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SEC Number File Number

AS096-005555

PHILIPPINE NATIONAL BANK AND SUBSIDIARIES (Company’s Full Name)

Pres. Diosdado P. Macapagal Boulevard, Pasay City (Company’s Full Name)

891-6040 to 70 (Telephone Number)

(Calendar Year Ended)

SEC FORM 17-A REPORT Form Type

(Amendment Designation (if applicable)

December 31, 2005 Period Ended Date

LISTED (Secondary License Type and File Number)

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SECURITIES AND EXCHANGE COMMISSION SEC FORM 17-A
ANNUAL REPORT PURSUANT TO SECTION 17 OF THE SECURITIES REGULATION CODE AND SECTION 141 OF CORPORATION CODE OF THE PHILIPPINES 1. For the fiscal year ended December 31, 2005 2. SEC ID No. AS096-005555 3. BIR Tax Identification No. 000-188-209

4. Exact name of issuer as specified in its charter: Philippine National Bank 5. Philippines Province, Country or other jurisdiction of Incorporation or organization 6. (SEC Use Only) Industry Classification Code: 1300 Postal Code

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PNB Financial Center, Pres. Diosdado P. Macapagal Blvd, Pasay City Address of principal office (632)/891-60-40 up to 70 Issuer’s telephone number, including area code _

8. 9.

N/A Former name, former address, and former fiscal year, if changed since last report

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10. Securities registered pursuant to Sections 8 and 12 of the SRC or Sections 4 and 8 of the RSA Title of Each Class Preferred Stock, P40 par value Common Stock, P40 par value Number of Shares Issued 54,357,751 shares 518,888,165 shares

11. Are any or all of these securities listed on the Philippine Stock Exchange. Yes [ √ ] No [ ] If yes, state the name of such stock exchange and the classes of securities listed therein: Philippine Stock Exchange Common Stock 12. Check whether the issuer: (a) has filed all reports required to be filed by Section 17 of the SRC and SRC Rule 17.1 thereunder or Section 11 of the RSA and RSA Rule 11 (a) – 1 thereunder, and Sections 26 and 141 of The Corporation Code of the Philippines during the preceding twelve (12) months (or for such shorter period that the registrant was required to file such reports): Yes [ √ ] No [ ] (b) has been subject to such filing requirements for the past ninety (90) days Yes [√ ] No [ ] 13. Aggregate market value of the voting stock held by non-affiliates: P20,755,012,080 * *518,875,302 common shares @ P40 par value

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PART I - BUSINESS AND GENERAL INFORMATION Item 1. Business 1. Business Development The Philippine National Bank (PNB, the Parent Company) was established by the Government of the Philippines on July 22, 1916 as an instrument of economic development. In addition to engaging in the general commercial banking business, PNB also served as the country’s de facto central bank until 1949 when the Central Bank of the Philippines was created. Through the years, PNB has led the banking industry with its introduction of many innovations such as the bank on wheels, computerized banking, ATM banking, mobile money changing, and domestic traveler’s checks. To date, PNB boasts of the widest overseas network as well as one of the most widespread domestic branch networks among banks operating in the country. Pursuant to its policy of rationalizing the Government’s involvement in corporate ventures and privatization of GOCCs under Proclamation No. 50, the Government offered to the Philippine public 30% of the outstanding shares of the Bank in June 1989. The Government disposed of 13% and 7.2% of the outstanding shares in PNB to the Philippine public in March 1992 and December 1995, respectively. PNB is on the fourth year of its 5-year rehabilitation plan approved by the Bangko Sentral ng Pilipinas (BSP). The said rehabilitation plan which was signed in May 2002 stipulated the following financial components/conditions: P7.8 billion of the P25 billion assistance extended by the BSP and Philippine Deposit Insurance Corp. (PDIC) would be converted into equity; PNB will partially settle P10 billion of its obligation by way of dacion en pago through the assignment of government and government-related receivables; and PNB will maintain P6.1 billion as a ten-year loan at an interest rate equivalent to the 91-day T-Bill rate plus 1 percentage point to be re-priced quarterly. Subsequently, PNB secured the consent of the Securities and Exchange Commission (SEC) in July 2002 to undergo quasi-reorganization which reduced the par value of its shares from P60 to P40. This was done in order to accommodate the P7.8 billion debt-to-equity conversion of the PDIC through the issuance of 195,175,444 preferred shares. The debt-to-equity conversion allowed the government to have a direct hand in the governance and management of the Bank until full divestment of its equity holdings. The said move resulted in the government having control of 44.98% of the Bank while the Lucio Tan Group controls 44.98%. In the third quarter of 2005, the Philippine Government and the Lucio Tan Group completed the joint sale of their 67% stake in PNB. The Lucio Tan Group exercised its right to match the share bid offered by the Union Bank consortium and purchased the shares owned by the government. The Lucio Tan Group thus gained about 77% ownership of PNB.

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2. Business Description PNB through its Head Office and branches provides a full range of banking and other financial services to corporate, middle-market and retail customers, the National Government, Local Government Units (LGUs) and Government-Owned and Controlled Corporations (GOCCs). The Bank’s principal commercial banking activities include deposit-taking, lending, trade financing, bills discounting, fund transfers / remittance servicing, asset management, treasury operations, and comprehensive trust and retail banking services.

a) Principal Products and Services Lending Operations PNB continues to offer a comprehensive selection of credit facilities which include commercial and industrial loans, term loans, credit lines, trade-related (import/export) financing facilities, bills purchased lines, consumer loans (housing loans, motor vehicle loans, all-purpose credit facility), conduit financing, loans to LGUs, loans covered under guarantee programs and credit card services. PNB and its subsidiaries (the Group) maintained a diversified loan portfolio with the extent of exposure shown as follows: Industry Classification
Financial Intermediation Manufacturing Real Estate, Renting & Business Activities Wholesale & Retail Trade Electricity, Gas & Water Transportation, Storage & Communications Public Administration, Defense & Compulsary Soc. Agriculture, Hunting & Forestry Other Community, Social & Personal Services Construction Private Households Hotel & Restaurant Education Mining & Quarrying Health & Social Work Fishing Others Total % to Total

18.98% 15.20% 12.11% 9.27% 9.18% 9.18% 9.14% 6.81% 3.42% 2.81% 1.82% 0.39% 0.35% 0.30% 0.02% 0.01% 1.01%
100.00%

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In 2005, the Group was able to further reduce its non-performing loans (NPL) by P9.8 billion to P27.9 billion.

Treasury Operations The year 2005 was quite favorable to Treasury Operations. The volatility in the interest and foreign exchange markets allowed for numerous, significant portfolio positions to be established which turned favorable. Consolidated interest income on investment securities amounted to P4.2 billion or 37.4% of total interest income. Foreign exchange and trading and investment securities net gain reached P1.1 billion and P940 million respectively, representing 31.4% of total other income. Treasury also initiated its regional distribution expansion through the opening of sales desk in Cebu. The primary objective of the regional sales desks is to make available better investment products to PNB’s regional clientele. Deposit Generation Consolidated deposits grew by P6.8 billion from P161.0 billion as of year-end 2004 to P167.8 billion as of year-end 2005. Demand and savings deposits increased by 9.5% and 6.4%, respectively, while time deposits decreased by 8.2%. To better serve its clients, PNB relocated 9 of its branches to more strategic locations and renovated 17 others. Aside from its 324 domestic branches, PNB also maintains a network of 315 ATMs which are likewise linked to other ATM networks (Megalink, Bancnet and Exepressnet).

Remittance Services PNB further strengthened its position as the country’s leader in OFW remittances by generating remittances amounting to about US$2.4 billion for 2005. The Bank expanded its overseas presence by opening 7 new offices (2 in the US, 1 in Singapore, 1 in the Netherlands and 3 in Saudi Arabia) during the year, bringing the total number of overseas offices to 102. PNB’s extensive network of overseas branches, subsidiaries, representative offices, foreign remittance centers and 672 correspondent banks worldwide continue to provide convenient and safe remittance services to numerous OFWs abroad.

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Disposition of Acquired Assets PNB continued to aggressively dispose of its acquired assets by conducting public auctions throughout the country which resulted in the disposition of P1.3 billion worth of assets in 2005. PNB also explored new promotional channels such as billboards, creation of a website and direct response advertising. In addition, the Bank continued contracting and accrediting real estate brokers in order to expand its distribution channels for asset disposition. Trust Services PNB provides a wide array of personal and corporate trust and fiduciary services. Personal trust services for customers include living trust accounts, custodianship, educational trust, estate planning, guardianship, insurance trust, and investment management. Corporate trust services include trusteeship, securitization, investment portfolio management, administration of employee benefits, pension and retirement plans, trust indenture, global custodial services and custodianship services for local corporations. Trust agency services include acting as bond registrar, collecting and paying agent, stock transfer agent, and receiving bank. Total trust assets held reached P14.9 billion as of year-end of 2005. Gross revenue for 2005 reached P202 million higher by 20.2% compared to P168 million last year. The PNB Trust Banking Group attributes the sustained growth of its business volume and profitability to competitive edge relative to special government escrow transactions with POEA, trusteeship of bond floatation of local government units and growth in Unit Investment Trust Funds (UITF).

b) Revenue derived from Foreign Operations In the Philippines, PNB and its subsidiaries offer a wide range of financial services. Additionally, most of the remittance services are managed and conducted in USA, Canada, Asia, and United Kingdom. The following shows the percentage distribution of the consolidated revenues for 2005, 2004 and 2003:

2005 Philippines Canada and USA Asia (excluding Philippines) United Kingdom & Other European Union Countries Total 85% 7% 6% 2% 100%

2004 83% 8% 7% 2% 100%

2003 83% 8% 7% 2% 100%

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c) New Products and Services PNB introduced the following new products and services in 2005: Global Filipino Cash Card – a product which provides OFW beneficiaries access to remittances without opening a deposit account with the Bank. Budget Checking Account – a checking account with a low maintaining balance which charges a fee for every check issued in excess of the three allotted checks per month. Advise & Pay Anywhere – a service which allows OFW beneficiaries to claim their remittances at any domestic PNB branch or any accredited Pay-out Agents, such as, SM (Shoe Mart), M. Lhullier, One Network Bank (largest rural bank in the country). Remittance Bills Payment – a remittance facility which allows OFWs to pay their insurance premiums, real estate amortizations and other utilities in the Philippines direct to the service providers. Pangarap Business Loan – a loan facility introduced to OFWs in Hongkong to address their needs for financing in establishing small businesses in the Philippines. Following are the products that will be launched in the next twelve months: Auto-Debit Arrangement – an e-Collect facility for corporate clients that will allow Bank’s clients subscribers/agents to remit regular payments via automatic deduction from their active CASA accounts on due dates. PayWise Money Card – a facility that utilizes the features of the Global Filipino Money Card as disbursement accounts. @-550 – a fee-based ATM savings account facility that has a maintaining balance requirement below market rates. Kiddie Account - a savings account facility for kids and adolescents, ages 7-18, with a special/combined savings/investment mechanism/features. WM Neo – an investment deposit product facility with zero/low maintaining balance but offered a limited run.

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eCheck Depot Facility - a facility which provides safekeeping and monitoring of clients’ postdated checks for automatic and faster credit to main depository account upon maturity/value date. eCheck Management Facility – an outsourced disbursement solution for clients’ payables; Electronic check preparation and check cutting facility released through PNB’s branches. d) Competition For 2005, PNB’s ranking and market share in terms of key performance areas are as follows:

Performance Area Total Assets Loans* Total Deposits Private Deposits Net Worth *Excluding Interbank Call Loans

Market Share 8.2% 5.5% 8.6% 7.0% 7.6%

Rank 4 6 4 5 4

In terms of total assets, deposits and net worth, PNB ranked 4th among local private commercial banks, behind Metrobank, Bank of the Philippine Islands (BPI) and Equitable-PCI Bank. PNB remains competitive by virtue of its strong brand recall and extensive domestic and overseas network. It sustains its market presence by aggressively vying for interest rate-sensitive deposits and by prioritizing the generation of low cost funds. It also constantly monitors the performance of its products and services in order to maximize profits and customer satisfaction. It has likewise taken aggressive measures to improve productivity and minimize costs. Moreover, it continues to develop new and innovative products that will cater to its diverse clientele.

e) Major Sales PNB sold certain non-performing loans amounting to P4.7 billion and P5.3 billion in 2005 and 2004, respectively through special purpose vehicle (SPV) to take advantage of incentives under Republic Act (RA) No. 9182, The Special Purpose Vehicle Act 2002, and at the same time improve its chances of recovering from its non-performing loans.

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f) Related Party Transactions In the ordinary course of business, PNB has loans and other transactions with its subsidiaries and affiliates, and with certain directors, officers, stockholders and related interest (DOSRI). Under the PNB’s policy, these loans and other transactions are made substantially on the same terms as with other individuals and businesses of comparable risks. The amount of direct credit accommodations to each of the PNB’s DOSRI, 70.00% of which must be secured, should not exceed the amount of their respective deposits and book value of their respective investments in PNB. In the aggregate, DOSRI loans generally should not exceed the PNB’s capital funds or 15.00% of its total loan portfolio, whichever is lower. As of December 31, 2005 and 2004, the PNB is in compliance with such regulations.

g) Patents, Trademarks, Licenses, Franchises, Concessions and Royalty Agreements PNB’s operations are not dependent on any patents, trademarks, copyrights, franchises, concessions, and royalty agreements. PNB has licenses to the following IT softwares, and systems used in the its operations: • Kirchman Bankway International (April 1, 1999 to March 31, 2006) - provides support to various bank operations such as deposits, loans and ATM. PNB is currently in negotiations with KBI representatives on a 2 year renewal. • Branch Delivery System – major delivery system for the branch to process transactions. There is continuous renewal of maintenance service. • Operations Processing Integrated Control System (August 27, 2003 up to next 10 years) – provides treasury support for foreign exchange money market, securities and Reuters interface. There is continuous renewal of maintenance service. • Anti-Virus Software (September 1, 2005 effective for 2 years) - unless revoked by PNB, the agreement shall automatically be renewed on a year to year basis. • Trust Application Processing Management System (License term is perpetual and scope of use is for one (1) Production Database, twenty (20) users and twenty-five (25) Pro-IV Runtime Licenses) - provides support for Trust

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transactions. There is a continuous payment of the necessary fees to ensure support for use of the software.

h) Need for any government approval of principal products or services PNB obtained license from Financial Monetary Authority of Austria for establishment of remittance subsidiary in Austria .

i) Research and Development There is no material amount spent for research and development.

j) Number of employees PNB’s existing employees as of December 31, 2005 and the number of employees it anticipates to have within the next twelve (12) months are as follows: Projected 2006 1,812 3,934 5,746

12/31/05 Officers Rank-and-file Total 1,812 3,934 5,746

In view of the roll-out of Branch Delivery System (BDS) Project, the bank did not project additional personnel but replacements for those who will retire and resign from the bank. Except for selected offices, all regular employees (rank-and-file) of PNB are covered by the existing Collective Bargaining Agreement (CBA) which will expire on June 30, 2007.

k) Risk Management PNB has adopted the principle of “going beyond compliance” in its risk management process. Its underlying principle in risk management is not to constrict its risk-taking activities but to face risks with mitigating controls to meet its goals. Enhancing its risk management system is not merely to meet the requirements of Basel 2 as prescribed by the BSP but to address the evolving and diversified risks the Bank is facing. Improving risk management process is a going concern issue of PNB. As in the previous years, the approval of the risk management process, framework, policies, risk appetite and infrastructure is vested in the Risk Management Committee (RMC), a board level committee in charge of the oversight functions of

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PNB’s risk management. The Risk Management Group (RMG) supports the RMC in performing its task. To address credit risk, the PNB has institutionalized its risk management process at various levels (i.e. portfolio level, product level and standalone level). It has enhanced its operational risk controls and service delivery to attune to its defined risk policies and business strategy. Balance Sheet Risk, Liquidity Risk and Market Risk are managed using a framework of risk management policies and risk control procedures and limits. These limits are reviewed annually by RMG and approved by the Bank’s Assets & Liabilities Committee (ALCO), the RMC and the Board of Directors. The monitoring of market risk limits (Earnings at Risk limit, Maximum Cumulative Outflow (MCO) limit, Value at Risk (VAR) limit) as well as the reporting of any limit excess are carried out independently by RMG. Credit Risk The NPL ratio of PNB significantly improved in 2005 as a result of its focused remedial management and stringent credit risk management. The Bank provides sufficient reserves for delinquent loans. For new loans, PNB took a stricter credit evaluation and approval of loans by strictly adhering to the approved RAACs and thorough analysis of borrower’s credit worthiness. It has strengthened the credit screening ability of its account officers through continuous training. On credit standards, PNB has been implementing the internal Credit Rating System for the corporate accounts with asset size of more than P 15 Million and credit scoring for the retail lending. These systems dimension the quality of prospective and existing individual credit exposures and shall serve as basis to determine the profitability of default and exposure at default of the PNB’s loan porfolio. Credit risks are also carefully managed through the regular pro-active portfolio review primarily focused on credit risk concentration on large exposure, per industry, unsecured loans, geographical region per product, per currency, DOSRI loans, LGUs, SBL, contingent exposure, etc., PNB’s concentration risk with potential impact on capital are immediately brought to the attention of Management for appropriate action. Stress testing are conducted as the need arises to test the effect of economic downturns and market events (e.g. oil price hike) on PNB’s loan portfolio and Capital Adequacy Ratio (CAR). Risk-based CAR covering credit risk stood at 11.9% (solo) and 17.2% (consolidated) as of December31, 2005.

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Market Risk •

Balance Sheet Risk Management

The balance sheet risk in the banking book arises from customer’s preferences and characteristics in the booking of assets and liabilities which result in the mismatch in the interest repricing and maturity dates of these assets and liabilities. The bank assesses the impact of changes in Interest rates over a one year period in the banking book using Earnings-At-Risk (EAR), which arrays the repricing behaviors of assets and liabilities. • Liquidity Risk Management

PNB’s liquidity management involves maintaining sufficient and diverse funding capacity to accommodate fluctuations in asset and liability levels due to changes in the Bank’s business operations or unanticipated events created by customer behavior or capital market conditions. Liquidity is dimensioned on a daily basis and under stressed situations. Liquidity risk is monitored and controlled primarily by a gap analysis of maturities of relevant assets and liabilities reflected in the MCO report, as well as an analysis of liquid assets, which provides guidance as to the Bank’s ability to generate sufficient liquidity. Further, an internal liquidity ratio has been set to determine sufficiency of liquid assets over deposit liabilities. • Market Risk Management

PNB is exposed to a potential loss in its trading portfolio because the values of its trading positions are sensitive to changes in market prices and rates. Similarly, it is also exposed to market risk in its investment portfolio. Market risk is dimensioned and controlled in both the trading book and in the balance sheet. In the trading book, market risk is controlled by a daily analysis of the Value-At-Risk (VAR) of trading instruments under normal market conditions. The volatilities used for this regular analysis are those for a rolling one-year period, updated quarterly. The risk amounts computed are for 99% confidence level. Below is a table showing the VAR of the PNB for the year ended December 31, 2005. (In Million Pesos)
Average VAR 76.29 8.29 84.58 High VAR 272.22 18.79 278.13 Low VAR 18.91 2.38 23.43

Interest Rate Risk Foreign Exchange Risk Total VAR

Note: The high and low of the total portfolio may not equal the sum of the individual components as the high and lows of the individual portfolios may have occurred on different trading days.

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PNB also uses back testing to verify the results of the daily VAR calculation. Likewise, it performs stress tests wherein the trading portfolios are valued under extreme market scenarios not covered by the confidence interval of the Bank’s VAR model. Stress tests determine the effects of potentially extreme market developments on the value of our market risk sensitive exposures. Complementary to the use of the VAR approach to control maximum exposure, the PNB also employs dealer limits and loss control limits. For regulatory purposes, PNB uses the standardized approach in the computation of the risk-based capital adequacy ratio covering credit and market risks. Its combined CAR stood at 11.1% (solo) and 15.8% (consolidated) as of December 31, 2005. Operational Risk Basically, operational risk is directly managed by the business units; thus, the Risk Management Group’s role is to oversight and provide risk management tools and monitor effectiveness of such tools. In the area of identification, assessment, monitoring and management of operational risk, PNB has adopted the following framework in addition to existing operating guidelines, controls and procedures to improve operating efficiencies. • Annual Operational Risk Assessment Process

This risk analysis framework is required to be undertaken annually by each business unit of the Bank to identify, assess and monitor their operational risks and accordingly develop and keep current appropriate plans to deal with these operational risk exposures. The risk owners who are tasked to closely monitor operational risk are clearly defined in this framework. • Business Continuity Plan (BCP)

BCP is the business recovery and resumption plan in the event of significant business disruption or disaster prepared by each business unit. Every year the BCP is reviewed, updated and tested to ensure the Bank’s preparedness and continued operations in case of emergency conditions. PNB’s BCP framework includes: emergency action plans dedicated technical recovery facilities calling chain for crisis communication internal and third party backup operating site and seating arrangement formal emergency response/crisis management team structure and procedures

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Product Manuals

Bank products are provided with product manuals as basis for functional and line approval on the different aspects of the product (i.e. target market, procedures, documentation, regulatory compliance, etc). Among others, the product manual contains a risk/return evaluation on the product, documented control procedures and limits to address the risks inherent in the product prior to its implementation. The manuals are reviewed annually. • Product Managers

Product managers are designated to monitor the implementation of the Bank products. They are responsible for the annual review of the product to address issues such as customer appropriateness, profitability, compliance with regulatory requirements, performance against targets, limits, business goals, etc. As preparation for the eventual implementation of Basel 2, PNB has started the establishment of database of losses and findings of BSP and internal auditors as initial input in the determination of capital charge for operational risk. As part of its risk awareness program, the Bank has conducted risk fora and lectures to operating units.

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Business Development/Description of Significant Subsidiaries PNB, through its subsidiaries, engages in a number of diversified financial and related businesses such as merchant banking, remittance servicing, non-life insurance, stock brokerage, foreign exchange trading, leasing, and other related services. PNB through its associates is also engaged in other services such as financing of small-and medium-sized industries, life insurance and financial advisory services. Following are the Bank’s significant subsidiaries: Domestic Subsidiaries:

PNB Capital and Investment Corporation (PNB Capital), a wholly-owned subsidiary of PNB, is an investment house with non quasi-banking license. It was incorporated on June 30, 1997 and commenced operations on October 8, 1997. PNB Capital is authorized to buy and sell, for its own account; securities issued by private corporations and the government of the Philippines. Its principal business is providing investment banking services namely debt underwrit ing (bonds, commercial papers), equity underwriting, placements, loan syndications and general financial advisory. As a percentage of total revenue, fee income from providing investment banking services amounted to 1% of revenues in 2005. The

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rest was due to interest income and trading income. This is expected to grow in the coming year, as the market prospects improve, and deals built in the pipeline in 2005 close. PNB Capital is authorized to buy and sell for its own account securities issued by private corporations and the government of the Philippines. Its main competitors are investment banking units of other competing universal banks, stand alone quasibanks, and other general financial advisory firms. Since much of the business comes from referrals and/or cross sold to potential clients through existing network of contacts and clients, PNB Capital is in a good position to leverage fromPNB’s network of clients, suppliers, stakeholders, marketers and support units. Benefiting from this vantage point depends on how effectively PNB Capital is able to identify and leverage on this network to originate and facilitate investment banking transactions. The biggest risks in the business are reputational risk and liability risk. Reputational risk is risk from not closing anticipated deals on time, or as committed. Liability risk is from being held liable for any losses incurred by the client due to non-performance of committed duties or gross negligence. •

PNB Forex, Inc. (PFI), a wholly-owned subsidiary of PNB, was incorporated on October 13, 1994 as a trading company, engaged in the buying and selling of foreign currencies of all kinds and nature for its own account and or behalf of others. Its licensed traders directly market the buying and selling of foreign currencies to clients. The company is among the several registered foreign exchange dealers in the Philippines. It is under the direct supervision of the Bangko Sentral ng Pilipinas as a foreign exchange dealer. On September 13, 2005, PFI’s Board of Directors (BOD) approved the temporary cessation of its operation. Effective January 2006, its operation was placed in dormant status. Its BOD approved on November 25, 2005 the reduction of its capital to P50 million. Likewise, the SEC approved the return of capital.

PNB Holdings Corporation (PHC), is formerly Philippine Exchange Co., Inc., which was established on May 20, 1920. Its primary function is to direct, manage and take care of companies whose properties were foreclosed by PNB. It also engages in real estate leasing and non-life insurance business. PHC is a whollyowned subsidiary of PNB. It has an authorized capital of P500 million or 5 million shares at P100 par value per share with a total paid up capital of P255.1 million. PHC is the parent company of PNB General Insurers Co., Inc. (PNB Gen) incorporated on February 13, 1991 as a non-life insurance company that offers fire, marine, motor car, surety, casualty, aviation, engineering, accident insurance and other specialized lines. It maintains 18 service offices located in major cities in the country. There are 93 domestic non-life insurance companies and 2 professional reinsurers in the Philippines. After only 14 years of operations, PNB Gen is already considered as one of the fastest growing and highly competitive

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insurance companies in the country. It started operations with an initial paid-up capital of P13 million. To date, PNB Gen’s paid-up capital stands P312.6 million, one of highest in the industry, assuring clients of steel-clad protection. Its networth has increased to P862.7 million as of December 31, 2005 with premium production of P580 million, so far the highest level attained by PNB Gen in years. Breaking the P500 million production classifies PNB Gen as large insurance company. PNB Gen is also one of the most profitable companies in the industry with an average ROE of 16%, more than double the industry norm. All principal products being offered by PNB Gen have been approved by the Insurance Commission. PNB Gen is compliant with environmental laws. A compliance program can be evaluated by analyzing two dimensions: effort and outcome. Effort is the time, money, resources, and commitment that the company put into building and improving a compliance program. Outcomes are the impact that our efforts have on our level of compliance. As the compliance program matures, the principal measures of effectiveness moves from effort to outcomes. PNB Gen’s compliance risk involves the risk of legal and regulatory sanctions, financial loss, and damage to the reputation of the company as a result of failure to comply with all applicable laws, regulations, codes of conduct and standards of good practice are the major risks involved in the business. PNB Gen developed its own compliance program in recognition of its duty to adhere to relevant regulations based on a culture of accountability and transparency. PNB Gen are committed to put in place the appropriate processes to ensure a common understanding of and compliance with insurance laws, rules and regulations, through a continuing training and education program, and enhance monitoring and enforcement. •

PNB Securities, Inc. (PNBSI), a wholly-owned subsidiary of PNB, was incorporated on January 18, 1991 engaged in buying and selling all kinds of securities for its own and on behalf of others. The company derives 95% of its revenues from commission income. In 2005, the company ranked 11th among 130 active members in the Philippine Stock Exchange in terms of value turnover. PNB SI acted as transacting broker on behalf of the Lucio Tan Group and the National Government wherein the former acquired the latter’s 32.45% shareholdings in the Philippine National Bank, the parent firm of the company. At present, PNB SI has an existing complement of five (5) employees.

Japan-PNB Leasing and Finance Corporation (J-PNB) is the former PF leasing and Finance Corporation which was incorporated on April 24, 1996 under the auspices of the Provident Fund of PNB. PF Leasing was largely inactive until it was used as the vehicle for the joint venture between PNB (60%), IBJ Leasing Co Ltd., Tokyo (35%), and Industrial Bank of Japan, now called Mizuho Corporate Bank (5%). The corporate name was changed to Japan-PNB Leasing and Finance

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Corporation and the joint venture company commenced operations as such in February 1998. J-PNB operates as a financing company under RA 8556 (the amended Finance Company Act). Its major activities are financial leasing, secured direct lending, and receivables discounting. All the leasing and lending activities of the company are in the domestic market. At present, J-PNB has a total of 25 employees. • Opal Portfolio Investments (SPV-AMC) Inc., is a wholly owned subsidiary of PNB and was incorporated on September 16, 2004 under R.A. No. 9182 or the Special Purpose Vehicle (SPV) Act of 2002. It’s primary purpose is to invest in, or acquire Non-Performing Assets (“NPA”) of Financial Institutions (“FIs”) consisting of Non-Performing Loans (“NPL”) and, subject to compliance with the requirements under the laws of the Philippines for the acquisition of land, Real and Other Properties Owned and Acquired (“ROPOA”). BSP approved the establishment of the company on September 18, 2004. Tau Portfolio Investments (SPV-AMC) Inc., is a wholly owned subsidiary of PNB and was incorporated on September 16, 2004 under R.A. No. 9182 or the Special Purpose Vehicle (SPV) Act of 2002. It’s primary purpose is to invest in, or acquire Non-Performing Assets (“NPA”) of Financial Institutions (“FIs”) consisting of Non-Performing Loans (“NPL”) and, subject to compliance with the requirements under the laws of the Philippines for the acquisition of land, Real and Other Properties Owned and Acquired (“ROPOA”). BSP approved the establishment of the company on September 18, 2004. Omicron Asset Portfolio (SPV-AMC) Inc., is a wholly owned subsidiary of PNB and was incorporated on September 16, 2004 under R.A. No. 9182 or the Special Purpose Vehicle (SPV) Act of 2002. It’s primary purpose is to invest in, or acquire Non-Performing Assets (“NPA”) of Financial Institutions (“FIs”) consisting of Non-Performing Loans (“NPL”) and, subject to compliance with the requirements under the laws of the Philippines for the acquisition of land, Real and Other Properties Owned and Acquired (“ROPOA”). BSP approved the establishment of the company on September 18, 2004. Tanzanite Investments (SPV-AMC) Inc., is a wholly owned subsidiary of PNB and was incorporated on September 16, 2004 under R.A. No. 9182 or the Special Purpose Vehicle (SPV) Act of 2002. It’s primary purpose is to invest in, or acquire Non-Performing Assets (“NPA”) of Financial Institutions (“FIs”) consisting of Non-Performing Loans (“NPL”) and, subject to compliance with the requirements under the laws of the Philippines for the acquisition of land, Real and Other Properties Owned and Acquired (“ROPOA”). BSP approved the establishment of the company on September 18, 2004.

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Foreign Subsidiaries: • PNB International Investment Corporation (PNB-IIC), a wholly-owned subsidiary of PNB and established as a US holding company in 1983 specifically to own and hold Century Bank, a California State Chartered Bank. CHC changed its name to PNB International Investments Corporation in 1999 after it sold Century Bank. In 1990, PNB IIC established PNB Remittance Centers, Incorporated (PNB-RCI) as its subsidiary to engage in money transfer services from the U.S. to the Philippines. As of end-2005, PNB-RCI has 39 remittance centers. In 1999, in order to establish a money transfer operations in Canada, PNB-RCI established PNB-RCI Holdings Corporation under the California Corporation Law, as a direct owner of PNB Remittance Centers Canada (PNB-RCC) which was established and authorized to engage a money transfer company in Canada in 2000. As of December 31, 2005, PNB-RCC has 8 branches in Canada. PNB-RCI’s major competitors in the US are LBC, RCBC, Express Remittance, BPI, EPCI/Atlas Express Padala and Banco De Oro-Forex Express. PNBRCC’s competitors are all private companies and these include Western Union, LBC, Manila Cargo, I-Remit and Mabini Express. To further enhance the competitiveness of PNB’s remittance business, it has started installing the Integrated Remittance System (IRS) in our US and other Overseas Remittance Subsidiaries. The IRS is a user-friendly Window-based application that covers frontline (database creation/management, remittance processing, etc.,) as well as backroom functions (system security administration, communication configuration) and it puts together in one (1) system PNB’s two existing remittance systems i.e.: the Rapid Remit and Electronic Remittance Processing System (ERPS). • PNB Remittance Center Limited (PNB RCL), a wholly-owned subsidiary of PNB incorporated on April 24, 1994 and is engaged in remittance services in Hong Kong. As of December 31, 2005, the company operates eight (8) offices in Hong Kong. PNB RCL also services Indonesian overseas workers in Hongkong through a remittance tie-up with Bank Mandiri. Its major competitors are Metrobank, EPCI, I-Remit/LBC, RCBC and BPI. • PNB International Finance, Ltd. (PNB-IFL), a wholly-owned subsidiary of PNB and registered with the Registrar of Companies in Hong Kong on July 20, 1976. It was a deposit-taking-company and also engaged in loan syndication, money market operations, remittance of funds and import / export financing. Its deposit-taking license was surrendered in 2001 and was granted a money lenders’ license in 2002. It is principally engaged in granting retail loans to Filipino workers and professionals.

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• PNB Europe PLC, started as a PNB Representative office in 1968 until it was converted into PNB London Branch in 1976. In 1997, PNB was authorized to incorporate a new subsidiary bank – PNB (Europe) Plc and started its operations on the same year. PNB Europe PLC holds a full banking license and offers deposit services including savings deposits, personal and business loans, letters of credit, equipment leasing, traveler’s cheques and foreign exchange remittance services. It has an extension office at Notting Hill Gate to primarily handle remittances. Its major competitors in remittance services are RCBC, Peso Express, CBN Group, IRemit, Phil-Rem, Metrobank and Allied Bank. • PNB Corporation, Guam (PCG), a wholly-owned subsidiary of PNB incorporated in May 1990. PCG is organized to engage in money transfer business particularly as “PNB Foreign Exchange”. PCG also operates offices in Guam and Saipan. The following are PCG’smajor competitors: Metrobank, Rustan’s Delivery, Allied Bank, LBC Express, Pinoy Express, Micronesia, Apex, Limco, Money Express and Amparo. • PNB Italy, SpA, a wholly-owned subsidiary of PNB and was incorporated in 1994. It was established to service the remittance requirements of Filipinos in Italy and operates (3) offices in Italy: Rome, Milan and Florence. PNB Italy is also the parent company of PNB Netherlands B.V., a remittance company operating in Amsterdam, whose operations started in April 2004. In August 15, 2005, PNB Netherlands B.V. opened its Rotterdam Extension Office basically to service the remittance requirements of Filipino seamen entering the ports of Rotterdam. PNB Italy’s major competitors are Equitable-PCI Express Padala, BPI Remittance Europe, Metro Remittance Italy, RCBC Telemoney Europe, LBP Finance Services and FILITAL.

Item 2.Properties PNB’s corporate headquarters, the PNB Financial Center, is housed in a sprawling modern eleven-storey building complete with all amenities, located at a well-developed reclaimed 99,999 square meters of land on the southwest side of Roxas Boulevard, Pasay City, Metro Manila, bounded on the west side by the Pres. Diosdado P. Macapagal Boulevard and on the north side by the World Trade Center building.

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The PNB Financial Center is located in vicinity where bustling cultural, financial and tourism activities are converged. It also houses PNB’s domestic subsidiaries. Some office spaces are presently leased to various companies. PNB also leases the premises occupied by some of its branches (about 41.59% of the branch sites are Parent Company-owned). Some of its subsidiaries also lease the premises occupied by their Head Offices and most of their branches. The lease contracts are for periods ranging from 1 to 25 years and are renewable at the Group’s option under certain terms and conditions. Various lease contracts include escalation clauses, most of which bear an annual rent increase of 10.00%. Certain land and buildings of the Bank are pledged as collaterals to secure the Bank’s borrowings from PDIC. Item 3.Legal Proceedings The Bank is a party to various legal proceedings which arise in the ordinary course of its operations. None of such legal proceedings, either individually or in the aggregate, are expected to have a material adverse effect on the Bank or its financial condition. Item 4.Submission of Matters to a Vote of Security Holders No matter was submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders.

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PART II – OPERATIONAL AND FINANCIAL INFORMATION Item 5. Market for Common Equity and Related Stockholder Matters
A. Market Price of and Dividends on Common Equity and Related Stockholders Matter

1) Market Information All PNB common shares are listed and traded at the Philippine Stock Exchange, Inc. The high and low sales prices of PNB shares for the last two fiscal years are:
2005 High Low P 41.50 P 22.00 45.50 29.00 49.50 32.00 36.00 29.00 2004 High Low P 25.50 P 23.00 24.25 23.00 24.00 22.25 23.25 21.50

1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.

