If you are in any doubt about this Offering Circular, you should consult representatives of the Selling Agents such as a sales professional or bank manager, or a professional accountant or other professional adviser.

OFFERING CIRCULAR STRICTLY CONFIDENTIAL 6 MAY 2010

RIZAL COMMERCIAL BANKING CORPORATION (A BANKING CORPORATION ORGANIZED AND EXISTING UNDER PHILIPPINE LAWS)

P2,854,000,000 6.50% LONG TERM NEGOTIABLE CERTIFICATES OF TIME DEPOSIT DUE 2015

ISSUE PRICE 100.0% OF FACE VALUE

Rizal Commercial Banking Corporation, (the “Bank”) is offering Fixed Rate Coupon-Bearing Long Term Negotiable Certificates of Time Deposit due 2015 with an aggregate principal amount of P2,854,000,000 (the “LTNCDs”). Interest on the LTNCDs will accrue from, and including, 6 May 2010 to, but excluding, the Maturity Date at the Interest Rate which shall be 6.50% per annum and will be payable every 6 February, 6 May, 6 August, and 6 November, beginning 6 May, 2010 (except that the last Interest Payment Date shall be on the Maturity Date).

The LTNCDs will be redeemed at their principal amount on 6 November 2015 (the “Maturity Date”) at a Final Redemption Amount equal to 100% of the aggregate nominal amount of the LTNCDs, plus accrued and unpaid interest up to, but excluding, the Maturity Date. Subject to the satisfaction of certain regulatory approval requirements, the Bank may redeem the LTNCDs in whole and not only in part on any Interest Payment Date prior to Maturity Date at an Early Redemption Amount equal to the Issue Price, plus accrued and unpaid interest up to, but excluding, the date fixed for pre-termination (the “Early Redemption Date”). See Terms and Conditions of the LTNCDs.

The LTNCDs will be issued in scripless form in denominations of P100,000 and in integral multiples of P100,000 and will be registered and lodged with the Registrar through the LTNCD Registry in the name of the LTNCD Holders. The LTNCDs will be represented by a Master Long Term Negotiable Certificate of Time Deposit deposited with the Registrar. The electronic records of the Registrar (the “LTNCD Registry”) shall serve as the best evidence of ownership with respect to the LTNCDs up to the level of the beneficial LTNCD Holders. However, a written advice will be issued by the Registrar to the LTNCD Holders to confirm the registration of LTNCDs in their name in the LTNCD Registry including the amount and summary terms and conditions of the LTNCDs (the “Registry Confirmations”). The LTNCDs are intended to be listed by the Bank in the Philippine Dealing Exchange Corporation (“PDEX”). Once registered and lodged, the LTNCDs will be eligible for transfer through the Market Makers, or through trading participants of the PDEx upon listing of the LTNCDs of PDEx by electronic book-entry transfers in the LTNCD Registry, cancellation of the Registry Confirmations of transferor LTNCD Holders, and issuance of Registry Confirmations in favor of transferee LTNCD Holders. The LTNCDs are and shall be, while outstanding, insured with the Philippine Deposit Insurance Corporation (“PDIC”) for up to the maximum insurance coverage set out in and subject to PDIC’s applicable rules, regulations, terms and conditions, as may be amended from time to time. See Terms and Conditions of the LTNCDs.

The Bank has a Bank Financial Strength Rating of E+ and a Senior Unsecured Debt Rating of Ba3 from Moody’s Investor Services. A rating is not a recommendation to buy, sell or hold securities or any instrument, and may be subject to revision, suspension or withdrawal at any time by the rating agency concerned. The LTNCDs are not rated.

INVESTING IN THE LTNCDS INVOLVES CERTAIN RISKS. SEE “INVESTMENT CONSIDERATIONS” FOR A DISCUSSION OF CERTAIN FACTORS TO BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE LTNCDS.

LEAD MANAGER, BOOKRUNNER, MARKET MAKER AND SELLING AGENT

SELLING AGENTS SELLING AGENT AND MARKET MAKER

i

The date of this Offering Circular is 6 May 2010.

This Offering Circular shall not be reproduced in any form, in whole or in part, for any purpose whatsoever nor shall it be

transmitted to any other person.

The Bank confirms that this Offering Circular contains all information with respect to the Bank and its subsidiaries (collectively,

the “Group”) and the LTNCDs which is material in the context of the issue and offering of the LTNCDs, that the information

contained herein is true and accurate in all material respects and is not misleading, that the opinions and intentions expressed

herein are honestly held and have been reached after considering all relevant circumstances and are based on reasonable

assumptions, that there are no other facts, the omission of which would, in the context of the issue and offering of the LTNCDs,

make this document as a whole or any such information or the expression of any such opinions or intentions misleading in any

material respect, and that all reasonable enquiries have been made by the Bank to verify the accuracy of such information. The

Bank accepts responsibility accordingly.

In making an investment decision, the prospective LTNCD Holder must rely on its own examination of the Bank and the terms

of the offering of the LTNCDs, including the merits and risks involved. By receiving this Offering Circular, the prospective

LTNCD Holder acknowledges that (i) it has not relied on the Lead Manager or any of the Selling Agents or any person affiliated

with them in connection with its investigation of the accuracy of any information in this Offering Circular or its investment

decision, and (ii) no person has been authorized to give any information or to make any representation concerning the Bank,

the Group or the LTNCDs other than as contained in this Offering Circular and, if given or made, any such other information or

representation should not be relied upon as having been authorized by the Bank, the Lead Manager and Bookrunner or Selling

Agents.

No representation or warranty, express or implied, is made by the Lead Manager and Bookrunner and Selling Agents as to the

accuracy or completeness of the information contained in this Offering Circular. Neither the delivery of this Offering Circular nor

the offer of the LTNCDs shall, under any circumstances, constitute a representation or create any implication that there has

been no change in the affairs of the Bank or the Group since the date of this Offering Circular or that any information contained

herein is correct as at any date subsequent to the date hereof. The Lead Manager and Bookrunner and Selling Agents

expressly do not undertake to update the contents of this Offering Circular.

None of the Bank, the Lead Manager and Bookrunner or the Selling Agents or any of their respective affiliates or

representatives is making any representation to any LTNCD Holder regarding the legality of an investment by such LTNCD

Holder under applicable laws. In addition, the LTNCD Holder should not construe the contents of this Offering Circular as legal,

business or tax advice. The LTNCD Holder should be aware that it may be required to bear the financial risks of an investment

in the LTNCDs for an indefinite period. The LTNCD Holder should consult with its own advisers as to the legal, tax, business,

financial and related aspects of a purchase of the LTNCDs.

This Offering Circular does not constitute an offer to sell, or an invitation by or on behalf of the Bank, the Lead Manager and

Bookrunner or Selling Agents or any of their respective affiliates or representatives to purchase any of the LTNCDs, and may

not be used for the purpose of an offer to, or a solicitation by, anyone, in each case, in any jurisdiction or in any circumstances

in which such offer or solicitation is not authorized or is unlawful. Recipients of this Offering Circular are required to inform

themselves about and observe any applicable restrictions.

Each LTNCD Holder must comply with all applicable laws and regulations in force in each jurisdiction in which it purchases,

offers or sells such LTNCDs or possesses or distributes this Offering Circular and must obtain any consent, approval or

permission required by it for the purchase, offer or sale by it of such LTNCDs under the laws and regulations in force in any

jurisdictions to which it is subject or in which it makes such purchases, offers or sales and the Bank, Lead Manager and

Bookrunner or Selling Agents shall have no responsibility therefor.

ii

Conventions

In this Offering Circular, unless otherwise specified or the context otherwise requires, all references to the “Philippines” are

references to the Republic of the Philippines. All references to the “Government” herein are references to the Government of

the Philippines. All references to “United States” or “U.S.” herein are to the United States of America. Unless otherwise

specified or the context otherwise requires, references herein to “U.S. dollars” and “U.S.$” are to the lawful currency of the

United States of America and references herein to “Pesos” and “P” are to the lawful currency of the Republic of the Philippines.

Certain monetary amounts and currency translations included in this document have been subject to rounding adjustments;

accordingly, figures shown as totals in certain tables may not be an arithmetic aggregation of the figures, which precede them.

References in this document to ownership interests are, save as otherwise disclosed, as at the date of this document.

Forward-looking Statements

All statements contained in this Offering Circular that are not statements of historical fact constitute “forward-looking

statements”. Some of these statements can be identified by forward-looking terms, such as “anticipate”, “believe”, “can”,

“could”, “estimate”, “expect”, “intend”, “may”, “plan”, “will” and “would” or similar words. However, these words are not the

exclusive means of identifying forward-looking statements. All statements regarding the Group’s expected financial condition

and results of operations, business, plans and prospects are forward-looking statements. These forward-looking statements

include statements as to the Group’s business strategy, revenue and profitability, planned projects and other matters discussed

in this Offering Circular regarding matters that are not historical fact. These forward-looking statements and any other

projections contained in this Offering Circular (whether made by the Bank or any third party) involve known and unknown risks,

uncertainties and other factors that may cause the Group’s actual results, performance or achievements to be materially

different from any future results, performance or achievements expressed or implied by such forward-looking statements or

other projections.

TABLE OF CONTENTS

OFFERING CIRCULAR SUMMARY ......................................................................................................1

SELECTED FINANCIAL INFORMATION..............................................................................................6

INVESTMENT CONSIDERATIONS .....................................................................................................10

TERMS AND CONDITIONS OF THE LTNCDS ...................................................................................24

CAPITALIZATION ................................................................................................................................42

DESCRIPTION OF THE BANK............................................................................................................43

OFFER PROCEDURE........................................................................................................................114

INDEX TO FINANCIAL STATEMENTS .............................................................................................118

1

OFFERING CIRCULAR SUMMARY

This summary highlights information contained elsewhere in this Offering Circular. This summary is qualified by, and must be read in conjunction with, the more detailed information and financial statements appearing elsewhere in this Offering Circular. Each prospective LTNCD Holder is recommended to read this entire Offering Circular carefully, including the Bank's consolidated financial statements and related notes (the “Financial Statements”) and “Investment Considerations”.

DESCRIPTION OF THE BANK

Rizal Commercial Banking Corporation (the “Bank”) is a universal bank which provides a wide range of banking and other

financial products and services, including commercial and retail banking, credit cards, asset management and treasury and

investment banking products and services. These services include traditional loan and deposit products, as well as treasury,

trust banking, investment banking, private banking, cash management, leasing and finance, remittance, insurance, retail cash

cards and credit card services. As of 31 December 2009, the Bank is the fourth largest capitalized private domestic universal

bank in terms of total assets and capital, based on the published Statements of Conditions. In terms of branches, the Bank,

excluding the Government-owned and foreign banks, ranked fourth in the Philippines, with a country-wide total of 338 branches

as of 31 December 2009, including three extension offices.

