. The Parent Company has outstanding industry issues with the Bureau of Internal Revenue. The tax assessments are presently being resolved along with the efforts of the banking industry. The following is a summary of commitments and contingent liabilities at their equivalent peso contractual amounts (amounts in thousands): Trust department accounts (Note 25) Unused commercial letters of credit Late deposits/payments received Outward bills for collection Items held for safekeeping Others 2009 P =8,007,279 490,173 38,450 37,131 18 122,076 2008 =9,730,339 P 233,788 20,366 3,812 14 135,077

28. Bankwise, Inc. (A Thrift Bank) (BWI) On January 15, 2005, the Parent Company temporarily assumed management of BWI. In February 2008, the MB approved the closure of the thrift bank. The Parent Company had interbank call loans (IBCL) to BWI amounting to P =1.67 billion as of December 31, 2009 and 2008 and assumed uninsured deposits of BWI totality to P =905.54 million and P =886.00 million as of December 31, 2009 and 2008, respectively. Relative to this exposure, on February 07, 2008, the MB approved a 90-day special liquidity support, which was used by the Parent Company to acquire 25-year government securities. On May 09, 2008, such support was restructured with lower interest and extended term of 20 years resulting to a day 1 gain of P =1.10 billion in 2008 (see Note 15), which the Parent Company used to partially offset the effect of the required allowance on IBCL in 2006. The remaining required allowance and the required provision on the additional IBCL in 2007 totaling to P =565.91 million and the required allowance on accounts receivable amounting to =19.54 million and P P =886.00 million, representing the uninsured deposits assumed in 2009 and 2008, respectively, were deferred over 20 years as approved by the Banko Sentral ng Pilipinas. The Philippine Financial Reporting Standards require that the allowance on the IBCL be charged against 2007 and 2006 operations and the allowance on accounts receivable be charged against 2009 and 2008 operations. Had such allowance been charged to the proper accounting period, the Group and the Parent Companys net income in 2009 and 2008 would have been increased by =4.43 million and P P =152.38 million, net of related deferred income tax, respectively, and both the surplus and total assets would have been decreased by P =1,011.91 million as of

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- 75 December 31, 2009 and P =1,016.34 million as of December 31, 2008. As further discussed in Note 28, management computed that the earnings of the government securities from the special liquidity support will effectively cover the required allowance on the Parent Companys IBCL to the thrift bank and the assumed uninsured deposits.

29. Notes to Cash Flows The amounts of interbank loans receivable and securities purchased under agreements to resell considered as cash and cash equivalents follow (in thousands):
Consolidated 2009 P =2,633,259 (540,040) P =2,093,219 Parent 2008 = 8,295,911 P (565,906) =7,730,005 P 2009 P =2,633,259 (540,040) P =2,093,219 2008 = 8,295,911 P (565,906) =7,730,005 P

Interbank loans receivable and SPURA Interbank loans receivable and SPURA not considered as cash and cash equivalents

Non-cash investing activity The Group acquired certain investment properties through foreclosure and dacion transactions in 2009 and 2008 amounting to P =818.33 million and P =119.43 million, respectively.

30. Approval of the Release of the Financial Statements The accompanying financial statements of the Group and of the Parent Company were authorized for issue by the BOD on April 13, 2010.

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