The trading price of each PNB common share was P31.50 as of December 29, 2005. (P34.00 as of March 31, 2006) 2) Holders There are 33,089 PNB shareholders as of December 31, 2005 (33,018 as of March 31, 2006). The top twenty (20) holders of common shares, the number of shares held and the percentage of total shares outstanding held by each are as follows:
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. Stockholder Leadway Holdings, Inc. Uttermost Success, Ltd. Donfar Management, Ltd. Mavelstone Int’l. Ltd. Fragile Touch Investment, Ltd. Fast Return Enterprise, Ltd. Pioneer Holdings Equities, Inc. Multiple Star Holding Corp. Republic of the Philippines Allmark Holdings Corporation Profound Holdings, Inc. Kentwood Development Corp. Fil-Care Holdings Inc. Dunmore Development Corp. (X-496) Kenrock Holdings Corporation Kentron Holdings & Equities Corporation Fairlink Holdings Corporation Purple Crystal Holdings, Inc. Ivory Holdings, Inc. Safeway Holdings & Equities, Inc. No. of Shares 46,495,880 36,523,715 34,138,651 34,055,186 31,157,859 27,926,481 23,183,068 21,925,853 17,454,140 14,754,256 12,987,043 12,271,396 11,119,076 10,779,000 10,522,961 10,343,270 9,945,960 9,374,238 8,780,714 8,577,826 % to Total Share 8.11% 6.37% 5.96% 5.94% 5.44% 4.87% 4.04% 3.82% 3.04% 2.57% 2.27% 2.14% 1.94% 1.88% 1.84% 1.80% 1.74% 1.64% 1.53% 1.50%

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3) Dividends The company has not declared any cash dividends on its common equity for the fiscal years 2004 and 2005. The company’s ability to pay dividend is contingent on the successful implementation of its rehabilitation plan and the capability to set aside unrestricted retained earnings for dividend distribution. 4) Recent Sales of Unregistered Securities or Exempt Securities There are no securities of the company sold by it within the past three (3) years which were not registered under the Code.

B. Description of Registrant’s Securities As of December 31, 2005, the Bank’s authorized capital stock amounted to P50,000,000,040.00 divided into 1,054,825,557 common shares and 195,175,444 preferred shares, both classes of shares having a par value of P40.00 per share. The Bank has a total of P22,929,836,640.00 subscribed capital. The preferred shares have the following features: • Non-voting, non-cumulative, fully participating in dividends with the common shares; • Convertible, at any time at the option of the holder who is qualified to own and hold common shares, to common shares on a one (1) preferred share for one (1) common share basis; • With mandatory and automatic conversion into common shares upon the sale of such preferred shares to any person other than the National Government or any other government agency or government owned or controlled corporation; and • With rights to subscribe to additional new preferred shares with all of the features as herein provided, in the event that the Bank shall hereafter offer new common shares for subscription, in such number corresponding to the number of shares being offered.

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Item 6. Management’s Discussion and Analysis 1) Management’s Discussion and Analysis Following are the discussions of the consolidated financial condition and results of operations of PNB and its Subsidiaries based on the audited financial statements as of and for the years ended December 31, 2005 and December 31, 2004. The comparative figures for 2004 were restated to reflect the adjustments resulting from adoption of new and revised accounting standards, except Philippine Accounting Standards (PAS) 32, Financial Instruments: Disclosure and Presentation and PAS 39, Financial Instruments: Recognition and Measurement, for which the Philippine SEC has allowed to be applied from January 1, 2005. A. Financial Condition • Consolidated resources as of December 31, 2005 was P223.1 billion, higher by P3.4 billion from P219.7 billion as of December 31, 2004. Significant changes were registered in the following asset accounts: Cash and Other Cash Items (COCI) was P 6.1 billion or P 2.8 billion higher from P 3.3 billion. The 2005 balance includes foreign currency notes and coins on hand, foreign and miscellaneous COCI on hand, which were presented under Other Resources in 2004. Due from Other Banks decreased by P1.4 billion from P7.1 billion to P5.7 billion on account of foreign transactions. Interbank Loans Receivable dropped by P 2.0 billion from P 18.9 billion to P 16.9 billion due to lower lending to foreign banks. Securities Held Under Agreements to Resell was higher by P 8.3 billion from P 4.0 billion to P 12.3 billion due to increase in lending to BSP. Financial Assets at Fair Value Through Profit or Loss was P 538 million, P 217 million lower from P 755 million. This account is presented under Trading Account Securities in 2004. Available for Sale and Held to Maturity Investments which were presented under Investment Securities in 2004 went down by P 17.5 billion from P 63.0 billion to P 45.5 billion mainly due to the reclassification of P 19.9 billion unquoted securities from Investment Securities to Loans and Receivables.

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-

-

-

-

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Loans and Receivables went up by P23.5 billion from P56.2 billion to P79.7 billion. The increase was mainly attributed to the reclassifications of P 19.9 billion unquoted securities from Investment Securities and P 7.9 billion other receivables (net of allowance for impairment losses) from Other Resources, partly offset by the P 4.3 billion loans sold through SPV in 2005. Investment in subsidiaries and associates increased by P40 million from P644 million to P684 million attributed to share in net earnings of an associate. Other Resources decreased by P9.0 billion from P18.7 billion to P9.7 billion on account of other receivables (e.g. sales contract receivable, accounts receivable, accrued interest receivable) presented under Loans and Receivables in 2005.

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• Consolidated liabilities as of year-end 2005 totaled P200.2 billion, higher by P6.0 billion compared to P194.2 billion as of year-end 2004. Deposit Liabilities grew by P6.8 billion from P161.2 billion to P167.8 billion. By deposit mix, both savings and demand deposits increased by P 7.7 billion and P1.3 billion, respectively, partly offset by decrease in time deposits by P2.2 billion. Due to Bangko Sentral ng Pilipinas was higher by P13 million from P103 million to P116 million. Margin Deposits and Cash Letters of Credit dropped by P68 million, from P138 million to P70 million. Accrued Taxes, Interest and Other Expenses dropped by P1.2 billion, from P6.1 billion to P4.9 billion due to lower interest on deposit liabilities. Other Liabilities increased by P914 million from P9.8 billion to P10.7 billion. Consolidated capital funds stood at P22.9 billion as of December 31, 2005, lower by P2.7 billion compared to P25.6 billion as restated as of December 31, 2004. The decrease was mainly due to the P2.1 billion adjustment on cumulative effect of change in accounting for financial instruments – PAS 39 and P 1.9 billion valuation loss on SPV subordinated notes and P279 million translation adjustment, partly offset by P 931 million net unrealized gain on available for sale investments and P 628 million net income for the year.

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B. Results of Operations •

Sustaining its strong profitability momentum, PNB and its Subsidiaries reported P 628 million net income for 2005, a surge of 75% from its net income last year attributed to growth in net interest margin. Net interest margin substantially improved by 62% to P5.2 billion from P3.2 billion. This came from higher interest income on loans and investments as well as collections on NPL accounts as a result of focused restructuring initiatives. Interest expense was effectively kept down at P5.8 billion. Fee-based and other income amounted to P6.4 billion, slightly lower by P227 million from P6.7 billion. Administrative and other operating expenses slightly increased by P689 million from P7.9 billion to P8.6 billion as a result of continuing effort to keep a tight watch on the administrative and overhead expenses. Provision for impairment losses amounted to P504 million and P 964 million for the years ended 2005 and 2004, respectively. Provision for income tax amounted to P1.89 billion and P618 million for 2005 and 2004, respectively. Higher provision for 2005 was due to write-off of P 1.1 billion deferred taxes.

• •

• •

C. Key Performance Indicators Following are the top five (5) key performance indicators of the Group: 1. Capital adequacy Capital adequacy ratio covering credit risks (consolidated basis) computed based on BSP regulations as of December 31, 2005 and 2004 were 17.2% and 16.2%, respectively. 2. Asset quality Non-performing loans (NPL) were substantially reduced by P9.8 billion from P37.7 billion to P27.9 billion. NPL coverage ratio stood at 69.5% and 41.6% as of year-end 2005 and 2004, respectively.

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3.

Profitability Return on equity Return on assets 2/ Net interest margin
1/ 2/ 3/

1/

3/

12/31/05 2.59% 0.28% 3.66%

12/31/04 1.41% 0.17% 2.63%

Net income divided by average total capital funds for the period indicated. Net income divided by average total assets for the period indicated. Net interest income divided by average interest-earning assets for the period indicated.

4.

Liquidity The ratio of liquid assets to total assets were 38.3% to 19.2% as of December 31, 2005 and 2004, respectively, The Bank is in compliance with liquidity and legal reserve requirements for deposit liabilities and deposit substitutes.

5.

Cost efficiency The ratio of total operating expenses to the sum of net interest income and other income for December 31, 2005 and 2004 were 74.1% and 80.4%, respectively.

D. Known trends, demands, commitments, events and uncertainties • •

There are no known trends, demands, commitments, events or uncertainties that might affect Bank’s liquidity. There are no known trends, events or uncertainties that have had or that are reasonably expected to have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations of the Bank.

E. Events that will trigger direct or contingent financial obligation In the normal course of business, the Group makes various commitments and incurs certain contingent liabilities that are not presented in the financial statements. These commitments and contingent liabilities include various guarantees, forward exchange contracts, commitments to extend credit, standby

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letters of credit, pending litigations including litigations involving redemption of foreclosed properties already sold to third parties and contested tax assessments. Several suits and claims remain unsettled. However, no specific disclosures on such unsettled assets and claims because any such specific disclosures would prejudice the Group’s position with the other parties with whom it is in dispute. The Group and its legal counsel believe that any losses arising from these contingencies which are not specifically provided for will not have a material adverse effect in the financial statements. F. Material off-balance sheet transactions, arrangement or obligation The following is a summary of various commitments and contingent liabilities as of December 31, 2005 and 2004 at their equivalent peso contractual amounts:
12/31/05 12/31/04

Trust department accounts Deficiency claims receivable Inward bills for collection Unused commercial letters of credit Confirmed export letters of credit Outward bills for collection Outstanding guarantees issued Items held as collateral Other contingent accounts

(In Thousand Pesos) =14,938,781 P =14,561,817 P 9,929,287 8,585,697 10,535,492 5,229,104 12,422,322 2,968,974 3,673,416 218,009 133,462 172,683 1,760 47,900 -

G. Capital Expenditures PNB has commitments for capital expenditures. Among these are investments on IT-related projects, relocation and renovation of branch buildings, acquisition and major repairs of furniture, fixtures and equipment needed to bring the Bank at par with competitors. Expected sources of funds for the projects will come from sale of acquired assets. H. Significant Elements of Income or Loss Significant elements of net income of the Bank for 2005 came from its continuing operations. I. Seasonal Aspects There was no seasonal aspect that had a material effect on the Bank’s financial condition or results of operations.

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Item 7. Financial Statements The Audited Financial Statements of PNB and its Subsidiaries as of December 31, 2005 & 2004 (as restated) and for the years ended December 31, 2005 & 2004 (as restated) and the Notes to Financial Statements, the Report of Independent Auditor and the Statement of Management’s Responsibility are filed as part of this Form SEC 17-A. Item 8. Information on Independent Accountant and Other Related Matters PNB engaged the services of SyCip Gorres Velayo and Co. (SGV) for the audit of the Group’s statement of condition as of December 31, 2005 and 2004, and the related statements of income, changes in capital funds and cash flows for the years then ended. A. External Audit Fees and Services 1. External Audit Fees Audit and Audit Related Fees • P3.150 million engagement fee (exclusive of VAT and out of pocket expenses) for each year 2005 and 2004 audit of the Bank. Tax Fees • P500 thousand engagement fee (exclusive of VAT and out of pocket expenses) for the specific procedures to establish the validity of the Bank’s claim pursuant to CTA Circular No. 1-95, as amended by CTA Circular No. 10-97. Other Fees • P3.50 million engagement fee (exclusive of VAT and out of pocket expenses) for the specific procedures performed in connection with the Bank’s Offering Circular on the issuance of Subordinated Notes in 2004. • P2.750 million engagement fee (exclusive of VAT and out of pocket expenses) to provide training on identification of embedded derivatives and provide review comments and recommendations on the results of contracts review; evaluate the Bank’s existing risk management strategies and activities and review of: (1) detailed procedures for identification of embedded derivatives, (2) hedging and accounting policies, (3) hedge documentation templates, (4) hedge effectiveness testing approach and (5) IAS 39 implications on non-derivative financial assets and liabilities.

Approval Policies The approval of audit engagement fees is based on the Bank’s existing Manual of Signing Authority.

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2.

Changes in accounting policies
On January 1, 2005, the following new accounting standards became effective and were adopted by the Group: • PAS 19, Employee Benefits, provides for the accounting for long-term and other employee benefits. The adoption of this standard resulted in the recognition of a net transition liability of P17.9 million as a charge against deficit as of January 1, = 2004. Net income in 2004 increased by =30.9 million. The change in accounting P policy also resulted in the inclusion of additional disclosures in the accompanying financial statements. • PAS 21, The Effects of Changes in Foreign Exchange Rates, prohibits the capitalization of foreign exchange losses. The standard also requires the entities in the Group to determine their functional currency. The adoption of this standard has no material impact on the financial statements. • PAS 30, Disclosures in the Financial Statements of Banks and Similar Financial Institutions, provides for the required disclosure and presentation in respect of the accounts of banks and similar financial institutions. It also provides that any provision for general banking risks is treated as an appropriation of surplus and should not be included in the determination of net income for the period. The effect of adopting this standard resulted in the reallocation of the general loan loss reserves as of January 1, 2005 amounting to P342.3 million to cover the additional = specific reserves required upon the adoption of PAS 39. The standard requires more comprehensive disclosure about the Group’s financial instruments, whether recognized or unrecognized in the financial statements. The required new disclosures are reflected in the financial statements, where applicable. • PAS 32, Financial Instruments: Disclosure and Presentation, covers the disclosure and presentation of all financial instruments. The standard requires more comprehensive disclosures about the Group’s financial instruments. New disclosure requirements include terms and conditions of financial instruments used by the Group, types of risks associated with financial instruments (market risk, foreign exchange risk, price risk, credit risk, liquidity risk and cash flow risk), fair value information of financial assets and financial liabilities, and the Group’s financial risk management policies and objectives. The standard also requires financial instruments to be classified as debt or equity in accordance with their substance and not their legal form. The standard also requires presentation of financial assets and financial liabilities on a net basis when, and only when, an entity: (a) currently has a legally enforceable right to set off the recognized amounts; and (b) intends either to settle on a net basis, or to realize the asset and settle the liability simultaneously. • PAS 39, Financial Instruments: Recognition and Measurement, establishes the accounting and reporting standards for recognizing and measuring the Group’s financial assets and financial liabilities. It also covers the accounting for derivative instruments.

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The effect of adopting this standard did not result in the restatement of prior year financial statements as allowed by the SEC under its Memorandum Circular 19 Series of 2004. The total cumulative effect of adopting the standard amounting to = P 2.1 billion, however, was charged against deficit as of January 1, 2005. The disclosures required by PAS 32 are reflected in the financial statements, where applicable. The adoption of the provision of PAS 39 on the classification and related measurement, other than impairment, of financial assets and liabilities on the Group financial statements resulted in an increase in deficit as of January 1, 2005 amounting to =80.9 million. P Prior to January 1, 2005, the adequacy of allowance for impairment losses on loans and other receivables and risk assets was determined based on management criteria and BSP requirements. The effect of adopting PAS 39 provisions on impairment of financial resources as of January 1, 2005 amounted to P8.2 billion, net of the = general reserves reallocated to specific reserves. However, allowance for impairment losses charged to deficit as of January 1, 2005 amounted to P1.9 billion, net of the P1.9 billion loss on the zero= = coupon notes received in 2004 as consideration of the non-performing loans (NPL) sold to special purpose vehicle (SPV) companies which was separately charged to deficit on January 1, 2005. As of December 31, 2004, this loss on the zero-coupon notes was not recognized in the financial statements. In 2005, the Parent Company sold certain NPL to an SPV company at a loss of = P 4.4 billion. The Parent Company availed of the incentives under Republic Act (RA) No. 9182 on the deferral of losses incurred from the sale of NPL to SPV companies. Accordingly, as of January 1, 2005, no allowance for impairment losses on these NPLs was set up in the financial statements. The Group adopted the fair valuation method for all its derivative transactions. The effect of adopting fair valuation method resulted in an increase in deficit as of January 1, 2005 amounting to =74.2 million. P PAS 40, Investment Property, prescribes the accounting treatment for investment property and related disclosure requirements. The Group adopted the cost model in accounting for its investment property. The effect of adopting the cost model in accounting for ROPOA qualified as investment property resulted in a net decrease in deficit as of December 31, 2003 by =3.2 billion. Net income decreased by P32.2 P = million in 2004. Previously, ROPOA were carried at the lower of total outstanding exposure at the time of foreclosure or bid price, less allowance for impairment losses (i.e. net realizable value). PFRS 4, Insurance Contract, specifies the financial reporting for all insurance contracts (including reinsurance contracts) that an entity issues and to reinsurance contracts that it holds. • PFRS 5, Non-current Assets Held for Sale and Discontinued Operations, specifies the accounting for assets held for sale and the presentation and disclosure of discontinued operations. As of December 31, 2005, the Group had no assets that qualify as noncurrent assets held for sale and discontinued operations.

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The Group also adopted in 2005 the following revised standards: • PAS 1, Presentation of Financial Statements, provides a framework within which an entity assesses how to present fairly the effects of transactions and other events; provides the base criteria for classifying liabilities as current or noncurrent; prohibits the presentation of income from operating activities and extraordinary items as separate line items in the statements of income; and specifies the disclosures about key sources of estimation uncertainty and judgments that management has made in the process of applying the entity’s accounting policies. It also requires changes in the presentation of minority interest in the statements of condition and statements of income. • PAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, removes the concept of fundamental error and the allowed alternative to retrospective application of voluntary changes in accounting policies and retrospective restatement to correct prior period errors. It defines material omission or misstatements, and describes how to apply the concept of materiality when applying accounting policies and correcting errors. • PAS 10, Events after the Balance Sheet Date, provides a limited clarification of the accounting for dividends declared after the statement of condition date. • PAS 16, Property, Plant and Equipment, provides additional guidance and clarification on the recognition and measurement of items of property, plant and equipment. It also provides that each part of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item shall be depreciated separately. • PAS 17, Leases, provides a limited revision to clarify the classification of a lease of land and buildings and prohibits expensing of initial direct costs in the financial statements of lessors. • PAS 24, Related Party Disclosures, provides additional guidance and clarity in the scope of the standard, the definitions and the disclosures for related parties. It also requires disclosure of the total compensation of key management personnel by benefit type. • PAS 27, Consolidated and Separate Financial Statements, reduces alternatives in accounting for subsidiaries in the consolidated financial statements and in accounting for investments in the separate financial statements of a parent company, venturer or investor. The adoption of this standard in the Parent Company financial statements resulted in the increase in deficit amounting to =501.2 million P as of December 31, 2003. However, accumulated equity income reversed to deficit represents the income received after the quasi-reorganization. Other downward adjustments to capital funds representing the Parent Company’s share in revaluation increment, net unrealized loss on available-for-sale investments (AFS) and equity translation adjustment of the subsidiaries as of January 1, 2004 amounted to = P438.5 million. The accumulated translation adjustment reversed excludes those

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that have been closed to deficit on restructuring date. Net income of the Parent Company decreased by =282.6 million in 2004. P • PAS 28, Investments in Associates, reduces alternatives in accounting for associates in the consolidated financial statements and in accounting for investments in the separate financial statements of an investor. The effect of adopting this standard in the Parent Company financial statements resulted in an increase in deficit as of December 31, 2003 amounting to = P91.8 million. Net income of the Parent Company in 2004 decreased by =30.2 P million. • PAS 33, Earnings per Share, prescribes principles for the determination and presentation of earnings per share for entities with publicly traded shares, entities in the process of issuing ordinary shares to the public, and any entities that calculate and disclose earnings per share. • PAS 36, Impairment of Assets, establishes the frequency of impairment testing for certain intangibles and provides additional guidance on the measurement of an asset’s value in use. • PAS 38, Intangible Assets, provides additional clarification on the definition and recognition of certain intangibles.

3.

Disagreements with Accountants PNB and its subsidiaries had no disagreement with the auditors on any matter of accounting principles or practices, financial statements disclosure, or auditing scope procedure.

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PART III - CONTROL AND COMPENSATION INFORMATION Item 9. Directors and Executive Officers A. Names, ages and dates of assumptions of Directors and Executive Officers
Position Board of Directors 1/ Chairman of the Board Vice Chairman, President & Chief Executive Officer Director Director Director Director Director Director Director Director Director Corporate Secretary Executive Officers: Executive Vice President Executive Vice President Executive Vice President First Senior Vice President First Senior Vice President First Senior Vice President First Senior Vice President First Senior Vice President First Senior Vice President First Senior Vice President Name Florencia G. Tariela 2/ Omar Byron T. Mier Virgilio R. Angelo Domingo T. Chua Feliciano L. Miranda, Jr. 2/ Vicente S. Perez Eric O. Recto Washington Z. Sycip 2/ Lucio C. Tan Ricardo M. Tan Macario U. Te Renato J. Fernandez Age 59 59 58 64 76 47 42 84 71 69 76 69 Date of Assumption 05/24/05 05/24/05 05/24/05 05/24/05 05/24/05 05/24/05 05/24/05 05/24/05 05/24/05 05/24/05 05/24/05 05/24/05

Anthony Q. Chua 54 08/01/02 Asterio L. Favis, Jr. 53 11/05/02 Carmen G. Huang 55 08/16/02 Cris S. Cabalatungan 55 03/03/03 Renato A. Castillo 52 09/01/05 Sylvia Chan Lim 56 01/21/00 Cynthia V. Javier 53 03/01/04 Michael O. de Jesus 47 08/01/02 Ramon L. Lim 54 11/05/02 Isabelita T. Manalastas Watanabe 52 12/23/02 First Senior Vice President Edgardo T. Nallas 48 01/02/06 First Senior Vice President Ma. Elena S. Sarmiento 52 01/06/03 First Senior Vice President Pacita P. Henson 38 02/01/06 Senior Vice President Rafael Z. Sison, Jr. 50 01/09/06 1/ The directors (under Section 5.3 of the PNB By-Laws) are elected by the stockholders entitled to vote during the annual meeting of stockholders and shall hold office for one (1) year and until their successors are elected and qualified. 2/ independent directors

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There are eleven (11) members of the Bank’s Board of Directors, two of whom are independent directors. All incumbent directors were elected during the annual meeting of stockholders held on May 24, 2005 and shall hold office until their successors have been duly elected. The Corporate Governance Committee (acting as the bank’s Nomination Committee) pre-screens and shortlists all candidates nominated to become members of the Board of Directors according to prescribed qualifications and disqualifications.

B. Profile of Directors and Executive Officers together with their business experience covering at least the past five (5) years Board of Directors FLORENCIA G. TARRIELA, 59, Filipino, was elected as Chairman of the Board of Directors of the Bank on May 24, 2005. She is Chairman of the Corporate Governance Committee, PNB Capital and Investment Corporation and PNB Italy SpA. She obtained her Bachelor of Science in Business Administration Major in Economics at the University of the Philippines and her Masters in Economics from the University of California at Los Angeles (UCLA) where she topped the Masters Comprehensive Exams. Ms. Tarriela is currently a columnist for “Business Options” of Manila Bulletin. She is a Trustee of Finex Foundation, a Director of Tulay Sa Pagunlad, Inc. (TSPI), Kilosbayan, Philippine Bible Society, Makati Garden Club and Summer Institute of Linguistics (SIL). She is also a Director of PNB Remittance Center, Ltd., and Bulawan Mining Corporation. She was formerly President of the Bank Administration Institute of the Philippines (BAIPHIL), a member of the Financial Executive Institute (“Finex”) and Independent Director of the Philippine Depository & Trust Corporation, Philippine Dealing & Exchange Corporation and the Philippine Dealing System Holding Corporation. Ms. Tarriela served the Philippine Government as Undersecretary of Finance, alternate member of the Monetary Board of the Bangko Sentral ng Pilipinas and alternate board member of the Land Bank of the Philippines and the Philippine Deposit Insurance Corporation. She was formerly Deputy Country Head and Managing Partner and the first Filipino lady Vice President of Citibank N. A. She is co-author of the books “ Coincidence or Miracle?” and “Oops - Don’t Throw Those Weeds Away!” OMAR BYRON T. MIER, 59, Filipino, is Vice Chairman of the Board, President and CEO of the Bank. He obtained his Bachelor of Science in Business Administration Major in Accounting and his Bachelor of Arts in Economics from the University of the Philippines in 1967 and 1968, respectively. A certified public accountant, he took his M.A. in Economics in 1970 at the same university. Mr. Mier is currently the Chairman of Victorias Milling Co., Inc., and Japan-PNB Leasing and Finance Corporation and Chairman & President of PNB Holdings

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Corporation. He is also Director of PNB International Investment Corporation, PNB Remittance Center, Inc., PNB Remittance Center, Ltd., PNB Europe Plc., PNB General Insurers Company, Inc., PNB Capital and Investment Corporation, PNB Forex, Inc., PNB Securities, Inc. and Beneficial-PNB Life Insurance Company, Inc. He served as Executive Vice President of the Bank from August 16, 2002 to April 10, 2005. He worked with Citibank N.A. (Manila and Malaysia) for 24 years where he held the positions of Country Risk Manager/Senior Credit Officer and Head of Risk Management Group and World Corporation Group Head. Prior to his appointment in 2002 at PNB, he served as Deputy General Manager & Corporate Banking Department Head of Deutsche Bank, Manila from 1995 to 2001.

VIRGILIO R. ANGELO, 58, Filipino, was elected Director of the Bank on May 24, 2005. He is Chairman of Non-Performing Assets Committee and Trust Committee of the Bank. He obtained his Bachelor of Science in Business Administration Major in Economics (Magna Cum Laude) from the University of the East and his Masters in Business Administration (Sans Thesis) from the Ateneo Graduate School of Business. He is currently the Chairman of PNB Forex, Inc., and a Director of PNB International Finance, Ltd., PNB Remittance Center, Inc. and PNB General Insurers Company, Inc. He is also Vice Chairman, President and Chief Executive Officer of the Trade and Investment Development Corporation of the Philippines also known as the Philippine Export-Import Credit Agency (PhilEXIM). He was President and Chief Executive Officer and Director of the Philippine Postal Savings Bank (PPSB). He served as Administrator and Vice Chairman of the Board of the Overseas Workers Welfare Administrator (OWWA). He also served as General Manager and Vice Chairman of the Board of the Philippine Charity Sweepstakes Office (PCSO). He was President and Director of BPI Securities Corporation. He was Division Head-Corporate Banking Group of the Bank of Philippine Islands. He was the Group Head for Corporate Relationship Management Group of the Citytrust Banking Corporation. He was also the Marketing Officer and Portfolio Manager of First Metro Investment Corporation (Metrobank Group) and Research Head and Assistant Trust Officer of the Philippine Banking Corporation. DOMINGO TEE CHUA, 64, Filipino, has been serving as Director of the Bank since April 27, 2001. He obtained his Bachelor of Science in Chemical Engineering from the Mapua Institute of Technology. Mr. Chua is currently the Chairman of PNB Securities, Inc., PNB Remittance Center, Inc. (U.S.A.), Dynamic Holdings Ltd. (a listed company in Hongkong) and Air Philippines Corporation. He is also a Director of PNB Corporation, Guam., PNB General Insurers Company., Inc., PNB Investments Ltd., PNB Remittance Center, Ltd., and PNB (Europe) PLC. He is currently the President of Manufacturing Services, Allied Leasing & Finance Corporation and Lucky Travel Corporation, and the General Manager of Himmel Industries, Incorporated. He is also currently serving in the Board of Directors of various corporations, including Asia Brewery, Inc.,

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Maranao Hotel & Resort Corporation, Oceanic Bank (SFO, USA), Xiamen Commercial Bank (China), Allied Bank Corporation (Hongkong) Ltd., Allied Bankers Insurance Corporation, Foremost Forms, Inc., Grandspan Development Corporation, Dominican Realty & Development Corporation, and Eurotiles Industrial Corporation. FELICIANO L. MIRANDA, JR., 76, Filipino, was President and CEO of the Bank from January 2000 to April 2002. He was re-elected as a Director on May 24, 2005. He obtained his Bachelor of Science in Commerce Major in Accounting from Far Eastern University and finished all curricular requirements and Comprehensive Examinations for his Master of Arts Degree in Economics from Georgetown University in Washington D. C. USA. Mr. Miranda is currently the Chairman of PNB International Finance, Ltd. and Bulawan Mining Corporation. He is a Director of PNB Capital & Investment Corporation, JapanPNB Leasing & Finance Corporation, PNB Holdings Corporation, PNB Remittance Center, Ltd., PNB Italy SpA, Beneficial-PNB Life Insurance Company, PNB RCI Holding Co., Ltd., Sun Life of Canada – Bond Equity Fund and Sun Life of Canada – Money Market Fund. Mr. Miranda was former Deputy Governor, Supervision and Examination Sector of the Bangko Sentral ng Pilipinas (BSP) and worked for the BSP for forty one (41) years. After his retirement from the BSP in 1994, he served as Consultant to the Monetary Board and various domestic banks and local units of foreign banks namely: Asiatrust Bank, Bank of Commerce, Deutsche Bank, International Bank of China, ISLA Bank, Prudential Bank, Rizal Commercial Banking Corporation, State Investment Trust, Inc., World Bank and the Asian Development Bank. He was also a director of the Bank of Commerce, Sumigin Investment Co., and LBP Leasing Corporation. VINCENT S. PEREZ, 47, Filipino, was elected Director of the Bank on May 24, 2005. He obtained his Bachelor’s Degree in Business Economics from the University of the Philippines and his MBA from the Wharton Business School of the University of the Philippines in 1983. Mr. Perez is currently the Chairman of the Executive Committee of the Bank and PNB International Investment Corporation and Director of PNB Capital and Investment Corporation, PNB Forex Inc., PNB Remittance Center, Ltd., and Bulawan Mining Corporation. He is also the Chairman of Chikka Holdings, Kadluan Management Corporation, Malampaya Foundation, Merritt Partners, and Veritas Mobile Solutions. He is an Independent Director of SM Investments Corporation. Mr. Perez’s career ranged from credit analyst, international banker, debt trader, investment bank partner, private equity investors to cabinet minister. He was the youngest and longest serving Philippine Energy Secretary from June 2001 to March 2005. He boosted energy self-sufficiency, renewed oil exploration, aggressively promoted clean indigenous energy, crafted and ambitious renewable energy policy, relaunched energy conservation, and accelerated rural electrification. He served briefly in early 2001 as Undersecretary for Industry and Investments at the Department of Trade and Industry and as Managing Head of the Board of Investments, and let IT Investment missions to Europe and USA. Prior to joining the cabinet in 2001. Mr.

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Perez had 17 years experience in debt restructuring, capital markets and private equity in emerging markets. After internship with Far East Bank, New Jersey National Bank and Citibank, he joined Mellon Bank in Pittsburgh in 1983. He became a Latin American credit analyst and Mexico desk officer in the Latin American debt restructuring group. In 1987, Mr. Perez joined Lazard Brothers debt trading team in London. The following year he moved to Lazard Freres & Co. in New York and pioneered its emerging markets team, arranging numerous debt and equity financing in Latin America, India, Philippines and Turkey. At 35, he became the first Asian General Partner at Lazard Freres. In 1995, he became Managing Director of Lazard Asia in Singapore until 1996. Mr. Perez founded Next Century Partners in 1997, as private equity firm that invested in mobile communications, semi-conductor assembly and canned foods. His team launched successful various start-ups in mobile services and established an environmental investment company. ERIC O. RECTO, 42, Filipino, was elected Director of the Bank on May 24, 2005. He obtained his Bachelor of Science in Industrial Engineering from the University of the Philippines and his Masters in Business Administration from Cornell University, Johnson Graduate School of Management in Ithaca, New York. He is the Chairman of the Risk Management Committee of the Bank. He is currently President of Philweb Corporation and ISM Communications Corporation. He is also President and CEO of Eastern Telecommunication Philippines, Inc. (ETPI) and Connectivity Unlimited Resource Enterprise, Inc. (CURE). He is the Chairman of PNB Europe PLC as well as a Director of PNB International Finance Ltd., PNB Holdings Corporation, PNB Securities, Inc., and Bulawan Mining Corporation. He was the Undersecretary of the Department of Finance, Republic of the Philippines (ROP) for International Finance and for Privatization (Concurrent). He served as alternate Director vice the Secretary of Finance of the Philippine Deposit Insurance Corporation and the Philippine Export Credit Agency. He was also a Member of the Board of Directors of the Central Bank Board of Liquidators. He was Senior Vice President and Chief Financial Officer of Alaska Milk and Belle Corporation prior to joining the Government. He was a member of the Board of Directors of Philippine Global Communications, Inc., Tagaytay Highlands International Golf Club, Inc., Legend International Resorts Ltd. and Maginet Corporation. He was the Executive Vice President, Chief Financial Officer and a member of the Board of Directors of the APC Group Inc., Vice President–Finance, Chief Financial Officer and a member of the Board of Directors of Sinophil Corporation. He was Vice President – Corporate Finance (Manila) and Vice President – Asset Finance Group (Hongkong) of the Bankers Trust Company. He also served as Senior Consultant – Project Development Services Division of the SGV & Company. WASHINGTON Z. SYCIP, 84, American, is one of the Bank’s independent directors. He has been serving as director of the Bank since May 30, 2000. He obtained his Bachelor of Science in Commerce from the University of Santo Tomas and his Master of Science in Commerce from Columbia University. Mr.

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SyCip is currently the Chairman of Macro Asia Corporation, Lufthansa Technik Philippines, Inc., Cityland Development Corporation, State Investment Trust, Inc. and Steag State Power, Inc. He is currently a director of various corporations, including Aboitiz Transport Systems, Inc., Belle Corporation, Stateland Group, Manila Electric Company, the PHINMA Group, Inc., Philippine Airlines, Inc., Benpres Holdings Corporation, First Philippine Holdings Inc., Philippine Hotelier, Inc. and Philam Life. LUCIO C. TAN, 71, Filipino, has been serving as Director of the Bank since December 8, 1999. He obtained his Bachelor of Science in Chemical Engineering from Far Eastern University in 1960. On October 25, 2003, he was conferred the degree of Doctor of Philosophy, Major in Commerce by the University of Santo Tomas. From his humble beginnings as the eldest child of Chua King Ha and Tan Yan Kee, Dr. Tan through hard work and perseverance, became Chairman of Allied Banking Corporation from 1977 to 1999. He is presently the Chairman and CEO of Philippine Airlines, Inc. and the Chairman of Asia Brewery, Inc., Basic Holdings Corporation, Himmel Industries, Inc. and Fortune Tobacco Corporation. Dr. Tan’s involvement in his numerous ventures did not deter him from sharing his time and resources with the needs of the community. In 1986, he founded the Tan Yan Kee Foundation, Inc. where he is Chairman and President. He is the Chairman Emeritus of the Federation of Filipino-Chinese Chamber of Commerce and Industry, Inc. (FFCCCII). He is also the President of the San Lorenzo Ruiz Mission Foundation, Inc. and Founder and Vice Chairman of the Foundation for Upgrading the Standard of Education, Inc. (FUSE). He is the Adviser/Benefactor of the medical scholarship program of Asia Brewery, Inc. and Benefactor/Honorary Adviser of other professional and socio-civic groups. For his outstanding achievements and leadership, Dr. Tan received numerous recognitions and awards both in the Philippines and abroad. Aside from his doctorate from the University of Santo Tomas, Dr. Tan was also conferred a Doctor of Humane Letters Degree (Honoris Causa) by the University of Guam, Guam, U.S.A. (June 1, 2003); and a Doctor of Applied Agriculture Degree (Honoris Causa) by the Central Luzon State University, Muñoz, Nueva Ecija (November 29, 2000); Doctor of Technology Management (Honoris Causa) by the Western Visayas College of Science and Technology, La Paz, Iloilo (March 27, 2004); Doctor of Science In International Business and Entrepreneurship (Honoraris Causa) by Cavite State University (October 8, 2004); Doctor of Humanities (Honoris Causa) by the Western Mindanao State University in Zamboanga; and Doctor of Business Management (Honoris Causa) by the St. Paul University Philippines in Tuguegarao, Cagayan. He was chosen as a Lifetime Achievement Awardee by the Dr. Jose P. Rizal Awards for Excellence (June 19, 2002); adopted to the Ancient Order of the Chamorri and designated Ambassadorat-large of the U.S. Island-territory of Guam (November 2, 2002); and conferred the Diploma of Merit by the Socialist Republic of Vietnam, one of the highest honors conferred by the Vietnamese Government on foreign nationals (January 17, 2002). Dr. Tan was named Outstanding Manilan for the year 2000 by the City Government of Manila (June 24, 2000); and conferred the UST Medal of

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Excellence in 1999, the highest award given by the Pontifical and Royal University of Santo Tomas. Aside from being named Most Distinguished Bicolano Business Icon in 2005. Dr. Tan was also conferred the following awards: “2003 Most Outstanding Member Award” by the Philippine Chamber of Commerce and Industry (PCCI) in recognition of his altruism and philanthropy, business acumen; hard work and perseverance in his numerous business ventures; Award of Distinction by the Cebu Chamber of Commerce and Industry (June 21, 2004); and the Award for Exemplary Civilian Service of the Philippine Medical Association (June 5, 2004). The latest in Dr. Tan’s string of achievements was his designation as Honorary Mayor and adopted son of Bacolod City last February 4, 2006. RICARDO M. TAN, 69, Filipino, was elected Director of the Bank on May 24, 2005. He obtained his Bachelor of Science in Economics (Money & Banking) from the University of San Francisco, California and his Master of Science in Economics (Money & Banking/Central Banking in Developing Countries) from the London School of Economics and Political Science, University of London. Mr. Tan is currently the President & CEO of the Philippine Deposit Insurance Corporation (“PDIC”) and Vice Chairman of the PDIC Board of Directors. He was also the Consultant of PDIC from August 2001 to February 2003 and Executive Vice President and Head, Insurance and Risk Management Sector, PDIC from 1997 to 2001. He was Deputy Director, Programs Department (Region West) of Asian Development Bank. He was former Vice President, Trust Department and concurrently Vice President and Treasurer, Treasury Department and subsequently Vice President of the Credit, Loans and Discounts Department of Rizal Commercial Banking Corporation. He was Central Bank Financial Attache at the Embassy of the Philippines in London, U. K. He worked as Presidential Staff Assistant, In-Charge of Office of Economic Affairs, Office of the President of the Philippines, Malacañang and Senior Economist, Economic Research Department, Central Bank of the Philippines. MACARIO U. TE, 76, Filipino, has been serving as Director of the Bank since December 8, 1999. He obtained his Bachelor of Science in Commerce at the Far Eastern University. Mr. Te is currently Director of PNB General Insurers Company, Inc., PNB Capital & Investment Corporation, Bulawan Mining Corporation, PNB Securities, Inc., PNB Holdings Corporation, PNB Remittance Center, Ltd., PNB Italy SPA and PNB International Finance Ltd. He is owner and Chairman of M.T. Holdings. He is also a Director of Beneficial-PNB Life and Insurance Co., Inc., Baguio Gold Holdings, Balabac Resources and Holdings, Nissan North EDSA and Oriental Petroleum and Minerals Corporaiton. He was a former Director of the Traders Royal Bank, Traders Hotel, Pacific Rim Oil Resources Corporation, Link World Construction Development Corporation, Suricon Resources Corporation and Palawan Consolidated Mining Corporation. He was Chairman of Autobus Industries Corporation from 1984 to 1995.