The Bank, incorporated under the name Rizal Development Bank, began operations as a private development bank in the

province of Rizal in 1960. In 1962, the Bank received approval from the then Central Bank of the Philippines, now the Bangko

Sentral ng Pilipinas (“BSP”) to operate as a commercial bank and on 2 January 1963, the Bank began operations under its

present name. In 1973, the Bank formed alliances with two foreign banks, Continental Illinois National Bank (“Conill”) and

United Financial of Japan (“UFJ”), then known as Sanwa Bank. The relationship with Continental Illinois ended in 1985 after it

sold its shareholding in the Bank to UFJ. In December 2006, UFJ (which, after its merger in 2004 with Mitsubishi Tokyo

Financial Group, became known as The Bank of Tokyo-Mitsubishi UFJ Limited) disposed of its entire shareholdings in the

Bank, with the majority being sold to Spinnaker Global Strategic Fund Ltd. and Spinnaker Global Emerging Markets Fund Ltd.

(together, “Spinnaker”).

As of 31 December 2009, the Yuchengco group, primarily through a holding company, the Pan Malayan Management and

Investment Corporation (“Pan Malayan”) owned approximately 48.1% of the Bank’s outstanding shares. In addition, as of such

date, others members of the Yuchengco Group of Companies (“YGC”) owned or controlled an additional 5.6% of the Bank’s

issued and outstanding common shares. In the early part of 2009, Spinnaker Group sold its entire stake in the Bank. The equity

interest, of about 16% of the Bank’s outstanding common shares were primarily bought back by the Bank to have the flexibility

to look for a strategic investor that agreed with the Bank’s current business direction.

As of 31 December 2009, the Bank’s audited consolidated total assets and capital funds amounted to P288.5 billion and P30.5

billion, respectively. The Bank’s audited consolidated pre-tax income and net income for the year ended 31 December 2009

amounted to P4.1 billion and P3.3 billion, respectively.

As of 31 December 2009, the Bank had a market capitalization on the Philippine Stock Exchange (“PSE”) of P15.5 billion. The

Bank’s Tier 1 capital adequacy ratio and total capital adequacy ratio were 12.6% and 18.5%, respectively, as of 31 December

2009, and 13.2% and 17.3%, respectively, as of 31 December 2008.

The Bank offers commercial, corporate and consumer banking products and services throughout the Philippines, as well as

treasury, cash management and remittance services.

The Bank’s Retail Banking Group provides a range of banking products and services mainly sold through the Bank’s branch

network. These include deposit products, cash management solutions, investments including trust products, and

bancassurance. Aside from managing the Bank’s branches, RBG also manages the Bank’s nationwide ATM network.

2

The Bank’s corporate banking practice focuses particularly on international corporate clients in special economic zones,

Japanese and Filipino-Chinese businesses and leading Philippine and multinational corporations. Through its current affiliation

with YGC and past affiliation with UFJ, it has established long- standing relationships with Japanese companies in special

economic zones within the Philippines, as well as Chinese and international companies.

The Bank also provides a full range of consumer banking products and services in the Philippines, primarily through its

subsidiary, RCBC Savings Bank, Inc. (“RCBC Savings Bank” or “RSB”). The Bank through RCBC Capital Corporation (“RCBC

Capital”) also acts as arranger for local issuances of investment securities. It was one of the Joint Issue Managers and

Arrangers of the Retail Treasury Bond issuance of the Republic of the Philippines launched on 15 September 2009, along with

Banco de Oro Universal Bank Inc., BPI Capital Corporation, Development Bank of the Philippines, First Metro Investment

Corporation, Land Bank of the Philippines, and Metropolitan Bank & Trust Company. RCBC was one of the top 5 selling agents

in terms of total sales amounting to P114.4 billion.

The Bank’s international operations consist of its wholly-owned subsidiaries, RCBC North America, Inc. (formerly RCBC

California International Inc.) (“RCBC North America”) and RCBC TeleMoney Europe (“RCBC Telemoney Europe”) in the United

States and Italy, respectively, and its majority-owned subsidiary RCBC International Finance Limited (“RCBC IFL”) and its

subsidiary RCBC Investments, Ltd. (“RCBC Investments”) in Hong Kong. The Bank’s relationship with other banks, exchanges

and other international money transfer agencies has strengthened its remittance business used primarily by overseas Filipino

workers (“OFWs”). The Bank estimates it had an approximate 8.7% share of the remittance business in the Philippines as of 30

September 2009, and 9.8% as of 30 September 2008, based on remittance volumes published by the BSP.

The Bank has allocated resources and investments in technology focused on providing better services for the banking needs of

its clients. It is critical to this strategy not just to keep pace with evolving customer expectations but to anticipate their future

needs, given the fast pace of technological advancement.

STRATEGY

The Bank aims to continue its growth in the core business lines through its superior execution abilities, customer service

initiatives and expanded distribution platforms. The key elements of the Bank's strategy are as follows:

• Increase profitability from existing businesses while building a diversified franchise;

• Further expand the Bank’s existing branch network while enhancing the effectiveness of the distribution network

through the introduction of more electronic channels;

• Invest in technology;

• Invest in people;

• Expand focus on providing services to non-resident Filipinos;

• Accelerate disposition of non-performing assets (“NPAs”); and

• Where suitable opportunities arise, pursue a prudent acquisition strategy.

3

COMPETITIVE STRENGTHS

The Bank aims to leverage its strategies by its principal competitive strengths, as follows:

• Sustainable size in a consolidating market, with an established operating history;

• Leading positions in key products;

• Strong group synergies and support;

• Proven and experienced management team; and

• Extensive and strategically located banking infrastructure and branch network.

RECENT DEVELOPMENTS

Disposal of shares in Great Life Financial Assurance Corporation

On 11 November 2009, the Board of Directors approved a proposed sale by the Bank of its one million shares in Great Life

Financial Assurance Corporation (“Great Life”), representing 20% of the total outstanding shares of Great Life, to Great Pacific

Life Assurance Corporation (“Grepalife”). This sale will facilitate the merger of Great Life and Grepalife thereby allowing

Grepalife to enjoy the benefits of a stronger company with economies of scale, a wider customer base and market reach. The

Bank has a 5% interest in Grepalife and through such ownership will retain its bancassurance partnership with Grepalife. The

merger of Great Life into Grepalife will allow the Bank to continue to grow its bancassurance partnership with a more effective

and bigger Grepalife.

US$ Negotiable Certificates of Time Deposit

On 30 September 2009, in order to expand its banking operations and offer an alternative investment instrument to depositors,

RCBC issued US$ 85 million worth of US$ denominated Negotiable Certificates of Time Deposit (“September NCTD”). On 19

October 2009, RCBC issued a second offering worth US$ 13.2 million of US$ denominated Negotiable Certificates of Time

Deposit (“October NCTD”). The September NCTD and the October NCTD carry a fixed annual interest rate of 3.75% per

annum, payable quarterly until they mature on 30 September 2012.

Retail Treasury Bonds

The Bank through RCBC Capital was mandated to act as one of the Joint Issue Managers and Arrangers of the Retail Treasury

Bond issuance of the Republic of the Philippines, launched on 15 September 2009. Other arrangers included Banco de Oro

Universal Bank Inc., BPI Capital Corporation, Development Bank of the Philippines, First Metro Investment Corporation, Land

Bank of the Philippines, and Metropolitan Bank & Trust Company. RCBC was one of the top 5 selling agents in terms of total

sales amounting to P114.4 billion.

Dividends Paid for Ordinary or Other Shares

In its meeting held on 29 June 2009, the Bank’s Board of Directors approved the declaration and payment of cash dividends,

subject to BSP approval, amounting to P0.0667 per share or approximately P4.524 million payable to holders of convertible

preferred shares. The Bank received the approval of the aforementioned cash dividends from the BSP on 10 September 2009.

On 28 September 2009, the Bank’s Board of Directors approved the declaration and payment of cash dividends amounting to

P0.0579 per share or approximately P146 thousand payable to holders of common shares. The BSP approved the cash

dividends to holders of the common shares on 7 December 2009. The Board of Directors also approved the declaration and

4

payment of dividends amounting approximately P228.1 million payable to holders of hybrid perpetual securities. The BSP has

not yet approved the cash dividends to holders of hybrid perpetual securities as of date.

Lower Tier 2 Issuance

On 15 May 2009, RCBC issued P4 billion of Tier 2 (or supplementary) capital through the issuance of 7.75% subordinated

notes due in 2019, callable at par in 2014. Following the issuance, the Bank reported a total CAR of 19.35%.

Share swap with MICO Equities, Inc.

Under BSP regulations on cross-selling, an investment of at least 5% in an insurance company will allow the bank to widen its

product offering to include bancassurance business for non-life insurance products. On 9 March 2009, the Board of Directors

approved a proposed purchase by the Bank of a 5.6% equity interest in MICO Equities, Inc. (“MICO”), Yuchengco group’s

holding company for its non-life insurance business, through a swap of 41,993,389 common shares of the Bank in exchange for

169,059 shares in MICO. On 1 September 2009, the shareholders of the Bank approved by written resolution the re-issuance

by the Bank of the 41,993,389 common shares. This share swap paves the way for the Bank to enter into a bancassurance

partnership with MICO’s subsidiary, Malayan Insurance Co. Inc. (“Malayan Insurance”). Under this partnership arrangement,

Malayan Insurance’s insurance products may be sold through the Bank’s branch network throughout the Philippines.

Acquisition of Pres. Jose P. Laurel Rural Bank, Inc.

In February 2009, RCBC acquired the 10-branch Pres. Jose P. Laurel Rural Bank, Inc. (“JP Laurel Rural Bank”) of Batangas,

which it took over from the Laurel family, for P375 million. The acquisition is in line with the Bank’s strategy to build up its

microfinance business.

Divestment by Spinnaker of its Interest in the Bank and Change in Directors

In the early part of 2009, Spinnaker Global Strategic Fund Ltd. and Spinnaker Global Emerging Markets Fund Ltd. (collectively,

“Spinnaker”) sold its entire stake amounting to approximately 16% of the outstanding share capital of the Bank. The equity

interest was primarily bought back by the Bank to have the flexibility to look for a strategic investor that agreed with the Bank’s

current business direction. With the divestment by Spinnaker, its nominees to the Board of Directors of the Bank, Mr.

Christopher Teague and Mr. Robert McCarthy resigned and were replaced by Mr. Reynaldo B. Vea and Ms. Yvonne S.

Yuchengco.

Discussion on 2009 Full Year Financial Report

In accordance with prevailing regulations, the Bank has released to the BSP and the PSE its audited consolidated statement of

condition as of 31 December 2009.

The full year financial report has been subjected to audit by the auditors.

Based on consolidated audited financial statements as of 31 December 2009, RCBC reported a 53.5% increase in net income

at P3.3 billion compared to P2.2 billion in 2008. Net interest income also increased by 21.2% to P10.3 billion. Other income

grew 28.1% to P5.9 billion as the Bank took advantage of opportunities from the improvement in the financial markets. The

Bank’s income from trading and foreign exchange gains amounted to P2.7 billion and P0.3 billion as of 31 December 2009 and

2008, respectively.

As of 31 December 2009, the Bank’s total consolidated resources stood at P288.5 billion while total loans were little changed

amounting to P164.9 billion. Total capital funds increased from P27.6 billion in 31 December 2008 to P30.5 billion in 31

December 2009, representing a 10.5% increase.

5

The Bank’s consolidated network also increased to 338 as of 31 December 2009 from 324 as of 31 December 2008, while its

consolidated ATM networks also grew from 380 in December 2008 to 471 in December 2009.

6

SELECTED FINANCIAL INFORMATION

The following summary financial information has been derived from the Financial Statements, and is qualified in its entirety by reference to such Financial Statements, including the notes thereto. The Bank's 2006 and 2007 audited financial statements have been prepared in accordance with Philippine Financial Reporting Standards. The 2008 and 2009 audited financial statements have been prepared in accordance with Financial Reporting Standards in the Philippines for Banks. Investors should read the following summary of consolidated financial and other data relating to the bank in conjunction with the financial statements and the related notes included elsewhere in this Offering Circular.

7

Years ended 31 December

2007 2008 2009

Consolidated Income Statements (in P millions)

INTEREST INCOME ON

Loans and other receivables..................... 9,583.8 10,885.3 12,109.3

Investment securities ................................ 4,917.9 3,991.9 3,959.5

Others ....................................................... 828.7 782.4 701.4

15,330.4 15,659.6 16,770.2

INTEREST EXPENSE ON

Deposit liabilities ....................................... 4,192.6 5,128.8 4,716.4

Bills payable and other borrowings........... 2,318.7 2,060.7 1,786.0

6,511.3 7,189.5 6,502.4

NET INTEREST INCOME 8,819.1 8,470.1 10,267.8

IMPAIRMENT LOSSES – Net 942.5 998.5 2,243.2

NET INTEREST INCOME AFTER IMPAIRMENT LOSSES 7,876.6 7,471.6 8,024.6

OTHER INCOME

Trading gain (loss) .................................... 1,329.1 (511.9) 2,252.8

Service charges and fees ......................... 1,514.5 1,643.4 1,613.6

Miscellaneous ........................................... 1,537.0 3,465.2 2,019.8

4,380.6 4,596.7 5,886.2

OTHER EXPENSES

Employee benefits .................................... 2,384.4 2,524.9 2,779.2

Occupancy ................................................ 1,410.8 1,492.8 1,651.2

Taxes and licenses ................................... 1,068.9 1,143.5 1,219.8

Other operating expenses......................... 3,303.8 3,814.6 4,180.5

8,167.9 8,975.8 9,830.7

INCOME BEFORE TAX 4,089.3 3,092.5 4,080.1

TAX EXPENSE 845.6 919.4 744.4

NET INCOME 3,243.7 2,173.1 3,335.7

Attributable to:

Equity Holdings of Parent ......................... 3,207.6 2,153.7 3,328.4

Minority Interest ........................................ 36.1 19.4 7.3

8

As of 31 December

Consolidated Statements of Condition 2007 2008 2009

(in P millions)

Cash and other cash items.............................................. 5,875.7 6,807.9 6,811.5

Due from the Bangko Sentral ng Pilipinas 17,611.4 16,391.0 19,321.3

Due from other banks .................................................... 4,744.9 4,862.2 3,066.9

Investment securities..................................................... 64,584.5 46,810.8 65,762.7

Loans and receivables – net.......................................... 117,195.2 164,402.9 164,892.4

Investments in associates – net .................................... 4,172.9 4,294.2 4,021.8

Bank premises, furniture, fixtures and equipment – net 3,503.8 4,029.8 4,754.1

Investment properties – net ........................................... 7,761.4 7,387.6 5,066.6

Deferred tax assets........................................................ 1,645.8 1,391.7 1,408.3

Other resources – net .................................................... 12,002.3 11,892.1 13,410.0

TOTAL RESOURCES 239,097.9 268,270.2 288,515.6

Deposit liabilities

Demand ..................................................................... 10,765.2 11,125.1 11,034.2

Savings...................................................................... 66,769.8 75,738.4 93,571.6

Time........................................................................... 98,393.8 109,363.5 115,672.0

Bills payable................................................................... 12,820.5 21,452.6 10,781.0

Bonds payable ............................................................... 5,650.7 6,002.8 5,836.1

Accrued taxes, interest and other expenses ................. 3,087.5 2,787.5 3,249.9

Subordinated debt ......................................................... 5,158.1 6,941.9 6,898.9

Other liabilities ............................................................... 7,431.9 7,221.7 10,927.0

TOTAL LIABILITIES 210,077.5 240,633.5 257,970.7

CAPITAL FUNDS 29,020.4 27,636.7 30,544.9

TOTAL LIABILITIES AND CAPITAL FUNDS 239,097.9 268,270.2 288,515.6

9

Years ended 31 December

2007 2008 2009

Selected Financial Ratios (Pro-forma, in percentage, except Earnings per Share)

Return on assets(1) 1.4 0.9 1.2

Return on shareholders’ equity(2) 12.4 7.4 12.0

Net interest margin(3) 5.0 4.3 4.6

Cost-income ratio(4) 61.9 68.7 60.9

Loans-to-deposits(5) 70.5 83.6 75.2

Tier I capital adequacy ratio(6) 15.1 13.2 12.6

Total capital adequacy ratio(7) 18.7 17.3 18.5

Total equity-to-total assets(8) 12.1 10.3 10.6

Total non-performing loans-to-total loans – excluding interbank loans(9) 5.8 2.8 4.4

Total non-performing loans-to-total loans – including interbank loans(10) 5.3 2.4 3.8

Allowances for probable loan losses to total loans(11) 4.1 1.9 2.6

Allowances for probable loan losses-to-total non-performing loans(12) 78.5 77.8 70.4

Earnings per share (P) (13) 2.9 1.7 3.1

Notes:

(1) Net income divided by average total resources for the period indicated.

(2) Net income divided by average total capital funds for the period indicated.

(3) Net interest income divided by average interest-earning assets.

(4) Total operating expenses divided by the sum of net interest income and other income.

(5) Total gross loans divided by total deposits.

(6) Tier I capital divided by total risk-weighted assets.

(7) Total capital divided by total risk-weighted assets.

(8) Total capital funds divided by total resources.

(9) Total nonperforming loans divided by total loans – excluding interbank loans.

(10) Total nonperforming loans divided by total loans – including interbank loans.

(11) Total allowance for probable loan losses divided by total gross loans.

(12) Total allowance for probable loan losses divided by non-performing loans.

(13) Net income divided by weighted average common shares.

10

INVESTMENT CONSIDERATIONS

An investment in the LTNCDs involves a number of investment considerations. You should carefully consider all the information contained in this Offering Circular including the investment considerations described below, before any decision is made to invest in the LTNCDs. The Bank's business, financial condition and results of operations could be materially adversely affected by any of these investment considerations. The market price of the LTNCDs could decline due to any one of these risks, and all or part of an investment in the LTNCDs could be lost.

The following discussion is not intended to be a comprehensive description of the risks and other factors and is not in any way meant to be exhaustive. Prospective LTNCD Holders are encouraged to make their own independent legal, tax, financial, and business examination of the Bank, the LTNCDs, and the market. Neither the Bank nor the Lead Manager and Bookrunner make any warranty or representation on the marketability or price on any investment in the LTNCDs.

CONSIDERATIONS RELATING TO THE PHILIPPINES

Substantially all of the Bank’s operations and assets are based in the Philippines; therefore any downturn in general

economic conditions in the Philippines could have a material adverse impact on the Bank

Substantially all of the Bank’s business operations and assets are based in the Philippines. As a result, the Bank’s income,

results of operations and the quality and growth of its assets depend, to a large extent, on the performance of the Philippine

economy. In the past, the Philippines has experienced periods of slow or negative growth, high inflation, significant devaluation

of the Philippine currency and the imposition of exchange controls.

From mid-1997 to 1999, the economic crisis in Asia adversely affected the Philippine economy, causing a significant

depreciation of the peso, increases in interest rates, increased volatility and the downgrading of the Philippine local currency

sovereign rating and the ratings outlook for the Philippine banking sector. These factors had a material adverse impact on the

ability of many Philippine companies to meet their debt-servicing obligations. In particular, the significant depreciation of the

peso made it difficult for many Philippine companies with peso revenue streams and significant U.S. dollar or other foreign

currency-denominated loans or costs to meet their repayment obligations. While the Philippine economy registered positive

economic growth in the period from 1999 to 2001 as it recovered from the Asian economic crisis, it continues to face a

significant budget deficit, limited foreign currency reserves, a volatile peso exchange rate and a relatively weak bank sector.

In 2006, GDP growth was at 5.4% while GNP growth was at 6.1%. In 2007, GDP growth increased to 7.3%. In 2008, GDP

growth slowed down to 4.5%. Prospects for future growth remain uncertain with the global economic crisis threatening to curb

consumption and export demand from emerging market economies including the Philippines. In February 2009, the

Government announced that the budget deficit for fiscal year 2008 was P68.1 billion, below the government’s target ceiling of

P75 billion for the same period.

The country’s GDP for the third quarter of 2009 was at 0.8%, the low-end of the full-year target growth of 0.8% and 1.8%. The

Government had to revise downward the second quarter economic figure from the previously announced 1.5% to 0.6% bringing

the first half growth at only 0.6% and the nine-month growth at 0.7%. Meanwhile, GNP for the third quarter of 2009 expanded to

3.5%, a decrease from 6.2% recorded in the same period last year. In December 2009, it was reported that the budget deficit

for the fiscal year 2009 could reach P312 billion. The Government’s full-year ceiling was originally P250 billion, but by October

2009, the country already exceeded the ceiling, pushing the deficit to P266.1 billion.

The year 2010 is expected to bring more changes in the economic conditions of the Philippines. Under regional and bilateral

trade pacts, Philippine tariffs on nearly all imports from five other members of Association of Southeast Asian Nations

(“ASEAN”) and China dropped to 0% as of 1 January 2010. Similarly, tariffs levied on a number of products from Australia, New

Zealand, Korea and Japan were also dropped to 0% at the start of the year.

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Any deterioration in economic conditions in the Philippines as a result of these or other factors, including a significant

depreciation of the Peso or increase in interest rates, could materially adversely affect the Bank’s borrowers and contractual

counter parties. This, in turn, could materially and adversely affect the Bank’s financial condition and results of operations,

including the Bank’s ability to grow its asset portfolio, the quality of the Bank’s assets and its ability to implement the Bank’s

business strategy.