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RENATO J. FERNANDEZ, 69, Filipino, has been serving as Corporate Secretary of the Bank since July 16, 2002. He obtained his Bachelor of Science in Literature and Bachelor of Laws from the Ateneo de Manila (now Ateneo de Manila University). He is a member of the Philippine Bar. Mr. Fernandez is also the Assistant Corporate Secretary of PNB International Finance Ltd., PNB Remittance Center Ltd. and PNB Italy SPA. He was engaged in active law practice as a member of the Law Firm of Sen. Estanislao A. Fernandez and the Caparas, Ilagan and Masakayan Law Offices. He was Country Personnel and Industrial Relations Manager of Firestone Tire and Rubber Co., of the Philippines, Personnel Director then Head of Legal Affairs of Citibank N.A., Vice President and Group Head of Human Resource Management (seconded) of CityTrust Banking Corporation and Internal Legal Counsel of Citibank, N.A. from 1984 to 1996. Thereafter, he worked as Consultant on Legal Affairs for Citibank, N.A. and the Philippine Banking Corporation. In November 1996, he became General Counsel and Corporate Secretary of The Philippine Banking Corporation and later for the merged Philippine Banking Corporation, Global Business Bank and Asian Banking Corporation. He was formerly a Director and Past President of the following organizations – Personnel Management Association of the Philippines, Society of Fellows in Personnel Management, Legal Management Council of the Philippines and the Association of Bank Lawyers of the Philippines. The following are the Executive Officers of the Bank ANTHONY Q. CHUA, 54, Filipino, is Executive Vice President and Head of the Global Operations Sector of the Bank. He finished his Bachelor of Arts and Bachelor of Science Major in Accounting (Cum Laude) at the De la Salle University, Manila and his MBA and Doctorate in Finance from the Michigan State University. A certified public accountant, he started his banking career with Citibank in 1981 where he held the positions of Relationship Manager for the Institutional Banking Group, Risk Manager and Product Development Unit Head for the Investment Banking Group, Transaction Banking Head, and later Global Asset Management Head until 1995. He was President of the Philippine Bank of Communications from 1997 to 1998. In 1999, he joined SGV Manila as Project Consultant and later became a Partner of the Business Consulting Group in 2000 and the Risk Consulting Group in 2001. ASTERIO L. FAVIS, JR., 53, Filipino, is Executive Vice President and Head of the Treasury Group. He obtained his B. S. in Management Engineering (Cum Laude) from the Ateneo de Manila University in 1976. Prior to PNB, he was Vice President for Foreign Exchange and Treasury of the Philippine Commercial and International Bank from 1982 to 1988 and later assigned to the Office of the President until 1990. He was also Senior Vice President/Director of AsianBank Corporation from 1990 to 2000 and Senior Vice President/Director of AB Capital and Investment Corporation from 2000 to 2002. He is presently a stockholder/director of Favis Management & Development Corporation, Aspirations International, Inc. and Carnivorous Delights, Inc.

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CARMEN G. HUANG, 55, Filipino, is Executive Vice President, Chief Financial Officer and Chief of Staff of the President of the Bank. She obtained her Bachelor of Arts Major in Mathematics and her Bachelor of Science in Commerce Major in Accounting (Cum Laude) from St. Scholastica’s College in 1974. She is a CPA and she completed the academic requirements for her MBA at the Ateneo de Manila University. She worked with Land Bank of the Philippines for 16 years where she held the position of Senior Vice President. She was also EVP of UBIX Corporation, EVP/CFO of Crown Equities, Inc. and SVP & Chief of Staff to the President of Equitable PCIB before joining PNB in August 2002. She was a director of Ecology Savings Bank, Inc., Jardine Land, Inc. PCIB Properties, Inc., Strategic Property Holdings and Equitable PCI Life Insurance Corporation. CRIS S. CABALATUNGAN, 55, Filipino, is First Senior Vice President and Chief Audit Executive of the Bank. He obtained his Bachelor of Science in Commerce Major in Accounting (Cum Laude) from De La Salle College, Bacolod and is a certified public accountant. He previously worked for Citibank/Citigroup for 21 years (including a 3-year posting in the Singapore Regional Office as International Staff) where, among others, he held the positions of Vice President and Head of Consumer Banking Resident Auditor Program and Risk Management Division Head of the Consumer Bank’s Credit Cycle Group. He joined Global Bank in 2001 as Group Head and First Vice President of the Internal Audit Group until the Metrobank Group of Companies absorbed it. He was appointed in 2002 as Internal Audit Group Head and First Vice President of the Philippine Savings Bank, a subsidiary of Metrobank. SYLVIA CHAN-LIM, 56, Filipino, is First Senior Vice President and Treasurer of the Bank. She obtained her Bachelor of Science in Biochemistry from the University of Santo Tomas. She started her banking career at Allied Banking Corporation in 1977 as a Manager in the Treasury Department and rose to become a Senior Vice President. She also held positions as Director of Allied Forex Corporation and Allied Savings Bank, and Assistant Treasurer of Bonifacio Heritage Memorial Inc. In 2000, she was tapped to head the Treasury Group of PNB. Presently, she is the Group Head of the Budget Division and the Corporate Disbursing Office and Director of PNB Remittance Center, Inc., PNB Forex, Inc. and Baguio Gold Holdings SpA Corporation. MICHAEL O. DE JESUS, 47, Filipino, is First Senior Vice President and Head of the Corporate Banking Sector of PNB. He obtained his B. A. in Economics in 1981 from Union College in Schenectady, New York and his MBA Major in Finance in 1986 from The Wharton School of the University of Pennsylvania. Mr. de Jesus has held senior executive positions in credit and corporate banking at Citibank Manila, Citibank New York, Credit Lyonnias New York and The DaiIchi Kangyo Bank New York. Prior to joining PNB in August 2002, Mr. de Jesus was First Vice President and Head of the Corporate Bank of the United Coconut

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Planters Bank. He was also a Director of its subsidiaries, UCPB Leasing and Finance Corporation and UCPB Savings Bank. RAMON L. LIM, 54, Filipino, is First Senior Vice President and Sector Head for International Banking and Overseas Remittance Sector for Asia & Pacific including Australia New Zealand, Guam & Saipan and the Middle East. He obtained his Bachelor of Science in Commerce Major in Accounting (Magna Cum Laude) from the University of San Carlos in 1971. A certified public accountant, he completed his Masters in Business Management at the Asian Institute of Management (AIM) in 1980 as full scholar under the Post-Graduate Scholarship Program of Citibank Manila where he previously worked from 1976 to 1983. In 1984, he began his overseas posting at Citibank’s Head Office in New York, next at its Taipei Branch as Vice President and Deputy Treasurer and, finally at its Hongkong Regional Office as Currency Fund Manager. He then moved to become the Managing Director of Solid Pacific Finance Ltd., Hongkong from 1993 to 1995, and Investment Manager of MHK Properties & Investment Ltd., Hongkong from 1995 to 1997. Before joining PNB in 2002, he was Treasurer, then Business Manager & Trust Officer of Union Bank of the Philippines from 1997 to 2002. ISABELITA T. MANALASTAS-WATANABE, 52, Filipino, is First Senior Vice President and Sector Head of International Banking and Overseas Remittance for Europe, Israel and African Continent following her stint as Managing Director of PNB’s Japan Operations and First Senior Vice President and Area Head for Asia Pacific. She finished her Bachelor of Science in Business Economics in 1974 at the University of the Philippines and completed her M.A. in Economics in 1980 at Tsukuba Daigaku (Tokyo University). She has a Diploma in Japanese Language from the Osaka University of Foreign Studies and completed the Executive Program for Leaders in Development at Harvard University, USA. Before joining PNB, she was Finance Attache of the Philippine Embassy in Tokyo and Deputy Director of Asean-Japan Center, Tokyo. MA. ELENA S. SARMIENTO, 52, Filipino, is First Senior Vice President and Trust Officer of the Bank. She graduated Magna Cum Laude from the College of the Holy Spirit in 1975 with a degree in Bachelor of Science in Commerce major in Accounting. A certified public accountant, she also has Masteral Degree units in Business Administration at the De La Salle Graduate School of Business. She completed the American Bankers Association’s Trust Course at the National Trust School of the Northwestern University in Evanston, Illinois, USA. She graduated from the Philippine Trust Institute in 1984 as its Most Outstanding Graduate with an Award of Excellence. Prior to her appointment with PNB, she has had about 20 years of trust banking/investment management experience with various banks and financial institutions, including UCPB, Union Bank and Bancom Development Corporation. She was President of the Trust Officers Association of the Philippines in 2003 and currently a Director. She has also been a member of the

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Board of Trustees of the Trust Institute Foundation of the Philippines for the past 8 years. CYNTHIA V. JAVIER, 53, Filipino, is First Senior Vice President and Head of the Information Technology Group. She holds a degree in Bachelor of Science in Mathematics from the University of Santo Tomas. She started her banking career with Citibank where she held the position of Senior System Analyst. In 1988 up to 1990, she was the Vice President of Bank of Philippine Islands. She was also the Vice President of Citibank Global Finance Technology in Tokyo, Japan and Vice President for Cash Management Division of Citibank Latin America based on Ft. Lauderdale, Florida, U.S.A. RENATO A. CASTILLO, 52, Filipino, is the Chief Credit Officer and Head of the Remedial Management of the Bank. He finished his Bachelor Science in Commerce 1974 at the De La Salle University major in Accounting. He worked with Bank of America for nineteen (19) years where he held the various positions of Account Officer Group Head/VP and Country Credit Officer/VP. He joined JP Morgan Chase Bank in 1997 as Country Credit Officer/Vice President. He was appointed in 2003 as Senior Vice President of the Development Bank of the Philippines. EDGARDO T. NALLAS, 48, Filipino, is the First Senior Vice President and Head of the Human Resource Group (HRG). He obtained his degree in AB Economics (Accelerated) from the De La Salle University in 1977. He earned units in Master in Business Administration (MBA) from the said school. He started his career in banking in 1977 with Philippine Banking Corporation. In 1992, he joined Solidbank Corporation as an Assistant Vice President for the Human Resource Group. He moved on as Vice President of HRG for BA Savings Bank in 1997. Prior to joining PNB, Mr. Nallas was a Senior Vice President for HRG at the Philippine Bank of Communications. He is an active member of the Personnel Management Association of the Philippines (PMAP), and the Bankers Council for People Management (BCPM). He was a former Director and Vice President of BCPM and has handled the chairmanship of the various committees of the Council. PACITA P. HENSON, 38, Filipino, is the First Senior Vice President of the Global Marketing for Remittance & Overseas Lending and Card Marketing Sector of the Bank. She obtained her Bachelor of Arts Major in International Relations, Cum Laude from Mount Holyoke College, South Hadley, Massachusetts, U.S.A. and her Masters in Business Administration from the University of the Philippines. Before joining PNB, she was Country Marketing Director, American Express Bank Philippines. She was also previously connected with Western Union Philippines as Marketing Manager and Citibank N.A. as Asst. Vice President for marketing. Her marketing experience also includes stints as Account Officer with PCIBank and as Marketing Manager with the Philippine Exporters Foundation.

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RAFAEL Z. SISON, JR. , 50 , Filipino, is the Senior Vice President and Head of the Retail Banking Sector and Officer-in-Charge of the Consumer Finance Sector of the Bank. He is a graduate of Bachelor of Science in Business Administration Major in Management from the Ateneo de Davao College. Before joining PNB, he was First Vice President for Sales and Distribution Head of the Chinatrust Commercial Bank Corporation. He started his career in banking with Citytrust Banking Corporation as Field Sales Manager, then Branch Manager. He moved on to Solidabank where he rose from Branch Manager to Region Head. His retail banking experience also includes stints with United Overseas Bank as Head of its Retail and Branch Banking and Rizal Commercial Banking Corporation as Area Head of its Manila Branches. The following are the Board Advisors of the Bank JOSE A. R. MELO, 73, Filipino, was appointed Chairman of the Board of Advisors on June 25, 2002. He obtained his Bachelor of Laws (LlB) from the Manuel Luis Quezon University (MLQ) and his Master of Laws from the University of Santo Tomas. Justice Melo is currently a Director of PNB Remittance Center Inc., and Island Power Corporation. He is Chairman of PNOC Exploration Corporation as well as the Board of Directors of Fontana Development Corporation and Fontana Golf and Country Club.. He is also the Adviser to the Board of PNB General Insurers Co., Inc. Justice Melo is a member of the Philippine Bar. He was an Associate Justice of the Supreme Court from 1992 to 2002, Associate Justice of the Court of Appeals from 1979 to 1992. He also served as Commissioner of the Civil Service Commission. Justice Melo was an Associate Commissioner of the Professional Regulation Commission, and was a Staff member of the Legal Office, Office of the President rising from position of Executive Assistant and attaining the second highest position of Junior Presidential Staff Assistant now Presidential Director. Justice Melo was Confidential Assistant to the Chairman, Presidential Anti-Graft Committee, Legal Adviser, Board of Censors for Motion Pictures and Associate Attorney of the Diokno Law Office. ALEJANDRO R. ROCES, 81, Filipino, was appointed a Member of the Board of Advisors on May 25, 2004. He obtained his Bachelor of Fine Arts from the University of Arizona, U.S.A., his Master of Arts from the Far Eastern University and his Doctorate in Literature from Tokyo University, Japan. Mr. Roces is currently the Chairman of the College Assurance Plan Philippines, Inc., CAP Pension, CAP College, CAP Health Maintenance, Inc. Colegio de San Agustin, St. Louis University and St. Mary’s University. He is also Director of CAP Life, CAP Technologies, Inc. He also served as Chairman of the Movie & Television Review and Classification Board from March 2001 to June 2002. He was honored as National Artist for Literature in 2003.

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JOSE NGAW, 57, Filipino, was appointed a Member of the Board of Advisors on May 24, 2005. He obtained his Bachelor of Science in Commerce Major in Management (1st Honors-Gold Medalist) from Letran College, his Bachelor of Laws from the San Beda Law School (Dean’s List) and he is a candidate for MBA of the Ateneo Graduate School of Business. Mr. Ngaw is currently a Director of PNB Securities, Inc., PNB Remittance Company (Canada) and Bacnotan Steel, Industries, Inc. He is the Assistant to the Chairman of the Lucio Tan Group of Companies, Board Member of the University of the East, U.E.R.M., Air Philippines Corporation and Board Advisor of Philippine Airlines, Inc. He is also the Board Secretary of the Century Park Hotel and the Secretary General/Corporate Secretary of the Federation of Filipino-Chinese Chambers of Commerce & Industry. He was also engaged in law practice. SANTIAGO S. CUA, JR., 53, was appointed a Member of the Board of Advisors on May 24, 2005. He obtained his Bachelor of Science in Management Engineering from the Ateneo de Manila University in 1974. Mr. Cua is currently the Chairman of PNB Remittance Center Ltd. and a Director of PNB International Investment Corporation, PNB Corporation Guam and PNB Europe PLC. He is also a Director of Philippine Racing Club, Inc., Central Vegetable Oil Manufacturing, Pacific Oil Products, Inc., ACL Management Corporation and Trans-Visayan Marketing Inc., Iloilo. Mr. Cua is the Corporate Secretary of the International School, Manila. He has more than 20 years of banking experience, starting at the European Asian Bank AG from 1974 to 1984 where he served in various capacities in Germany, the Philippines and Taiwan and in Deutsche Bank Asia AG in Hamburg from 1985 to 1987. He was former Senior Executive Vice President of Westmont Bank from 1994 to 1998. From July 1998 to May 2003, he served as Senior Executive Vice President, Chief Operating Officer and Chief Lending Officer of the Bank. CIELO M. SALGADO, Ph.D., 64, Filipino, was appointed a Member of the Board of Advisors on May 24, 2005. She obtained her Bachelor of Science Major in Management at the Assumption College, Masters Degree in Economics at the Ateneo de Manila University and a doctorate Degree in Economics at the University of Sto. Tomas. She is presently the Chairperson of PNB General Insurers Company, Inc. and PNB Remittance Company (Canada) and a Director of Allied Savings Bank. She is a former PNB Director, former Chairperson of the National Service Corporation, PNB Investment Limited and PNB International Investment Corporation. She served PNB in various positions and retired as Vice President after 22 years before she was elected as Vice Governor of the Province of Pampanga for 2 terms. Ms. Salgado is a recipient of various awards from the Technical Education & Skills Development Authority (TESDA), the Philippine National Red Cross, Soroptimists International, the Girl Scouts of the Philippines, a Most Outstanding Kapampangan Awardee for Government Service (32 years), Luzon Journal and the Philippine National Bank itself. She is the Founder of the Adopt-A-Family Movement and at present a director and its administrator. She is the Chairperson of the Flames of Fire for Jesus Foundation and the Charter

45

President of the Antipolo Sandigan Foundation of the Philippines. She was recently elected director of the National Sandigan Foundation of the Philippines and is its Assistant Treasurer. C. Independent Directors Among the Directors, Ms. Florencia G. Tarriela and Mr. Washington Z. SyCip were elected as Independent Directors. Mr. Feliciano L. Miranda, Jr. was subsequently named by the Board as an Independent Director. Ms. Tarriela’s election as Independent Director is pending BSP approval although there is no issue from the SEC. D. Identity of Significant Employees There is no person who is not an executive officer, who is expected to make a significant contribution to the business. E. Family Relationship Directors Domingo Tee Chua and Lucio C. Tan are related by affinity as brothersin-law. F. Involvement in Certain Proceedings Except for Mr. Lucio C. Tan, neither the Directors nor any of the Executive Officers have, for a period covering the past five (5) years, reported: i) ii) iii) Any petition for bankruptcy filed by or against a business with which they are related as a general partner or executive officer; Any criminal conviction by final judgment or being subject to a pending criminal proceeding, domestic or foreign; Being subject to any order, judgment, or decree, of a competent court domestic or foreign, permanently or temporarily enjoining, barring, suspending or limiting involvement in any type of business, securities, commodities or banking activities; and Being found by a domestic or foreign court of competent jurisdiction (in a civil action), the Commission or comparable foreign body, or a domestic or foreign Exchange or other organized trading market or self regulatory organization, to have violated a securities or commodities law or regulation, and the judgment has not been reversed, suspended, or vacated.

iv)

Mr. Lucio C. Tan, in his capacity as Chairman of Fortune Tobacco Corporation, is the defendant in Criminal Case Nos. 98-38181 to 98-38189 pending before Branch 75 of the Metropolitan Trial Court of Marikina City, for violation of Section 253 of the old National Internal Revenue Code, in relation to Section 45 (on corporate income tax returns), Sections 100 and 114 (value-added tax returns), Section 127 (b) (ad valorem tax), and Section 252 (b) and (d) thereof.

46

Item No. 10 – Executive Compensation A. Executive Compensation Annual compensation of executive officers consists of a 14 month guaranteed cash emolument. There is no other form of compensation for services rendered by the executive officers to the Bank and its subsidiaries. In view of the Bank’s ongoing financial rehabilitation, no performance bonus or profit sharing has been granted to directors and executive officers for the past two years. B. Compensation of Directors The Directors receive a reasonable renumeration for each attendance at a Board meeting or any meeting of the Board Committees. Summary of Compensation Table
ANNUAL COMPENSATION (In Thousand Pesos) Year Salary

Name A. Mr. Omar Byron T. Mier 1/ President/Chief Executive Officer (CEO) and Vice Chairman B.Four most highly compensated Executive Officers other than the CEO: 1. Ms. Carmen G. Huang Executive Vice President 2. Mr. Anthony Q. Chua Executive Vice President 3. Mr. Asterio J. Favis Executive Vice President 4. Ms. Cynthia V. Javier First Senior Vice President CEO and four (4) most highly Compensated executive officers

Bonus

Others

Total

All other officers and directors (as a group unnamed)

Actual 2004 Actual 2005 Projecte d 2006 Actual 2004 Actual 2005 Projecte d 2006

13,272 13,143 13,400 481,058 509,652 586,000

2,265 2,287 2,300 81,808 85,596 98,500

126 126 126 39,332 42,430 48,500

15,663 15,556 15,826 602,198 637,678 733,000

1/

President & CEO effective April 11, 2005

47

D. Employment of Contracts and Termination of Employment and Change-in-Control Arrangements

All executive officers are covered by the Bank’s standard employment contract which guarantees annual compensation on a 14-month schedule of payment. In accordance with the Bank’s Amended By-Laws, Sec. 6.1, all officers with the rank of Vice President and up serve at the pleasure of the Board of Directors. E. Warrants and Options Outstanding: Repricing No warrants or options on the Bank’s shares of stock have been issued or given to the Directors or Executive Officers as a form of compensation for services rendered.

Item 11. Security Ownership of Certain and Beneficial Owners and Management A. Security Ownership of Certain Record (R) and Beneficial Owners (B) (more than 5%) as of March 31, 2006:
Name, address of Name of Beneficial Owner and record owner and relationship with Relationship with Record Owner Citizenship issuer Republic of the Philippines i Malacañang Palace Manila All Seasons Realty Corporation – 7,023,387 Shares Allmark Holdings Corp. – 14,624,256 Shares Domingo T. Chua – 133,057 Shares Donfar Mgt. Corp. – 34,138,651 Shares Lucio C. Tan 2 #30 Biak Na Bato Quezon City Filipino Percentage of Ownership 3.05%%

Title of Class Common Shares

No. of Shares Held 17,454,140 Shares

Filipino

443,879,707 shares

77.43%

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Dreyfuss Mutual Investments, Inc. – 7,298,081 Shares Dynaworld Holdings, Inc. – 8,107,051 Shares Fairlink Holdings Corp. – 9,945,960 Shares Fast Return Enterprises, Ltd.– 27,926,481 Shares Fil-Care Holdings, Inc. – 11,119,076 Shares Fragile Touch Investment Ltd. – 31,157,859 Shares Integrion Investments, Inc. – 7,298,081 Shares Ivory Holdings, Inc. – 8,780,714 Shares Kenrock Holdings Corp. – 10,522,961 Shares Kentron Holdings & Equities Corp. – 10,243,270 Shares Kentwood Develop- ment Corporation – 12,271,396 Shares La Vida Development Corp. – 4,123,000 Shares

49

Leadway Holdings, Inc. – 46,495,880 Shares Local Trade & Development Corp. – 5,836,153 Shares Lucio C. Tan – 10 Shares Luys Securities Co., Inc. – 1,686,000 Shares Mariano Tanenglian – 180,238 Shares Mandarin Securities Corporation 3,387,300 Shares Mavelstone International Ltd. – 34,055,186 Shares Merit Holdings & Equities Corp. – 4,377,119 Multiple Star Holdings Corp. – 21,925,853 Shares Opulent LandOwners, Inc. – 4,105,313 Shares Pioneer Holdings Equities, Inc. – 23,083,068 Shares Power Realty Develop-ment Corp. – 589,268 Shares

50

Profound Holdings, Inc. – 12,872,543 Shares Purple Crystal Holdings, Inc. – 9,374,238 Shares Safeway Holdings & Equities, Inc. – 8,477,826 Shares Society Holdings Corp. – 7,315,399 Shares Total Holdings Corp. – 4,387,186 Shares Triton Securities Corp. – 763,277 Shares Uttermost Success, Ltd. -36,523,715 Shares Witter Webber and Schwab Investment, Inc. 7,298,081 Shares Zebra Holdings, Inc – 6,432,773 Shares Philippine Deposit3 Insurance Corp. 2228 Chino Roces Ave., Makati City

Preferred Shares

Filipino

54,357,751 Shares4

9.48%

1/ The President of of the Philippines has the right to vote or direct the voting of shares held by the Republic of the Philippines 2/ As reported by the Bank in the Consolidated List of Stockholders and their Stockholdings for the Quarter Ended December 31, 2005 to the Bangko Sentral ng Pilipinas, Mr. Lucio C. Tan owns ten (10) shares in his name and represents stockholders owning a total of 443,879,707 shares or 77.43 %. 3/ It is expected that the Government will nominate the President of PDIC as the Proxy of PDIC during the Bank’s May 30, 2006 Annual Stockholders’ Meeting. As of date, the position of PDIC President is still vacant pending appointment of new incumbent by the President of the Philippines. 4/ Non-voting, non-cumulative, fully participating in dividends with the common shares; Convertible, at any time at the option of the holder who is qualified to own and hold common shares, to common shares on a one (1) preferred share to one (1) common share basis; With mandatory and automatic conversion into common shares upon sale of such preferred shares to any person other than the National Government or any government agency or government owned or controlled corporation; and With rights to subscribe to additional new preferred shares with all the features as herein provided, in the event that the Bank shall hereafter offer new common shares for subscription, in such number corresponding to the number of shares being offered.

51

B. Security Ownership of Management (Individual Directors and Executive Officers) as of March 31, 2006
Name of Beneficial Number and Owner and Amount of Shares Title of Relationship with Beneficially Owned Class Record Owner Common Florencia G. Tarriela 2 shares Shares Chairman P80.00 -doOmar Byron T. Mier 1/ 100 shares Vice Chairman P4,000.00 -doVirgilio R. Angelo 1 share Director P40 -doDomingo T. Chua 140,068 share Director P5,602,720 -doFeliciano L. Miranda 10 shares Independent Director P400.00 -doVicente S. Perez, Jr. 1 share Director P40.00 -doEric O. Recto 1 share Director P40.00 -doWashington Z. SyCip 34,010 shares Independent Director P1,360,400.00 -doLucio C. Tan 10 shares Director P400.00 -doRicardo M. Tan 4 shares Director P160.00 -doMacario U. Te 10 shares Director P400.00 -doIsabelita T. Manalastas 216 shares Watanabe P8,640.00 FSVP -doCynthia V. Javier 5 shares First Senior Vice Presiden P200.00 TOTAL 174,438 shares P6,977,520.00 -doAll Executive Officers & 182,443 shares and Directors P7,297,720.00 as a group 1/ Appointed President & CEO effective April 11, 2005 % of Citizenship Ownership Filipino 0.0000003489% Filipino Filipino Filipino Filipino Filipino Filipino 0.0000174445% 0.0000001744% 0.0244341906% 0.0000017445% 0.0000001744% 0.0000001744%

American 0.0059328813% Filipino Filipino Filipino Filipino 0.0000017445% 0.0000006978% 0.0000017445% 0.0000376802%

Filipino

0.0000008722% 0.0003039433% 0.0318263061%

52

C. Voting Trust Holders of 5% or More There are no voting trust holders of 5% or more. After the Joint Sale on August 12, 2005, the Government’s 44.98% voting rights which were at par with the Lucio Tan Group’s was reduced to 12.53% (for the Republic of the Philippines and PDIC). The Government was allowed to retain seats in the Board but its other nominees before the Joint Sale were requested to stay by the controlling Lucio Tan Group (77.43%) as an expression of confidence and in the interest of corporate continuity. On the other hand, the Government continues to support the Bank even after the Joint Sale. Many of the government’s nominees remain in the boards of PNB subsidiaries here in abroad. The Memorandum of Agreement of the Republic of the Philippines and the PDIC on the one hand, and the Lucio Tan Group, on the Other hand, dated May 3, 2002 has effectively expired on September 16, 2005.

D. Changes in Control On August 12, 2005, the Government and the Lucio Tan Group offered for joint sale their shares representing 67% equity interest in the Bank. After the bidding, the members of the Lucio Tan Group exercised their right to match the offer of P43.77 per share. As a consequence, the Lucio Tan Group consolidated control of its equity ownership in the Bank to 77.43%.

Item 12. Certain Relationships and Related Transactions In the ordinary course of business, the Philippine National Bank (Parent Company) has loans and other transactions with its subsidiaries and affiliates, and with certain directors, officers, stockholders and related interests (DOSRI). Under the Bank’s the Parent Company policy, these loans and other transactions are made substantially on the same terms as with other individuals and businesses of comparable risks. The amount of direct accommodations to each of the Parent Company’s DOSRI, 70% of which must be secured, should not exceed the amount of their respective deposits and book value of their respective investments in the Parent Company. In the aggregate, DOSRI loans generally should not exceed the Parent Company’s capital funds or 15% of the Parent Company’s total loan portfolio, whichever is lower. As of December 31, 2005 and 2004, the Parent Company is in compliance with such regulations.

53

For the past two (2) years, credit transactions with Philippine Air Lines, Asia Brewery, Inc., Fortune Tobacco, and Air Philippines are classified as DOSRI since these companies are known to be affiliated with the Lucio Tan Group of Companies. Mr. Lucio C. Tan, a Director of the bank, is the Chairman & CEO of Philippine Air Lines, also the Chairman of Asia Brewery, Inc. and Fortune Tobacco. Mr. Domingo T. Chua, also a Director of the Bank, is the Chairman of Air Philippines and a Director of Asia Brewery, Inc. Loans to these companies were granted by the Bank before Messrs. Tan (since December 1999) and Chua (since April 2001) became Directors of the Bank, and these loans continue to be classified as performing. Other than the foregoing, there is no other transaction with the Bank for the past two (2) years wherein any director, executive officer, significant security holder, or members of their immediate family had or is to have a direct or indirect material interest.

PART IV – CORPORATE GOVERNANCE

Item 13. Corporate Governance

PNB adheres to the principles of good governance as culled from leading best practices internationally and on a national level. It subscribes to the philosophy of integrity, accountability and transparency in its manner of doing business, fair dealing with its clients, investors, staff, stockholders and its various publics, professionalism in managing the company and its subsidiaries and respect for the laws and regulations of the countries affecting its business. Internally, it follows a philosophy of rational checks and balances as well as a structured approach to its operating processes. To this end the bank has promulgated a Revised Manual on Corporate Governance and appointed a senior officer to ensure compliance with the provisions of the Manual. The Directors, Advisors and Executive Officers of the Bank have taken a course on Corporate Governance to be able to understand and implement the principles thereof in a consistent and satisfactory manner. • Measures to fully comply with Corporate Governance – Under the Manual, compliance with the principles of good corporate governance principally starts with the Board of Directors. It is the Board’s responsibility to foster the long-term success of the corporation and secure its sustained competitiveness in accordance with its fiduciary responsibility. In order to have a central focus for the bank’s activities, the Board has appropriately established the company’s Mission and Vision Statements.

54

To have a structure for compliance, the Manual established and defined the responsibilities and functions of the Board and the various Committees necessary for good governance, i.e., the Corporate Governance Committee, the Audit and Compliance Committee, the Risk Management Committee and the roles of the External and Internal auditors and the Corporate Secretary. The Manual also established an evaluation system by which the Directors and the Executive Officers can rate the bank periodically against certain leading practices and principles on good corporate governance. Last but not least, the Manual made provisions for the protection of Investors’ Rights including Minority Interests. • Evaluation System The evaluation system which was provided to measure or determine the extent of compliance with the Manual of Corporate Governance consists of a SelfAssessment Questionnaire which is filled up by the various functional groups indicating the compliance rating of certain institutional units/processes/activities which include the Board of Directors. Management, Organizational and Procedural Controls, the Nomination process, Independent Audit Mechanisms and Disclosure and Transparency among others. The evaluation process includes a self-assessment scorecard which is filled up by the Members of the Board. The above are submitted to the Compliance Officer who issues the required certificate of compliance with the corporate governance mechanism to the SEC. The Manual provides for a set of graduated penalties for non-compliance with/violation of its provisions. • No Material deviations Because of the heightened sense of corporate responsibility among the staff and enhanced culture of compliance within the whole bank, there have been no material deviations noted by the Compliance Officer. • Plans to improve Corporate Governance The Manual was updated on March 2004, January 28, 2005 and April 8, 2006. Apart from these there are no other plans to change the Manual for the moment.

55

PART V - EXHIBITS AND SCHEDULES Item 14. Exhibits and Reports on SEC Form 17-C A. Exhibits 1) Audited Financial Statements of Philippine National Bank and its Subsidiaries as of December 31, 2005 & 2004 (as restated) and for the years ended December 31, 2005 & 2004 (as restated) and Notes to Financial Statements 2) Report of Independent Auditors 3) Statement of Management’s Responsibility B. Reports on SEC Form 17-C
Item Reported Report Date

1) Approval and confirmation of the resignation from the service of the Bank of Mr. Jose Vicente M. Cuison, Special Assistant to the President effective January 31, 2005. 2) Notice from Mr. Cesar V. Purisima, Secretary of Finance, acting for the Republic of the Philippines and Mr. Ricardo M. Tan, President & CEO of Philippine Deposit Insurance Corporation advising that the National Government will initiate the joint sale of 67% shares of the National Government and the Lucio Tan Group in PNB, pursuant to the provisions of the MOA dated May 3, 2002 and the Joint Sale Agreement dated August 1, 2002. 3) Approval of the resignation of Mr. Lorenzo V. Tan, President and CEO, effective April 8, 2005 and appointment of Mr. Omar Byron T. Mier as Acting President of the Bank effective April 11, 2005. 4) Approval of the following nominees to the Board of Directors of the Philippine National Bank for the year 2005: Mr. Virgilio R. Angelo, Mr. Domingo T. Chua, Mr. Omar Byron T. Mier, Mr. Feliciano L. Miranda, Jr., Mr. Vincent S. Perez, Mr. Eric O Recto, Mr. Washington Z. SyCip, Mr. Lucio C. Tan, Mr. Ricardo M. Tan, Ms. Florencia G. Tarriela and Mr. Macario U. Te.