Volatility in the value of the Peso against the U.S. dollar and other currencies as well as in the global financial and

capital markets could adversely affect the Bank's business

During the last decade, the Philippine economy has from time to time experienced devaluation of the Peso and limited

availability of foreign exchange. In July 1997, the BSP announced that it would allow market forces to determine the value of

the Peso. From 30 June 1997 to 31 December 2003, the Peso has experienced periods of significant depreciation and has

declined from P29.00 = U.S. $1.00 (average) in July 1997 to P56.267 = U.S. $1.00 as at 31 December 2004. However, the

Peso in recent years has further strengthened versus the U.S. dollar on the back of positive investor sentiment and increased

dollar flows both from foreign investors and Overseas Filipino Workers. From its end-December 2004 level, the Peso

appreciated to P47.52 by end-December 2008, an appreciation of 15.5% over the four-year period.

Nevertheless, like all emerging markets, the Philippines is not immune to volatilities in the global financial and capital markets

and changing investor risk appetites that could trigger capital outflows and put pressure on the Peso. Given this, a decline in

the value of the Peso as regards foreign currencies may affect the ability of the Bank's customers to service debt obligations

denominated in foreign currencies and increase non-performing loans. There can be no assurance that the Peso will not

depreciate further against other currencies and that such depreciation will not have an adverse effect on the Bank.

Under BSP guidelines, the Bank is required to match Foreign Currency Deposit Unit (“FCDU”) liabilities with foreign currency

assets in its FCDU books. As at 31 December 2008, the Bank had consolidated P268.3 billion of resources and P240.6 billion

of liabilities (of which P72.1 billion of resources and P73.2 billion liabilities were in its FCDU books). The Bank has entered into

foreign exchange forward contracts as a means of hedging against foreign currency fluctuations. More importantly, it is the

Bank’s policy to extend foreign exchange loans only to entities with natural or regulatory hedge (exporters or those with foreign

exchange-adjustment mechanisms like utilities). However, there can be no assurance that the Bank will be able to successfully

hedge its exposure to foreign currency risks.

In early 2007, the BSP liberalized its foreign exchange policies pertaining to current account and capital account transactions

as well as to prudential regulations. On the latter, the BSP has imposed a symmetrical limit of 20% of unimpaired capital with an

absolute limit of US$50 million on both the overbought and oversold positions of banks. In particular, the oversold limit at 20%

of unimpaired capital serves as a prudential measure to discourage excessive exposure of banks to foreign exchange risks.

However, the BSP's liberalization of its foreign exchange policies has its downside. While it encourages freer dollar inflows, in

the same manner it opens up the country to a greater magnitude of capital flight at the first sign of market volatility.

The disruptions recently experienced in the international capital markets have led to reduced liquidity and increased

credit risk premiums for certain market participants.

The disruptions recently experienced in the international capital markets have led to reduced liquidity and increased credit risk

premiums for certain market participants and have resulted in a reduction of available financing. Companies located in

countries in the emerging markets may be particularly susceptible to these disruptions and reductions in the availability of credit

or increases in financing costs, which could result in them experiencing financial difficulty.

In addition, the availability of credit to entities operating within the emerging markets is significantly influenced by levels of

investor confidence in such markets as a whole and so any factors that impact market confidence (for example, a decrease in

credit ratings or state or central bank intervention in one market) could affect the price or availability of funding for entities within

any of these markets.

12

Political instability may have a negative effect on the Philippine economic condition which could have a material

impact on the Bank’s business.

The Philippines has from time to time experienced political instability. No assurance can be given that the political environment

in the Philippines will be stable and that current or future governments will adopt economic policies conducive to sustained

economic growth, and we cannot make any assurance that the Bank will not be affected, materially or otherwise, by any

change in the Philippine political environment.

In 2001, following an impeachment trial, mass demonstrations and the military declaration of its withdrawal of support, former

President Joseph Estrada was removed from office. Then Vice President Gloria Macapagal Arroyo was installed as President

of the Philippines on 20 January 2001.

National and local elections were held on 10 May 2004. Notwithstanding the protest rallies and several disqualification cases

filed against President Arroyo (none of which prospered), she and Senator Noli De Castro were proclaimed by Congress as

President and Vice President, respectively on 24 June 2004. In 2005, President Arroyo was alleged to have committed fraud in

the 2004 national elections based on taped conversations she supposedly had with an official of the Commission on Elections

(“Comelec”). After President Arroyo admitted to speaking with a Comelec official, several cabinet members resigned from their

posts and, along with opposition groups, called for her resignation. Impeachment complaints were then filed against President

Arroyo, but the House of Representatives eventually voted to reject the impeachment complaints. Impeachment complaints

were re-filed in 2006 and 2007 and have also been rejected.

In February 2006, the Government thwarted a coup plot supposedly involving certain military rebels and communists. President

Arroyo put the country under a state of emergency, citing an alleged tactical alliance between right- and left-wing enemies of

the state and a conspiracy over broad front to topple the Government. The state of emergency was lifted after a week.

In November 2007, a group of military rebels together with a senator walked out of their trial in Makati City and occupied the

second floor of the Manila Peninsula Hotel calling for President Arroyo to resign. They were soon joined by a few church

officials and former Vice President Teofisto Guingona who appealed to the public for support. After a few hours, the mutinous

group agreed to surrender to avoid bloodshed.

Since 2007 the Philippine Senate has been conducting inquiries into the allegedly anomalous US$329 million deal to construct

the National Broadband Network. In February 2008, former Philippine Forest Corporation president Rodolfo Noel Lozada Jr.

testified in the Senate and accused key Arroyo allies of overpricing the deal and receiving and/or demanding hefty commissions

for the implementation of said deal. The controversy has again fueled mass protests by various cause-oriented groups calling

for the President to resign.

The Arroyo administration has been pushing for changes to the Philippine Constitution including, among others, a change in the

form of government from presidential to parliamentary. However, the Philippine Supreme Court recently ruled to deny petitions

to allow a People’s Initiative that would have made constitutional changes possible through an abbreviated process and a

plebiscite.

Another impeachment complaint against President Arroyo was filed, citing the NBN controversy. This, however, has not yet

been taken up by Congress and falls within the constitutional ban prohibiting the filing of an impeachment complaint within one

year from the filing of the last impeachment complaint.

In August 2008, certain members of a long-standing secessionist group, the Moro Islamic Liberation Front (“MILF”), launched

attacks on government troops and civilians, including damage to property, following a stall in the signing of the Memorandum of

Agreement on Ancestral Domain (“MOA-AD”), the result of peace talks between the Philippine Government and the MILF in an

effort to promote mutual cooperation and preserve the development of Mindanao. The delay came on the heels of allegations

that the MOA-AD was essentially ceding highly developed portions of Mindanao to the secessionists without a popular

13

consensus, thus compromising national identity and granting sovereignty to the MILF. The attacks have decreased with the

onset of Ramadan, but are nonetheless far from abated. The government continues to hold out on the MOA-AD signing.

General elections will be held on 10 May 2010. This general election is gaining much controversy not only because it will be the

first time that the system will be automated, but also because of recent election-related killings. In 23 November 2009, 57

people were killed in Maguindanao. The victims, the wife and sisters of Buluan Vice Mayor Esmael Mangudadatu and at least

30 media workers, were on their way to Shariff Aguak to submit the Vice Mayo’s certificate of candidacy for governor of

Maguindanao. The suspects of the massacre are members of the Ampatuan family, including the incumbent governor of

Maguindanao, Andal Ampatuan Sr.

Because of the political unrest and security issues, President Arroyo declared martial law in Maguindanao province on 4

December 2009. The declaration was contained in Proclamation No. 1959, which also suspended the privilege of the writ of

habeas corpus in Maguindanao province except for certain areas identified as bailiwicks of the Moro Islamic Liberation Front

(“MILF”) separatists. The declaration was objected to by various sectors of society. As a result, President Arroyo lifted the

declaration of martial law in Maguindanao on 12 December 2009. The arrested members of the Ampatuan family were charged

with rebellion and multiple counts of murder. As the arrested Ampatuans face the charges, the Maguindanao province

continues to pose high political risk as the Ampatuans are believed to maintain strong control over the province.

Another recent election-related controversy is President Arroyo’s decision to run for Congress as the representative of the

second district of Pampanga, her home province. She formally filed her certificate of candidacy on 1 December 2009, thereby

affirming the speculation that President Arroyo is planning to lead an amendment to the Philippine Constitution to change the

current political system into a parliamentary form of government and to take the post of Prime Minister. With this, she

addresses the term limit for an elected president under the present Philippine Constitution and, if elected Prime Minister, will be

able to hold power for a longer period of time.

No assurance can be given that the future political environment in the Philippines will be stable or that current or future

Governments will adopt economic policies conducive to sustaining economic growth. Political instability in the Philippines could

negatively affect the general economic conditions in the Philippines which could have a material impact on the financial results

of the Bank and the Group.

An increase in the number of terrorist activities in the Philippines could negatively affect the Philippine economy and,

therefore, the Group’s financial condition and its business

The Philippines has been subject to a number of terrorist attacks in recent years. An increase in the number of terrorist

activities in the Philippines could negatively affect the Philippine economy and, therefore, the Group’s financial condition and its

business.

The Philippine army has been in conflict with the Abu Sayyaf organization, which has ties to the al-Qaeda terrorist network and

has been identified as being responsible for kidnapping and terrorist activities in the Philippines. There has been a series of

bombings in the Philippines, mainly in southern cities. Although no one has claimed responsibility for these attacks, Philippine

military officials have stated that the attacks appeared to be the work of the Abu Sayyaf organization. On 24 February 2004, a

bomb exploded on a Superferry ship off the coast of Manila, causing the vessel to sink, killing 116 people. On 14 February

2005, three bombs exploded in the cities of General Santos, Davao and Makati, killing at least 11 people and injuring over 100

people. On 8 June 2008, gunmen believed to belong to the Abu Sayyaf Group abducted broadcast journalist Ces Drilon of

ABS-CBN, her two cameramen and a professor of Mindanao State University in Sulu but were released 10 days later. On 15

January 2009, three workers from the International Committee of the Red Cross were also abducted by members of the group.

All three workers were released in April and July 2009.

There can be no assurance that the Philippines will not be subject to further, or an increased number of, acts of terrorism in the

future. Terrorist attacks have, in the past, had a material adverse effect on investment and confidence in, and the performance

14

of, the Philippine economy and, in turn, the Group’s business. Furthermore, there can be no assurance that the Philippines will

not suffer a large-scale terrorist attack which cripples the Philippine economy for a significant period of time.

Corporate governance and disclosure standards in the Philippines may differ from those in more developed countries

While a principal objective of the Philippine securities laws and the listing rules of the Philippine Stock Exchange (“PSE”) is to

promote full and fair disclosure of material corporate information, there may be less publicly available information about

Philippine public companies, such as the Bank, than is regularly made available by public companies in the U.S. and other

countries. Furthermore, although the Bank complies with the requirements of the PSE with respect to corporate governance

standards, these standards may differ from those applicable in other jurisdictions. For example, the Philippine Securities

Regulation Code requires the Bank to have at least two independent directors or such number of independent directors as is

equal to 20% of the Board, whichever is the lower number. The Bank usually has two independent directors. Many other

jurisdictions require significantly more independent directors.

Financial statements of Philippine banks are prepared in accordance with Financial Reporting Standards in the Philippines for

Banks which requires the use of certain critical accounting estimates. Management of institutions are to use their own judgment

to come up with estimates on certain statement of condition and income statement accounts such as, but not limited to,

impairment losses on loans and receivables; fair value of derivatives; impairment of available-for-sale and held-to-maturity

securities; and realization of deferred income tax assets among others.

CONSIDERATIONS RELATING TO THE PHILIPPINE BANKING INDUSTRY

The Philippine banking industry is highly competitive and increasing competition may result in declining margins in

the Bank's principal businesses

The Bank is subject to significant levels of competition from many other Philippine banks and branches of international banks,

including competitors which in some instances have greater financial and other capital resources, a greater market share and

greater brand name recognition than the Bank. The banking industry in the Philippines is a mature market that has, in recent

years, been subject to consolidation and liberalization, including liberalization of foreign ownership regulations. There are

currently a total of 38 domestic and foreign commercial banks operating in the Philippines.

The recent mergers and consolidations in the banking industry, as well as the liberalization of foreign ownership regulations in

banks, have allowed the emergence of foreign and bigger local banks in the market. This is expected to increase the level of

competition both from Philippine banks and branches of international banks. This may impact the Philippine banks’ operating

margins, but this would also enhance the industry’s overall efficiency, business opportunities and service delivery.

In the future, the Bank may face increased competition from financial institutions offering a wider range of commercial banking

services and products, larger lending limits, greater financial resources and stronger balance sheets than the Bank. Increased

competition may arise from:

Other Philippine banks and financial institutions with significant presence in Metro Manila and large country-wide

branch networks;

Foreign banks, due to, among other things, relaxed standards which permitted large foreign banks to open

branch offices;

Domestic banks entering into strategic alliances with foreign banks with significant financial and management

resources; and

Continued consolidation in the banking sector.

15

There can be no assurance that the Bank will be able to compete effectively in the face of such increased competition. In

addition, the Bank faces intense competition in areas it has identified for growth such as consumer loans and remittances.

Increased competition may make it difficult for the Bank to increase the size of its loan portfolio and deposit base, as well as

cause increased pricing competition, which could have a material adverse effect on its margins, results of operations and

financial condition and inhibit the Bank’s ability to implement its growth strategy.

In addition, the Bank may face increasing competition for Japanese clients. UFJ’s share disposal was prompted by its merger

with The Bank of Tokyo-Mitsubishi, which already has a presence in the Philippines. There can be no assurances that the

Bank’s Japanese related business will not suffer because of perceptions that the Bank no longer has a strong Japanese

alliance.

Philippine banks are generally exposed to higher credit risks and greater market volatility than banks in more

developed countries

Philippine banks are subject to the credit risk that Philippine borrowers may not make timely payment of principal and interest

on loans and, in particular that, upon such failure to pay, Philippine banks may not be able to enforce the security interest they

may have. The credit risk of Philippine borrowers is, in many instances, higher than that of borrowers in developed countries

due to:

The greater uncertainty associated with the Philippine regulatory, political, legal and economic environment;

The dependence of the Philippine economy in general on exports for economic growth. In recent years,

however, Philippine economic growth has largely been fueled by personal consumption spending that

accounted for 70% of Gross Domestic Product (“GDP”);

The large foreign debt of the Government, relative to the gross domestic product of the Philippines. The

country’s foreign debt has increased by 21.73%, from P1.505 trillion as at January 2008 to P1.87 trillion in

January 2009. This already represents 24.9% of 2008 GDP at current prices; and

The greater volatility of interest rates and U.S. dollar/Peso exchange rates.

Higher credit risk has a material adverse effect on the quality of loan portfolios and exposes Philippine banks, including the

Bank, to more potential losses and higher risks than banks in more developed countries. In addition, higher credit risk generally

increases the cost of capital for Philippine banks compared to their international counterparts. Such losses and higher capital

costs arising from this higher credit risk may have a material adverse effect on the Bank's financial condition, liquidity and

results of operations. According to data published by the BSP, average non-performing loan ratios (including interbank loans) in

the Philippine banking system were 5.7%, 4.5%, and 3.5% as at the years ended 31 December 2006, 2007 and 2008,

respectively.

The Bank's ability to assess, monitor and manage risks inherent in its business differs from the standards of its

counterparts in more developed countries

The Bank is exposed to a variety of risks, including credit risk, market risk, portfolio risk, foreign exchange risk and operational

risk. The effectiveness of the Bank's risk management is limited by the quality and timeliness of available data in the Philippines

in relation to factors such as the credit history of proposed borrowers and the loan exposure borrowers have with other financial

institutions. In addition, the information generated by different groups within the Bank may be incomplete or obsolete. The Bank

may also have developed credit screening standards in response to such inadequacies in quality of credit information that are

different from, or inferior to, the standards used by its international competitors. As a result, the Bank's ability to assess, monitor

and manage risks inherent in its business would not meet the standards of its counterparts in more developed countries. If the

Bank is unable to acquire or develop in the future the technology, skills set and systems available to meet such standards, it

16

could have a material adverse effect on the Bank's ability to manage these risks and on the Bank's financial condition, liquidity

and results of operations.

CONSIDERATIONS RELATING TO THE BANK

The reports of the Bank’s independent auditors with respect to the consolidated statements of condition of the Bank

as of 31 December 2006, 2007 and 2008 and the related consolidated income statements, statements of changes in

capital funds and cash flows statements for the periods then ended were qualified

The Bank prepared its 2006 and 2007 consolidated financial statements in accordance with Philippine Financial Reporting

Standards and its 2008 consolidated financial statements in accordance with Financial Reporting Standards in the Philippines

for Banks, other than with respect to the matters qualified in the relevant audit report. Punongbayan & Araullo (“P&A”), the

Bank’s independent auditors for fiscal years 2006 to 2008 have identified certain matters relating to the preparation of the

Bank’s consolidated financial statements that were not consistent with the applicable accounting standards and have included

qualifications to such effect in their published audit reports. The Bank’s auditors issued audit reports included qualifications with

respect to the staggered recognition of the additional allowance for impairment and losses, not writing-off of impaired credit

card receivables against current operations, the derecognition of certain non-performing assets (“NPAs”) transferred and

recording by the Bank of certain transactions pending approval by the BSP (applicable to non-consolidated or Bank financial

statements only). The qualifications are described below:

• The Bank transferred certain NPAs to special purpose vehicles (“SPVs”), including transfers to Philippine Investment

One, Inc. (“PIOI”) and New Pacific Resources Management Inc. (“NPRMI”). In recording the transfer, the Bank

derecognized the NPAs from its financial records, but the related allowance for impairment was retained or “freed”.

The transfers to PIOI and NPRMI were in consideration for, among other things, subordinated notes that contained

provisions that payments under the notes are dependent on the SPV’s ability to make collections on the transferred

NPAs. The Bank’s auditors have determined that such provisions do not reflect a complete transfer of risks and

rewards as required by applicable accounting standards and that the transferred NPAs should be recognized in the

Bank’s financial statements, including any required additional allowance for impairment. Moreover, under Republic

Act No. 9182 and the various resolutions and circulars published by the BSP regarding such Act (together, the “SPV

Act”), the Bank is permitted to defer and amortize the required additional allowance for impairment on the NPAs

transferred to PIOI and on the losses resulting from transfers of NPAs to other SPVs. Applicable accounting

standards in the Philippines, however, require the full recognition of the required additional allowance for impairment

and losses against current operations in the period that such impairment and losses were determined instead of

capitalizing it as deferred charges and amortizing it over future periods. Had the Bank reflected its interest in PIOI

and NPRMI in its financial statements and not derecognized the NPAs transferred, derecognized the allowance for

impairment related to the NPAs transferred that qualified for derecognition at the time of sale, and fully recognized

the required additional allowance for impairment and losses, the gross balance of the Bank’s loans and receivables

account would have increased by P5.2 billion as of 31 December 2007 and 2008; allowance for impairment would

have increased by P1.4 billion and P2.0 billion in 2007 and 2008, respectively; available-for-sale securities would

have decreased by P1.4 billion in 2007 and 2008; investment property would have increased by P1.4 billion in 2007

and 2008; deferred charges (part of Other Resources) would have decreased by P8.6 billion and P7.8 billion in 2007

and 2008, respectively; other liabilities would have increased by P24.0 million and P26.5 million in 2007 and 2008,

respectively; and net income would have decreased by P1.3 billion and P791.3 million in 2006 and 2008, respectively

• Bankard Inc, (“Bankard”), a subsidiary of the Bank, obtained BSP approval for it to stagger the booking of P3.6 billion

required additional allowance for impairment as of 31 December 2003 for a period of seven years starting in fiscal

year 2004. Applicable accounting standards in the Philippines, however, require the full recognition of required

allowance for impairment against current operations in the period such losses were determined. In 2006, Bankard

sold and transferred to the Bank certain credit card receivables, P2.8 billion of which were approved by the BSP for

17

the staggering scheme. After the sale and transfer of the receivables, the Bank charged in fiscal year 2006 an

impairment loss of P162.1 million of such receivables and wrote-off the remaining balance of P2.6 billion against

allowance for impairment, instead of against operations. Had Bankard recognized the required allowance for

impairment in the period the losses were determined and had the subsequent write-off of the impaired credit card

receivables been charged against 2006 operations, both balances of the loans and receivables account and the

surplus account would have decreased by P2.6 billion as of 31 December 2007 and 2008. Further, the Bank’s net

income would have decreased by P2.6 billion in fiscal year 2006.

• As part of its corporate restructuring strategy on 27 November 2006, the Bank approved the capital infusion of P1

billion each into RCBC Capital and Bankard, both subsidiaries of the Bank, by way of conversion of RCBC Capital’s

and Bankard’s debt to the Bank into equity. The Bank reflected the effects of these transactions in its 2006 financial

statements (non-consolidated or Bank only) by recording the capital infusion as part of Investments in Subsidiaries

and Associates account and, in addition, provided for allowance for impairment amounting to P200 million. However,

BSP approved the transactions only on 23 February 2007. The Bank’s auditors have determined that these

transactions should have been recognized only at the time of the BSP approval. Had the capital infusion not been

recorded in the 2006 financial statements (non-consolidated or Bank only), the Bank’s loans and receivables would

have increased by P2.0 billion; investments in subsidiaries and associates would have been decreased by P1.8

billion and its 2006 net income would have been increased by P200.0 million.