January 14, 2005

March 16, 2005

April 8, 2005

May 23, 2005

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5) Approval of the election of the following Directors during the 2005 Annual Stockholder’ Meeting to serve for a period of one (1) year until their successors shall have been elected and qualified: Mr. Virgilio R. Angelo, Mr. Domingo T. Chua, Mr. Omar Byron T. Mier, Mr. Feliciano L. Miranda, Jr., Mr. Vincent S. Perez, Mr. Eric O. Recto, Mr. Washington Z. SyCip, Mr. Lucio C. Tan, Mr. Ricardo M. Tan, Ms. Florecia G. Tarriela and Mr. Macario U. Te. (1) Approval of the election of the Corporate Officers during the Organizational Meeting: Ms. Florencia G. Tarriela, Chairperson of the Board, Mr. Omar Byron T. Mier, Vice Chairman & President, Ms. Sylvia Chan-Lim, Treasurer, Mr. Renato J. Fernandez, Corporate Secretary, Mr. Alvin C. Go, Chief Legal Counsel and Chris S. Cabalatungan, Internal Auditor. 6) Approval of the retirement from the service of the Bank of Mr. Danilo C. Castro, Senior Vice President, effective June 30, 2005. 7) Listing of the additional 85,925,293 PNB Warrants and 85,925,293 Underlying PNB Common Shares. 8) Approval of the hiring of Mr. Renato A. Castillo as Head of Remedial Management Group and Chief Credit Officer, effective upon assumption of duties. 9) Received official communication from the Joint Technical Committee that the Government has received a formal notice from the Lucio Tan Group that they will match the bid of Union Bank for the government shares in the 67% equity sale of PNB. 9) Completion of the acquisition by the Lucio Tan Group of the shareholdings of ROP and PDIC comprising of 45,216,215 common shares and 140,817,693 preferred shares. 10) Approval of the resignation of Messrs. Ismael R. Sandig, Executive Vice President for Retail Banking Sector/Consumer Finance Sector and Federico Y. Cadiz, Executive Vice President, Asset Management Group effective August 31, 2005 and September 15, 2005, respectively. 11) Advise of Ms. Cristina Q. Orberta, OIC and EVP of the PDIC and Chairperson of the Joint Technical Committee that the Government will be offering its 20,670,435 PNB shares to small local investors (SLI) as provided under Section 2 (f) of R.A. 7886 dated February 20, 1995.

May 24, 2005

July 1, 2005

July 14, 2005

July 29, 2005

August 19, 2005

August 26, 2005

August 29, 2005

December 5, 2005

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COVER SHEET

A S 0 9 6 - 0 0 5 5 5 5
SEC Registration Number

P H I L I P P I N E I D I A R I E S

N A T I O N A L

B A N K

A N D

S U B S

(Company’s Full Name)

P N B

F i n a n c i a l

C e n t e r ,

P r e s i d e n t

D

i o s d a d o y C i t y

M a c a p a g a l

B o u l e v a r d ,

P a s a

(Business Address: No. Street City/Town/Province)

Mr. Omar Byron T. Mier
(Contact Person)

891-6040 to 70
(Company Telephone Number)

1 2
Month

3 1
Day

A A F S
(Form Type)

Month

Day

(Fiscal Year)

(Annual Meeting)

(Secondary License Type, If Applicable)

Dept. Requiring this Doc.

Amended Articles Number/Section Total Amount of Borrowings

Total No. of Stockholders To be accomplished by SEC Personnel concerned

Domestic

Foreign

File Number

LCU

Document ID

Cashier

STAMPS Remarks: Please use BLACK ink for scanning purposes.

*SGVMC107795*

PHILIPPINE NATIONAL BANK AND SUBSIDIARIES
Financial Statements December 31, 2005 and 2004 and Report of Independent Auditors

SGV & CO

SyCip Gorres Velayo & Co.
6760 Ayala Avenue 1226 Makati City Philippines

Phone: (632) 891-0307 Fax: (632) 819-0872 www.sgv.com.ph BOA/PRC Reg. No. 0001 SEC Accreditation No. 0012-F

Report of Independent Auditors

The Stockholders and the Board of Directors Philippine National Bank PNB Financial Center President Diosdado Macapagal Boulevard Pasay City

We have audited the accompanying statements of condition of Philippine National Bank and Subsidiaries (the Group) and the statements of condition of Philippine National Bank (the Parent Company) as of December 31, 2005 and 2004 and the related statements of income, changes in capital funds and cash flows for the years then ended. These financial statements are the responsibility of the Group’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the Philippines. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in Note 9 to the financial statements, to take advantage of incentives under Republic Act (RA) No. 9182, The Special Purpose Vehicle Act of 2002, and at the same time improve its chances of recovering from its non-performing loans (NPL), the Parent Company sold certain NPL to special purpose vehicle (SPV) companies. In accordance with regulatory accounting policies prescribed by the Bangko Sentral ng Pilipinas (BSP) for banks and financial institutions availing of the provisions of RA No. 9182, losses amounting to =4.3 billion in 2005 and =1.1 billion in 2004 from the sale of the P P NPL to the SPV companies, representing the allowance for impairment losses specifically provided for the NPLs but released to cover other impairment losses of the Parent Company, were deferred over a ten-year period. As of January 1, 2005, upon adoption of Philippine Accounting Standard 39, the Parent Company had no longer set up allowance for impairment losses on the NPL sold in 2005. Had the allowance for impairment losses on the sold NPL in 2005 been set up as of January 1, 2005 and the 2004 loss been charged against operations as required by accounting principles generally accepted in the Philippines (Philippine GAAP), deferred charges and capital funds as of December 31, 2005 and 2004 would have decreased by =5.2 billion and =1.1 billion, respectively, and 2005 net income would P P have increased by P124.8 million and 2004 net income would have decreased by =1.1 billion. = P

SGV & Co is a member practice of Ernst & Young Global

-2-

In 2004, the Parent Company received zero-coupon notes as part of the consideration for the NPL sold. As of December 31, 2004, the loss of =1.9 billion representing the difference between the P present value and the carrying value of these zero-coupon notes was deferred as allowed by BSP. Philippine GAAP requires that the loss be charged to current operations. Had such loss been recognized in 2004, investments in bonds and other debt instruments and capital funds as of December 31, 2004 would have decreased by =1.9 billion. Net income in 2004 would have decreased P by =1.9 billion. On January 1, 2005, the Parent Company recognized the loss on the zero-coupon P notes as a direct charge to deficit. In our opinion, the financial statements referred to above present fairly, in all material respects the financial position of the Group and of the Parent Company as of December 31, 2005 and 2004, and the results of their operations and their cash flows for the years then ended in conformity with Philippine GAAP, except for the effects on the 2005 and 2004 financial statements of deferring the losses on the sale of NPL to SPV companies as discussed in the third paragraph and the effects on the 2004 financial statements of not recognizing the loss on the zero-coupon notes received from the sale of NPL as discussed in the fourth paragraph.

SYCIP GORRES VELAYO & CO.

(original signed) Renato J. Galve Partner CPA Certificate No. 37759 SEC Accreditation No. 0081-A Tax Identification No. 102-087-055 PTR No. 4180840, January 2, 2006, Makati City March 24, 2006

PHILIPPINE NATIONAL BANK AND SUBSIDIARIES STATEMENTS OF CONDITION
(In Thousand Pesos)

Group December 31 2004 2005 RESOURCES Cash and Other Cash Items (Note 15) Due from Bangko Sentral ng Pilipinas (Note 15) Due from Other Banks Interbank Loans Receivable (Note 30) Securities Held Under Agreements to Resell (Note 15) Financial Assets at Fair Value Through Profit or Loss (Note 7) Trading Account Securities, at fair value (Note 7) Available-for-Sale Investments, at fair value (Notes 8 and 15) Held-to-Maturity Investments, at amortized cost (Notes 8 and 24) Investment Securities - net (Note 8) Loans and Receivables - net (Notes 9 and 25) Receivables from Customers - net (Notes 9 and 25) Furniture, Fixtures, Equipment and Leasehold Improvements, at cost - net (Note 10) Bank Premises, at appraised value - net (Notes 10) Investments in Subsidiaries and an Associate (Notes 2 and 11) Investment Properties - net (Notes 2 and 12 and 21) Other Resources - net (Note 13) 5,266,817 – 79,730,962 – 788,877 14,540,365 684,171 26,847,767 9,745,868 P223,119,024 = – 63,033,848 – 56,151,608 726,764 14,680,353 643,718 27,989,971 18,679,150 = P219,741,024 40,243,664 – P6,102,118 = 3,719,362 5,696,540 16,914,045 12,300,000 538,468 –
(As Restated Note 3)

Parent Company 2004 2005 P5,765,899 = 3,719,362 5,098,751 16,881,081 12,300,000 512,091 – 38,084,187 5,091,685 – 77,554,727 – 700,345 14,536,391 5,500,591 26,765,021 9,394,360 P221,904,491 =
(As Restated Note 3)

= P3,342,672 3,765,737 7,051,470 18,921,030 4,000,000 – 754,703

= P3,342,466 3,765,737 6,092,449 18,882,242 4,000,000 – 712,229 – – 60,930,559 – 54,002,036 633,584 14,669,857 5,509,803 27,989,395 17,965,720 = P218,496,077

LIABILITIES AND CAPITAL FUNDS Liabilities Deposit Liabilities (Note 15) Demand Savings Time Bills and Acceptances Payable (Notes 2 and 16) Due to Bangko Sentral ng Pilipinas (Note 18) Margin Deposits and Cash Letters of Credit (Note 18) Manager’s Checks and Demand Drafts Outstanding (Note 18) Accrued Taxes, Interest and Other Expenses (Notes 18) Subordinated Debt (Note 17) Other Liabilities (Note 18) (Forward) P15,849,762 = 127,672,738 24,304,277 167,826,777 13,145,874 115,704 69,527 472,805 4,939,651 2,958,437 10,679,448 200,208,223 = P14,476,485 120,041,480 26,491,088 161,009,053 13,534,658 103,326 137,991 477,893 6,139,490 3,000,000 9,764,975 194,167,386 P15,698,886 = 127,657,683 26,739,311 170,095,880 12,443,283 115,704 69,527 472,805 4,795,600 2,958,437 9,658,377 200,609,613 = P14,433,937 119,997,438 28,548,468 162,979,843 12,895,473 103,326 137,991 477,893 6,076,517 3,000,000 8,740,575 194,411,618

-2-

Group December 31 2004
(As Restated -

Parent Company 2004
(As Restated -

2005 Capital Funds Capital stock (Notes 2 and 19) Capital paid in excess of par value (Note 2) Surplus reserves (Notes 2 and 24) Deficit (Notes 2, 3 and 9) Revaluation increment on land and buildings (Notes 2 and 10) Accumulated translation adjustment (Notes 2 and 11) Net unrealized gain (loss) on available-for-sale investments (Note 8) Minority Interest 806,825 22,817,435 93,366 22,910,801 P223,119,024 = 1,480,301 217,479 P22,929,837 = 545,745 495,118 (3,657,870)

Note 3)

2005 P22,929,837 = 545,745 495,118 (4,926,731) 1,480,301 – 770,608 21,294,878 – 21,294,878 P221,904,491 =

Note 3)

= P22,929,837 545,745 481,694 (267,142) 1,443,486 496,817 (143,548) 25,486,889 86,749 25,573,638 = P219,741,024

= P22,929,837 545,745 481,694 (1,173,317) 1,439,328 – (138,828) 24,084,459 – 24,084,459 = P218,496,077

See accompanying Notes to Financial Statements.

PHILIPPINE NATIONAL BANK AND SUBSIDIARIES STATEMENTS OF INCOME
(In Thousand Pesos, Except Earnings Per Share Amounts)

Group 2004 (As Restated 2005 INTEREST INCOME ON Loans and receivables (Notes 9 and 25) Investment securities (Note 8) Deposits with banks and others INTEREST EXPENSE ON Deposit liabilities (Note 15) Bills payable and other borrowings (Notes 16 and 17) NET INTEREST INCOME PROVISION FOR IMPAIRMENT LOSSES (Note 14) NET INTEREST INCOME AFTER PROVISION FOR IMPAIRMENT LOSSES OTHER INCOME Service charges, fees and commissions Foreign exchange gains - net Trading and investment securities gains - net (Note 7) Equity in net earnings of a subsidiary and an associate (Note 11) Miscellaneous (Notes 23) OTHER EXPENSES Compensation and fringe benefits (Notes 20 and 25) Occupancy and equipment-related costs (Note 21) Depreciation and amortization (Notes 10 and 12) Taxes and licenses (Note 22) Miscellaneous (Notes 22 and 23) INCOME BEFORE INCOME TAX PROVISION FOR INCOME TAX (Note 22) NET INCOME ATTRIBUTABLE TO: Equity Holders of the Parent Company (Note 28) Minority Interest Earnings Per Share Attributable to Equity Holders of the Parent Company (Note 28) Basic Diluted P1.08 = P1.08 = = P0.61 = P0.61 4,729,539 2,691,263 1,085,548 940,205 49,665 1,676,013 6,442,694 3,438,937 857,259 800,452 1,001,462 2,554,859 8,652,969 2,519,264 1,891,726 P627,538 = P620,921 = 6,617 P627,538 = 2,270,729 2,995,724 1,346,674 417,898 30,219 1,879,763 6,670,278 3,333,362 759,212 763,447 868,844 2,239,464 7,964,329 976,678 618,142 = P358,536 = P351,917 6,619 = P358,536 P6,340,391 = 4,145,956 600,435 11,086,782 4,728,664 1,124,366 5,853,030 5,233,752 504,213 Note 3) = P4,753,299 4,015,209 468,401 9,236,909 4,845,233 1,156,612 6,001,845 3,235,064 964,335

Parent Company Years Ended December 31 2004 (As Restated 2005 P6,118,239 = 4,064,096 530,918 10,713,253 4,789,760 1,097,448 5,887,208 4,826,045 502,855 4,323,190 1,806,022 576,223 922,447 Note 3) = P4,552,212 3,900,620 387,745 8,840,577 4,863,293 1,125,620 5,988,913 2,851,664 932,395 1,919,269 2,134,003 845,131 412,336


1,496,224 4,800,916 2,774,334 699,450 769,078 973,868 1,924,620 7,141,350 1,982,756 1,731,778 P250,978 = P250,978 = – P250,978 =


1,750,748 5,142,218 2,701,819 625,031 722,788 841,498 1,652,809 6,543,945 517,542 478,793 = P38,749 = P38,749 – = P38,749

P0.44 = P0.44 =

= P0.07 = P0.07

See accompanying Notes to Financial Statements.

PHILIPPINE NATIONAL BANK AND SUBSIDIARIES STATEMENTS OF CHANGES IN CAPITAL FUNDS
(In Thousand Pesos)
Group Net Unrealized Gain (Loss) on AFS P126,966 =

Capital Stock Balance at December 31, 2003, as previously reported Effect of change in accounting for (Note 3): Minority interest - Philippine Accounting Standard (PAS) 1 Retirement benefits - PAS 19 Investment properties - PAS 40 Adjustment on revaluation increment Balance at December 31, 2003, as restated Transfer to surplus reserves Net deduction from revaluation increment Net movement in unrealized loss on available-for-sale (AFS) investments Translation adjustment during the year Total income and expenses recognized directly in equity Net income for the year, as restated (Note 3) Total income and expenses for the year Balance at December 31, 2004 = P22,929,837

Additional Paid-in Capital P545,745 =

Surplus Reserves =445,146 P

Deficit (P3,558,857) =

Accumulated Revaluation Translation Increment Adjustment P1,291,648 = P433,702 =

Total = P22,214,187

Minority Total Interest Capital Funds P– = =22,214,187 P

– – – – 22,929,837 – – – – – – – P22,929,837 =

– – – – 545,745 – – – – – – – P545,745 =

– – – – 445,146 36,548 – – – – – – P481,694 =

– (17,868) 3,222,471 (228,257) (582,511) (36,548) – – – – 351,917 351,917 (P267,142) =

– – – 155,214 1,446,862 – (3,376) – – (3,376) – (3,376) P1,443,486 =

– – – – 433,702 – – – 63,115 63,115 – 63,115 P496,817 =

– – – – 126,966 – – (270,514) – (270,514) – (270,514)

– (17,868) 3,222,471 (73,043) 25,345,747 – (3,376) (270,514) 63,115 (210,775) 351,917 141,142

80,130 – – – 80,130 – – – – – 6,619 6,619 P86,749 =

80,130 (17,868) 3,222,471 (73,043) 25,425,877 – (3,376) (270,514) 63,115 (210,775) 358,536 147,761 P25,573,638 =

(P143,548) P25,486,889 = =

-2-

Group Additional Paid-in Capital P545,745 = – – – – 545,745 – 545,745 – – – – – – – – – P545,745 = Accumulated Revaluation Translation Increment Adjustment P1,288,272 = – – – 155,214 1,443,486 1,443,486 – – – – 36,815 – 36,815 – 36,815 P1,480,301 = P496,817 = – – – – 496,817 – 496,817 – – – – – (279,338) (279,338) – (279,338) P217,479 = Net Unrealized Gain (Loss) on AFS

Capital Stock Balance at December 31, 2004, as previously reported Effect of change in accounting for (Note 3): Minority interest - PAS 1 Retirement benefits - PAS 19 Investment properties - PAS 40 Adjustment on revaluation increment Balance at December 31, 2004, as restated Cumulative effect of change in accounting for financial instruments - PAS 39 (Note 3) Balance at January 1, 2005 Valuation loss on SPV subordinated notes (Note 9) Amortization of deferred losses (Note 9) Transfer to surplus reserves Net movement in unrealized gain on AFS Net addition to revaluation increment Translation adjustment during the year Total income and expenses recognized directly in equity Net income for the year Total income and expenses for the year Balance at December 31, 2005 = P22,929,837 – – – – 22,929,837 – 22,929,837 – – – – – – – – – P22,929,837 =

Surplus Reserves =481,694 P – – – – 481,694 – 481,694 – – 13,424 – – – – – – P495,118 =

Deficit (P3,242,226) = – 13,073 3,190,268 (228,257) (267,142) (2,075,890) (2,343,032) (1,868,299) (54,036) (13,424) – – – – 620,921 620,921 (P3,657,870) =

Total

Minority Total Interest Capital Funds = P– 86,749 – – – 86,749 – 86,749 – – – – – – – 6,617 6,617 P93,366 = = P22,356,591 86,749 13,073 3,190,268 (73,043) 25,573,638 (2,056,029) 23,517,609 (1,868,299) (54,036) – 930,512 36,815 (279,338) 687,989 627,538 1,315,527 P22,910,801 =

(P143,548) P22,356,591 = = – – – – (143,548) 19,861 (123,687) – – – 930,512 – – 930,512 – 930,512 P806,825 = – 13,073 3,190,268 (73,043) 25,486,889 (2,056,029) 23,430,860 (1,868,299) (54,036) – 930,512 36,815 (279,338) 687,989 620,921 1,308,910 P22,817,435 =

-3Parent Company Accumulated Translation Adjustment P433,702 = – (433,702) – – – – – – – – – – P– = Net Unrealized Gain (Loss) on AFS P126,966 = – 4,633 – – – 131,599 – – (270,427) (270,427) – (270,427) (P138,828) =

Capital Stock Balance at December 31, 2003, as previously reported Effect of change in accounting for (Note 3): Retirement benefits - PAS 19 Investment in subsidiaries in separate financial statements - PAS 27 Investment in an associate in separate financial statements - PAS 28 Investment properties - PAS 40 Adjustment on revaluation increment Balance at December 31, 2003 as restated Transfer to surplus reserves Net deduction from revaluation increment Net unrealized loss on AFS Total income and expenses recognized directly in equity Net income for the year, as restated (Note 3) Total income and expenses for the year Balance at December 31, 2004 = P22,929,837 – – – – – 22,929,837 – – – – – – P22,929,837 =

Additional Paid-in Capital P545,745 = – – – – – 545,745 – – – – – – P545,745 =

Surplus Reserves P445,146 = – – – – – 445,146 36,548 – – – – – P481,694 =

Deficit (P3,558,857) = (17,868) (501,242) (91,764) 3,222,470 (228,257) (1,175,518) (36,548) – – – 38,749 38,749 (P1,173,317) =

Revaluation Increment P1,291,648 = – (6,400) – – 155,214 1,440,462 – (1,134) – (1,134) – (1,134) P1,439,328 =

Total Capital Funds P22,214,187 = (17,868) (936,711) (91,764) 3,222,470 (73,043) 24,317,271 – (1,134) (270,427) (271,561) 38,749 (232,812) P24,084,459 =

-4Parent Company Accumulated Translation Adjustment P496,817 = – (496,817) – – – – – – – – – – – – – – P– = Net Unrealized Gain (Loss) on AFS (P143,548) = – 4,720 – – – (138,828) 19,861 (118,967) – – – 889,575 – 889,575 – 889,575 P770,608 =

Capital Stock Balance at December 31, 2004, as previously reported Effect of change in accounting for (Note 3): Retirement benefits - PAS 19 Investment in subsidiaries in separate financial statements - PAS 27 Investment in an associate in separate financial statements - PAS 28 Investment properties - PAS 40 Adjustment on revaluation increment Balance at December 31, 2004, as restated Cumulative effect of change in accounting for financial instruments - PAS 39 (Note 3) Balance at January 1, 2005 Valuation loss on SPV subordinated notes (Note 9) Amortization of deferred losses (Note 9) Transfer to surplus reserves Net movement in unrealized gain on AFS Net addition to revaluation increment Total income and expenses recognized directly in equity Net income for the year Total income and expenses for the year Balance at December 31, 2005 = P22,929,837 – – – – – 22,929,837 – 22,929,837 – – – – – – – – P22,929,837 =

Additional Paid-in Capital P545,745 = – – – – – 545,745 – 545,745 – – – – – – – – P545,745 =

Surplus Reserves P481,694 = – – – – – 481,694 – 481,694 – – 13,424 – – – – – P495,118 =

Deficit (P3,242,226) = 13,073 (784,191) (121,984) 3,190,268 (228,257) (1,173,317) (2,068,633) (3,241,950) (1,868,299) (54,036) (13,424) – – – 250,978 250,978 (P4,926,731) =

Revaluation Increment P1,288,272 = – (4,158) – – 155,214 1,439,328 – 1,439,328 – – – – 40,973 40,973 – 40,973 P1,480,301 =

Total Capital Funds P22,356,591 = 13,073 (1,280,446) (121,984) 3,190,268 (73,043) 24,084,459 (2,048,772) 22,035,687 (1,868,299) (54,036) – 889,575 40,973 930,548 250,978 1,181,526 P21,294,878 =

See accompanying Notes to Financial Statements.

PHILIPPINE NATIONAL BANK AND SUBSIDIARIES STATEMENTS OF CASH FLOWS (In Thousand Pesos)
Parent Company Years Ended December 31 2004 2004 (As Restated (As Restated Note 3) Note 3) 2005 = P976,678 964,335 763,447 (249,551) (385,578) (30,219) 7,210 P1,982,756 = 502,855 769,078 (483,469) (102,238) – 9,212 = P517,542 932,395 722,787 (249,551) (385,578) – 7,210 Group

2005 CASH FLOWS FROM OPERATING ACTIVITIES Income before income tax Adjustments for: Provision for impairment losses (Note 14) Depreciation and amortization (Notes 10 and 12) Gain on sale of investment property Gain on foreclosure Equity in net earnings of investees (Note 11) Dividends received (Note 11) Changes in operating resources and liabilities: Decrease (increase) in amounts of: Financial assets at fair value through profit or loss/Trading account securities (Note 7) Loans and receivables Other resources Increase (decrease) in amounts of: Deposit liabilities (Note 15) Due to Bangko Sentral ng Pilipinas (Note 18) Margin deposits and cash letters of credit (Note 18) Manager’s checks and demand drafts outstanding (Note 18) Accrued taxes, interest and other expenses (Note 18) Other liabilities Net cash generated from operations Income taxes paid Net cash provided by operating activities CASH FLOWS FROM INVESTING ACTIVITIES Decrease (increase) in amounts of: Interbank loans receivables Available-for-sale investments Held-to-maturity investments Investments in subsidiaries and an associate Proceeds from sale of investment property Net acquisition of bank premises, furniture fixtures, equipment and leasehold improvements (Note 10) Net cash provided by (used in) investing activities CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from (settlement of) bills and acceptances payable (Note 16) Proceeds from subordinated debt (Note 17) Net cash provided by (used in) financing activities NET INCREASE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR Cash and other cash items Due from Bangko Sentral ng Pilipinas Due from other banks Interbank loans receivable (Note 30) Securities held under agreements to resell
(Forward)

P2,519,264 = 504,213 800,452 (483,469) (102,238) (49,665) 9,212

216,235 (5,594,019) 4,579,070 6,817,724 12,378 (68,464) (5,088) (1,199,839) 403,846 8,359,612 (505,581) 7,854,031

247,752 (1,172,583) 2,017,794 15,093,865 (74,738) (64,198) (154,698) (2,496,435) 2,687,205 18,130,286 (480,314) 17,649,972

200,138 (5,429,572) 4,274,137 7,116,037 12,378 (68,464) (5,088) (1,285,988) 679,791 8,171,563 (522,063) 7,649,500

253,670 (826,079) 2,466,411 14,688,745 (74,738) (64,198) (154,698) (2,449,613) 2,522,176 17,906,481 (342,010) 17,564,471

2,346,334 (11,191,803) 8,670,327 – 2,982,533 (275,148) 2,532,243

(2,346,334) 851,109 (16,605,981) 43,031 2,136,251 (343,604) (16,265,528)

2,346,334 (9,033,469) 6,697,986 – 3,096,748 (276,376) 2,831,223

(2,346,334) 851,022 (16,830,998) 111,499 2,136,251 (320,003) (16,398,563)

(388,784)

(388,784) 9,997,490

984,730 3,000,000 3,984,730 5,369,174

(452,190)

(452,190) 10,028,533

965,359 3,000,000 3,965,359 5,131,267

3,342,672 3,765,737 7,051,470 16,574,696 4,000,000 34,734,575

3,257,207 1,115,502 5,807,556 13,785,136 5,400,000 29,365,401

3,342,466 3,765,737 6,092,449 16,535,908 4,000,000 33,736,560

3,205,026 1,115,502 5,142,524 13,742,241 5,400,000 28,605,293

-2Parent Company Years Ended December 31 2004 2004 (As Restated (As Restated Note 3) Note 3) 2005 Group

2005 CASH AND CASH EQUIVALENTS AT END OF YEAR Cash and other cash items Due from Bangko Sentral ng Pilipinas Due from other banks Interbank loans receivable (Note 30) Securities held under agreements to resell

P6,102,118 = 3,719,362 5,696,540 16,914,045 12,300,000 P44,732,065 =

= P3,342,672 3,765,737 7,051,470 16,574,696 4,000,000 = P34,734,575

P5,765,899 = 3,719,362 5,098,750 16,881,081 12,300,000 P43,765,092 =

= P3,342,466 3,765,737 6,092,449 16,535,908 4,000,000 = P33,736,560

See accompanying Notes to Financial Statements.

PHILIPPINE NATIONAL BANK AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS

1. General Information Philippine National Bank (the Parent Company) was incorporated in 1916 and started commercial operations that same year. Its principal place of business is at PNB Financial Center, President Diosdado Macapagal Boulevard, Pasay City. As of December 31, 2005, the Parent Company is owned 77.43% by Lucio Tan Group (LTG) and 12.53% by the National Government (NG). As of December 31, 2004, the Parent Company was owned 44.98% by LTG and 44.98% by NG. The Parent Company has 33,089 and 33,439 shareholders as of December 31, 2005 and 2004, respectively. The Parent Company provides a full range of banking and other financial services to corporate, middle-market and retail customers, the NG, local government units (LGU’s) and governmentowned and controlled corporations (GOCC’s) and various government agencies. The Parent Company’s principal commercial banking activities include deposit-taking, lending, bills discounting, foreign exchange dealing, investment banking, fund transfers/remittance servicing and a full range of retail banking and trust services through its 324 domestic and 33 overseas branches and offices in 2005 and 324 domestic and 29 overseas branches and offices in 2004. The Parent Company’s international subsidiaries have a network of 69 and 66 offices in 2005 and 2004, respectively, in key cities of the United States of America (USA), Canada, Western Europe, Middle East and Asia. The Parent Company and its Subsidiaries (the Group) are engaged in a number of diversified financial and related businesses such as merchant banking, remittance servicing, non-life insurance, leasing, stock brokerage, foreign exchange trading and related services. A certain associate of the Parent Company is also engaged in other services such as financing of small and medium-sized industries, life-insurance, as well as financial advisory services. The accompanying financial statements of the Group and of the Parent Company were authorized for issue by the Parent Company’s board of directors (BOD) on March 24, 2006.

2. Restructuring and Rehabilitation The Parent Company is currently operating under a rehabilitation program pursuant to the Memorandum of Agreement (MOA) signed by the Republic of the Philippines, the Philippine Deposit Insurance Corporation (PDIC) and the LTG on May 3, 2002. Pursuant to the MOA, the following measures have been implemented: (1) Capital Restructuring i. The Parent Company instituted a capital reduction exercise as of December 31, 2001, reducing the par value of its common shares from P60 per share to =40 per share, = P

*SGVMC107795*

-2-

resulting in a total capital reduction of =7.6 billion. This resulted in a decrease in the P authorized capital stock of the Parent Company from =50.0 billion divided into P 833,333,334 common shares to =33.3 billion divided into 833,333,334 common shares. P The reduction in par value and the amendment to the articles of incorporation of the Parent Company were approved by the BOD of the Parent Company on May 17, 2002 and by the Philippine Securities and Exchange Commission (SEC) on July 23, 2002. ii. On May 16, 2002, the Bangko Sentral ng Pilipinas (BSP) approved the following: (a) booking of an appraisal increment of =431.8 million for the year ended P December 31, 2001 on branch premises and recognition of the same for the purpose of determining the Parent Company’s capital adequacy ratio; and (b) booking of translation adjustment of P1.6 billion for the year ended December 31, 2001 representing the increase = in peso value of the Parent Company’s investment in foreign subsidiaries, for the purpose of the Rehabilitation Plan and as an exception to existing BSP regulations, provided that the same shall be excluded for dividend distribution purposes. iii. The translation adjustment of =1.6 billion was applied to eliminate the Parent Company’s P remaining deficit of =1.3 billion as of December 31, 2001, after applying the total P reduction in par value amounting to P7.6 billion as a result of the capital reduction = exercise. This corporate act was approved by the SEC on November 7, 2002, subject to the following conditions: (a) the remaining translation adjustment of =310.7 million as of P December 31, 2001 (shown in the statements of condition as part of Capital Paid in Excess of Par Value) will not, without the prior approval of the SEC, be used for or applied towards any provisions for losses that may be incurred in the future; and (b) for purposes of declaration of dividends, any future surplus account of the Parent Company shall be restricted to the extent of the deficit wiped out by the translation adjustment. The foregoing capital restructuring measures were aimed at reducing the deficit in the capital funds of the Parent Company which amounted to =8.9 billion as of December 31, P 2001. The Parent Company’s deficit before and after the quasi-reorganization follows (in thousand pesos): Deficit before the quasi-reorganization (balance at December 31, 2001) Reduction in par value during the year Application of translation adjustment to deficit on quasi-reorganization Deficit after the quasi-reorganization Transfer to capital paid in excess of par value

=8,877,094 P (7,561,409) (1,626,430) (310,745) =310,745 P

-3-

(2) Debt-to-Equity Conversion In 2002, convertible preferred shares were issued to the PDIC as payment for the =7.8 billion P borrowed by the Parent Company from the PDIC. This increased (i) the authorized capital stock of the Parent Company to =50.0 billion consisting of 1,054,824,557 common shares P with a par value of =40 each and 195,175,444 convertible preferred shares with a par value of P = P40 each and (ii) the issued capital stock of the Parent Company to =22.9 billion consisting of P 378,070,472 common shares with a par value of =40 each and 195,175,444 convertible P preferred shares with a par value of P40 each. = (3) Assignment of Certain Government Accounts to the PDIC On July 30, 2002, the Parent Company and the PDIC signed an agreement whereby the Parent Company transferred and conveyed by way of “dacion en pago”, or payment in kind, its rights and interests to the loans of the NG, certain LGU’s, certain GOCC’s and various government agencies and certain debt securities issued by various government entities (the Government accounts), to the PDIC. The “dacion en pago” arrangement reduced the Parent Company’s outstanding obligations arising from the financial assistance given to the Parent Company by the BSP and the PDIC. The accrual of interest incurred by the Parent Company on the government accounts and =10.0 billion payable to the PDIC ceased on October 1, 2001. P After the completion of the corporate actions and rehabilitation set out above (especially, the conversion of debt to equity and the “dacion en pago” arrangement), the balance of the Parent Company’s outstanding obligations to the PDIC was =6.1 billion. This balance was restructured P into a term loan of 10 years, with interest payable at 91-day treasury bills (T-bills) rate plus 1.00% (Note 16). In line with the rehabilitation program of the Parent Company as approved under Monetary Board (MB) Resolution No. 626 dated April 30, 2003, the Parent Company and the BSP entered into a Memorandum of Understanding (MOU) on September 16, 2003. Pursuant to the MOU, the Parent Company shall comply to the full extent of its capability with the following directives of MB Resolution No. 649, among others: Maintain a strong management team supported by competent staff; Improve the Parent Company’s past due ratio; Sell the PNB Financial Center; Dispose real and other properties owned or acquired (ROPOA) (now investment property); and (5) Comply with certain prescribed limits. (1) (2) (3) (4)

-4-

3. Summary of Significant Accounting Policies Basis of Financial Statement Preparation The accompanying financial statements have been prepared in compliance with the accounting principles generally accepted in the Philippines (Philippine GAAP) as set forth in Philippine Financial Reporting Standards (PFRS). The financial statements are prepared under the historical cost convention as modified for the measurement at fair value of derivatives, land and buildings, and trading and investment securities other than those classified as held-to-maturity (HTM) and loans and receivables. The financial statements of the Parent Company reflect the accounts maintained in the Regular Banking Unit (RBU) and Foreign Currency Deposit Unit (FCDU). The financial statements individually prepared for these units are combined and inter-unit accounts are eliminated. The books of accounts of the RBU are maintained in Philippine pesos, while those of FCDU are maintained in their original currencies. For financial reporting purposes, FCDU accounts and foreign currency-denominated accounts in RBU are translated into their equivalents in Philippine pesos based on the Philippine Dealing System weighted average rate (PDSWAR) prevailing at the end of the year (for resources and liabilities) and at the average PDSWAR for the year (for income and expenses). Foreign exchange differentials arising from foreign currency transactions and restatements of foreign currency-denominated resources and liabilities, except non-monetary assets, are credited to or charged against operations in the year in which the rates change. The accounting policies have been consistently applied to all the periods presented, except for those relating to the classification and measurement of financial instruments. The comparative figures for 2004 were restated to reflect the adjustments resulting from adoption of new and revised accounting standards, except Philippine Accounting Standard (PAS) 32, Financial Instruments: Disclosure and Presentation and PAS 39, Financial Instruments: Recognition and Measurement, for which the Philippine SEC has allowed to be applied from January 1, 2005. Consolidation The Group financial statements comprise the financial statements of the Parent Company and the following wholly owned and majority owned subsidiaries:
Country of Incorporation Effective Functional Percentage Currency of Ownership 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00

Subsidiary PNB Capital and Investment Corporation (PNB Capital) PNB Forex, Inc. PNB Holdings Corporation (PNB Holdings) PNB Securities, Inc. PNB Corporation – Guam PNB International Investments Corporation PNB Europe PLC PNB International Finance Limited PNB Italy – SpA PNB Remittance Center, Ltd.

Industry

Financial Markets Philippines Philippine Peso - do - do - do - do - do - do - do - do - do - do Guam US dollar - do USA US dollar - do United Kingdom Pounds Sterling Hong Kong - do Hong Kong dollar - do Italy Euro Hong Kong Services Hong Kong dollar

(Forward)

-5-

Subsidiary Omicron Asset Portfolio (SPV-AMC), Inc. Opal Portfolio Investments (SPV-AMC), Inc. Tanzanite Investments (SPV-AMC), Inc. Tau Portfolio Investments (SPV-AMC), Inc. Japan - PNB Leasing and Finance Corporation (Japan - PNB Leasing)

Country of Industry Incorporation Financial Markets Philippines - do - do - do - do - do - do - do - do -

Effective Functional Percentage Currency of Ownership Philippine Peso 100.00 - do 100.00 - do 100.00 - do 100.00 - do 60.00

The financial statements of PNB Venture Capital Corporation (PVCC), a 60%-owned subsidiary, are not included in the Group’s financial statements due to immateriality of balances and PVCC is already approved for liquidation. The financial statements of the Subsidiaries are prepared for the same reporting year as the Parent Company, using consistent accounting policies. Subsidiaries are consolidated from the date on which control is transferred to the Group and cease to be consolidated from the date on which control is transferred out of the Group. The results of Subsidiaries acquired or disposed of during the financial year are included in or excluded from the Group statements of income from the respective dates of their acquisition or disposal. Intercompany balances and transactions and resulting unrealised profits and losses are eliminated in full on consolidation. Changes in Accounting Policies On January 1, 2005, the following new accounting standards became effective and were adopted by the Group: • PAS 19, Employee Benefits, provides for the accounting for long-term and other employee benefits. The adoption of this standard resulted in the recognition of a net transition liability of P17.9 million as a charge against deficit as of January 1, 2004. Net income in 2004 = increased by =30.9 million. The change in accounting policy also resulted in the inclusion of P additional disclosures in the accompanying financial statements.

• PAS 21, The Effects of Changes in Foreign Exchange Rates, prohibits the capitalization of foreign exchange losses. The standard also requires the entities in the Group to determine their functional currency. The adoption of this standard has no material impact on the financial statements. • PAS 30, Disclosures in the Financial Statements of Banks and Similar Financial Institutions, provides for the required disclosure and presentation in respect of the accounts of banks and similar financial institutions. It also provides that any provision for general banking risks is treated as an appropriation of surplus and should not be included in the determination of net income for the period. The effect of adopting this standard resulted in the reallocation of the general loan loss reserves as of January 1, 2005 amounting to P342.3 million to cover the = additional specific reserves required upon the adoption of PAS 39. The standard requires more comprehensive disclosure about the Group’s financial instruments, whether recognized or unrecognized in the financial statements. The required new disclosures are reflected in the financial statements, where applicable.

-6-

PAS 32, Financial Instruments: Disclosure and Presentation, covers the disclosure and presentation of all financial instruments. The standard requires more comprehensive disclosures about the Group’s financial instruments. New disclosure requirements include terms and conditions of financial instruments used by the Group, types of risks associated with financial instruments (market risk, foreign exchange risk, price risk, credit risk, liquidity risk and cash flow risk), fair value information of financial assets and financial liabilities, and the Group’s financial risk management policies and objectives. The standard also requires financial instruments to be classified as debt or equity in accordance with their substance and not their legal form. The standard also requires presentation of financial assets and financial liabilities on a net basis when, and only when, an entity: (a) currently has a legally enforceable right to set off the recognized amounts; and (b) intends either to settle on a net basis, or to realize the asset and settle the liability simultaneously.

• PAS 39, Financial Instruments: Recognition and Measurement, establishes the accounting and reporting standards for recognizing and measuring the Group’s financial assets and financial liabilities. It also covers the accounting for derivative instruments. The effect of adopting this standard did not result in the restatement of prior year financial statements as allowed by the SEC under its Memorandum Circular 19 Series of 2004. The total cumulative effect of adopting the standard amounting to =2.1 billion, however, was P charged against deficit as of January 1, 2005. The disclosures required by PAS 32 are reflected in the financial statements, where applicable. The adoption of the provision of PAS 39 on the classification and related measurement, other than impairment, of financial assets and liabilities on the Group financial statements resulted in an increase in deficit as of January 1, 2005 amounting to P80.9 million. = Prior to January 1, 2005, the adequacy of allowance for impairment losses on loans and other receivables and risk assets was determined based on management criteria and BSP requirements. The effect of adopting PAS 39 provisions on impairment of financial resources as of January 1, 2005 amounted to =8.2 billion, net of the general reserves reallocated to P specific reserves. However, allowance for impairment losses charged to deficit as of January 1, 2005 amounted to =1.9 billion, net of the =1.9 billion loss on the zero-coupon notes P P received in 2004 as consideration of the non-performing loans (NPL) sold to special purpose vehicle (SPV) companies which was separately charged to deficit on January 1, 2005. As of December 31, 2004, this loss on the zero-coupon notes was not recognized in the financial statements. In 2005, the Parent Company sold certain NPL to an SPV company at a loss of =4.4 billion. P The Parent Company availed of the incentives under Republic Act (RA) No. 9182 on the deferral of losses incurred from the sale of NPL to SPV companies. Accordingly, as of January 1, 2005, no allowance for impairment losses on these NPLs was set up in the financial statements. The Group adopted the fair valuation method for all its derivative transactions. The effect of adopting fair valuation method resulted in an increase in deficit as of January 1, 2005 amounting to =74.2 million. P

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• PAS 40, Investment Property, prescribes the accounting treatment for investment property and related disclosure requirements. The Group adopted the cost model in accounting for its investment property. The effect of adopting the cost model in accounting for ROPOA qualified as investment property resulted in a net decrease in deficit as of December 31, 2003 by =3.2 billion. Net income decreased by =32.2 million in 2004. Previously, ROPOA were P P carried at the lower of total outstanding exposure at the time of foreclosure or bid price, less allowance for impairment losses (i.e. net realizable value). • PFRS 4, Insurance Contract, specifies the financial reporting for all insurance contracts (including reinsurance contracts) that an entity issues and to reinsurance contracts that it holds. • PFRS 5, Non-current Assets Held for Sale and Discontinued Operations, specifies the accounting for assets held for sale and the presentation and disclosure of discontinued operations. As of December 31, 2005, the Group had no assets that qualify as noncurrent assets held for sale and discontinued operations.

The Group also adopted in 2005 the following revised standards: • PAS 1, Presentation of Financial Statements, provides a framework within which an entity assesses how to present fairly the effects of transactions and other events; provides the base criteria for classifying liabilities as current or noncurrent; prohibits the presentation of income from operating activities and extraordinary items as separate line items in the statements of income; and specifies the disclosures about key sources of estimation uncertainty and judgments that management has made in the process of applying the entity’s accounting policies. It also requires changes in the presentation of minority interest in the statements of condition and statements of income. PAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, removes the concept of fundamental error and the allowed alternative to retrospective application of voluntary changes in accounting policies and retrospective restatement to correct prior period errors. It defines material omission or misstatements, and describes how to apply the concept of materiality when applying accounting policies and correcting errors. PAS 10, Events after the Balance Sheet Date, provides a limited clarification of the accounting for dividends declared after the statement of condition date. PAS 16, Property, Plant and Equipment, provides additional guidance and clarification on the recognition and measurement of items of property, plant and equipment. It also provides that each part of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item shall be depreciated separately. PAS 17, Leases, provides a limited revision to clarify the classification of a lease of land and buildings and prohibits expensing of initial direct costs in the financial statements of lessors. PAS 24, Related Party Disclosures, provides additional guidance and clarity in the scope of the standard, the definitions and the disclosures for related parties. It also requires disclosure of the total compensation of key management personnel by benefit type.

• •

• •

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PAS 27, Consolidated and Separate Financial Statements, reduces alternatives in accounting for subsidiaries in the consolidated financial statements and in accounting for investments in the separate financial statements of a parent company, venturer or investor. The adoption of this standard in the Parent Company financial statements resulted in the increase in deficit amounting to =501.2 million as of December 31, 2003. However, accumulated equity income P reversed to deficit represents the income received after the quasi-reorganization as discussed in Note 2. Other downward adjustments to capital funds representing the Parent Company’s share in revaluation increment, net unrealized loss on available-for-sale investments (AFS) and equity translation adjustment of the subsidiaries as of January 1, 2004 amounted to =438.5 million. The accumulated translation adjustment reversed excludes those that have P been closed to deficit on restructuring date as discussed in Note 2. Net income of the Parent Company decreased by P282.6 million in 2004. = PAS 28, Investments in Associates, reduces alternatives in accounting for associates in the consolidated financial statements and in accounting for investments in the separate financial statements of an investor. The effect of adopting this standard in the Parent Company financial statements resulted in an increase in deficit as of December 31, 2003 amounting to =91.8 million. Net income of the Parent Company in 2004 decreased by =30.2 million. P P PAS 33, Earnings per Share, prescribes principles for the determination and presentation of earnings per share for entities with publicly traded shares, entities in the process of issuing ordinary shares to the public, and any entities that calculate and disclose earnings per share. PAS 36, Impairment of Assets, establishes the frequency of impairment testing for certain intangibles and provides additional guidance on the measurement of an asset’s value in use. PAS 38, Intangible Assets, provides additional clarification on the definition and recognition of certain intangibles.

• •

The adoption of the above new and revised accounting standards involved changes in accounting policies and the Group has accordingly restated the comparative financial statements retroactively in accordance with the transitional provisions of these accounting standards. The tables and related notes below provide the reconciliation of financial position as of December 31, 2004 and 2003 and the results of operations for 2004 (in thousand pesos) following the adoption of PFRS:
Group Parent Company December 31, 2004 (end of last period presented under previous GAAP) Effect of Effect of Previous Previous Transition Transition PFRS GAAP GAAP to PFRS to PFRS =3,342,672 P =– P =3,342,672 P =3,342,466 P =– P 3,765,737 7,051,470 18,921,030 4,000,000 754,703 63,033,848 56,151,608 726,764 14,680,353 a b c 782,704 24,827,015 18,403,652 P216,441,556 = – – – – – – – – – (138,986) 3,162,956 275,498 =3,299,468 P 3,765,737 7,051,470 18,921,030 4,000,000 754,703 63,033,848 56,151,608 726,764 14,680,353 643,718 27,989,971 18,679,150 =219,741,024 P 3,765,737 6,092,449 18,882,242 4,000,000 712,229 60,930,559 54,002,036 633,584 14,669,857 7,059,371 24,826,439 17,684,027 =216,600,996 P – – – – – – – – – (1,549,568) 3,162,956 281,693 =1,895,081 P

Account Description RESOURCES Cash and Other Cash Items Due from Bangko Sentral ng Pilipinas Due from Other Banks Interbank Loans Receivable Securities Held under Agreements to Resell Trading Account Securities, at fair value Investment Securities - net Receivables from Customers - net Furniture, Fixtures, Equipment and Leasehold Improvements, at cost - net Bank Premises, at appraised value - net Investments in Subsidiaries and an Associate - net Investment Properties - net Other Resources - net

Item

PFRS P3,342,466 = 3,765,737 6,092,449 18,882,242 4,000,000 712,229 60,930,559 54,002,036 633,584 14,669,857 5,509,803 27,989,395 17,965,720 =218,496,077 P

(Forward)

-9-

Account Description LIABILITIES AND CAPITAL FUNDS Liabilities Deposit Liabilities Demand Savings Time Bills and Acceptances Payable Due to Bangko Sentral ng Pilipinas Margin Deposits and Cash Letters of Credit Manager’s Checks and Demand Drafts Outstanding Accrued Taxes, Interest and Other Expenses Subordinated Debt Other Liabilities Capital Funds Preferred stock Common stock Capital paid in excess of par value Surplus reserves Deficit Revaluation increment on land and buildings Accumulated translation adjustment Net unrealized loss on available-forsale investments Minority Interest

Item

Group Parent Company December 31, 2004 (end of last period presented under previous GAAP) Effect of Effect of Previous Transition Previous Transition GAAP GAAP to PFRS PFRS to PFRS

PFRS

=14,476,485 P 120,041,480 26,491,088 161,009,053 13,534,658 103,326 137,991 477,893 6,043,362 3,000,000 9,778,681 194,084,965 7,807,018 15,122,819 545,745 481,694 (3,242,226) 1,288,272 496,817 (143,548) 22,356,591 – 22,356,591 P216,441,556 =

=– P – – – – – – – 96,128 – (13,706) 82,427 – – – – 2,975,084 155,214 – – 3,130,298 86,749 3,217,047 =3,299,468 P

=14,476,485 P 120,041,480 26,491,088 161,009,053 13,534,658 103,326 137,991 477,893 6,139,490 3,000,000 9,764,975 194,167,386 7,807,018 15,122,819 545,745 481,694 (267,142) 1,443,486 496,817 (143,548) 25,486,889 86,749 25,573,638 =219,741,024 P

=14,433,937 P 119,997,438 28,548,468 162,979,843 12,895,473 103,326 137,991 477,893 5,980,389 3,000,000 8,669,489 194,244,405 7,807,018 15,122,819 545,745 481,694 (3,242,226) 1,288,272 496,817 (143,548) 22,356,591 – 22,356,591 =216,600,996 P

=– P – – – – – – – 96,128 – 71,086 167,217 – – – – 2,068,909 151,056 (496,817) 4,720 1,727,868 – 1,727,868 =1,895,081 P

= P14,433,937 119,997,438 28,548,468 162,979,843 12,895,473 103,326 137,991 477,893 6,076,517 3,000,000 8,740,575 194,411,618 7,807,018 15,122,819 545,745 481,694 (1,173,317) 1,439,328 – (138,828) 24,084,459 – 24,084,459 =218,496,077 P

d e

f g h i j

Account Description RESOURCES Cash and Other Cash Items Due from Bangko Sentral ng Pilipinas Due from Other Banks Interbank Loans Receivable Securities Held under Agreements to Resell Trading Account Securities, at fair value Investment Securities - net Receivables from Customers - net Furniture, Fixtures and Equipment and Leasehold Improvements, at cost - net Bank Premises, at appraised value - net Investments in Subsidiaries and an Associate - net Investment Properties - net Other Resources - net

Item

Previous GAAP P3,257,207 = 1,115,502 5,807,556 13,785,136 5,400,000 1,002,455 47,326,768 60,040,313 678,833 14,869,381

Group Parent Company December 31, 2003 (Date of Transition) Effect of Effect of Transition Transition Previous GAAP to PFRS to PFRS PFRS =– P – – – – – – – – – (118,902) 3,191,276 150,097 =3,222,471 P =3,257,207 P 1,115,502 5,807,556 13,785,136 5,400,000 1,002,455 47,326,768 60,040,313 678,833 14,869,381 620,709 28,073,850 18,396,153 =200,373,863 P =3,205,026 P 1,115,502 5,142,524 13,742,241 5,400,000 965,899 44,998,375 58,205,304 607,687 14,812,915 6,737,815 24,881,999 18,042,548 = P197,857,835 =– P – – – – – – – – – (1,147,889) 3,191,276 147,597 =2,190,984 P

PFRS = P3,205,026 1,115,502 5,142,524 13,742,241 5,400,000 965,899 44,998,375 58,205,304 607,687 14,812,915 5,589,926 28,073,275 18,190,145 =200,048,819 P

k l m

739,611 24,882,574 18,246,056 P197,151,392 =

LIABILITIES AND CAPITAL FUNDS Liabilities Deposit Liabilities Demand Savings Time Bills and Acceptances Payable Due to Bangko Sentral ng Pilipinas Margin Deposits and Cash Letters of Credit Manager’s Checks and Demand Drafts Outstanding Accrued Taxes, Interest and Other Expenses Other Liabilities

=13,122,823 P 106,610,304 26,182,061 145,915,188 12,549,928 178,064 202,189 632,591 8,374,387 7,084,858 174,937,205

=– P – – – – – – – 17,868 (7,087) 10,781

=13,122,823 P 106,610,304 26,182,061 145,915,188 12,549,928 178,064 202,189 632,591 8,392,255 7,077,771 174,947,986

=13,223,617 P 106,571,865 28,495,616 148,291,098 11,930,114 178,064 202,189 632,591 8,262,278 6,147,314 175,643,648

=– P – – – – – – 17,868 70,032 87,900

= P13,223,617 106,571,865 28,495,616 148,291,098 11,930,114 178,064 202,189 632,591 8,280,146 6,217,346 175,731,548

n o

(Forward)

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Account Description Capital Funds Preferred stock Common stock Capital paid in excess of par value Surplus reserves Deficit Revaluation increment on land and buildings Accumulated translation adjustment Net unrealized gain on availablefor-sale investments Minority Interest

Item

Previous GAAP =7,807,018 P 15,122,819 545,745 445,146 (3,558,857) 1,291,648 433,702 126,966 22,214,187 – 22,214,187 P197,151,392 =

Group Parent Company December 31, 2003 (Date of Transition) Effect of Effect of Transition Transition Previous GAAP to PFRS to PFRS PFRS =– P – – 2,976,346 155,214 – – 3,131,560 80,130 3,211,690 =3,222,471 P =7,807,018 P 15,122,819 545,745 445,146 (582,511) 1,446,862 433,702 126,966 25,345,747 80,130 25,425,877 =200,373,863 P =7,807,018 P 15,122,819 545,745 445,146 (3,558,857) 1,291,648 433,702 126,966 22,214,187 – 22,214,187 =197,857,835 P =– P – – 2,383,339 148,814 (433,702) 4,633 2,103,084 – 2,103,084 =2,190,984 P

PFRS = P7,807,018 15,122,819 545,745 445,146 (1,175,518) 1,440,462 – 131,599 24,317,271 – 24,317,271 =200,048,819 P

p q h i j

Reconciliation of 2004 results of operations (in thousand pesos) upon adoption of PFRS follows:
Group Effect of Transition to PFRS =– P – – – – – – – 123,422 Parent Company Effect of Previous Transition to PFRS GAAP =4,552,212 P 3,900,620 387,745 8,840,577 4,863,293 1,125,620 5,988,913 2,851,664 808,973 =– P – – – – – –

Item INTEREST INCOME ON Receivables from customers Trading and investment securities Deposits with banks and others INTEREST EXPENSE ON Deposit liabilities Bills payable and other borrowings NET INTEREST INCOME PROVISION FOR IMPAIRMENT LOSSES NET INTEREST INCOME AFTER PROVISION FOR IMPAIRMENT LOSSES OTHER INCOME Service charges, fees and commissions Foreign exchange gain - net Trading and investment securities gains - net Equity in net earnings of a subsidiary and an associate Miscellaneous

Previous GAAP =4,753,299 P 4,015,209 468,401 9,236,909 4,845,233 1,156,612 6,001,845 3,235,064

PFRS =4,753,299 P 4,015,209 468,401 9,236,909 4,845,233 1,156,612 6,001,845 3,235,064 964,335

PFRS =4,552,212 P 3,900,620 387,745 8,840,577 4,863,293 1,125,620 5,988,913 2,851,664 932,395

r

840,913

123,422

2,394,151 2,995,724 1,346,674 417,898 s t 30,219 1,487,566 6,278,081

123,422 – – – – 392,197 392,197

2,270,729 2,995,724 1,346,674 417,898 30,219 1,879,763 6,670,278

2,042,691 2,134,003 845,131 412,336 331,586 1,346,752 5,069,808

123,422 – – – (331,586) 403,996 72,410

1,919,269 2,134,003 845,131 412,336 – 1,750,748 5,142,218

OTHER EXPENSES Compensation and fringe benefits Taxes and licenses Occupancy and equipment-related costs Depreciation and amortization Miscellaneous INCOME BEFORE INCOME TAX PROVISION FOR INCOME TAX NET INCOME

u

v

3,364,303 868,844 759,212 469,089 2,239,464 7,700,911 971,321 618,142 = P353,179

(30,941) – – 294,358 – 263,418 5,357 – =5,357 P

3,333,362 868,844 759,212 763,447 2,239,464 7,964,329 976,678 618,142 P358,536 =

2,732,760 841,498 625,031 428,430 1,652,809 6,280,527 831,972 478,793 =353,179 P

(30,941) – – 294,358 – 263,418 (314,430) – (P314,430) =

2,701,819 841,498 625,031 722,788 1,652,809 6,543,945 517,542 478,793 =38,749 P

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a. The adjustment on investments in Subsidiaries and an Associate in 2004 consists of: Group Parent Company Other investment in shares of stock reclassified to other resources, net of allowance for decline in value of =332.1 million (see item c) P Reversal of share in accumulated: Income of subsidiaries (see item f) Translation adjustment (see item h) Income of an associate (see item f) Revaluation increment Unrealized loss on AFS (see item i)

(P138,986) = – – – – – (P138,986) =

(P145,181) = (784,191) (496,817) (121,984) (6,115) 4,720 (P1,549,568) =

b. The adjustment on Investment Properties of the Group and of the Parent Company in 2004 consists of: Reversal of allowance for probable losses on ROPOA under previous GAAP (see item f) Initial measurement of investment properties at fair value (see item f) Recognition of allowance for impairment losses on investment properties (see item f) Recognition of accumulated depreciation on investment properties (see item f) Reclassification of foreclosed machineries and other equipment to other resources (see item c)

= P4,143,964 3,954,809 (3,272,257) (1,636,248) (27,312) =3,162,956 P

c. The adjustment on Other Resources in 2004 consists of: Group Parent Company Reclassification of other investment in shares of stock from investments in subsidiaries and associate, net of allowance of =332.1 million P (see item a) Reversal of amortization of prepaid retirement expenses Reclassification of foreclosed machineries and other equipment from investment properties (see item b)

=138,986 P 109,200 27,312 = P275,498

=145,181 P 109,200 27,312 =281,693 P

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d. The adjustment on Accrued Taxes, Interest and Other Expenses of the Group and of the Parent Company consists of: Recognition of transition liability on retirement fund (see item f) Recognition of additional liability on retirement fund in 2004

= P17,868 78,260 P96,128 =

e. The adjustment on Other Liabilities in 2004 consists of: Group Parent Company Recognition of deferred income tax liability on reclassified revaluation increment on land (see item g) Reclassification of minority interest from other liabilities to capital funds (see item j) Reversal of deferred income tax liability on share in revaluation increment of a subsidiary

= P73,043 (86,749) – (P13,706) =

=73,043 P – (1,957) =71,086 P

f.

The adjustment on Deficit in 2004 consists of: Group Parent Company Reversal of allowance for probable losses on ROPOA under previous GAAP (see item b) Initial measurement of investment properties at fair value (see item b) Recognition of allowance for impairment losses on investment properties (see item b) Recognition of accumulated depreciation on investment properties (see item b) Reclassification of revaluation increment on land (see item g) Reversal of retirement expense under previous GAAP Recognition of transition liability on retirement fund (see item d) Reversal of accumulated equity in net income of subsidiaries (see item a) Reversal of accumulated equity in net income of an associate (see item a) = P4,143,964 3,954,809 (3,272,257) (1,636,248) (228,257) 30,941 (17,868) – – = P2,975,084 =4,143,964 P 3,954,809 (3,272,257) (1,636,248) (228,257) 30,941 (17,868) (784,191) (121,984) =2,068,909 P

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g. The adjustment on Revaluation Increment on Land and Buildings in 2004 consists: Group Parent Company Reclassification of revaluation increment on land (see item f) Recognition of deferred income tax on revaluation increment on land (see item e) Reversal of share in revaluation increment on building of a subsidiary = P228,257 (73,043) – = P155,214 =228,257 P (73,043) (4,158) =151,056 P

h. The adjustment in the Parent Company financial statements pertains to the reversal of accumulated translation adjustment on foreign subsidiaries amounting to =496,817 in 2004 P and =433,702 in 2003 (see items a and k). P i. The adjustment in the Parent Company financial statements pertains to the reversal of the share in accumulated unrealized loss on available-for-sale investments (AFS) of a subsidiary amounting to =4,720 in 2004 and =4,633 in 2003 (see items a and k). P P The adjustment in the Group financial statements pertains to the reclassification of Minority Interest amounting to =86,749 in 2004 and =80,130 in 2003 previously reported under Other P P Liabilities to capital funds (see items e and o).

j.

k. The adjustment on Investment in Subsidiaries and an Associate in 2003 consists of: Group Parent Company Other investment in shares of stock reclassified to other resources, net of allowance for decline in value of =332.1 million (see item m) P Reversal of share in accumulated: Income on subsidiaries (see item p) Translation adjustment (see item h) Income of an associate (see item p) Revaluation increment Unrealized loss on AFS (see item i)

(P118,902) = – – – – – (P118,902) =

(P116,402) = (501,242) (433,702) (91,764) (9,412) 4,633 (P1,147,889) =

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l.

The adjustment on Investment Properties in 2003 consists of: Reversal of allowance for probable losses on ROPOA under previous GAAP (see item p) Initial measurement of investment properties at fair value (see item p) Recognition of allowance for impairment losses on investment properties (see item p) Recognition of accumulated depreciation on investment properties (see item p) Reclassification of foreclosed machineries and other equipment to other resources (see item m)

P4,015,695 = 3,569,231 (3,020,565) (1,341,890) (31,195) P3,191,276 =

m. The adjustment on Other Resources in 2003 consists of: Group Parent Company Reclassification of other investment in shares of stocks from investments in subsidiaries and associates - net of allowance for decline in value of P352.1 million (see item k) = Reclassification of foreclosed machineries and other equipment from investment properties (see item l)

=118,902 P 31,195 = P150,097

=116,402 P 31,195 =147,597 P

n. The adjustment pertains to the recognition of transition liability on retirement fund amounting to =17,868. P o. The adjustment on Other Liabilities in 2003 consists of: Group Parent Company Recognition of deferred income tax liability on reclassified revaluation increment on land (see item q) Reclassification of minority interest from other liabilities to capital funds (see item j) Reversal of deferred income tax liability on share in revaluation increment of a subsidiary

=73,043 P (80,130) – (P7,087) =

=73,043 P – (3,011) =70,032 P

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p. The adjustment on Deficit in 2003 consists of: Group Parent Company Reversal of allowance for probable losses on ROPOA under previous GAAP (see item l) Recognition of investment properties at fair values (see item l) Recognition of allowance for impairment losses on investment properties (see item l) Recognition of accumulated depreciation on investment property (see item l) Adjustment on revaluation increment on land (see item q) Recognition transition liability on retirement fund (see item n) Reversal of accumulated equity income of subsidiaries (see item k) Reversal of accumulated equity income of an associate (see item k) = P4,015,695 3,569,231 (3,020,565) (1,341,890) (228,257) (17,868) – – = P2,976,346 =4,015,695 P 3,569,231 (3,020,565) (1,341,890) (228,257) (17,868) (501,242) (91,764) =2,383,340 P

q. The adjustment on Revaluation Increment in 2003 consists of: Group Parent Company Adjustment on revaluation increment on land (see item p) Recognition of deferred income tax on reclassified revaluation increment on land (see item o) Reversal of revaluation increment of a subsidiary = P228,257 (73,043) – = P155,214 =228,257 P (73,043) (6,400) =148,814 P

r.

The adjustment pertains to additional provision for impairment losses on investment properties amounting to =123,422. P The adjustment in the Parent Company financial statements represents the reversal of accumulated equity income of subsidiaries and an associate amounting to =331,586 in P 2004. The adjustment on Miscellaneous Income in 2004 consists of: Group Parent Company Recognition of gain on foreclosure resulting from initial measurement of investment properties at fair value Minority interest in income of a consolidated subsidiary Recognition of dividend income of a subsidiary

s.

t.

= P385,578 6,619 – = P392,197

=385,578 P – 18,418 =403,996 P

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u. The adjustment represents the reversal of retirement expense in 2004 amounting to 30,941 recognized under previous GAAP (see item f). v. The adjustment pertains to the recognition of depreciation on investment properties in 2004 amounting to =294,358. P The table below presents the reconciliation of financial position (in thousand pesos) at January 1, 2005 following the adoption of PAS 32 and 39:
Group Effect of Adoption to PAS 32 and PAS 39 =2,196,473 P – – – – 754,703 27,733,003 13,937,144 (754,703) (63,033,848) 26,219,964 – – – – (8,982,342) (P1,929,606) = Parent Company January 1, 2005 (Date of Transition) Effect of Adoption PFRS December 31, of PAS 32 and PFRS PFRS PAS 39 January 1, 2005 2004 January 1, 2005 =5,539,145 P 3,765,737 7,051,470 18,921,030 4,000,000 754,703 27,733,003 13,937,144 – – 82,371,572 726,764 14,680,353 643,718 27,989,971 9,696,808 =217,811,418 P =3,342,466 P 3,765,737 6,092,449 18,882,242 4,000,000 – – – 712,229 60,930,559 54,002,036 633,584 14,669,857 5,509,803 27,989,395 17,965,720 =218,496,077 P =2,054,969 P – – – – 712,229 27,772,796 11,789,671 (712,229) (60,930,559) 26,231,612 – – – – (8,840,838) (P1,922,349) = =5,397,435 P 3,765,737 6,092,449 18,882,242 4,000,000 712,229 27,772,796 11,789,671 – – 80,233,648 633,584 14,669,857 5,509,803 27,989,395 9,124,882 =216,573,728 P

Account Description RESOURCES Cash and Other Cash Items Due from Bangko Sentral ng Pilipinas Due from Other Banks Interbank Loans Receivable Securities Held under Agreements to Resell Financial Assets at Fair Value Through Profit or Loss Available-for-sale investments, at fair value Held-to-Maturity Investments, at amortized cost Trading Account Securities, at fair value Investment Securities - net Loans and Receivables - net Furniture, Fixtures, Equipment and Leasehold Improvements, at cost - net Bank Premises, at appraised value - net Investments in Subsidiaries and an Associate - net Investment Properties - net Other Resources - net

Note a

PFRS December 31, 2004 =3,342,672 P 3,765,737 7,051,470 18,921,030 4,000,000 – – – 754,703 63,033,848 56,151,608 726,764 14,680,353 643,718 27,989,971 18,679,150 P219,741,024 =

b c d b e f

g

LIABILITIES AND CAPITAL FUNDS Liabilities Deposit Liabilities Demand Savings Time Bills and Acceptances Payable Due to Bangko Sentral ng Pilipinas Margin Deposits and Cash Letters of Credit Manager’s Checks and Demand Drafts Outstanding Accrued Taxes, Interest and Other Expenses Subordinated Debt Other Liabilities Capital Funds Preferred stock Common stock Capital paid in excess of par value Surplus reserves Deficit Revaluation increment on land and buildings Accumulated translation adjustment Net unrealized loss on available-for-sale investments Minority interest

=14,476,485 P 120,041,480 26,491,088 161,009,053 13,534,658 103,326 137,991 477,893 6,139,490 3,000,000 9,764,975 194,167,386 7,807,018 15,122,819 545,745 481,694 (267,142) 1,443,486 496,817 (143,548) 25,486,889 86,749 25,573,638 = P219,741,024

=– P – – – – – – – – (51,543) 177,966 126,423 – – – – (2,075,890) – – 19,861 (2,056,029) – (2,056,029) (P1,929,606) =

=14,476,485 P 120,041,480 26,491,088 161,009,053 13,534,658 103,326 137,991 477,893 6,139,490 2,948,457 9,942,941 194,293,809 7,807,018 15,122,819 545,745 481,694 (2,343,032) 1,443,486 496,817 (123,687) 23,430,860 86,749 23,517,609 =217,811,418 P

=14,433,937 P 119,997,438 28,548,468 162,979,843 12,895,473 103,326 137,991 477,893 6,076,517 3,000,000 8,740,575 194,411,618 7,807,018 15,122,819 545,745 481,694 (1,173,317) 1,439,328 – (138,828) 24,084,459 – 24,084,459 =218,496,077 P

=– P – – – – – – – – (51,543) 177,966 126,423 – – – – (2,068,633) – – 19,861 (2,048,772) – (2,048,772) (P1,922,349) =

=14,433,937 P 119,997,438 28,548,468 162,979,843 12,895,473 103,326 137,991 477,893 6,076,517 2,948,457 8,918,541 194,538,041 7,807,018 15,122,819 545,745 481,694 (3,241,950) 1,439,328 – (138,828) 22,015,826 – 22,015,826 =216,573,728 P

h i

j

k

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a. The adjustment on Cash and Other Cash Items consists of reclassification from Other Resources: Group Parent Company Foreign currency notes and coins on hand, checks and other cash items (FCOCI) Miscellaneous cash and other cash items (MCOC) =1,762,348 P 434,125 = P2,196,473 =1,620,844 P 434,125 =2,054,969 P

b. The adjustment represents reclassification of trading account securities (TAS) to financial assets at fair value through profit or loss (FVPL). c. The adjustment on AFS consists of reclassification from investment securities amounting to = P27,772,796 and =27,733,003 for the Group and the Parent Company, respectively. P d. The adjustment on HTM in the Group and Parent Company financial statement consists of: Group Parent Company =13,956,761 P =11,809,288 P (19,617) = P13,937,144 (19,617) =11,789,671 P

Reclassification from investment securities Effect of change from straight-line to effective interest method of amortization

e. The adjustment on Investment Securities consists of reclassification to the following accounts: Group Parent Company =13,956,761 P =11,809,288 P 27,733,003 27,772,796 21,344,084 21,348,475 = P63,033,848 =60,930,559 P

HTM (see Note d) AFS (see Note c) Loans and receivables (see Note f)

f.

The adjustment on Loans and Receivables consists of: Group Parent Company Reclassification of unquoted securities from investment securities (see Note e) Reclassification of sales contract receivables from other resources (see Note g) Reclassification of allowance for impairment losses on transferred accounts (see Note g) Additional provision for impairment losses (see Note j) Reduction in carrying value of sales contract receivables with off market rates (see Note j) = P21,344,084 18,797,890 (11,955,937) (1,920,801) (45,272) = P26,219,964 =21,348,475 P 18,797,890 (11,955,937) (1,913,544) (45,272) =26,231,612 P

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g. The adjustment on Other Resources consists of (in thousand pesos): Group Parent Company Reclassification of sales contract receivables to loans and receivables (see Note f) Reclassification of allowance for impairment losses on transferred accounts (see Note f) Reclassification of FCOCI and MCOCI to cash and other cash items (see Note a) Recognition of the mark-to-market gain on embedded derivatives (see Note j) Unamortized transaction cost of subordinated debt under previous GAAP (P18,797,890) = 11,955,937 (2,196,473) 103,778 (47,694) (P8,982,342) = (P18,797,890) = 11,955,937 (2,054,969) 103,778 (47,694) (P8,840,838) =

h. The adjustment on Subordinated Debt represents the unamortized transaction cost determined under PAS 39 amounting to P51,543. = i. The adjustment represents the market valuation loss on stand alone derivatives amounting to = P177,966. The adjustment on Deficit consists of: Group Parent Company Recognition of additional impairment losses (see Note f) Recognition of the change in fair values of freestanding derivatives at transition date (see Note i) Recognition of the change in fair values of embedded derivatives at transition date (see Note g) Recognition of the unamortized discount on sales contract receivables with off-market rates (see Note f) Unrealized gain on AFS credited to income in prior years (see Note k) Take up of the effect of change from straight line to effective interest method (P1,920,801) = (P1,913,544) =

j.

(177,966)

(177,966)

103,778

103,778

(45,272) (19,861) (15,768) (P2,075,890) =

(45,272) (19,861) (15,768) (P2,068,633) =

k. The adjustment represents the unrealized gain on AFS credited to income in prior years amounting to =19,861 (see Note j). P

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The Group has yet to adopt the following standards and amendments that have been approved but are not yet effective: • Amendments to PAS 19, Employee Benefits - Actuarial Gains and Losses, Group Plans and Disclosures - The revised disclosures from the amendments will be included in the Group’s financial statements when the amendments are adopted in 2006. PFRS 6, Exploration for and Evaluation of Mineral Resources - This standard does not apply to the activities of the Group. PFRS 7, Financial Instruments - Disclosures - The revised disclosures on financial instruments provided by this standard will be included in the Group’s financial statements when the standard is adopted in 2007.

• •

Effect on the Statement of Cash Flows for 2004 There are no material differences between the statement of cash flows prepared under PFRS and statement of cash flows presented under previous GAAP except for the presentation of FCOCI and MCOCI under Cash and Other Cash Items (COCI) in 2005. Previously, FCOCI and MCOCI were presented under Other Resources. Investments in Subsidiaries and Associates Investments in Subsidiaries Subsidiaries are all entities (including special purpose entities) over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Investments in Associates Investments in associates are accounted for under the equity method of accounting. Associates are all entities over which the Group has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates are accounted for by the equity method of accounting and are initially recognized at cost. The Group’s share of its associates’ post-acquisition profits or losses is recognized in the statements of income, and its share of post-acquisition movements in reserves is recognized in reserves. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. When the Group’s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Group does not recognize further losses, unless it has incurred obligations or made payments on behalf of the associate. Investments in subsidiaries and associates in the Parent Company financial statements are carried at cost, less any impairment in value. Cost represents the carrying value of the investments as at the quasi-reorganization date of the Parent Company as discussed in Note 2, reduced by dividends subsequently received from the investees.