Certain of these deviations from accounting standards are allowed by the BSP under the SPV Act or otherwise. However, there

can be no assurances that the BSP will not change its policies to align its policies with the applicable accounting standards. If

the BSP were to change its policies, or if the Bank were to make adjustments to its financial statements to make them fully

consistent with the applicable accounting standards, the Bank’s total resources and surplus would decrease and impairment

losses would increase resulting in a decrease in net income. If the Bank were to make any such adjustments to its financial

statements, it may restate the financial statements of previous years, including the financial statements included in this Offering

Circular. The Bank’s financial statements included in this Offering Circular may not be comparable with the financial statements

of other banks in the Philippines and may not be comparable with the Bank’s future or past financial statements that have been

prepared on a different basis without such qualifications.

The Bank may incur significant losses from its trading and investment activities due to market fluctuations and

volatility

In recent years, the performance of the Bank’s treasury operations has been a key factor in its operating income. Trading and

foreign exchange gains were P2.1 billion and P1.2 billion for fiscal years 2006 and 2007, respectively, which represented 17.2%

and 8.9% of operating income (net interest income and other operating income) for the respective periods. However, in 2008,

trading and foreign exchange gains were down 71.7% to P340.0 million, which now represents just 2.6% of operating income.

This trend has shown that the income derived from these activities is inherently volatile and may not be sustainable year after

year.

The Bank’s income from these activities are subject to substantial volatility based on, among other things, changes in interest

rates, foreign currency exchange rates, debt prices, stock market fluctuations economic, political and other conditions that may

fluctuate from time to time. Given the current turmoil in the global financial markets, there can be no assurance that, in the

future, the Bank will be able to realize a stable amount of trading and foreign exchange gains, that it will not incur a loss from

such trading or that it will hold unto its trading and investment securities to realize interest income, any or all of which could

have a material adverse effect on the Bank’s future net income.

A substantial portion of the Bank’s assets are held in the form of Government securities. As of 30 September 2009, the Bank

held P58.2 billion Government securities, respectively, which comprised 21.7% of its total assets. Such instruments are subject

not only to market fluctuations but to political or economic changes in the Government’s sovereign rating. There can be no

assurance that the rating of Philippine sovereign debt will not be subject to downgrades or negative outlooks. Furthermore,

18

should the Government be unable to service its obligations, the Bank would suffer a material adverse impact on its financial

condition.

In addition, due to the tainting of the Bank’s held-to-maturity (“HTM”) securities in 2006, the Bank was forbidden to classify any

securities under the held-to-maturity classification for two years. The tainting was lifted in 2008 which led to the re-classification

of P20.7 billion worth of securities to the held-to-maturity classification. Any such future reclassification or tainting could

materially alter the mark-to-market values reflected in the financial statements and could add to the volatility of the Bank’s

income.

The Bank may face increasing levels of non-performing loans and provision for impairment of assets

The Bank’s results of operations have been, and continue to be, negatively affected by the level of its non-performing loans

(“NPLs”). For fiscal years 2006, 2007 and 2008, the Bank made charges to income provisions for impairments of P1.7 billion,

P0.9 billion, and P1.0 billion, respectively, representing approximately 24.1%, 10.7% and 11.8% of the Bank’s net interest

income for these periods. For the nine months ended 30 September 2009, the Bank made charges to income provisions for

impairments of P1.7 billion representing approximately 21.9% of the Bank’s net interest income for this period.

As of 31 December 2006, 2007 and 2008 and 30 September 2009, the Bank’s NPLs totaled P6.3 billion, P6.5 billion, P3.9

billion and P5.9 billion, respectively.

Ongoing volatile economic conditions in the Philippines continue to adversely affect many of the Bank’s customers, causing

uncertainty regarding their ability to fulfill their loan obligations thus significantly increasing the Bank’s exposure to credit risk.

These and other factors could result in an increased number of NPLs in the future and would require the Bank to book

additional provisions for impairment on loans.

While the Bank has instituted more aggressive NPL disposal activities and stricter credit processes, there can be no assurance

that the Bank will be successful in continuing to reduce its NPL levels. An increase in the Bank’s NPLs could have a material

adverse effect on its financial condition, capital adequacy and results of operations. Part of the Bank’s NPL disposal strategy is

to continue to sell NPLs to SPVs. The Bank may not be able to sell its NPLs at commercially reasonable terms, if at all. In

addition, certain of the Bank’s past sales to SPVs have not sufficiently transferred the risks and rewards of the sold NPLs to the

SPVs in accordance with the applicable accounting standards. If the Bank were to include these NPLs in its statement of

condition, it would be required to increase its impairment losses and its financial condition and results of operations would be

negatively affected.

The Bank's provisioning policies in respect of non-performing loans require significant subjective determinations

which may increase the variation of application of such policies

BSP regulations require that Philippine banks classify non-performing loans based on four different categories corresponding to

levels of risk: Loans Especially Mentioned, Substandard, Doubtful and Loss. Generally, classification depends on a combination

of a number of qualitative as well as quantitative factors such as the number of months payment is in arrear, the type of loan,

the terms of the loan, and the level of collateral coverage. These requirements have in the past, and may in the future, be

subject to change by the BSP. Periodic examination by the BSP of these classifications may also result in changes being made

by the Bank to such classifications and to the factors relevant thereto. In addition, these requirements in certain circumstances

may be less stringent than those applicable to banks in other countries and may result in particular loans being classified as

non-performing later than would be required in such countries or being classified in a category reflecting a lower degree of risk.

Furthermore, the level of loan loss provisions which the Bank recognizes may increase significantly in the future due to the

introduction of new accounting standards. The level of provisions currently recognized by the Bank in respect of its loan

portfolio depends largely on the estimated value of the collateral coverage for the portfolio. The level of the Bank's provisions

may not be adequate to cover increases in the amount of its non-performing loans, or any deterioration in the overall credit

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quality of the Bank's loan portfolio, including the value of the underlying collateral. In particular, the amount of the Bank’s

reported loan losses may increase in the future as a result of factors beyond the Bank’s control.

Certain accounting standards have been adopted in the Philippines, based on International Accounting Standards, which

require the Bank’s loan loss provisions to reflect the net present value of the cash flows of the loan and underlying collateral.

These new accounting standards may result in the Bank recognizing significantly higher provisions for loan loss in the future.

The Bank may be unable to recover the assessed value of its collateral when its borrowers default on their obligations which

may expose the Bank to significant losses.

While the Bank believes its current level of provisions and collateral position are more than adequate to cover its non-

performing loan exposure, an unexpected or significant increase in non-performing loan levels may result in the need for higher

levels of provisions in the future.

The Bank may be unable to recover the assessed value of its collateral when its borrowers default on their obligations,

which may expose the Bank to significant losses

As of 31 December 2006, 2007 and 2008, respectively, the Bank’s secured loans represented 74.1%, 67.1%, and 59.2% of the

Bank’s total loans. As of those dates, 50.7%, 41.1% and 61.0% respectively, of the collateral on these loans consisted of real

estate properties. As of 30 September 2009, the Bank’s secured loans represented 62.3% of the Bank’s total loans and 63.2%

of the collateral on these loans consisted of real estate properties.

The Bank may not be able to recover the value of any collateral or enforce any guarantee due, in part, to the difficulties and

delays involved in enforcing such obligations in the Philippine legal system. In order to foreclose on collateral or enforce a

guarantee, banks in the Philippines are required to follow certain procedures specified by Philippine law. These procedures are

subject to administrative and bankruptcy law requirements more burdensome than in certain other jurisdictions. The resulting

delays can last several years and lead to deterioration in the physical condition and market value of the collateral, particularly

where the collateral is in the form of inventory or receivables. In addition, such collateral may not be insured. These factors

have exposed, and may continue to expose, the Bank to legal liability while in possession of the collateral. These difficulties

may significantly reduce the Bank's ability to realize the value of its collateral and therefore the effectiveness of taking security

for the loans it makes. The Bank carries the value of the foreclosed properties at the lower of the bid price and the loan balance

plus accrued interest at the time of such foreclosures. While the Bank at each statement of condition date, provides impairment

on its foreclosed properties in accordance with applicable accounting standards and BSP regulations, it may incur further

expenses to maintain such properties. In realizing cash value for such properties, the Bank may incur further expenses such as

legal fees and taxes associated with such realization.

The Bank may not be successful in implementing new business strategies or penetrating new markets

The Bank’s business strategy includes expanding the range of its products and services in order to diversify its revenue

sources. For example, the Bank has targeted overseas remittances and loans to SMEs as key areas of growth. In addition, the

Bank, through its subsidiary RSB, is expanding its consumer loan operations. Expansion of the Bank’s business activities to

increase the number of financial products and services that it offers exposes it to a number of risks and challenges including,

among others, the following:

• New and expanded business activities may require greater marketing and compliance costs than the Bank’s

traditional services;

• New and expanded business activities may have less growth or profit potential than the Bank anticipates, and there

can be no assurance that new business activities will become profitable at the level the Bank desires or at all;

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• The Bank may fail to identify and offer attractive new services in a timely fashion, putting it at a disadvantage with

competitors;

• The Bank’s competitors may have substantially greater experience and resources for the new and expanded

business activities and thus the Bank may not be able to attract customers from its competitors;

• The Bank may need to enhance the capability of its IT systems to support a broader range of activities; and

• Economic conditions, such as rising interest rates or inflation, could hinder the Bank’s expansion, particularly in the

consumer loan industry.

The Bank’s inability to implement its business strategy could have a material adverse effect on its business, financial condition

and results of operations.

Increased exposure to consumer debt could result in increased delinquencies in the Bank’s loan and credit card

portfolios

The Bank, primarily through RSB, has expanded its consumer loan operations. In addition, the Bank plans to expand its credit

card operations. These developments increase the Bank’s exposure to consumer debt and changes in general economic

conditions affecting Philippine consumers. Accordingly, economic difficulties in the Philippines that have a significant adverse

effect on Philippine consumers could result in reduced growth and deterioration in the credit quality of the Bank’s personal loan

and credit card portfolios. For example, a rise in unemployment or an increase in interest rates could have an adverse impact

on the ability of borrowers to make payments and increase the likelihood of potential defaults, while reducing demand for

consumer loans. In addition, the number of loan accounts may be negatively affected by declines in household income, public

concerns about unemployment or other negative macroeconomic factors.