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Other Investments Other investments in shares of stock where the Group’s ownership interest is less than 20% or where control is likely to be temporary are initially recognized at cost, being the fair value of the consideration given and including acquisition charges associated with the investments. After initial recognition, investments are classified as available-for-sale and measured at fair value. Gains or losses are recognized as a separate component of equity until the investment is sold, collected or otherwise disposed of, or until the investment is determined to be impaired, at which time the cumulative gain or loss previously reported in equity is included in the statements of income. Equity Adjustment from Foreign Currency Translation Each entity in the Group determines its own functional currency and items included in the financial statements of each entity are measured using that functional currency. Transactions in foreign currencies are initially recorded in the functional currency rate at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency rate of exchange at statement of condition date. Exchange differences are taken to profit or loss. 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. Financial statements of consolidated foreign subsidiaries that are not integral to the operations of the Group are translated into the presentation currency of the Group (the Philippine peso) at the rate of exchange at statement of condition date and, their income statements are translated at the weighted average exchange rates for the year. The exchange differences arising from the translation are taken directly to a separate component of equity (under Accumulated Translation Adjustment). On disposal of a foreign entity, the deferred cumulative amount recognized in equity relating to that particular foreign operation is recognized in the statements of income. Cash Equivalents For purposes of reporting cash flows, cash equivalents include amounts due from BSP and other banks and interbank loans receivable and securities held under agreements to resell that are convertible to known amounts of cash, with original maturities of three months or less from dates of placements and that are subject to an insignificant risk of changes in value. Repurchase and Resale Agreements Repurchase agreements are contracts under which a party sells securities and simultaneously agrees to repurchase the same securities at a specified future date at a fixed price. Resale agreements are contracts under which a party purchases securities and simultaneously agrees to resell the same securities at a specified future date at a fixed price. Securities sold under repurchase agreements (repos) are retained in the financial statements as trading or investment securities and the counterparty liability is included in amounts due to other banks or bills payable, as appropriate. Securities held under resale agreements (reverse repos) are recorded at cost under Securities Held under Agreements to Resell account. The corresponding interest expense or interest income is accrued when incurred or earned.

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Financial Assets The Group classifies its financial assets in the following categories: financial assets at FVPL; loans and receivables; HTM investments; and AFS investments. Management determines the classification of its investments at initial recognition. When financial assets are recognized initially, they are measured at fair value, plus in the case of investments not at fair value through profit or loss, directly attributable transaction costs. Regular way purchases and sales of financial assets are recognized on the trade date – the date on which the Group commits to purchase or sell the asset. Loans and receivables are recognized when cash is advanced to the borrowers. Financial assets at fair value through profit or loss A financial asset is classified as financial assets at FVPL if acquired principally for the purpose of selling in the short term or if so designated by management. Derivatives are also categorized as held for trading unless they are designated as hedges. Gains and losses arising from changes in the fair value of the financial assets are included in the statements of income in the period in which they arise. The fair value of investments that are actively traded in organized financial markets is determined by reference to quoted market bid price at the close of business on the statement of condition date. For investments with no active market, fair value is determined using valuation techniques. Such techniques include using recent arm’s length market transactions, reference to the current market value of another instrument which is substantially the same, discounted cash flow analysis and option pricing models. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. These are carried at amortized cost using the effective interest rate method, less impairment in value. Gains and losses are recognized in income when the loans and receivables are derecognized and impaired, as well as through the amortization process. Held-to-maturity investments HTM investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Group’s management has the positive intention and ability to hold to maturity. Where the Group sell other than an insignificant amount of HTM assets, the entire category would be tainted and reclassified as AFS. These investments are carried at amortized cost using the effective interest rate method, less impairment in value. Gains and losses are recognized in income when the HTM are derecognized and impaired, as well as through the amortization process. Available-for-sale investments AFS investments are non-derivative financial assets that are designated as AFS or those securities that are intended to be held for an indefinite period of time, which may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices. After initial recognition, AFS financial assets are measured at fair value with gains and losses being recognized as a separate component of capital funds until the financial asset is derecognized or impaired at which time the cumulative gain or loss previously recognized in capital funds should

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be recognized in the statements of income. Premiums and discounts and directly attributable transaction costs on these investments are amortised using the effective interest rate method and taken to interest income. Dividends on AFS equity instruments are recognized in the statements of income when the entity’s right to receive payment is established. Prior to January 1, 2005, trading and investment securities were accounted for as follows: Trading Account Securities TAS, which consist of government and private debt and equity securities, are purchased and held principally with the intention of selling them in the near term. These securities are carried at fair value; realized and unrealized gains and losses on these instruments are recognized in Trading and Securities Gain - net in the statements of income. Interest earned on debt instruments is reported as Interest Income. Available-for-Sale Securities Securities are classified as AFS when purchased and held indefinitely, i.e., neither held to maturity nor for trading purposes, where the Group anticipates to sell in response to liquidity requirements or in anticipation of changes in interest rates or other factors. AFS are carried at fair market value and any unrealized gains or losses are reported as a separate component of capital funds. Investments in Bonds and Other Debt Instruments (IBODI) IBODI are debt securities where the Group has the positive intent and ability to hold to maturity. These securities are carried at amortized cost on a straight-line basis; realized gains and losses are included in Trading and Securities Gain - net in the statements of income. Property and Equipment The Group’s depreciable properties, excluding buildings, are stated at cost less accumulated depreciation and amortization, and any impairment in value. The initial cost of property and equipment consists of its purchase price, including import duties, taxes and any directly attributable costs of bringing the asset to its working condition and location for its intended use. Expenditures incurred after items of property and equipment have been put into operation, such as repairs and maintenance are normally charged against operations in the year in which the costs are incurred. In situations where it can be clearly demonstrated that the expenditures have resulted in an increase in the future economic benefits expected to be obtained from the use of an item of property and equipment beyond its originally assessed standard of performance, the expenditures are capitalized as an additional cost of property and equipment. When property and equipment are retired or otherwise disposed of, the cost and the related accumulated depreciation and amortization are removed from the accounts, and any resulting gain or loss is reflected as income or loss in the statements of income. Land is stated at appraised values less any impairment in value while buildings are stated at appraised value less accumulated depreciation and any impairment in value. Valuations are performed frequently enough to ensure that the fair value of a revalued asset does not differ materially from its carrying amount.

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Any revaluation surplus is credited to the Revaluation Increment on Land and Buildings included in the equity section of the statements of condition, except that it reverses a revaluation decrease of the same asset previously recognized in statements of income, in which case the increase is recognized in statements of income. A revaluation deficit is recognized in statements of income, except that a deficit directly offsetting a previous surplus on the same asset is directly offset against the surplus in the Revaluation Increment on Land and Buildings. Depreciation is computed using the straight-line method over the estimated useful lives of the respective assets. Leasehold improvements are amortized over the shorter of the terms of the covering leases and the estimated useful lives of the improvements. The estimated useful life of the respective asset follows: Useful Life in Years 25 - 50 5 3 - 10

Buildings Furniture, fixtures and equipment Leasehold improvements

The useful life and the depreciation and amortization method are reviewed periodically to ensure that the period and the method of depreciation and amortization are consistent with the expected pattern of economic benefits from items of property and equipment. The carrying values of the property and equipment are reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. If any such indication exists and where the carrying values exceed the estimated recoverable amount, an impairment loss is recognized in the statements of income (see accounting policy on Impairment of Non-Financial Assets). Investment Properties Investment properties include ROPOA in settlement of loans and receivables from customers. Investment properties are recorded at fair value at acquisition date and subsequently carried at cost less accumulated depreciation and impairment in value. Transaction costs including nonrefundable taxes such as capital gains tax and documentary stamp tax that were paid by the Group are capitalized as part of cost. Depreciation is computed using the straight-line method over the estimated useful life of the assets. The estimated useful life of the depreciable investment properties which generally include building and improvements range from 25 to 50 years. Investment properties are derecognized when they have either been disposed of or when the investment properties are permanently withdrawn from use and no future benefit is expected from their disposal. Any gains or losses on retirement or disposal of an investment property are recognized in the statements of income in the year of retirement or disposal. Software Costs Software costs are capitalized on the basis of the cost incurred to acquire and bring to use the specific software. These costs are amortized over five years on a straight-line basis.

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Costs associated with developing or maintaining the computer software programs are recognized as expense when incurred. Interest-bearing Loans and Borrowings All loans and borrowings are initially recognized at the fair value of the consideration received less directly attributable transaction costs. After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortized cost using the effective interest rate method. Gains and losses are recognized in the statements of income when the liabilities are derecognized as well as through the amortization process. Income Taxes Deferred income tax is provided, using the balance sheet liability method, on all temporary differences at the statement of condition date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred income tax liabilities are recognized for all taxable temporary differences. Deferred income tax assets are recognized for all deductible temporary differences, carryforward of unused tax credits from excess minimum corporate income tax (MCIT) over regular corporate income tax (RCIT) and unused net operating loss carryover (NOLCO), to the extent that it is probable that taxable profit will be available against which the deductible temporary differences and carryforward of unused MCIT and unused NOLCO can be utilized. Deferred income tax, however, is not recognized when it arises 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 profit nor taxable profit or loss. Deferred tax liabilities are not provided on non-taxable temporary differences associated with investments in domestic subsidiaries, associates and interests in joint ventures. With respect to investments in foreign subsidiaries, associates and interests in joint ventures, deferred tax liabilities are recognized except where the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future. The carrying amount of deferred income tax assets is reviewed at each statement of condition 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 income tax asset to be utilized. Deferred income 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 enacted on substantially enacted at the statement of condition date. Impairment of Financial Assets The Group assesses at each statement of condition date whether there is objective evidence that a financial asset may be impaired.

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Assets carried at amortized cost A financial asset or a group of financial assets is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a “loss event”) and that loss event has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. The Group first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for assets that are not individually significant. If it is determined that no objective evidence of impairment exists for individually assessed financial asset, whether significant or not, the asset is included in a group of financial assets with similar credit risk characteristics (i.e., on the basis of the Group’s grading process that considers asset type, industry, geographical location, collateral type, past-due status and other relevant factors) and that group of assets is collectively assessed 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. If there is objective evidence that an impairment loss on loans and receivables carried at amortized cost has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of the estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate. The carrying amount of the asset is reduced through use of an allowance account. The amount of loss is charged to current operations. If a loan or HTM investment has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. 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. When a loan is uncollectible, it is written off against the related allowance for loan impairment. Such loans are written off after all the necessary procedures have been completed and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off decrease the amount of the provision for loan impairment in the statements of income. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized (such as an improvement in the debtor’s credit rating), the previously recognized impairment loss is reversed by adjusting the allowance account. Any subsequent reversal of an impairment loss is recognized in the statements of income, to the extent that the carrying value of the asset does not exceed its amortized cost at the reversal date.

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Assets Carried at Cost If there is objective evidence that an impairment loss on an unquoted equity instruments that are not carried at fair value because its fair value cannot be reliably measured, or on a derivative asset that is linked to and must be settled by delivery of such unquoted equity instrument has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the current market rate of return for a similar financial asset. Available-for-sale Investments If an AFS is impaired, an amount comprising the difference between its cost (net of any principal payment and amortization) and its current fair value, less any impairment loss on that financial asset previously recognized in profit or loss – is removed from equity and recognized in the statements of income. Impairment losses recognized in the statements of income on equity instruments are not reversed through the statements of income. If, in a subsequent period, the fair value of a debt instrument classified as AFS increases and the increase can be objectively related to an event occurring after the impairment loss was recognized in profit or loss, the impairment loss is reversed through the statements of income. Impairment of Non-Financial Assets The Group assesses at each statement of condition date whether there is an indication that an asset may be impaired. If such impairment indication exists, or when an annual impairment testing for an asset is required, the Group makes an estimate of the asset’s recoverable amount. An asset’s recoverable amount is the higher of the asset’s value in use or its net selling price. Where the carrying amount of an asset exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. An impairment loss is charged against operations in the year in which it arises, unless the asset is carried at a revalued amount, in which case the impairment loss is charged to the revaluation increment of the said asset. A previously recognized impairment loss is reversed by a credit to current operations (unless the asset is carried at a revalued amount in which case the reversal of the impairment loss is credited to the revaluation increment of the same asset) to the extent that it does not restate the asset to a carrying amount in excess of what would have been determined (net of any accumulated depreciation and amortization) had no impairment loss been recognized for the asset in prior years. Derecognition of Financial Assets and Liabilities Financial Asset A financial asset (or, where applicable, a part of a financial asset or part of a group of financial assets) is derecognized when: 1. the rights to receive cash flows from the asset have expired; 2. 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

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3. 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. Financial Liability A financial liability is derecognized when the obligation under the liability is discharged or cancelled or expired. Income Recognition Income is recognized to the extent that it is probable that economic benefits will flow to the Group and the income can be reliably measured. The following specific recognition criteria must also be met before income is recognized: Interest income Interest on loans and receivables, trading and investment securities, and interest-bearing placements is recognized using the effective interest method of amortization. The effective interest method is a method of calculating the amortized cost of a financial asset or a financial liability and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the Group estimates cash flows considering all contractual terms of the financial instrument (for example, prepayment options) but does not consider future credit losses. The calculation includes all fees and points paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts. Interest income on impaired financial assets is recognized using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. Loan fees and service charges Loan fees that are directly related to acquisition and origination of loans are included in the cost of receivable and are amortized using effective interest rate method over the term of the loan. Fees related to the administration and servicing of a loan are recognized as revenue as the services are provided. Dividends Dividend income is recognized when the right to receive payment is established. Underwriting fees, commissions, and sale of shares of stock Underwriting fees and commissions are accrued when earned. Income derived from sales of shares of stock is recognized upon sale. Discounts earned on credit cards Discounts are taken to income upon receipt from member establishments of charges arising from credit availments by credit cardholders. These discounts are computed based on certain agreed rates and are deducted from amounts remitted to the member establishments. Purchases by the credit cardholders which are collected on installment are recorded at the cost of the items

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purchased plus a certain percentage of cost. The excess is credited to Unearned Discounts and Lease Income and is shown as a deduction from Loans and Receivables in the statements of condition. The deferred income is amortized using the effective interest method over the installment term. Retirement Cost The Group determines retirement cost under the projected unit credit cost 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 defined benefit liability recognized in the statements of condition is the present value of the defined benefit obligation and actuarial gains and losses reduced by past service cost not yet recognized and the fair value of plan assets out of which the obligation are to be settled directly. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of government bonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating to the terms of the related retirement liability. Actuarial gains and losses are recognized as income or expense when the net cumulative unrecognized actuarial gains and losses of the plan at the end of the previous reporting year exceeded 10% of the higher of the defined benefit obligation and the fair value of plan assets at that date. These gains and losses are recognized over the expected average remaining working life of the employees participating in the plans. Past service costs are recognized immediately in income, unless the changes to the pension plan are conditional on the employees remaining in service for a specified period of time (the vesting period). In this case, the past service costs are amortized on a straight-line basis over the vesting period. Provisions and Contingencies Provisions are recognized when an obligation (legal or constructive) is incurred as a result of a past event and where 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. 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 assessment of the time value of money and, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognized as an interest expense. Contingent liabilities are not recognized in the financial statements. They are disclosed in the financial statements 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. Leases Finance leases, which transfer to/from the Group substantially all the risks and benefits incidental to ownership of the leased item, are capitalized at the inception of the lease at the fair value of the leased property or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between the finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are included as Interest Expense in the statements of income.

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Capitalized leased assets are depreciated over the shorter of the estimated useful lives of the assets or the respective lease terms. Leases where the lessor retains substantially all the risks and benefits of ownership of the asset are classified as operating leases. Operating lease payments are recognized as an expense/income in the statements of income on a straight-line basis over the lease term. Derivative Instruments The Group uses derivative financial instrument such as currency forwards and cross currency and interest rate swap contracts to manage its risks associated with interest rate and foreign currency fluctuations. Such derivative financial instruments are initially recorded at fair value on the date at which the derivative contract is entered into and are subsequently remeasured at fair value. Derivatives are carried as assets when the fair value is positive and as liabilities when the fair value is negative. Any gain or losses arising from changes in fair value on derivatives that do not qualify for hedge accounting are taken directly to the statements of income. The fair value of currency forwards is calculated by reference to current forward exchange rates for contracts with similar maturity profiles. The fair value of cross currency and interest rate swap contracts is determined using discounted cash flow techniques with reference to prevailing market rates. Certain derivatives are embedded in financial and non-financial host contracts, and these include conversion options in convertible debt instruments, credit default swaps and foreign-currency derivatives in structured notes, and currency derivatives in purchase orders and service agreements. These derivatives are bifurcated and carried at fair value with fair value changes being reported through profit or loss, when their economic risks and characteristics are not closely related to those of their respective host contracts and where the entire hybrid contracts (composed of both the host contract and the embedded derivative) are not accounted for as financial assets at FVPL. Offsetting Financial assets and financial liabilities are offset and the net amount reported in the statements of condition when there is a legally enforceable right to set off the recognized amounts and the Group intends to either settle on a net basis, or to realize the asset and the liability simultaneously. Earnings per Share Basic earnings per share is calculated by dividing the net income for the year attributable to common shareholders by the weighted average number of common shares outstanding during the year. Diluted earnings per share is calculated by dividing the net income attributable to common shareholders by the weighted average number of common shares outstanding during the year adjusted for the effects of dilutive convertible preferred shares.

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Subsequent Events Post-year-end events that provide additional information about the Group’s position at statement of condition date (adjusting events) are reflected in the financial statements. Post-year-end events that are not adjusting events are disclosed in the notes to financial statements when material.

4. Significant Accounting Judgments and Estimates The preparation of the financial statements in accordance with Philippine GAAP requires the Group to make estimates and assumptions that affect the reported amounts of resources, liabilities, income and expenses and disclosure of contingent resources and contingent liabilities. Future events may occur which will cause the assumptions used in arriving at the estimates to change. The effects of any change in estimates are reflected in the financial statements as they become reasonably determinable. Estimates and judgments 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. Impairment losses on loans and receivables The Group reviews its loan portfolios to assess impairment at least on a quarterly basis (refer to the significant accounting policies on impairment). As of December 31, 2005, loans and receivables amounted to =79.7 billion and P77.6 billion for the Group and the Parent Company, P = respectively, net of the allowance for impairment losses of P24.1 billion and =23.9 billion, = P respectively (see Note 9). Fair value of derivatives The fair values of derivatives that are not quoted in active markets are determined by using valuation techniques. Where valuation techniques (for example, models) 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 to ensure that the resulting values 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 and apply considerable judgment. Changes in assumptions about these factors could affect the reported fair value of financial instruments. As of December 31, 2005, the net positive fair value of derivatives that were valued using valuation techniques amounted to =72.6 million (see Note 27). P Impairment of available for-sale equity securities The Group determines that AFS equity investments are impaired when there has been a significant or prolonged decline in the fair value below their cost. This determination of what is significant or prolonged requires judgment. In making this judgment, the Group evaluates among other factors, the normal volatility in share price. 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, 2005, available-for-sale equity securities amounted to =1.1 billion for the Group P and the Parent Company, net of allowance for impairment losses of =122.8 million (see Note 8). P

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Held-to-maturity investments The classification to HTM 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 for the specific circumstances (such as selling an insignificant amount close to maturity), it will be required to reclassify the entire class as AFS. The investments would therefore be measured at fair value not amortized cost. As of December 31, 2005, HTM amounted to =5.3 billion for the Group and =5.1 billion for the Parent P P Company (see Note 8). Pension and other retirement benefits The expected rate of return on plan assets of 10% was 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 condition dates. As of December 31, 2005 and 2004, the present value of the retirement obligation of the Parent Company amounted to =775.7 million and =667.3 million, P P respectively (see Note 20). Impairment of Non-Financial Assets The Group assesses impairment on assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The factors that the Group considers important which could trigger an impairment review include the following: • • • significant underperformance relative to expected historical or projected future operating results; significant changes in the manner of use of the acquired assets or the strategy for overall business; and significant negative industry or economic trends.

The Group recognizes an impairment loss whenever the carrying amount of an asset exceeds its recoverable amount. The recoverable amount is the value in use. The net selling price is the amount obtainable from the sale of an asset in an arm’s length transaction while value in use is the present value of estimated future cash flows expected to arise from the continuing use of an asset and from its disposal at the end of its useful life. 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, 2005, the carrying value of the bank premises, furniture, fixtures, equipment, and leasehold improvements and investment properties amounted to =15.3 billion and P = P26.8 billion, respectively, for the Group and =15.2 billion and =26.8 billion, respectively, for the P P Parent Company. As of December 31, 2004, the carrying value of the bank premises, furniture, fixtures, equipment, and leasehold improvements and investment properties amounted to =15.4 billion and =28.0 billion, respectively, for the Group and =15.3 billion and P28.0 billion, P P P = respectively, for the Parent Company (see Notes 10 and 12).

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Recognition of deferred income taxes The Group has been in a tax loss position over the past several years. However, estimates of future taxable income indicate that certain temporary differences will be realized in the future. As discussed in Note 22, recognized deferred tax assets as of December 31, 2005 and 2004 amounted to =3.4 billion and =4.5 billion, respectively, for the Group and =3.3 billion and =4.5 billion, P P P P respectively, for the Parent Company. Deferred tax assets on the temporary differences amounting to =7.8 billion and =6.3 billion for Group and for the Parent Company as of December 31, 2005 P P and 2004, respectively, were not recognized.

5. Financial Risk Management Objectives and Policies The Group’s activities are principally related to the use of financial instruments. The Group accepts deposits from customers at fixed rates, and for various periods, and seeks to earn aboveaverage interest margins by investing these funds in high-quality assets. The Group seeks to increase these margins by consolidating short-term funds and lending for longer periods at higher rates, while maintaining sufficient liquidity to meet all claims that might fall due. The Group also seeks to raise its interest margins by obtaining above-average margins, net of allowances, through lending to commercial and retail borrowers with a range of credit standing. Such exposures involve not just on-balance sheet loans and advances; the Group also enters into guarantees and other commitments such as letters of credit and performance, and other bonds. The Group trades in financial instruments where it takes positions in traded and over-the-counter instruments, including derivatives, to take advantage of short-term market movements in equities and bonds and in currency and interest rate. The Group places trading limits on the level of exposure that can be taken in relation to both overnight and intra-day market positions. Credit risk The Group takes on exposure to credit risk, which is the risk that a counterparty will be unable to pay amounts in full when due. Impairment provisions are provided for losses that have been incurred at the statement of condition date. Significant changes in the economy, or in the health of a particular industry segment that represents a concentration in the Group’s portfolio, could result in losses that are different from those provided for at the statement of condition date. Management therefore carefully manages its exposure to credit risk. The Group structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to one borrower, or groups of borrowers, and to geographical and industry segments. Such risks are monitored on a revolving basis and subject to an annual or more frequent review. Limits on the level of credit risk by product, industry sector and by country are approved regularly by the Executive Committee of the BOD. The exposure to any one borrower including banks and brokers is further restricted by sub-limits covering on- and off-balance sheet exposures, and daily delivery risk limits in relation to trading items such as forward foreign exchange contracts. Actual exposures against limits are monitored daily.

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Exposure to credit risk is managed through regular analysis of the ability of borrowers and potential borrowers to meet interest and capital repayment obligations and by changing these lending limits where appropriate. Exposure to credit risk is also managed in part by obtaining collateral and corporate and personal guarantees, but a significant portion is personal lending where no such facilities can be obtained. In compliance with BSP requirements, the Group has recently developed an Internal Credit Risk Rating System (ICRRS) for corporate accounts and credit scoring for retail banking aimed at uniformly assessing its credit portfolio in terms of risk profile. The ICRRS is now in place and has been implemented through the grading of new and existing corporate loan borrowers with total assets of over =15.0 million. P Similarly, the Bank manages credit risk through a continuing review of credit policies, system and procedures. Credit-related commitments The primary purpose of these instruments is to ensure that funds are available to a customer as required. Guarantees and standby letters of credit which represent irrevocable assurances that the Group will make payments in the event that a customer cannot meet its obligations to third parties carry the same credit risk as loans. Documentary and commercial letters of credit which are written undertakings by the Group on behalf of a customer authorizing a third party to draw drafts on the Group up to a stipulated amount under specific terms and conditions are collateralized by the underlying shipments of goods to which they relate and therefore carry less risk than a direct borrowing. Commitments to extend credit represent unused portions of authorizations to extend credit in the form of loans, guarantees or letters of credit. With respect to credit risk on commitments to extend credit, the Group is potentially exposed to loss in an amount equal to the total unused commitments. However, the likely amount of loss is less than the total unused commitments, as most commitments to extend credit are contingent upon customers maintaining specific credit standards. The Group monitors the term to maturity of credit commitments because long-term commitments generally have a greater degree of credit risk than short-term commitments. Concentration of credit 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 Group’s performance to developments affecting a particular industry or geographic location.

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The distribution of resources, liabilities, off-balance sheet items and revenues by geographic region of the Group as of December 31, 2005 follows (in thousand pesos):
Resources Geographic region: Philippines Asia (excluding Philippines) United Kingdom Other European Union Countries United States and Canada P207,866,283 = 8,200,366 1,448,746 762,066 4,841,563 = P223,119,024 Liabilities P189,460,401 = 7,122,249 581,802 759,740 2,284,031 P200,208,223 = Credit Commitments P65,840,030 = 754,369 60,658 – 43,121 P66,698,178 = Revenues =14,962,961 P 982,928 171,281 104,206 1,308,100 P17,529,476 =

The Philippines is the home country of the Parent Company, which is also the main operating company. The Group offers a wide range of financial services as discussed in Note 1. Additionally, most of the remittance services are managed and conducted in Asia, Canada, USA and United Kingdom. The areas of operation include all the primary business segments. As one of the largest Philippine banks, the Group accounts for a significant share of credit exposure to many sectors of the economy. However, credit risk is spread over a diversity of personal and commercial customers. Note 9 also provides information on the concentration of credit on loans and receivables from customers. Market Risk The Parent Company is exposed to the potential loss in its trading portfolio because the values of its trading positions are sensitive to changes in the market prices and rates. Similarly, it is also exposed to market risk in its investment portfolio. Market risk is dimensioned and controlled in both the trading book and in the statements of condition. In the trading book, market risk is controlled by a daily analysis of the Value-at-Risk (VAR) of trading instruments under normal market conditions. The volatilities used for this regular analysis are those for a rolling one-year period, updated quarterly. The risk amounts computed are for 99% confidence level. The Parent Company also uses back testing to verify the results of the daily VAR calculation. Likewise, the Parent Company performs stress tests wherein the trading portfolios are valued under extreme market scenarios not covered by the confidence interval of the Parent Company’s VAR model. Stress tests determine the effects of potentially extreme market developments on the value of market risk sensitive exposures.

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Below is a table showing the VAR of the Parent Company for the year ended December 31, 2005 (in million pesos). Year End =34.76 P 5.59 =40.35 P Average P76.29 = 8.29 P84.58 = High P272.22 = 18.79 P278.13 = Low =18.91 P 2.38 =23.43 P

Interest rate risk Foreign exchange risk Total VAR

Note: The high and low for the total portfolio may not equal to the sum of the individual components as the highs and lows of the individual trading portfolios may have occurred on different trading days.

Complementary trading to the use of the VAR approach to control maximum exposure, the Bank also employs dealer’s limit and loss control limits. Foreign Currency Risk The Group takes on exposure to effects of fluctuations in the prevailing foreign currency exchange rates on its financial position and cash flows. Foreign currency liabilities generally consist of foreign currency deposits in the Bank's FCDU, accounts made in the Philippines or which are generated from remittances to the Philippines by Filipino expatriates and overseas Filipino workers who retain for their own benefit or for the benefit of a third party, foreign currency deposit accounts with the Parent Company and foreign currency-denominated borrowings appearing in the regular books of the Parent Company. Foreign currency deposits are generally used to fund the Parent Company's foreign currencydenominated loan and investment portfolio in the FCDU. Banks are required by the BSP to match the foreign currency assets with the foreign currency liabilities held through FCDUs. In addition, the BSP requires a 30% liquidity reserve on all foreign currency liabilities held through FCDUs. Outside the FCDU, the Parent Company has additional foreign currency assets and liabilities in its foreign branch network. The Group's policy is to maintain foreign currency exposure within acceptable limits and within existing regulatory guidelines. The Group believes that its profile of foreign currency exposure on its assets and liabilities is within conservative limits for a financial institution engaged in the type of business in which the Group is engaged.

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The table below summarizes the Group’s exposure to foreign currency exchange rate risk as of December 31, 2005. Included in the table are the Group’s assets and liabilities at carrying amounts (in thousand pesos), categorized by currency.
USD Resources Cash and Due from BSP Due from other banks Interbank loans receivable and securities held under agreements to resell Investment securities Available-for-sale investments Held-to-maturity investments Loans and receivables Other resources Total resources Liabilities Deposit liabilities Bills payable Accrued taxes, interest and other expenses Other liabilities Total liabilities Contingent Foreign Exchange Asset Spot purchases Forward purchases Total contingent foreign exchange asset Contingent Foreign Exchange Liabilities Spot sales Forward sales Total contingent foreign exchange liabilities Net Exposure P1,407,663 = 894,331 15,269,943 21,041,109 5,017,574 10,311,463 3,692,028 57,634,111 41,390,246 2,720,514 73,669 5,471,267 49,655,696 Others =133,072 P 1,237,476 404,332 184,350 – 1,320,334 170,574 3,450,138 633,420 1,384,243 3,309 538,465 2,559,437 Total =1,540,735 P 2,131,807 15,674,275 21,225,459 5,017,574 11,631,797 3,862,602 61,084,249 42,023,666 4,104,757 76,978 6,009,732 52,215,133

137,582 1,218,484 1,356,066

– 502,143 502,143

137,582 1,720,627 1,858,209

265,236 10,140,513 10,405,749 (P1,071,268) =

31,439 1,140,661 1,172,100 =220,742 P

296,675 11,281,174 11,577,849 (P850,526) =

Interest Rate Risk The Parent Company seeks to ensure that exposure to fluctuations in interest rates are kept within acceptable limits. Interest margins may increase as a result of such changes but may reduce or create losses in the event that unexpected movements arise. The Parent Company measures the sensitivity of its assets and liabilities to interest rate fluctuations by way of a “repricing gap” analysis using the repricing characteristics of its balance sheet positions tempered with approved assumptions. To evaluate earnings exposure, interest rate sensitive liabilities in each time band are subtracted from the corresponding interest rate assets to produce a “repricing gap” for that time band. The difference in the amount of assets and liabilities maturing or being repriced over a one year period would then give the Parent Company an indication of the extent to which it is exposed to the risk of potential changes in net interest income. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds

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the amount of interest rate sensitive assets. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. Accordingly, during a period of rising interest rates, a company with a positive gap would be better positioned than one with a negative gap to invest in higher yielding assets more quickly than it would need to refinance its interest-bearing liabilities. During a period of falling interest rates, a company with a positive gap would tend to see its assets repricing at a faster rate than one with a negative gap, which may restrain the growth of its net income or result in a decline in net interest income. For risk management purposes, the repricing gap covering the one year period is multiplied by an assumed change in interest rates to yield an approximation of the change in net interest income that would result from such an interest rate movement. The Parent Company’s BOD sets a limit on the level of earnings at risk (EAR) exposure tolerable to the Parent Company. Compliance to the EAR limit is monitored monthly by the Risk Management Group. The following table sets forth the repricing gap position of the Parent Company as of December 31, 2005 (in million pesos):
Up to 1 month Resources Placements with other banks Interbank loans receivable Securities Held Under Agreements to Resell Financial assets at fair value through profit or loss (including trading) Available-for-sale investments Held-to-maturity investments Loans and receivables Other resources Total resources Liabilities Deposit liabilities Bills payable Subordinated debt Other liabilities Capital funds Total Liabilities and Capital Funds Repricing Gap Cumulative Gap =8,818 P 11,759 12,300 1 to 3 months =– P 5,122 – 3 to 6 Months =– P – – 6 to 12 months =– P – – Greater than 1 year =– P – –

Total =8,818 P 16,881 12,300

512 9,949 – 23,920 3,062 P70,320 = 45,217 7,246 – 8,813 – P61,276 = P9,044 = 9,044

– 6,203 – 15,180 62 P26,567 = 22,096 – – 412 – P22,508 = P4,059 = 13,103

– 4,826 310 1,418 683 P7,237 = 10,961 – – 213 – P11,174 = (P3,937) = 9,166

– 3,351 760 1,159 949 P6,219 = 13,258 – – 1,725 – P14,983 = (P8,764) = 402

– 13,755 4,0220 35,878 57,9068 P111,561 = 78,5645 5,1978 2,958 3,9498 21,2954 P111,963 = (P402) = –

512 38,084 5,0920 77,555 62,6624 P221,904 = 170,0967 12,4434 2,958 15,112 21,2954 P221,904 = P– = –

(Note: Non-interest bearing resources and liabilities are lumped in the greater than 1-year bucket)

Given the repricing position of the resources and liabilities of the Parent Company as of December 31, 2005, if interest rates increase by 100 basis points, the Parent Company would expect annualized non-consolidated net interest income to increase by =4.0 million. Conversely, if P interest rates decrease by 100 basis points, the annualized non-consolidated net interest income would decrease by P4.0 million. This EAR computation is accomplished monthly, with a = quarterly stress test.

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Maturity (Liquidity Risk) The Group’s liquidity management involves maintaining sufficient and diverse funding capacity to accommodate fluctuations in asset and liability levels due to changes in the Group’s business operations or unanticipated events created by customer behavior or capital market conditions. The Group seeks to ensure sufficient liquidity through a combination of active management of liabilities, a liquid asset portfolio composed substantially of deposits in primary and secondary reserves, the securing of ample money market lines and the maintenance of repurchase facilities to pre-empt any unexpected liquidity situations. Liquidity risk is monitored and controlled primarily by a gap analysis of maturities of relevant assets and liabilities reflected in the maximum cumulative outflow report, as well as an analysis of liquid assets, which provides guidance as to the Group’s ability to generate sufficient liquidity. Further, an internal liquidity ratio has been set to determine sufficiency of liquid resources over deposit liabilities. Liability is dimensioned on a daily basis and under stressed situations. The table below analyses the Group’s resources and liabilities as of December 31, 2005 into relevant maturity groupings based on the remaining period at statement of condition date to the contractual maturity date (in million pesos):
Up to 1 month Resources Placements with other banks Interbank loans receivables Securities Held Under Agreements to Resell Financial assets at fair value through profit or loss (including trading) Available-for-sale investments Held-to-maturity investments Loans and receivables Other resources Total resources Liabilities Deposit liabilities Bills payable Subordinated debt Other liabilities Capital funds Total liabilities and capital funds Total Gap Cumulative Gap =7,654 P 11,792 12,300 1 to 3 months =624 P 5,122 – 3 to 6 6 to months 12 months =– P – – =5 P – – Greater than 1 year =1,132 P – –

Total =9,415 P 16,914 12,300

10 7,377 2 3,819 6,734 P49,688 = = 5,351 P 1,702 – 9,316 – P16,369 = P33,319 = 33,319

278 4,141 28 4,492 63 P14,748 = =10,696 P 24 – 412 – P11,132 = P3,616 = 36,935

78 3,309 312 4,210 688 P8,597 =

120 3,410 760 2,889 1,797 P8,981 =

52 22,007 4,165 64,321 49,428 P141,105 = =103,905 P 11,089 2,958 4,489 22,911 P145,352 = (P4,247) = –

538 40,244 5,267 79,731 58,710 P223,119 = =167,827 P 13,146 2,958 16,277 22,911 P223,119 = – –

=15,889 P =31,986 P 6 325 – – 220 1,840 – – P16,115 = P34,151 = (P7,518) (P25,170) = = 29,417 4,247

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Fair Values of Financial Resources and Liabilities The following table summarizes the carrying amounts and fair values of those financial resources and liabilities as of December 31, 2005 that are either not presented on the Group’s statement of condition at their fair values or where the carrying values do not approximate their respective fair values. Generally, bid prices are used to estimate fair values of assets, whereas offer prices are applied for liabilities.
Group Carrying Value Financial Assets Due from other banks Held-to-maturity investments Loans and receivables Financial Liabilities Subordinated debt Parent Company Fair value Carrying Value (In Thousand Pesos) P5,693,538 = 5,365,103 79,712,455 3,117,041 P5,098,751 = 5,091,685 77,554,727 2,958,437 Fair value

=5,696,540 P 5,266,817 79,730,961 2,958,437

P5,095,749 = 5,189,971 77,415,652 3,117,041

COCI, due from BSP, interbank loans receivables, and securities held under agreements to resell The carrying amount of these financial instruments approximates fair values due to their relatively short-term maturities. Due from other banks Due from other banks includes interbank placements and items in the course of collection. The fair value of floating rate placements and overnight deposits is their carrying amount. The estimated fair value of fixed interest-bearing deposits is based on discounted cash flows using prevailing money market interest rates for debts with similar credit risk and remaining maturity. Loans and receivables Loans and receivables are net of provisions for impairment. The estimated fair value of loans and receivables represents the discounted amount of estimated future cash flows expected to be received. Expected cash flows are discounted at current market rates to determine fair value. Held-to-maturity investments Fair value for HTM is based on market prices or broker/dealer price quotations. When this information is not available, fair value has been estimated using quoted market prices for securities with similar credit, maturity and yield characteristics. Deposit liabilities, due to BSP and other banks and other liabilities The estimated fair value of due to other banks, deposit liabilities and other liabilities with no stated maturity, which includes noninterest-bearing deposits, is the amount repayable on demand. Bills and acceptances payable The estimated fair value of floating rate borrowings is their carrying amount. Subordinated debt The fair value of subordinated debt is determined to be the present value of estimated future cash flows using a discount rate based on a benchmark rate adjusted for risk and remaining term to maturity considerations.