The Bank has a high exposure to the Philippine property market through real and other properties acquired (“ROPA”)

and its lending to customers in the real estate industry

The Bank has significant exposure to the Philippine property market due to the level of its holdings in ROPA and its loans to

customers in the real estate industry. The Bank acquires ROPA when it forecloses on the collateral provided by a borrower.

Accordingly, the level of the Bank’s ROPA varies based on the level of its NPLs. As of 31 December 2007 and 2008, the Bank’s

gross ROPA amounted to approximately P9.9 billion and P9.0 billion, respectively, which represent 4.2% and 3.4%,

respectively, of the Bank’s total tangible assets. As of 30 September 2009, gross ROPA amounted to P 7.3 billion, representing

2.7% of the Bank’s total tangible assets. The Bank’s outstanding loans to customers in the real estate industry amounted to

P46.5 billion as of 31 December 2008 and P41.9 billion as of 30 September 2009, representing 35.2% and 33.8% respectively,

of its total loans as at those dates.

The Bank periodically disposes of its ROPA in and through negotiated sales at prevailing market prices, which are largely

determined by purchasers. The Philippine property market is highly cyclical, and property prices in general have been volatile.

Since 1997, property prices have undergone a significant decline, and transaction volumes in the Philippine property market

have also generally declined. Property prices are affected by a number of factors, including, among other things, the supply of

and demand for comparable properties, the rate of economic growth in the Philippines and recent political and economic

developments.

To the extent that property values decline in the future, there can be no assurance that the Bank will be able to sell and recover

the value of the ROPA stated in the financial statements or that the ability of the Bank’s customers in the real estate industry to

make timely payment on their loans will not deteriorate. Furthermore, in an extended downturn in the property market, and

given the Bank’s significant amount of ROPA, it may take a number of years before the Bank is able to realize a significant part

of the value of its ROPA. Finally, the Bank is required by BSP guidelines to recognize annual provisions against ROPA which

21

have been held for a period of more than five years. A minimum provision of 10.0% of the book value of the ROPA is required

to be made annually starting in the sixth year, increasing incrementally to a required provision of 50.0% at the end of the tenth

year. As of 31 December 2007 and 2008, on a non-consolidated basis approximately P3.5 billion and P2.0 billion of ROPA,

respectively, had been held by the Bank for more than five years and the provisions for these ROPA amounted to P439.9

million and P528.9 million, respectively. As a result of these provisioning requirements, if the Bank is unable to dispose of its

ROPA, it may be required to recognize levels of provisions in future years which are higher than those currently recognized by

the Bank. Furthermore, if the Bank’s customers in the real estate industry fail to make timely payment on their loans, the Bank

may have to set aside additional provisions for impairment losses. Accordingly, an extended downturn in the Philippine property

sector could increase the level of the Bank’s provisions set against its ROPA or its loans extended to customers in the real

estate industry, reduce the Bank’s net income and consequently adversely affect the Bank’s business, financial condition and

results of operations.

The Bank may have to comply with stricter regulations and guidelines issued by regulatory authorities in the

Philippines, including the BSP and the Bureau of Internal Revenue (the "BIR") and international bodies, including

the Financial Action Task Force (the "FATF")

The Bank is regulated principally by, and has reporting obligations to, the BSP. The Bank is also subject to the banking,

corporate, taxation and other laws in effect in the Philippines. The regulatory and legal framework governing the Bank differs in

certain material respects from that in effect in other countries and may continue to change as the Philippine economy and

commercial and financial markets evolve. In recent years, existing rules and regulations have been modified, new rules and

regulations have been enacted and reforms have been implemented which are intended to provide tighter control and more

transparency in the Philippine banking sector. These rules include new guidelines on the monitoring and reporting of suspected

money laundering activities as well as regulations governing the capital adequacy of banks in the Philippines.

Furthermore, while the Philippines enacted the Anti-Money Laundering Act of 2001 (the "Anti-Money Laundering Act") to

introduce more stringent anti-money laundering regulations, these regulations did not initially comply with the standards set by

the FATF. However, following pressure from the FATF, an amendment to the Anti-Money Laundering Act became effective on

23 March 2003. In January 2005, the Philippines was removed from the list of Non-Cooperative Countries and Territories

(“NCCTs”), confirming that anti-money laundering (“AML”) measures to remedy deficiencies that were originally identified by the

FATF are in place. AML systems (including strict customer identification, suspicious transaction reporting, bank examinations,

and legal capacities to investigate and prosecute money laundering) w ere all identified to be of a satisfactory nature.

The Bank does not have an expanded derivatives license

Under Section X602 of the BSP’s Manual of Regulations for Banks (the “Manual”), all banks and their subsidiaries or affiliates

offering derivatives products and engaging in financial derivatives transactions are required to obtain a derivatives license. A

derivatives license may be either regular or expanded. A regular derivatives license allows the holder to engage in regular

derivatives transactions, such as swaps and forwards; while an expanded license allows the holder to engage in all other types

of financial derivatives products. An end-user does not need a derivatives license so long as there exists an underlying

transaction, and the derivatives transaction is for a hedging purpose and not used for speculation.

The Bank has a pending application with the BSP for an expanded derivatives license, but there can be no assurance whether

such application will be successful. In the meantime, the Bank continues to engage in regular derivatives transactions on the

basis of a hold-over transitory provision in BSP Circular No. 594 and the provision in Section X602 allowing banks to enter into

certain derivatives transactions without a derivatives license. The Bank has, in the past, recognized significant gains from

derivatives transactions. The absence of the license may adversely affect the derivatives operations of the Bank, including its

ability to purchase certain forms of credit protection, which could negatively affect its results of operations and financial

condition.

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The Bank is effectively controlled by one shareholder group, with which it has extensive financial and business

connections

The Bank is effectively controlled by YGC. As of 31 December 2009, the Yuchengco family, primarily through a holding

company, Pan Malayan, owned approximately 48.1% of the Bank’s common shares outstanding. In addition, other members of

YGC owned or controlled an additional 5.6% of the Bank’s issued and outstanding shares. There can be no assurance that the

interests of YGC will necessarily coincide with the interests of minority shareholders. See “Management, Employees and

Shareholders”.

In addition, the Bank’s loans to YGC amounted to approximately 3.0% of the Bank’s total loan portfolio as of 31 December

2009. YGC has been the Bank’s controlling shareholder for over forty years and is closely associated with the Bank. If there is

any public perception in the Philippines that the Bank is reliant on the financial condition of YGC, there could be a loss of

confidence in the Bank’s solvency among its depositors or creditors in the event of deterioration in the financial condition of

YGC. In particular, this could result in withdrawals of deposits or a decrease in new deposits beyond levels anticipated by the

Bank, or otherwise have a material adverse effect on the Bank’s financial condition and results of operation. Furthermore, the

Bank relies on its relationship with YGC for certain business synergies, including access to YGC clients and prospective clients

and joint product development. As a result, a deterioration in the financial condition of YGC or negative publicity regarding YGC

or any other entities owned or controlled by YGC could have a material adverse effect on the Bank’s financial condition and

business opportunities.

CONSIDERATIONS RELATING TO THE LTNCDS

Liquidity of the LTNCDs

While no established market for bank-issued senior bank notes exists in the Philippines, LTNCD Holders, however, can sell

their LTNCDs in the secondary market subject to market prices through the Market Maker or trading participants of the PDEx,

upon listing of the LTNCDs in PDEx, whether or not the transactions contemplated are privately negotiated or are bona fide

offers to purchase or sell the LTNCDs. Consequently, the parties to a transfer may be subject to the guidelines of the Market

Maker and the payment to the Market Maker and/or the Registrar of any reasonable fees, as well as the rules of the PDEx,

upon listing of the LTNCDs therein. There is no assurance that the secondary trading of the LTNCDs may not be affected given

these restrictions.

Costs of Secondary Sale

Should an LTNCD Holder opt to sell the LTNCDs in the secondary market through the Market Maker, such Note Holder shall

pay the fees of the Market Maker as well as the fees to the Registrar. The fees for Secondary Market Transactions are

discussed in page 117 of this Offering Circular.

Limit right to accelerate

Subject to Condition 6(b) of the Terms and o Conditions, the LTNCDs cannot be pre-terminated at the instance of any LTNCD

Holder before Maturity Date. In the case of an event of default, none of the LTNCD Holders may accelerate the LTNCDs on

behalf of other LTNCD Holders, and may only collect from the Bank to the extent of his holdings in the LTNCDs. There is no

assurance that the secondary trading of the LTNCDs may not be affected given this limitation.

Issuance and Transfer Restrictions

The LTNCDs may not be issued or transferred to (a) the Bank; (b) the subsidiaries or affiliates of the Bank; or (c) wholly or

majority-owned or controlled entities of such subsidiaries and affiliates of the Bank. Transfers of LTNCDs in the secondary

market that will not result in a change in the taxability or non-taxability of its interest income may be done at anytime. On the

other hand, a transfer of a LTNCD that will result in a change in the taxability or non-taxability of the interest income due

thereon may be done only on an Interest Payment Date. Once the system of the Registry can process transfers of a LTNCD

23

that will result in a change in the taxability or non-taxability of the interest income due thereon in between Interest Payment

Dates, then such transfers can be done at any time.

The Registrar is authorized to refuse any transfer or transaction in the CD Registry which may be in violation of these

restrictions. There is no assurance that the secondary trading of the LTNCDs may not be affected given these restrictions.

Price risk

The price of the LTNCDs in the secondary market is subject to market fluctuations which may result in investments in the

LTNCDs being reduced in value. The LTNCDs are not insured by the Bank or any of its branches, affiliates or subsidiaries.

During adverse market conditions, a LTNCD Holder may not able to liquidate all or part of the LTNCDs as and when required.

Taxation of the LTNCDs

The Philippine Tax Code provides that income earned on interest-bearing obligations of Philippine residents is Philippine-

sourced income subject to Philippine income tax. Generally, interest income from long-term deposit or investment certificates,

including the LTNCDs, issued by banks to individual citizens, residents, individuals, and non-resident individuals engaged in

trade or business in the Philippines are exempt from income tax. However, under the same Philippine Tax Code, should the

holder of the certificate pre-terminate the deposit or investment before the 5th year, a final tax shall be imposed on the entire

income and shall be deducted and withheld by the depository bank from the proceeds of the long-term deposit or investment

certificated based on the holding period thereof:

Four years to less than five years – 5%

Three years to less than four years – 12%;

Less than three years – 20%

While the LTNCDs cannot be pre-terminated at the instance of any LTNCD Holder before Maturity Date, unless there occurs an

event of default, LTNCD Holders may assign or transfer their LTNCD to another holder who is not a prohibited holder and such

transfer or assignment will not be considered as a pre-termination. However, as of the date hereof, the Philippine Bureau of

Internal Revenue has not issued definitive guidelines confirming that the transfer or assignment of LTNCDs is not a pre-

termination for tax purposes and will not result in the imposition of the final tax stated above.