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6. Segment Information Business Segments The Group’s operating businesses are determined and managed separately according to the nature of services provided and the different markets served with each segment representing a strategic business unit. The Group’s business segments follow: Retail Banking - principally handling individual customers’ deposits, and providing consumer type loans, overdrafts, credit card facilities and fund transfer facilities; Corporate Banking - principally handling loans and other credit facilities and deposit accounts for corporate and institutional customers; Treasury - principally providing money market, trading and treasury services, as well as the management of the Group’s funding operations by use of T-bills, government securities and placements and acceptances with other banks, through treasury and wholesale banking. These segments are the bases on which the Group reports its primary segment information. Other operations of the Group comprise of the operations and financial control groups. Transactions between segments are conducted at estimated market rates on an arm’s length basis. Interest is credited to or charged against business segments based on a pool rate which approximates the marginal cost of funds. Business segment information of the Group follows (in thousand pesos):
Retail Banking Corporate Banking P3,259,217 = P5,758,863 = P1,873,642 = P947,084 = 2005 Treasury P6,640,983 = P2,239,614 = Others P1,870,413 = P816,562 = Total P17,529,476 = P5,876,902 = 3,357,638 2,519,264 (1,891,726) (6,617)

Gross income Segment result Unallocated expenses Income from operations before tax Provision for income tax Minority interest Net income for the year attributable to holders of the Parent Company Other Information Segment resources Unallocated resources Total resources Segment liabilities Unallocated liabilities Total liabilities Other Segment Information Capital expenditures Unallocated capital expenditures Total capital expenditures Depreciation and amortization Unallocated depreciation and amortization Total depreciation and amortization

P620,921 = P31,320,808 = P78,498,210 = P67,397,607 = P26,546,286 = P203,762,911 = 19,356,113 P223,119,024 = P181,390,662 = 18,817,561 P200,208,223 = P300,692 = 193,269 P493,961 = P190,333 = 610,119 P800,452 =

P27,881,924 =

P69,879,460 =

P59,997,654 =

P23,631,624 =

P259,386 =

P8,519 =

P2,044 =

P30,743 =

P141,797 =

P7,801 =

P32,414 =

P8,321 =

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Gross income Segment result Unallocated expenses Income from operations before tax and minority interest Provision for income tax Minority interest Net income for the year attributable to holders of the Parent Company Other Information Segment resources Unallocated resources Total resources Segment liabilities Unallocated liabilities Total liabilities Other Segment Information Capital expenditures Unallocated capital expenditures Total capital expenditures Depreciation and amortization Unallocated depreciation and amortization Total depreciation and amortization

Retail Banking P2,665,170 = =1,299,763 P

Corporate Banking =5,347,414 P =315,801 P

2004 (As Restated - Note 3) Treasury Others =6,452,622 P =1,441,981 P =1,349,744 P =313,827 P

Total =15,907,187 P =3,279,135 P 2,302,457 976,678 (618,142) (6,619)

P351,917 = =35,152,132 P =76,767,000 P =94,917,336 P =5,417,254 P =212,253,722 P 7,487,302 =219,741,024 P =191,039,481 P 3,127,905 =194,167,386 P =336,062 P 81,147 =417,209 P =469,089 P 294,358 P763,447 =

=32,109,282 P

=67,080,807 P

=86,828,027 P

=5,021,365 P

=177,622 P

=1,624 P

=13,401 P

=143,415 P

=177,747 P

=13,563 P

=32,932 P

=244,847 P

Geographical Segments Although the Group’s businesses are managed on a worldwide basis, the Group operates in five principal geographical areas of the world. Geographical segments are presented in Note 5.

7. Financial Assets at Fair Value Through Profit or Loss/Trading Account Securities This account consists of:
Group 2005 Government securities - net Other debt securities P507,139 = 31,329 P538,468 = Parent Company 2004 2004 2005 (In Thousand Pesos) =712,229 P =712,229 P P512,091 = 42,474 – – =754,703 P =712,229 P P512,091 =

Government securities include unrealized gain of =0.8 million as of December 31, 2005 and net of P unrealized loss of =9.7 million as of December 31, 2004 for the Group and the Parent Company. P Other securities include unrealized gain of =2.8 million and P6.2 million as of December 31, 2005 P = and 2004, respectively, for the Group. In 2005, the effective interest rates range from 5.83% to 12.09%.

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8. Investment Securities As of December 31, 2005, this account consists of: Parent Group Company (In Thousand Pesos) Available-for-sale investments Government securities (Notes 15 and 24) Other debt securities Other equity securities - net of allowance for impairment losses of =122.8 million P (Note 14) Held-to-maturity investments Government securities (Notes 15 and 24) P38,790,610 = 339,688 P36,986,894 = –

1,113,366 40,243,664 5,266,817 P45,510,481 =

1,097,243 38,084,187 5,091,685 P43,175,872 =

As of December 31, 2004, investment securities consist of: Parent Group Company (In Thousand Pesos) Available-for-sale investments Government securities (Notes 15 and 24) Other debt securities Investments in bonds and other debt instruments Government securities (Notes 9, 15 and 24) Zero-interest coupon notes - net of allowance for impairment losses of =259.8 million P (Notes 9 and 14) Other debt securities - net of allowance for impairment losses of =267.6 million P (Note 14) =4,114,884 P 199,310 4,314,194 53,545,167 =4,114,884 P 196,119 4,311,003 51,665,567

3,771,805

3,771,805

1,402,682 58,719,654 = P63,033,848

1,182,184 56,619,556 =60,930,559 P

Unrealized gain on AFS amounted to =913.6 million (net of unrealized loss of =2.8 million of P P subsidiaries) and =868.7 million as of December 31, 2005 for the Group and Parent Company, P respectively, and unrealized loss on AFS amounted to =143.5 million (including =4.7 million of P P subsidiaries) and =138.8 million as of December 31, 2004 for the Group and Parent Company, P respectively. On January 1, 2005, the Group has reclassified certain securities from HTM (classified as IBODI as of December 31, 2004) to AFS amounting to =22.0 billion as allowed by the transition P provisions of PAS 39.

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As of December 31, 2004, IBODI also includes the following securities: a. Twelve-year peso-denominated bonds with face value amounting to P11.2 billion. These = bonds, with an original amount of =24.3 billion, were issued by the NG in settlement of the P Parent Company’s claims from NG. These bonds, which will mature in 2007, are eligible as part of the liquidity cover requirements on government deposits. These bonds were redeemable at any time at the option of the NG and were originally issued as nontransferable until the lifting of such restriction in 1997. In February 1998, =10.0 billion of these bonds P were sold with an agreement to swap interest payments based on the average 91-day and 364day T-bill rates during the three-month period preceding the annual repricing date for the remaining term of the bonds. As of December 31, 2004, IBODI includes =0.8 billion of bonds P pledged to secure performance for the estimated net interest differential under the interest rate swap agreement (see Note 27). b. Bonds issued by Philippine Sugar Corporation (PSC) amounting to =2.8 billion. The bonds P carry an annual interest rate of 4.00% and will mature in 2014. The full repayment of principal and accumulated interest to maturity is guaranteed by a sinking fund managed by the Parent Company’s Trust Banking Group (TBG). As of December 31, 2005 and 2004, the net asset value of the sinking fund amounted to =3.04 billion and =2.8 billion, respectively, P P earning an average rate of return of 9.44% per annum. Management expects that the value of the sinking fund in the year 2014 will be more than adequate to cover the full redemption value of PSC bonds. On January 1, 2005, these bonds were reclassified to Loans and discounts under Loans and receivables (see Note 9). In 2005, effective interest rates range from 4.20% to 17.28% and 4.03% to 10.63% for pesodenominated and foreign currency-denominated AFS, respectively. HTM securities have effective interest rates ranging from 4.17% to 8.57% and 5.19% to 8.88% for peso-denominated and foreign currency-denominated HTM, respectively, in 2005.

9. Loans and Receivables This account consists of:
Group 2005 Loans receivable: Loans and discounts (Note 8) Bills purchased Customers’ liabilities on acceptances, letters of credit and trust receipts Lease contracts receivable Credit card accounts Finance lease receivable Premiums receivable Parent Company 2004 2004 2005 (In Thousand Pesos) P85,108,439 = 2,994,513 1,744,153 – 558,896 – – 90,406,001 =64,197,772 P 2,139,659 3,225,426 – 1,021,588 – – 70,584,445

P85,977,058 = 2,994,513 1,744,153 824,179 558,896 144,351 – 92,243,150

=65,208,588 P 2,139,659 3,225,426 952,270 1,021,588 138,252 400,970 73,086,753

(Forward)

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Group 2005 Other receivables (Note 13): Accrued interest receivable Accounts receivable Sales contract receivables Transferred receivables Special rehabilitation receivable accounts Miscellaneous

Parent Company 2004 2004 2005 (In Thousand Pesos)

Unearned discount and lease income Capitalized interest on restructured loans Unrealized profit on asset sold or exchanged Allowance for impairment losses (Note 14)

=– P =– P P6,014,291 = P5,964,368 = – – 3,781,525 3,229,825 – – 2,175,412 2,175,412 – – 339,810 339,810 – – 209,137 209,137 – – 333,287 301,697 – – 12,853,462 12,220,249 73,086,753 102,626,250 70,584,445 105,096,612 (117,045) (7,555) (107,147) (7,317) (1,108,709) (1,108,709) (538,425) (538,425) – – (588,998) (588,999) (24,131,080) (15,709,391) (23,936,782) (15,466,145) P P P79,730,962 =56,151,608 P77,554,727 =54,002,036 = =

As of December 31, 2005 and 2004, 62.91% and 73.70%, respectively, of the total loans receivables of the Parent Company were subject to periodic interest repricing. Remaining receivables carry annual fixed interest rates ranging from 5.70% to 12.28 % in 2005 and from 4.75% to 8.42% in 2004 for foreign currency-denominated receivables, and from 5.70% to 29.0% in 2005 and from 5.00% to 13.00% in 2004 for peso-denominated receivables. Sales contract receivable bear fixed interest rate per annum of 0.58% to 19.05% in 2005 and 10.30% to 21.00% in 2004. The effective interest rates of Loans receivables and Sales contract receivables range from 5.26% to 15.00% for foreign currency-denominated receivables, and from 6.00% to 19.05% for pesodenominated receivables. The breakdown of loans and receivables by contractual maturity follows:
Group Due Within One Year Loans and discounts Bills purchased Customers’ liabilities on acceptances, letters of credit and trust receipts Lease contracts receivable Credit card accounts Premiums receivable Finance lease receivable Accrued interest receivable Accounts receivable Sales contract receivable Transferred assets Special rehabilitation accounts Miscellaneous P55,760,992 = 2,295,656 2005 Due Beyond One Year P30,216,066 = 698,857 Due Within One Year Total (In Thousand Pesos) = P34,897,835 P85,977,058 = 2,139,659 2,994,513 2004 Due Beyond One Year =30,310,753 P –

Total =65,208,588 P 2,139,659

1,473,826 422,959 558,896 – 144,351 5,694,926 3,781,525 124,187 339,810 209,137 333,286 P71,139,551 =

270,327 401,220 – – – 319,365 – 2,051,225 – – – P33,957,060 =

1,744,153 824,179 558,896 – 144,351 6,014,291 3,781,525 2,175,412 339,810 209,137 333,287 P105,096,612 =

1,188,633 477,279 1,021,588 400,970 25,095 – – – – – – = P40,151,059

2,036,793 474,991 – – 113,157 – – – – – – =32,935,694 P

3,225,426 952,270 1,021,588 400,970 138,252 – – – – – – =73,086,753 P

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Parent Company Due Within One Year Loans and discounts Bills purchased Customers’ liabilities on acceptances, letters of credit and trust receipts Credit card accounts Accrued interest receivable Accounts receivable Sales contract receivable Transferred assets Special rehabilitation accounts Miscellaneous P55,284,170 = 2,295,656 2005 Due Beyond One Year P29,824,269 = 698,857 Due Within One Year Total (In Thousand Pesos) = P34,035,572 P85,108,439 = 2,139,659 2,994,513 2004 Due Beyond One Year =30,162,200 P –

Total =64,197,772 P 2,139,659

1,473,826 558,896 5,645,003 3,229,825 124,187 339,810 209,137 301,697 P69,462,207 =

270,327 – 319,365 – 2,051,225 – – – P33,164,043 =

1,744,153 558,896 5,964,368 3,229,825 2,175,412 339,810 209,137 301,697 P102,626,250 =

1,188,633 1,021,588 – – – – – – = P38,385,452

2,036,793 – – – – – – – =32,198,993 P

3,225,426 1,021,588 – – – – – – =70,584,445 P

Actual maturities may differ from contractual maturities because borrowers can prepay certain obligations, sometimes without penalties. The information relating to loans as to secured and unsecured and as to collateral follows:
Group 2005 Amount % Amount (Amounts In Thousand Pesos) Secured: Real estate mortgage Chattel mortgage Shares of stock Bank deposit hold-out Others Unsecured P32,520,658 = 5,080,822 1,631,539 1,522,865 33,733,053 74,488,937 17,754,213 P92,243,150 = 35.26 5.51 1.77 1.69 36.57 80.75 19.25 100.00 =20,801,859 P 3,863,525 1,483,679 1,339,987 24,552,747 52,041,797 21,044,956 =73,086,753 P 2004 %

28.46 5.29 2.03 1.83 33.60 71.21 28.79 100.00

Parent Company 2005 Amount Secured: Real estate mortgage Chattel mortgage Shares of stock Bank deposit hold-out Others Unsecured P32,439,639 = 4,885,738 1,625,370 1,436,121 32,762,271 73,149,139 17,256,862 P90,406,001 = % Amount (Amounts In Thousand Pesos) 35.88 5.40 1.80 1.59 36.24 80.91 19.09 100.00 =20,694,302 P 3,725,273 1,231,266 1,265,992 23,600,477 50,517,310 20,067,135 =70,584,445 P 2004 % 29.32 5.28 1.74 1.79 33.44 71.57 28.43 100.00

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The information on loan concentration as to industry follows:
Group 2005 Amount Amount % (Amounts In Thousand Pesos) =855,632 P P17,505,713 = 18.98 15,614,858 14,021,970 15.20 11,586,121 11,169,810 12.11 12,210,086 8,547,133 9.27 8,267,178 8,471,278 9.18 4,663,815 8,468,672 9.18 2,579,331 8,427,260 9.14 2,486,479 6,281,693 6.81 10,232,527 3,158,873 3.42 2,036,870 2,594,055 2.81 878,864 1,681,407 1.82 132,195 355,079 0.39 803,065 317,829 0.35 513,679 280,933 0.30 36,472 19,114 0.02 27,611 10,439 0.01 161,970 931,892 1.01 =73,086,753 P P92,243,150 = 100.00 Parent Company 2005 Amount % (Amounts In Thousand Pesos) =921,421 P P17,455,957 = 19.31 15,098,420 13,478,628 14.91 11,165,571 11,169,810 12.36 8,267,178 8,471,278 9.37 2,579,331 8,427,260 9.32 11,820,686 8,266,138 9.14 4,351,476 8,314,264 9.20 2,486,479 6,281,693 6.95 10,066,268 3,083,092 3.41 2,034,931 2,592,903 2.87 307,343 1,347,433 1.49 131,178 350,673 0.39 776,401 309,560 0.34 513,679 280,933 0.31 36,472 19,114 0.02 27,611 10,440 0.01 – 546,825 0.60 =70,584,445 P P90,406,001 = 100.00 Amount 2004 % 1.31 21.39 15.82 11.71 3.65 16.75 6.16 3.52 14.26 2.88 0.44 0.19 1.10 0.73 0.05 0.05 – 100.00 2004 % 1.17 21.37 15.85 16.71 11.31 6.38 3.53 3.40 14.00 2.79 1.20 0.18 1.10 0.70 0.05 0.04 0.22 100.00

Financial intermediaries Manufacturing (various) Real estate, renting and business activities Wholesale and retail trade Electricity, gas and water Transport, storage and communications Public administration and defense Agriculture, hunting and forestry Other community, social and personal services Construction Private household Hotel and restaurant Education Mining and quarrying Health and social work Fishing Others

Financial intermediaries Manufacturing (various) Real estate, renting and business activities Electricity, gas and water Public administration and defense Wholesale and retail trade Transport, storage and communications Agriculture, hunting and forestry Other community, social and personal services Construction Private household Hotel and restaurant Education Mining and quarrying Health and social work Fishing Others

The BSP considers that loan concentration exists when the total loan exposure to a particular industry exceeds 30.00% of the total loan portfolio. As of December 31, 2005 and 2004, the Group and the Parent Company do not have loan concentration risk to any particular industry.

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NPL as to secured and unsecured follows:
2005 Secured Unsecured P24,893,915 = 3,021,588 P27,915,503 = Parent Company 2004 2004 2005 (In Thousand Pesos) =23,367,492 P P P24,816,311 =23,250,326 = 14,370,701 14,370,701 3,021,588 =37,738,193 P P P27,837,899 =37,621,027 = Group

Current banking regulations allow banks that have no unbooked valuation reserves and capital adjustments to exclude from nonperforming classification those receivables classified as Loss in the latest examination of the BSP which are fully covered by allowance for impairment losses, provided that interest on said receivables shall not be accrued. The details of the NPL of the Group and of the Parent Company follow:
Group 2005 Total NPL Less NPL fully covered by allowance for impairment losses P27,915,503 = 6,738,098 P21,177,405 = Parent Company 2004 2004 2005 (In Thousand Pesos) =37,738,193 P =37,621,027 P P27,837,899 = 6,674,646 P21,163,253 = 9,436,975 =28,184,052 P

9,532,547 =28,205,646 P

Most of these receivables are secured mainly by real estate or chattel mortgages. Restructured receivables of the Group and of the Parent Company as of December 31, 2005 and 2004 amounted to P23.2 billion and =19.5 billion, respectively. = P As discussed in Note 8, loans and discounts include investment in twelve-year peso-denominated bonds amounting to =0.4 billion pledged to secure performance for the estimated net interest P differential under the interest rate swap agreement (see Note 27). In 2004, the Parent Company sold the outstanding loans receivable of =5.3 billion from National P Steel Corporation (NSC) to SPV companies under the provisions of RA No. 9182, The Special Purpose Vehicle Act of 2002. In consideration for such sale, the Parent Company received zerocoupon notes and cash totaling =4.2 billion. In accordance with the BSP Memorandum dated P February 16, 2004, Accounting Guidelines on the Sale of Nonperforming Assets (NPAs) to Special Purpose Vehicles, the =1.6 billion allowance for impairment losses previously provided for the P NSC loans receivable was released by the Parent Company to cover additional allowance for impairment losses required for other existing NPAs and other risk assets of the Parent Company. With the release of such allowance, the loss on the sale of the NSC loans receivable to the SPV amounting to =1.1 billion representing the difference between the carrying value of the receivables P and consideration received was deferred by the Parent Company as allowed under the regulations issued by the BSP for banks and financial institutions availing of the provisions of RA No. 9182.

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The zero-coupon notes received by the Parent Company on October 15, 2004 at the principal amount of =803.5 million (Tranche A Note) payable in five years and at the principal amount of P = P3.4 billion (Tranche B Note) payable in eight years in exchange for the outstanding receivable from NSC of =5.3 billion are included under loans and discounts as of December 31, 2005. The P notes are secured by a first ranking mortgage and security interest over the NSC plant assets. As of December 31, 2004, the zero-coupon notes were classified as IBODI and had an outstanding balance of =3.8 billion, after receipt of an additional cash payment of =140.3 million and the P P recognition of an allowance for impairment losses of =259.8 million. Using a discount rate of P 13.24%, the present value of such notes as of that date amounted to =1.9 billion. The =1.9 billion P P difference between the present value and the outstanding balance of the notes was deferred over a ten-year period in accordance with regulatory accounting policies prescribed by the BSP for banks and non-bank financial institutions availing of the provisions of RA No. 9182. However, on January 1, 2005, the Parent Company recognized this difference as a direct charge against deficit. As of December 31, 2005, these notes had a carrying value of P2.0 billion. = In 2005, the Parent Company sold another pool of NPL with outstanding balance of =4.7 billion. P As discussed in Note 3, upon adoption of PAS 39 on January 1, 2005, the Parent Company had not set up allowance for impairment losses on the NPLs sold to SPV since it availed of the provisions of RA No. 9182 in the recognition of the loss from sale of =4.3 billion. P Under RA 9182, losses on sale of NPL to SPV companies can be amortized over 10 years based on the following schedule: End of Period From Date of Transaction Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Cumulative Write-down of Deferred Charges 5% 10% 15% 25% 35% 45% 55% 70% 85% 100%

For the purpose of computing the Parent Company’s income tax, the loss is treated as an ordinary loss and will be carried over as a deduction from the Parent Company’s taxable gross income for a period of five consecutive taxable years immediately following the year of sale. Had the allowance for impairment losses on the sold NPLs in 2005 been set up as of January 1, 2005 and the 2004 loss on the sale of NPL been charged against operations as required by Philippine GAAP, net income in 2005 would have increased by =124.8 million and net income P in 2004 would have decreased by =1.1 billion. Capital funds as of December 31, 2005 and 2004 P would have decreased by =5.2 billion and =1.1 billion, respectively. P P In 2005, the amortization of the loss on sale of NPLs in 2004 amounting to =54.0 million was P charged against deficit.

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On November 27, 1997, Maybank Philippines, Inc. (Maybank) and the Parent Company signed a deed of assignment transferring to the Parent Company certain Maybank assets (Transferred receivables) and liabilities amounting to =1.9 billion and =1.3 billion, respectively, in connection P P with the sale of the Parent Company’s 60.00% equity in Maybank. As of December 31, 2005 and 2004, the balance of Transferred Receivables amounting to =2.9 billion, P2.6 billion of which is P = included under loans and receivables, may be offset against the equivalent amount of transferred liabilities (included under Bills Payable to BSP and Local Banks - Note 16). The excess of the transferred receivables over the transferred liabilities is fully covered by an allowance for probable losses. The remaining equity ownership of the Parent Company in Maybank was sold in June 2000 (see Note 26). Special rehabilitation receivable accounts represent the portion of the assets previously transferred to the NG as part of the Parent Company’s rehabilitation in 1986. These receivables were repurchased by the Parent Company from the NG at a discount and are mostly secured by real estate mortgages. These receivables are likewise fully covered by allowance for impairment losses.

10. Bank Premises, Furniture, Fixture , Equipment and, Leasehold Improvements The composition of and changes in furniture, fixtures and equipment and leasehold improvements follow:
Group 2005 Furniture, Fixtures and Equipment 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 at End of Year Leasehold Improvements (In Thousand Pesos) P163,205 = 26,407 (12,790) 176,822 38,145 42,946 – 81,091 P95,731 =

Total

2004

P3,752,142 = 467,554 (1,089,249) 3,130,447 3,150,438 202,059 (915,196) 2,437,301 P693,146 =

P3,915,347 = 493,961 (1,102,039) 3,307,269 3,188,583 245,005 (915,196) 2,518,392 P788,877 =

= P3,758,092 417,209 (259,954) 3,915,347 3,079,259 307,371 (198,047) 3,188,583 = P726,764

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Parent Company 2005 Furniture, Fixtures and Equipment 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/others Balance at end of year Net Book Value at End of Year Leasehold Total Improvements (In Thousand Pesos) P103,227 = 14,913 – 118,140 20,432 18,240 – 38,672 P79,468 = P3,613,639 = 450,883 (1,053,133) 3,011,389 2,980,055 198,425 (867,436) 2,311,044 P700,345 =

2004

P3,510,412 = 435,970 (1,053,133) 2,893,249 2,959,623 180,185 (867,436) 2,272,372 P620,877 =

= P3,502,536 355,550 (244,447) 3,613,639 2,894,849 268,064 (182,858) 2,980,055 = P633,584

The composition of and changes in land and buildings follow:
Group 2005 Land Appraised Value Balance at beginning of year Additions Disposals/others Balance at end of year Accumulated Depreciation and Impairment Loss Balance at beginning of year Depreciation Disposals/others Balance at end of year Net Book Value at End of Year Buildings Total (In Thousand Pesos) P5,702,510 = 21,929 (12,137) 5,712,302 P16,114,626 = 21,929 (20,155) 16,116,400 2004

P10,412,116 = – (8,018) 10,404,098

= P16,157,650 19,845 (62,869) 16,114,626

231,344 – – 231,344 P10,172,754 =

1,202,929 144,833 (3,071) 1,344,691 P4,367,611 =

1,434,273 144,833 (3,071) 1,576,035 P14,540,365 =

1,288,269 148,815 (2,811) 1,434,273 = P14,680,353

Parent Company 2005 Land Appraised Value Balance at beginning of year Additions Disposals/others Balance at end of year Accumulated Depreciation and Impairment Loss Balance at beginning of year Depreciation Disposals/others Balance at end of year Net Book Value at End of Year Buildings Total (In Thousand Pesos) P5,689,338 = 21,929 (5,799) 5,705,468 P16,101,454 = 21,929 (13,817) 16,109,566 2004

P10,412,116 = – (8,018) 10,404,098

= P16,097,628 19,845 (16,019) 16,101,454

231,344 – – 231,344 P10,172,754 =

1,200,253 144,656 (3,078) 1,341,831 P4,363,637 =

1,431,597 144,656 (3,078) 1,573,175 P14,536,391 =

1,284,713 147,373 (489) 1,431,597 = P14,669,857

Depreciation on the revaluation increment of the buildings amounted to P55.7 million and = = P60.3 million in 2005 and 2004, respectively, for the Parent Company.

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Depreciation and amortization expense, inclusive of the depreciation on revaluation increment of the buildings, charged against operations of the Group amounted to =550.6 million and P = P456.2 million in 2005 and 2004, respectively, and =524.6 million in 2005 and =429.5 million in P P 2004 for the Parent Company. Had the land and buildings been carried at cost, the net book value of the land and buildings would have been =5.2 billion and =5.3 billion as of December 31, 2005 P P and 2004, respectively, for the Group and Parent Company. Land and buildings with carrying amount of =9.8 billion as of December 31, 2005 and P = P10.0 billion as of December 31, 2004 were pledged as collateral to secure the Parent Company’s borrowings from PDIC (see note 16).

11. Investments in Subsidiaries and an Associate The details of this account follow:
Group Equity Interest (Percentage) At equity: Acquisition cost of: PNB International Investments Corporation PNB Europe PLC PNB International Finance Limited PNB Holdings PNB Capital PNB Forex, Inc. PNB Securities, Inc. PNB Italy – SpA PNB Remittance Center, Ltd. Omicron Asset Portfolio (SPV - AMC), Inc. Opal Portfolio Investments (SPV - AMC), Inc. Tanzanite Investments (SPV - AMC), Inc. Tau Portfolio Investments (SPV - AMC), Inc. PNB Corporation – Guam Japan - PNB Leasing PNB Venture Capital Corporation Beneficial - PNB Life Insurance Company, Inc. Accumulated equity in net earnings: Balance at beginning of year Equity in net earnings for the year Dividends received during the year Balance at end of year Parent Company 2004 (As Restated Note 3) 2005

2005

2004 (In Thousand Pesos)

100 100 100 100 100 100 100 100 100 100 100 100 100 100 60 60 40

P– = – – – – – – – – – – – – – – 5,061 516,673 521,734 121,984 49,665 (9,212) 162,437 P684,171 =

= P– – – – – – – – – – – – – – – 5,061 516,673 521,734

P2,028,202 = 785,309 753,061 577,876 350,000 105,000 62,351 58,380 32,042 31,250 31,250 31,250 31,250 7,672 103,176 5,061 507,461 5,500,591

= P2,028,202 785,309 753,061 577,876 350,000 105,000 62,351 58,380 32,042 31,250 31,250 31,250 31,250 7,672 103,176 5,061 516,673 5,509,803 – – – – = P5,509,803

98,975 – 30,219 – (7,210) – 121,984 – = P643,718 P5,500,591 =

As discussed in Note 2, the SEC approved on November 7, 2002 the application of the accumulated translation adjustment of =1.6 billion to eliminate the Parent Company’s remaining P deficit of =1.3 billion as of December 31, 2001, after applying the total reduction in par value P amounting to =7.6 billion. The SEC approval is subject to the following conditions: (a) the P remaining translation adjustment of =310.7 million as of December 31, 2001 (shown as part of P

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Capital Paid in Excess of Par Value) will not be used to wipe out losses that may be incurred in the future without prior approval of SEC; and (b) for purposes of dividend declaration, any future surplus account of the Parent Company shall be restricted to the extent of the deficit wiped out by translation adjustment. As of December 31, 2005 and 2004, acquisition cost of the investments in the Parent Company financial statements include the translation adjustment and accumulated equity in net earnings, net of dividends subsequently received from the quasi-reorganization date, that were closed to deficit on restructuring date.

12. Investment Properties The composition and movement of this account follow:
Group 2005 Building and Land Improvements Total (In Thousand Pesos) Cost Balance at beginning of year Additions Disposals/others Balance at end of year Accumulated Depreciation and Impairment Losses Balance at beginning of year Depreciation Impairment losses Reversals/others Balance at end of year Net Book Value at End of Year P25,166,743 = 1,736,691 (1,876,041) 25,027,393 P7,718,612 = 387,296 (306,098) 7,799,810 P32,885,355 = 2,123,987 (2,182,139) 32,827,203

2004

= P32,456,027 2,143,382 (1,714,054) 32,885,355

2,512,914 – 147,748 549,565 3,210,227 P21,817,166 =

2,382,470 316,268 70,471 – 2,769,209 P5,030,601 =

4,895,384 316,268 218,219 549,565 5,979,436 P26,847,767 =

4,353,217 290,475 251,692 – 4,895,384 = P27,989,971

Parent Company 2005 Building and Land Improvements Total (In Thousand Pesos) Cost Balance at beginning of year Additions Disposals/others Balance at end of year P25,166,167 = 1,736,691 (1,876,041) 25,026,817 P7,718,612 = 286,051 (306,098) 7,698,565 P32,884,779 = 2,022,742 (2,182,139) 32,725,382

2004

= P32,455,451 2,143,382 (1,714,054) 32,884,779

(Forward)

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Parent Company 2005 Building and Land Improvements Total (In Thousand Pesos) Accumulated Depreciation and Impairment Losses Balance at beginning of year Depreciation Impairment loss Reversal/others Balance at end of year Net Book Value at End of Year

2004

P2,512,914 = – 147,748 549,413 3,210,075 P21,816,742 =

P2,382,470 = 297,345 70,471 – 2,750,286 P4,948,279 =

P4,895,384 = 297,345 218,219 549,413 5,960,361 P26,765,021 =

= P4,353,217 290,475 251,692 – 4,895,384 = P27,989,395

Certain investment properties consisting of prime commercial properties amounting to = P1.8 billion and =1.9 billion as of December 31, 2005 and 2004, respectively, were pledged as P collateral to secure the Parent Company’s bills payable to PDIC inclusive of the bills payable transferred from BSP (see Note 16). The fair value of the investment properties as of December 31, 2005 and 2004 amounted to =34.4 billion and =37.4 billion, respectively, as determined by independent and/or in-house P P appraisers.

13. Other Resources This account consists of:
Group 2005 Deferred charges - net (Note 9) Deferred tax assets (Note 22) Net interoffice accounts Prepaid expenses Sundry debits Accrued interest receivable Deficiency claims receivable Accounts receivable Transferred assets Foreign currency notes and coins on hand, checks and other cash items Sales contract receivable - includes unrealized profit on sale of =612.8 million in 2004 P Special rehabilitation accounts Deferred reinsurance premiums Miscellaneous (Note 27) Less allowance for impairment losses (Note 14) P5,287,440 = 3,368,679 563,319 123,139 78,076 – – – – – – – – 1,333,237 10,753,890 1,008,022 P9,745,868 = Parent Company 2004 2005 2004 (In Thousand Pesos) =1,214,125 P P5,287,190 = =1,207,338 P 4,547,802 3,331,461 4,510,584 367,589 563,319 367,589 94,569 108,103 80,696 35,299 76,992 34,909 6,881,625 – 6,843,589 4,619,191 – 4,619,191 3,452,155 – 3,382,590 2,937,519 – 2,937,519 1,762,348 2,181,182 241,290 134,320 2,420,768 30,889,782 12,210,632 =18,679,150 P – – – – 933,476 10,300,541 906,181 P9,394,360 = 1,620,844 2,181,182 241,290 – 2,105,850 30,133,171 12,167,451 =17,965,720 P

On January 1, 2005, financial assets included under Other Resources were reclassified to loans and receivables upon adoption of PAS 39.

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14. Allowance for Impairment Losses Changes in the allowance for impairment losses follow:
Parent Company 2004 2004 (As Restated (As Restated Note 3) Note 3) 2005 2005 (In Thousand Pesos) Balance at beginning of year, as previously stated Investment securities Loans and receivables Investment properties Other resources Allowance on SPV subordinated notes charged to deficit (Note 9) Effect of change in accounting for impairment losses (Note 3) Balance at beginning of year, as restated Provisions during the year Accounts charged off and others Balance at end of year Investment securities (Note 8) Loans and receivables (Note 9) Investment properties (Note 12) Other resources (Note 13) P527,421 = 15,709,391 4,143,964 12,210,632 32,591,408 1,868,299 1,920,801 36,380,508 504,213 (7,586,611) 122,846 24,131,080 4,036,162 1,008,022 P29,298,110 = =201,745 P 18,127,028 4,015,695 10,446,911 32,791,379 – – 32,791,379 964,335 (1,164,306) 527,421 15,709,391 4,143,964 12,210,632 =32,591,408 P P527,421 = 15,466,145 4,143,964 12,167,451 32,304,981 1,868,299 1,913,544 36,086,824 502,855 (7,587,708) 122,846 23,936,782 4,036,162 906,181 P29,001,971 = =201,745 P 17,926,497 4,015,695 10,380,063 32,524,000 – – 32,524,000 932,395 (1,151,414) 527,421 15,466,145 4,143,964 12,167,451 =32,304,981 P Group

15. Deposit Liabilities The breakdown of deposit liabilities by contractual maturity follows:
Group Due Within One Year Demand Savings Time P15,849,762 = 120,834,525 20,551,230 P157,235,517 = 2005 Due Beyond One Year P– = 6,838,213 3,753,047 P10,591,260 = Due Within One Year Total (In Thousand Pesos) = P14,476,485 P15,849,762 = 72,082,712 127,672,738 2,829,742 24,304,277 = P89,388,939 P167,826,777 = Parent Company Due Within One Year Demand Savings Time P15,698,886 = 120,819,469 22,986,265 P159,504,620 = 2005 Due Beyond One Year P– = 6,838,214 3,753,046 P10,591,260 = Due Within One Year Total (In Thousand Pesos) = P14,433,937 P15,698,886 = 72,038,670 127,657,683 4,887,122 26,739,311 = P91,359,729 P170,095,880 = 2004 Due Beyond One Year =– P 47,958,768 23,661,346 =71,620,114 P 2004 Due Beyond One Year =– P 47,958,768 23,661,346 =71,620,114 P

Total =14,476,485 P 120,041,480 26,491,088 =161,009,053 P

Total =14,433,937 P 119,997,438 28,548,468 =162,979,843 P

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Of the total deposit liabilities of the Parent Company, =6.6 billion in 2005 and =6.1 billion in 2004 P P were noninterest-bearing. Remaining deposit liabilities generally earned annual fixed interest rates ranging from 0.50% to 4.62% in 2005 and from 0.50% to 4.13% in 2004 for foreign currency-denominated deposit liabilities, and from 0.50% to 12.66% in 2005 and from 1.00% to 14.55% in 2004 for peso-denominated deposit liabilities. Under existing BSP regulations, non-FCDU deposit liabilities of the Parent Company are subject to liquidity reserves equivalent to 10.00% which increased to 11.00% starting July 15, 2005 and statutory reserves equivalent to 10.00%. Available reserves follow: 2004 2005 (In Thousand Pesos) = P3,285,009 P4,040,539 = 3,765,737 3,719,362 – 12,300,000 144,943 9,477,683 22,207,192 – = P29,402,881 P29,537,584 =

Cash on hand Due from BSP Securities held under agreements to resell AFS IBODI

As of December 31, 2005 and 2004, the Parent Company was in compliance with such regulations.

16. Bills and Acceptances Payable This account consists of:
Group 2005 Bills payable to: BSP and local banks (Note 9) Foreign banks PDIC and others (Notes 2 and 10) Acceptances outstanding Parent Company 2004 2004 2005 (In Thousand Pesos) P2,539,894 = 1,513,817 8,328,539 12,382,250 61,033 P12,443,283 = =2,704,474 P 1,385,255 8,716,846 12,806,575 88,898 =12,895,473 P

P2,931,894 = 1,824,408 8,328,539 13,084,841 61,033 P13,145,874 =

=2,884,474 P 1,844,440 8,716,846 13,445,760 88,898 =13,534,658 P

As of December 31, 2005, 94.11% and 96.08% of the bills payable of the Group and the Parent Company, respectively, were subject to periodic interest repricing. The annual interest rates ranged from 2.13% to 5.43% in 2005 and from 1.00% to 3.44% in 2004 for foreign currencydenominated borrowings, and from 3.00% to 12.00% in 2005 and from 3.00% to 12.00% in 2004 for peso-denominated borrowings.

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The breakdown of bills and acceptances payable by contractual maturity follows:
Group Due Within One Year Bills payable Acceptances outstanding P1,868,178 = 61,033 P1,929,211 = 2005 Due Beyond One Year P11,216,663 = – P11,216,663 = Due Within One Year Total (In Thousand Pesos) = P3,971,513 P13,084,841 = 88,898 61,033 = P4,060,411 P13,145,874 = Parent Company Due Within One Year Bills payable Acceptances outstanding P1,481,722 = 61,033 P1,542,755 = 2005 Due Beyond One Year P10,900,528 = – P10,900,528 = Due Within One Year Total (In Thousand Pesos) = P3,673,116 P12,382,250 = 88,898 61,033 = P3,762,014 P12,443,283 = 2004 Due Beyond One Year =9,133,459 P – =9,133,459 P 2004 Due Beyond One Year =9,474,247 P – =9,474,247 P

Total =13,445,760 P 88,898 =13,534,658 P

Total =12,806,575 P 88,898 =12,895,473 P

The Parent Company’s bills payable to BSP includes the transferred liabilities from Maybank amounting to =2.3 billion and =2.5 billion as of December 31, 2005 and 2004, respectively P P (see Note 9). Under the MOA mentioned in Note 2, the note payable to BSP of =13.9 billion was assigned to P PDIC. Such assignment increased the Parent Company’s total obligation to PDIC to =23.9 billion. P Of this amount, (a) =10.0 billion was settled thru “dacion en pago” of the Parent Company’s P resources comprising of loans to, and debt securities issued by various government entities, (b) P7.8 billion was converted into convertible preferred shares of the Parent Company, and (c) the = balance of =6.1 billion was converted into a note payable in ten years with interest of 91-day P T-bill rate plus 1.00%. Bills Payable - Others also includes funding from the Development Bank of the Philippines, Land Bank of the Philippines and the Social Security System under which the Parent Company acts as a conduit for certain financing programs of these institutions. Lending to such programs is shown under Loans and receivables (see Note 9).

17. Subordinated Debt On December 19, 2003, the Parent Company’s BOD approved the raising of lower tier 2 capital through the issuance in the local capital market of subordinated notes with maximum principal amount of =3.0 billion maturing in 10 years but callable with step-up on August 16, 2009. The P notes bear a coupon rate of 12.50% per annum with step-up after five years. The issuance of the foregoing subordinated notes under the terms approved by the BOD was approved by the MB, in its Resolution No. 06/01-23-04 dated January 22, 2004, subject to the Parent Company’s compliance with certain conditions.

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Relative to this, on February 16, 2004, the Parent Company issued =3.0 billion, 12.50% P Subordinated Notes (the Notes) due in 2014. As discussed in Note 27, on March 2, 2004, the Parent Company swapped the proceeds from the Notes into USD, which are then invested in USD-denominated interbank placements, Republic of the Philippines (ROP) and US Treasury bonds. Among the significant terms and conditions of the issuance of such Notes are: (a) Issue price at 100.00% of the principal amount; (b) The Notes bear interest at the rate of 12.50% per annum from and including February 16, 2004 to but excluding February 16, 2009. Interest will be payable semi-annually in arrears on February 16 and August 16 of each year, commencing on August 16, 2004. Unless the Notes are previously redeemed, interest from and including February 16, 2009 to but excluding February 16, 2014 will be reset at 11.23%, the equivalent of the five-year Money Market Association of the Philippines 1 Fixed Rate Treasury Notes (MART1 FXTN) as of February 9, 2004, plus a spread of 5.27% per annum. The stepped-up interest will be payable semi-annually in arrears on February 16 and August 16 of each year, commencing on August 16, 2009; (c) The Notes constitute direct, unconditional unsecured and subordinated obligations of the Parent Company and at all times rank pari passu without preference among themselves and at least equally with all other present and future unsecured and subordinated obligations of the Parent Company; (d) The Parent Company may redeem the Notes in whole but not in part at a redemption price equal to 100.00% of the principal amount together with accrued and unpaid interest on the day following the last day of the tenth interest period from issue date, subject to the prior consent of the BSP. The Notes may not be redeemed at the option of the noteholders; and (e) Each noteholder, by accepting a Note, irrevocably agrees and acknowledges that: (a) it may not exercise or claim any right of set-off in respect of any amount owed by the Parent Company arising under or in connection with the Notes; and (b) it shall to the fullest extent permitted by applicable law, waive and be deemed to have waived all such rights of set-off. As of December 31, 2005, Subordinated debt is net of unamortized transaction cost of = P41.6 million. As of December 31, 2004, Subordinated debt is presented at face amount and the unamortized transaction cost is included in Deferred Charges under Other Resources.

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18. Other Liabilities The following liabilities are due within one year from their respective statement of condition dates:
Group Parent Company 2004 2004 (As Restated (As Restated Note 3) Note 3) 2005 (In Thousand Pesos) =103,326 P =103,326 P P115,704 = 137,991 137,991 69,527 477,893 477,893 472,805 6,139,490 6,076,517 4,795,600 9,764,975 8,740,575 9,658,377 =16,623,675 P15,112,013 =15,536,302 P P =

2005 Due to BSP Margin deposits and cash letters of credit Manager’s checks and demand drafts outstanding Accrued taxes, interest and other expenses Other liabilities P115,704 = 69,527 472,805 4,939,651 10,679,448 P16,277,135 =

Accrued taxes, interest and other expenses consist of:
Group Parent Company 2004 2004 (As Restated (As Restated Note 3) Note 3) 2005 (In Thousand Pesos) =187,991 P =187,991 P P142,403 = 4,235,961 4,235,961 2,963,687 1,715,538 1,652,565 1,689,510 =6,139,490 P =6,076,517 P P4,795,600 =

2005 Taxes (Note 22) Interest Others (Note 21) P154,209 = 2,972,222 1,813,220 P4,939,651 =

Other liabilities consist of:
Group Parent Company 2004 2004 (As Restated (As Restated Note 3) Note 3) 2005 (In Thousand Pesos) =3,554,073 P =3,176,634 P P3,461,310 = 1,668,085 1,668,085 2,894,236 1,891,312 1,852,878 924,504 679,288 677,331 732,527 805,086 801,978 348,270 241,602 – – 96,128 96,128 179,824 829,401 467,541 1,117,706 =9,764,975 P =8,740,575 P P9,658,377 =

2005 Accounts payable Bills purchased - contra Due to other banks Deferred tax liability (Note 22) Deferred credits Reserve for unearned premiums Retirement liability (Note 20) Miscellaneous (Note 27) P4,117,883 = 2,894,236 924,504 741,216 349,646 293,547 179,824 1,178,592 P10,679,448 =

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19. Capital Funds Capital stock as of December 31, 2005 and 2004 consists of (in thousands except for par value and number of shares):
2005 Shares Preferred - P40 par value = Authorized Issued and outstanding Balance at beginning of year Conversion to common stock Balance at end of year Common - =40 par value P Authorized Issued and outstanding Balance at beginning of year Conversion from preferred stock Balance at end of year 195,175,444 195,175,444 (140,817,693) 54,357,751 1,054,824,557 378,070,472 140,817,693 518,888,165 P7,807,018 = (5,632,708) 2,174,310 – 15,122,819 5,632,708 20,755,527 P22,929,837 = Amount Shares 195,175,444 195,175,444 – 195,175,444 1,054,824,557 378,070,472 – 378,070,472 =7,807,018 P – 7,807,018 – 15,122,819 – 15,122,819 = P22,929,837 2004 Amount

The preferred shares have the following features: (a) Non-voting, non-cumulative, fully participating in dividends with the common shares; (b) Convertible, at any time at the option of the holder who is qualified to own and hold common shares; (c) With mandatory and automatic conversion into common shares upon the sale of such preferred shares to any person other than the NG or any GOCC’s; and (d) With rights to subscribe to additional new preferred shares with all of the features described above. In 2005, the NG sold a portion of its preferred shareholdings in the Parent Company to LTG. In accordance with the Articles of Incorporation, the preferred shares were automatically converted into common shares. Under existing BSP regulations, the determination of the Parent Company’s compliance with regulatory requirements and ratios is based on the amount of the Parent Company’s “unimpaired capital” (regulatory net worth) reported to the BSP, which is determined on the basis of regulatory accounting policies, which differ from Philippine GAAP in some respects. In addition, the risk-based capital ratio of a bank, expressed as a percentage of qualifying capital to risk-weighted resources, should not be less than 10.00% for both solo basis (head office and branches) and consolidated basis (parent bank and subsidiaries engaged in financial allied undertakings but excluding insurance companies). Qualifying capital and risk-weighted resources are computed based on BSP regulations. As discussed in Note 2, the BSP has approved the booking of additional appraisal increment of = P431.8 million in 2001 on branch premises and recognition of the same in determining the capital adequacy ratio, and booking of translation adjustment of =1.6 billion in 2001 representing the P

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increase in peso value of the investment in foreign subsidiaries for purposes of the quasireorganization and rehabilitation of the Parent Company provided that the same shall be excluded for dividend purposes. As of December 31, 2005 and 2004, the Group was in compliance with the capital adequacy ratio. The capital-to-risk assets ratio of the Group as reported to the BSP as of December 31, 2005 and 2004 was 17.20% and 16.20%, respectively.

20. Retirement Plan The Parent Company’s noncontributory retirement plan provides a retirement benefit equal to one hundred and twelve percent (112.00%) of plan salary per month for every year of credit service. Retirement expense charged against operations amounted to =83.7 million and =78.3 million (as P P restated) in 2005 and 2004, respectively. The following table shows the actuarial assumptions used in determining the retirement benefit obligation of the Parent Company: 2004 2005 10.00% 10.00% 12.00% 14.00% = P1,000 effective P1,100 effective = July 1, 2005 July 1, 2006 = 6.00% per year P1,000 effective July 1, 2006 thereafter 6.00% per year thereafter

Expected rate of return on plan assets Discount rate Salary rate increase

Actuarial valuation is made at least every two years. The amount of liability recognized in the Parent Company statements of condition (included under Other Liabilities) is as follows (in thousand pesos): 2005 P775,689 = 710,317 65,372 114,452 P179,824 = 2004 = P667,328 677,330 (10,002) 106,130 = P96,128

Present value of defined benefit obligation Fair value of plan assets Unrecognized actuarial losses Retirement liability

The amounts included in Compensation and Fringe Benefits in the Parent Company statements of income are as follows (in thousand pesos): 2005 P60,403 = 93,425 (67,733) (2,399) P83,696 = 2004 = P63,044 80,569 (65,354) – = P78,259

Current service cost Interest cost Expected return on plan assets Net actuarial gains recognized during the year

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The actual return on plan assets amounted to =78.5 million and =37.5 million in 2005 and 2004, P P respectively. The movements in the retirement liability recognized in the Parent Company statements of condition follow (in thousand pesos): 2005 P96,128 = 83,696 P179,824 = 2004 = P17,869 78,259 = P96,128

Balance at beginning of year Retirement expense Balance at end of year

Changes in the present value of the defined benefit obligation are as follows (in thousand pesos): 2005 P667,328 = 93,425 60,403 (45,467) – P775,689 = 2004 = P671,412 80,569 63,044 (13,756) (133,941) = P667,328

Defined benefit obligation at beginning of year Interest cost Current service cost Benefits paid Actuarial gain Defined benefit obligation at end of year

Changes in the fair value of the plan assets are as follows (in thousand pesos): 2005 P677,330 = 67,733 (45,467) 10,721 P710,317 = 2004 = P653,543 65,354 (13,756) (27,811) = P677,330

Fair value of plan assets at beginning of year Expected return Benefits paid Actuarial gain (loss) Fair value of plan assets at end of year

The fair value of the plan assets as of December 31, 2005 and 2004 includes the fair value of the investments in the Parent Company shares of stocks amounting to P184.1 million and = = P176.3 million, respectively. As of January 1, 2004 (transition date), December 31, 2004 and 2005, the net retirement liability (asset) of Japan-PNB and PNB General Insurers, Co., Inc. (PNB Gen), a wholly owned subsidiary of the Group follows (in thousand pesos): Japan-PNB =– P 1,580 2,169 PNB Gen (P5,740) = 6,260 7,015

January 1, 2004 December 31, 2004 December 31, 2005

Retirement expense of the Group charged to operations amounted to =92.4 million and P = P80.5 million (as restated) in 2005 and 2004, respectively.

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21. Leases The Parent Company leases the premises occupied by majority of its branches (about 41.59% of the branch sites are Parent Company-owned). Some of its subsidiaries also lease the premises occupied by their Head Offices and most of their branches. The lease contracts are for periods ranging from 1 to 25 years and are renewable at the Group’s option under certain terms and conditions. Various lease contracts include escalation clauses, most of which bear an annual rent increase of 10.00%. Rent expense charged against current operations (included in Occupancy and Equipment-related Costs in the statements of income) amounted to P383.2 million in 2005 and =369.0 million in = P 2004, for the Group, of which =274.7 million in 2005 and =235.1 million in 2004, pertain to the P P Parent Company. Future minimum rentals payable under non-cancelable operating leases follow:
Group 2005 Within one year Beyond one year but not more than five years Beyond more than five years P229,228 = 294,313 42,019 P565,560 = 2004 2005 (In Thousand Pesos) = P117,251 P165,632 = 251,350 270,990 26,474 42,019 = P395,075 P478,641 = Parent Company 2004 = P117,251 251,350 26,474 = P395,075

The Parent Company has entered into commercial property leases on its investment property portfolio consisting of the Parent Company’s ROPOA. These non-cancelable leases have remaining lease terms of between two and five years. Some leases include a clause to enable upward revision of the rental charge on an annual basis based on prevailing market rates (such as 5.00% per year). Future minimum rentals receivable under non-cancelable operating leases follow: 2004 2005 (In Thousand Pesos) =51,692 P P44,400 = 97,036 22,200 = P148,728 P66,600 =

Within one year Beyond one year but not more than five years

22. Income and Other Taxes Under Philippine tax laws, the Parent Company and certain subsidiaries are subject to percentage and other taxes (presented as Taxes and Licenses in the statements of income) as well as income taxes. Percentage and other taxes paid consist principally of gross receipts tax and documentary stamp tax.

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Income taxes include the corporate income tax, discussed below, and final tax paid at the rate of 20%, which represents final withholding tax on gross interest income from government securities and other deposit substitutes. These income taxes, as well as the deferred tax benefits and provisions, are presented as Provision for Income Tax in the statements of income. Prior to November 1, 2005, the RCIT was 32%. Interest allowed as a deductible expense is reduced by an amount equivalent to 38% of interest income subjected to final tax. RA No. 9337, An Act Amending National Internal Revenue Code, provides that effective November 1, 2005, the RCIT rate shall be 35% until January 1, 2009. Starting January 1, 2009, the RCIT shall be 30%. Interest expense allowed as a deductible expense is reduced by 42% starting November 1, 2005 until January 1, 2009. Starting January 1, 2009, interest expense allowed as a deductible expense shall be reduced by 33%. An MCIT of 2% on modified gross income is computed and compared with the regular income tax. Any excess of MCIT over the RCIT is deferred and can be used as a tax credit against future income tax liability for the next three years. In addition, NOLCO is allowed as a deduction from taxable income in the next three years from the period of incurrence for the Parent Company and certain subsidiaries. FCDU offshore income (income from non-residents) is tax-exempt while gross onshore income (income from residents) is generally subject to 10.00% income tax. In addition, interest income on deposit placement with other FCDUs and offshore banking units (OBUs) is taxed at 7.50%. RA No. 9294, which became effective in May 2004, provides that the income derived by the FCDU from foreign currency transactions with non-residents, OBUs, local commercial banks including branches of foreign banks is tax-exempt while interest income on foreign currency loans from residents other than OBUs or other depository banks under the expanded system is subject to 10.00% income tax. Provision for income tax consists of:
Group Parent Company 2004 2004 (As Restated (As Restated Note 3) Note 3) 2005 (In Thousand Pesos) =614,783 P =478,793 P P552,654 = 3,359 – 1,179,124 =618,142 P =478,793 P P1,731,778 =

2005 Current Deferred P712,602 = 1,179,124 P1,891,726 =

The components of net deferred tax assets included in Other Resources follow:
Group 2005 Deferred tax asset on: Allowance for impairment losses NOLCO and others Less deferred tax liability on unrealized trading gains on derivatives Parent Company 2004 2004 2005 (In Thousand Pesos) P3,470,311 = – 3,470,311 138,850 P3,331,461 = =4,510,584 P – 4,510,584 – =4,510,584 P

P3,490,509 = 17,020 3,507,529 138,850 P3,368,679 =

=4,530,782 P 17,020 4,547,802 – =4,547,802 P

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Based on the five-year financial forecast prepared by management and duly approved by the Executive Committee of the BOD, the Parent Company’s deferred tax assets of =3.3 billion as of P December 31, 2005 is expected to be realized from its taxable profits within the next three to five years. The Parent Company and certain subsidiaries did not recognize deferred tax assets on the following temporary differences:
Parent Company 2004 2004 (As Restated (As Restated Note 3) Note 3) 2005 2005 (In Thousand Pesos) Investment properties: Allowance for impairment losses Accumulated depreciation Fair value adjustment Allowance for impairment losses on loans and receivables and other resources NOLCO MCIT Others P4,036,162 = 1,924,199 (4,057,047) 1,903,314 12,604,086 10,899,139 42,891 617,937 P26,067,367 = =3,268,531 P 1,626,854 (3,954,809) 940,576 10,073,326 8,258,313 17,380 505,370 =19,794,965 P P4,036,162 = 1,924,199 (4,057,047) 1,903,314 12,375,272 10,899,139 41,459 627,614 P25,846,798 = =3,268,531 P 1,626,854 (3,954,809) 940,576 9,850,018 8,264,445 15,949 505,370 =19,576,358 P Group

The components of deferred tax liability included in Miscellaneous Liabilities relating to items credited to capital funds follow:
Parent Company 2004 2004 (As Restated (As Restated Note 3) Note 3) 2005 2005 (In Thousand Pesos) Deferred tax liability on: Revaluation increment on land and buildings Unrealized gain on AFS Group

P634,415 = 106,801 P741,216 =

=679,288 P – =679,288 P

P634,415 = 98,112 P732,527 =

=677,331 P – =677,331 P

Details of the Group’s NOLCO follow:
Year Incurred 1992 to 1999 2002 2003 2004 2005 Amount =12,121 P 4,400,046 2,228,206 1,700,948 7,029,130 =15,370,451 P Used/Expired Balance (In Thousand Pesos) =6,324 P =5,797 P 4,400,046 – 1,555 2,226,651 – 1,700,948 – 7,029,130 =4,407,925 P =10,962,526 P Expiry Year 2002 to 2009 2005 2006 2007 2008 to 2010

The Group’s NOLCO of P7.0 billion in 2005 includes the Parent Company’s loss on sale of NPLs = to SPV companies amounting to =5.4 billion which can be claimed as deductions from taxable P income for a period of five consecutive taxable years immediately following the year of sale.

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The Group’s NOLCO includes net operating losses of PNB Corporation - Guam from 1992 to 1999 amounting to =12.1 million recognized based on applicable tax laws similar to those of USA. P Guam’s NOLCO matures 10 years from the date such NOLCO was incurred. Details of the Group’s MCIT follow:
Year Incurred 2002 2003 2004 2005 Amount =1,275 P 953 16,428 25,510 =44,166 P Used/Expired (In Thousand Pesos) =1,275 P – – – =1,275 P Balance =– P 953 16,428 25,510 =42,891 P Expiry Year 2005 2006 2007 2008

Details of the Parent Company’s NOLCO follow:
Year Incurred 2002 2003 2004 2005 Amount =4,394,436 P 2,180,979 1,689,030 7,029,130 =15,293,575 P Used/Expired Balance (In Thousand Pesos) =4,394,436 P =– P – 2,180,979 – 1,689,030 – 7,029,130 =4,394,436 P =10,899,139 P Expiry Year 2005 2006 2007 2008 to 2010

Details of the Parent Company’s MCIT follow:
Year Incurred 2003 2004 2005 Amount =176 P 15,773 25,510 =41,459 P Used/Expired (In Thousand Pesos) =– P – – =– P Balance =176 P 15,773 25,510 =41,459 P Expiry Year 2006 2007 2008

The reconciliation between the statutory income tax rate to effective income tax rate follows:
Group 2004 (As Restated Note 3) 32.00% 74.87% 37.72 (44.86) (7.96) (27.70) (0.78) 63.29% Parent Company 2004 (As Restated Note 3) 32.00% 141.28 71.18 (84.65) (15.02) (52.28) – 92.51%

Statutory income tax rate Tax effects of: Unrecognized deferred tax assets Non-deductible expenses FCDU income before tax Tax-exempt income Tax-paid income Others - net Effective income tax rate

2005 32.50% 76.27 10.38 (25.35) (12.38) (6.96) 0.63 75.09%

2005 32.50% 96.82 13.19 (32.21) (15.73) (7.23) – 87.34%

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Revenue Regulations (RR) No. 10-2002 defines expenses to be classified as entertainment, amusement and recreation expenses (EARE) and set a limit for the amount that is deductible for tax purposes. EARE are limited to 1.00% of net revenues for sellers of services. EARE charged against current operations (included in Miscellaneous Expense) amounted to =110.1 million in P 2005 and =98.2 million in 2004 (Note 23). P

23. Miscellaneous Income and Expenses Miscellaneous income consists of:
Group Parent Company 2004 2004 (As Restated (As Restated Note 3) Note 3) 2005 (In Thousand Pesos) =638,612 P =635,130 P P483,469 = 230,073 230,073 391,166 168,371 168,371 202,160 188,504 187,373 63,693 654,203 529,801 355,736 =1,879,763 P =1,750,748 P P1,496,224 =

2005 Gain on sale or exchange of assets Income from derivatives Trust income (Note 24) Rental (Notes 21 and 25) Others (Note 25) P486,891 = 391,166 202,160 64,855 530,941 P1,676,013 =

Miscellaneous expenses consist of:
Group 2005 Insurance Management and professional fees Foreclosure Promotional expense Transportation and travel Stationery and supplies used Representation and entertainment (Note 22) Banking fees Others P424,245 = 358,683 247,888 153,910 123,917 120,076 116,099 98,459 911,582 P2,554,859 = Parent Company 2004 2004 2005 (In Thousand Pesos) =399,188 P =396,258 P P422,380 = 143,199 129,480 243,251 223,165 223,165 247,888 85,028 85,027 152,192 123,080 120,642 118,064 107,704 105,768 119,632 110,100 95,718 415,395 P1,924,620 = 98,215 93,045 401,209 =1,652,809 P

102,395 95,596 960,109 =2,239,464 P

Miscellaneous - Others include information technology-related expenses, postage, telephone and telegraph, repairs and maintenances, and litigation expense.

24. Trust Operations Securities and other properties held by the Parent Company in fiduciary or agency capacities for its customers are not included in the accompanying statements of condition since these are not resources of the Parent Company. Such resources held in trust were carried at a value of = P14.9 billion and =14.6 billion as of December 31, 2005 and 2004, respectively (Note 26). In P connection with the trust functions of the Parent Company, government securities amounting to = P152.0 million and =307.3 million as of December 31, 2005 and 2004, respectively, are deposited P with the BSP in compliance with the trust regulations.

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In compliance with existing banking regulations, the Parent Company transferred from surplus to surplus reserves of =13.7 million and =36.5 million in 2005 and 2004, respectively, corresponding P P to the 10.00% of the net income realized from its trust, investment management and other fiduciary business until such related surplus constitutes 20.00% of its regulatory capital (see Note 19).

25. Related Party Transactions In the ordinary course of business, the Parent Company has loans and other transactions with its subsidiaries and affiliates, and with certain directors, officers, stockholders and related interest (DOSRI). Under the Parent Company’s policy, these loans and other transactions are made substantially on the same terms as with other individuals and businesses of comparable risks. The amount of direct credit accommodations to each of the Parent Company’s DOSRI, 70.00% of which must be secured, should not exceed the amount of their respective deposits and book value of their respective investments in the Parent Company. In the aggregate, DOSRI loans generally should not exceed the Parent Company’s capital funds or 15.00% of the Parent Company’s total loan portfolio, whichever is lower. As of December 31, 2005 and 2004, the Parent Company was in compliance with such regulations. The information relating to the DOSRI loans of the Group follows (amounts in thousand pesos): 2005 Total outstanding DOSRI loans Inclusive of loans extended to NG, LGU’s and GOCC’s Exclusive of loans extended to NG, LGU’s and GOCC’s Percent of DOSRI loans to total loans Inclusive of loans extended to NG, LGU’s and GOCC’s Exclusive of loans extended to NG, LGU’s and GOCC’s Percent of unsecured DOSRI loans to total DOSRI loans Inclusive of loans extended to NG, LGU’s and GOCC’s Exclusive of loans extended to NG, LGU’s and GOCC’s Percent of past due DOSRI loans to total DOSRI loans Percent of nonperforming DOSRI loans to total DOSRI loans 2004

P14,921,141 = 2,757,635

= P10,472,610 1,909,666

21.34% 3.94%

14.33% 2.61%

1.20% 6.25% 0.05% –

1.38% 7.59% 0.02% –

In accordance with existing BSP regulations, the reported DOSRI performing loans exclude loans extended to certain borrowers before these borrowers became DOSRI.

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The information relating to Parent Company’s receivables and other accommodations to the following government units follows: 2004 2005 (In Thousand Pesos) = P476,915 P13,349,059 = 2,905,168 3,659,812 9,180,861 24,377,332 = P12,562,944 P41,386,203 =

NG LGU’s GOCC’s

For purposes of computing the maximum allowable DOSRI loans, which should not exceed the lower of the Parent Company’s capital funds or 15.00% of the Parent Company’s total loan portfolio, the aforementioned receivables from government units are not included in the computation of DOSRI limit. The Parent Company has lease agreements with some of its subsidiaries. In 2005, the lease agreement was amended to indicate the share of the subsidiaries in the maintenance of the building in lieu of rental payments. The income related to these agreements amounting to =4.7 million in P 2005 and =2.4 million in 2004 is included in Miscellaneous Income in the statements of income. P The significant account balances with respect to related parties included in the financial statements (after appropriate eliminations have been made) follow:
2005 Related Party Fortune Tobacco Corporation Asia Brewery Inc. Philippine Air Lines Asian Institute of Management Others Loans Receivable P1,500,000 = 500,000 243,405 154,425 282,913 P2,680,743 = Loans Interest Receivable Income (In Thousand Pesos) =1,000,000 P P95,172 = 500,000 49,385 261,412 14,007 166,323 12,342 293,595 71,202 =2,221,330 P P242,108 = 2004 Interest Income =109,434 P 54,330 13,869 24,284 71,283 =273,200 P

The compensation of the key management personnel follows:
Group 2005 Short term employee benefits Post-employment benefits P101,522 = 6,002 P107,524 = Parent Company 2004 2004 2005 (In Thousand Pesos) =106,458 P =54,538 P P46,059 = 5,912 4,253 3,781 =112,370 P =58,791 P P49,840 =

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26. Commitments and Contingent Liabilities In the normal course of business, the Group makes various commitments and incurs certain contingent liabilities that are not presented in the financial statements. These commitments and contingent liabilities include various guarantees, forward exchange contracts, commitments to extend credit, standby letters of credit, pending litigations including litigations involving redemption of foreclosed properties already sold to third parties and contested tax assessments. Several suits and claims remain unsettled. However, no specific disclosures on such unsettled assets and claims are made because any such specific disclosures would prejudice the Group’s position with the other parties with whom it is in dispute. Such exemption from disclosures is allowed under PAS 37, Provisions, Contingencies and Post Balance Sheet Events. The Group and its legal counsel believe that any losses arising from these contingencies which are not specifically provided for will not have a material adverse effect on the financial statements. In November 1994, the BSP, Maybank and the Parent Company executed a Memorandum of Agreement (MA) providing for the settlement of Maybank’s =3.0 billion liabilities to the BSP. P Under this MA, the Parent Company is jointly and severally liable with Maybank for the full compliance and satisfaction of the terms and conditions therein. The MA provides for the creation of an escrow fund to be administered by the BSP where all collections from conveyed assets and certain annual guaranteed payments required under the MA are to be deposited. Relative to the sale of the Parent Company’s 60.00% interest in Maybank, the Parent Company has requested the BSP to consider the revision of the terms of the MA to, among others, (a) delete the provision on the annual guaranteed payments in consideration of an immediate payment by the Parent Company of an agreed amount, and (b) exclude Maybank as a party to the MA. On May 7, 1997, the BSP approved the Parent Company’s request to amend the terms of the MA, subject to the following conditions among others: a) The Parent Company shall remit =150.0 million to the escrow account out of the proceeds P from sale; b) The Parent Company shall remit to the escrow account an amount equivalent to 50.00% of any profit that may be realized by the Parent Company on account of the sale; and c) If the amount in the escrow account has not reached the total of P3.0 billion by June 30, 2013, = the difference shall be paid by the Parent Company by way of a debit to its regular account with the BSP. On November 28, 1997, the Parent Company remitted =150.0 million in compliance with P item (a). The Parent Company anticipates that the payment of =150.0 million to the BSP together P with the existing balance of the funds in escrow as of that date will allow the escrow account to reach the required =3.0 billion earlier than programmed. This has effectively released the Parent P Company from any further payments under the MA. As of December 31, 2005 and 2004, the total trust assets of the escrow account maintained with the BSP amounted to =1.7 billion and P = P1.6 billion, respectively. Average yield during the year ranged from 11.00% to 16.00%. Management expects that the value of the escrow account by 2013 will be more than adequate to cover the P3.0 billion liability due the BSP. =

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The Parent Company’s remaining investment in Maybank was sold on June 29, 2000. The sale was approved by the BSP on August 16, 2000. The following is a summary of various commitments, contingent assets and contingent liabilities at their equivalent peso contractual amounts:
Group 2005 Trust department accounts (Note 24) Deficiency claims receivable Inward bills for collection Unused commercial letters of credit Confirmed export letters of credit Outward bills for collection Outstanding guarantees issued Items held as collateral Other contingent accounts P14,938,781 = 9,929,287 8,585,697 5,229,104 2,968,974 218,009 172,683 1,760 47,900 Parent Company 2004 2004 2005 (In Thousand Pesos) =14,561,817 P =14,561,817 P P14,938,781 = – – 9,929,287 10,535,492 10,535,492 8,585,697 12,422,322 12,422,322 5,229,104 3,673,416 3,673,416 2,968,974 133,462 132,405 218,009 – – 167,376 – – 1,748 – – 49,900

27. Derivative Financial Instruments Freestanding Derivatives The Parent Company enters into currency forwards, cross currency swap and interest rate swap contracts to manage its foreign exchange and interest rate risks. Currency forwards are contractual agreements to buy or sell a specified currency at a specific price and date in the future. Interest rate and cross currency swaps are contractual agreements to exchange interest and foreign exchange differentials based on specific notional amounts. These derivatives are accounted for as non-hedges, with the fair value changes being reported immediately in the statements of income. As of December 31, 2005, the total notional amounts of USD currency buy and sell forwards amounted to US$23.0 million and US$136.6 million, respectively, with total positive fair value of = P78.8 million. The Parent Company also has an outstanding forward sell of ROP bonds with face value of $108.4 million with a total negative fair value of P196.0 million. = As discussed in Note 8, the Parent Company sold in February 1998 =10.0 billion bonds with an P agreement to swap interest payments based on the average 91-day and 364-day T-bill rates of the auction result immediately preceding the annual repricing date for the remaining term of the bonds. As of December 31, 2005, the fair value of the interest rate differential on the basis swap agreement, representing the net present value of the interest differential that the Parent Company has to pay the counterparty, amounted to =267.4 million. P

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On March 2, 2004, the Parent Company entered into a cross currency swap agreement with a counterparty bank in which the proceeds from the Notes were swapped for USD. The USD amounts were then invested by the Parent Company in ROP and US Treasury bonds. Under the swap agreement, the Parent Company is committed to sell USD and buy PHP in 2009 at a specified exchange rate. On a semi-annual basis, the Parent Company pays 5.66% on the USD leg and receives 12.5% on the PHP leg. As of December 31, 2005, the aggregate notional amount of the cross currency swap is US$53.25 million or =3 billion while the positive fair value amounted P to =278.5 million. P Embedded Derivatives Certain financial and non-financial contracts of the Parent Company that contain embedded derivatives are treated as separate derivatives when their economic characteristics and risks are not closely related to those of the host contract and the host contract is not carried at fair value through profit or loss. These embedded derivatives are measured at fair value with the changes in fair value recognized in the statements of income. Such derivatives include conversion options in convertible debt instruments, credit default swaps and foreign-currency derivatives in structured notes and deposits, call and put options in investment securities and loans and receivables, bondlinked deposits, and foreign currency derivatives on non-financial contracts such as purchase orders and service agreements. Among the embedded derivatives that have been bifurcated and are outstanding as of December 31, 2005 include the following: i. credit derivatives in structured notes and deposits with a notional reference of US$36.7 million and a positive fair value of =123.6 million; P conversion option in a foreign currency denominated convertible preferred share with a notional quantity of 18,495 shares and a positive fair value of =7 million; P foreign currency derivative in a structured note with a notional reference of =40.0 million P and a negative fair value of =6.7 million; and P bond-linked deposits derivative with a notional amount of US$124.9 million and a positive fair value of =30.3 million. P As of December 31, 2005, Other Resources and Other Liabilities include the total positive fair value of =511.8 million and total negative fair value of =439.2 million, respectively, P P of the Parent Company’s derivative financial instruments.

ii.

iii.

iv.

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28. Earnings Per Share The earnings per share is calculated as follows:
Group (Attributable to Equity Holders of the Parent) 2004 (As Restated Note 3) 2005 a) Net income (in thousand pesos) a.1 Common shares Preferred shares a.2 Total Weighted average number of common shares for basic earnings per share Weighted average number of common shares for diluted earnings per share Effect of dilution: Convertible preferred shares Adjusted weighted average number of common shares for diluted earnings per share Basic earnings per share (a.1/b) Diluted earnings per share (a.2/c) P460,356 = 160,565 620,921 =232,098 P 119,819 351,917 Parent Company 2004 (As Restated Note 3) 2005 P186,077 = 64,901 250,978 =25,556 P 13,193 38,749

b)

425,009,703

378,070,472

425,009,703

378,070,472

c)

148,236,213

195,175,444

148,236,213

195,175,444

d) e)

573,245,916 P1.08 = 1.08

573,245,916 =0.61 P 0.61

573,245,916 P0.44 = 0.44

573,245,916 =0.07 P =0.07 P

29. Financial Performance The following basic ratios measure the financial performance of the Group and of the Parent Company:
Group 2004 (As Restated Note 3) 2005 1.41% 2.59% 0.17% 0.28% 2.63% 3.66% Parent Company 2004 (As Restated Note 3) 0.16% 0.02% 2.42%

2005 1.11% 0.11% 3.50%

Return on average equity Return on average assets Net interest margin on average earning assets

30. Notes to Cash Flow Statements Of the total interbank loans receivable of the Group and of the Parent Company as of December 31, 2004, =16.6 billion and =16.5 billion, respectively, have original maturities of three P P months or less.

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31. Other Matters On March 24, 2006, the Parent Company’s BOD approved the issuance of at least US$100.0 million or =5.0 billion additional Tier 2 Capital. P