If any payments of principal and/or interest in respect of the LTNCDs shall be subject to deductions or withholdings for or on

account of any present taxes, duties, assessments, or governmental charges of whatever nature imposed, levied, collected,

withheld, or assessed by or within the Philippines or any authority therein or thereof having the power to tax, including but not

limited to stamp, issue, registration, documentary, value-added or similar tax, or other taxes, duties, assessments, or

government charges, including interest, surcharges, and penalties thereon (the “Taxes”), then such Taxes shall be for the

account of the LTNCD Holder concerned, and if the Bank shall be required by law or regulation (or any change in interpretation

or implementation of such law or regulation prevailing) to deduct or withhold such Taxes, then the Bank shall make the

necessary withholding or deduction for the account of the LTNCD Holder concerned; provided, however, that all sums payable

by the Bank to tax-exempt persons shall be paid in full without deductions for Taxes or government charges, subject to the

submission by the relevant LTNCD Holder claiming the exemption of reasonable and acceptable evidence of such exemption to

the Registrar; and provided, further, that documentary stamp tax for the primary issue of the LTNCD and the documentation, if

any, shall be for the account of the Bank.

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TERMS AND CONDITIONS OF THE LTNCDS

The LTNCDs shall at all times be subject to and governed by these following Terms and Conditions. 1.0 Definitions and Interpretation (a) When used in these terms and conditions: Adverse Effect means a material adverse effect on the Issuer’s operations, activities, business, property, liabilities, condition (financial or otherwise) or prospects; implementation of the issuance of the Coupon-Bearing LTNCDs; or its ability to duly perform and observe its obligations and duties under the Coupon-Bearing LTNCDs and the Coupon-Bearing LTNCD Agreements (as defined below).

Anti-Money Laundering Laws of the Philippines means Republic Act No. 9160, Republic Act No. 9194, and BSP Circular Nos. 251, 253, and 279, and all other amendatory and implementing law, regulation, jurisprudence, notice or order of any Philippine governmental body relating thereto; Auditors mean Punongbayan & Araullo; Bank means Rizal Commercial Banking Corporation, a corporation duly organized and existing under the laws of the Philippines, and duly authorized to operate as a universal bank; Banking Day means any of the days in a week, other than Saturday or Sunday, and public holidays on which commercial banks and the Philippine Clearing House Corporation are generally open for the transaction of banking in Makati City, Philippines; BSP means the Bangko Sentral ng Pilipinas; Cash Settlement Account means an account designated by a LTNCD Holder with a Cash Settlement Bank which shall be credited for interest, principal, and other payments on the Coupon-Bearing LTNCDs. Cash Settlement Banks means (a) a bank licensed and authorized under the laws of the Philippines and appointed by the Bank as such for the sole purpose of receiving payments of principal, interest, and other amounts due on the Coupon-Bearing LTNCDs in such form prescribed by the Paying Agent or (b) a bank authorized under the laws of the Philippines, registered as such with the Philippine Dealing System, and so designated by the LTNCD Holder with whom the LTNCD Holder's Cash Settlement Account is maintained; Coupon-Bearing LTNCDs mean P2,854,000,000 worth of coupon-bearing Long-Term Negotiable Certificates of Time Deposit, to be issued by the Bank, represented by a Master LTNCD and subject to the LTNCD Regulations and these Terms and Conditions; Closed Period means the relevant period described in Condition 9(b)(i) and 9(b)(ii), during which no person may request any transfer of Coupon-Bearing LTNCDs to be recorded in the LTNCD Registry, and no transfers of Coupon-Bearing LTNCDs may be recorded in such LTNCD Registry; Early Redemption Amount means the Issue Price, plus accrued and unpaid interest up to, but excluding the Early Redemption Date; Early Redemption Date means the date (which must be an Interest Payment Date) when the Early Redemption Option is exercised by the Bank pursuant to Condition 6(b) and subject to the provisions of the LTNCD Regulations; Early Redemption Option means the option of the Bank to preterminate and redeem the Coupon-Bearing LTNCDs in whole, but not in part, before Maturity Date at the Early Redemption Amount on any Early Redemption Date, subject to the provisions of the LTNCD Regulations;

25

Event of Default means an event specified as such in Condition 12; Final Redemption Amount means 100% of the aggregate nominal amount of the Coupon-Bearing LTNCDs, plus accrued and unpaid interest up to, but excluding, the Maturity Date; HSBC means The Hongkong and Shanghai Banking Corporation Limited, a banking corporation duly organized and existing under the laws of the Hong Kong Special Administrative Region of the People’s Republic of China, and duly authorized to operate as a universal bank in the Philippines through its Philippine branch; Indebtedness means indebtedness for monies borrowed or any guarantee or indemnity for monies borrowed, other than the indebtedness under the Coupon-Bearing LTNCDs;

Interest Payment Date means the last day of a particular Interest Period when interest on the Coupon-Bearing LTNCDs is due and payable to the LTNCD Holders, and means each 6 February, 6 May, 6 August and 6 November beginning on 6 May 2010; provided, that if any Interest Payment Date is not a Banking Day, then interest will be paid on the next succeeding Banking Day without any adjustment as to the amount of interest to be paid; Interest Period means the period from and including the Issue Date to, but excluding the first Interest Payment Date, and every succeeding subsequent period beginning on the immediately preceding Interest Payment Date to, but excluding the next Interest Payment Date, but in the case of the last Interest Period, it will be the period from and including the immediately preceding Interest Payment Date up to, but excluding, the Maturity Date; Interest Rate means 6.50% per annum, being the fixed per annum rate payable to the LTNCD Holders for the entire tenor of the Coupon-Bearing LTNCDs; Issue means the issuance of Coupon-Bearing LTNCDs by the Bank pursuant to these Terms and Conditions; Issue Date shall mean 6 May 2010; Issue Price means 100% of the principal amount of the Coupon-Bearing LTNCDs; LTNCD Agreements means the Placement and Selling Agency Agreement, the Registry and Paying Agency Agreement, the Market Makers Agreement, the Master LTNCD, these Terms and Conditions and such other separate letters or agreements covering conditions precedent, fees, expenses and other obligations of the parties, including amendments thereto as these relate to the Coupon-Bearing LTNCDs; LTNCD Holder means a person who, at any relevant time, appears in the LTNCD Registry as the registered owner of a Coupon-Bearing LTNCD; LTNCD Registry means the electronic records of the Registrar bearing the official and best evidence of information of the names and other details of the LTNCD Holders and the amount of Coupon-Bearing LTNCDs held by each holder, including records of all transfers and transactions in respect of the Coupon-Bearing LTNCDs; LTNCD Regulations means the General Banking Law of 2000 (Rep. Act No. 8791), all the necessary rules and guidelines for the issuance of Long-Term Negotiable Certificates of Time Deposit, including Section X233.9 of the Manual of Regulations for Banks (the Manual) and BSP Circular No. 304 and BSP Circular No. 428, and any other circulars and regulations as may be relevant for the transaction, as these may be amended from time to time; Market Makers means HSBC and MIB as appointed by the Bank under the Market Maker Agreement to perform the role of market makers required under the LTNCD Regulations, and includes its successor entity, or any replacement Market Maker; Market Maker Agreement means the agreement to be executed by and between the Bank and the Market Makers, stipulating the rights and obligations of market makers with respect to transfers of the Coupon-Bearing LTNCDs;

26

Master LTNCD means the Master Long-Term Negotiable Certificate of Time Deposit representing each Series of the LTNCDs, setting forth the terms and conditions of each Issue; Maturity Date means five years and six months from the Issue Date, being 6 November 2015; MIB means Multinational Investment Bancorporation, an investment house duly organized and existing under and by virtue of the laws of the Republic of the Philippines; Offering Circular means the Offering Circular (including, for the avoidance of doubt, the consolidated financial statements of the Bank included therein) in preliminary and final form in respect of the Coupon-Bearing LTNCDs, and all amendments, supplements and addenda thereto; PDEx means the Philippine Dealing & Exchange Corporation, a domestic corporation duly registered with the Securities and Exchange Commission to operate an exchange and trading market for fixed income securities. PDTC means the Philippine Depository & Trust Corp., a corporation duly authorized to perform registry functions by appropriate authorities and organized and existing under and by virtue of the laws of the Republic of the Philippines; Paying Agent means the PDTC as appointed by the Bank under the Registry and Paying Agency Agreement to perform the role of a paying agent required under the LTNCD Regulations and includes its successor entity, or any replacement Paying Agent; Payment Account means a separate and distinct account to be opened by the Paying Agent with the Bank, and maintained by the Paying Agent in trust and for the benefit of the LTNCD Holders, into which the Bank shall timely deposit all amounts payable to the LTNCD Holders under the LTNCDs, to be used exclusively for such purpose as managed solely and exclusively by the Paying Agent; Philippine Pesos or the symbol P means the lawful currency of the Republic of the Philippines; Prohibited LTNCD Holders means the following persons and entities that are prohibited from purchasing and/or holding any of the Coupon-Bearing LTNCDs: (a) the Bank; (b) subsidiaries and affiliates of the Bank; and (c) wholly or majority-owned or controlled entities of such subsidiaries and affiliates of the Bank. For purposes hereof, an “affiliate” refers to an entity where at least 20%, but not exceeding 50%, of its outstanding voting stock is owned by the Bank; Purchase Advice means the advice sent by the Selling Agent, the Market Makers, or, in case the Coupon-Bearing LTNCDs are listed on PDEX, the trading participants of the PDEx, as the case may be, to the LTNCD Holder confirming the acceptance of the LTNCD Holder’s offer to purchase such Coupon-Bearing LTNCDs and consequent ownership thereof, as well as a summary of the terms and conditions of the sale of the Coupon-Bearing LTNCDs to a LTNCD Holder; RTGS means the Philippine Payment System via Real Time Gross Settlement that allows banks to continually effect electronic payment transfers which are interfaced directly to the automated accounting and settlement systems of the BSP; Registrar means PDTC as appointed by the Bank under the Registry and Paying Agency Agreement to perform the role of a registrar required under the LTNCD Regulations, and includes its successor entity, or any replacement Registrar; Registry and Paying Agency Agreement means the agreement dated 14 April 2010 executed by and between the Bank and the Registrar and Paying Agent, stipulating the rights and obligations of the Registrar and Paying Agent with respect to the LTNCDs; Registry Confirmation shall mean the written advice to be sent by the Registrar to the LTNCD Holders confirming the details and summary terms and conditions of Coupon-Bearing LTNCDs registered in the LTNCD Registry in the name of a LTNCD Holder;

27

Selling Agent means each of the Bank, HSBC, MIB, and BDO Capital & Investment Corp. as appointed by the Bank under the Placement and Selling Agency Agreement to perform the role of selling agents required under the LTNCD Regulations, and includes its successor entity, or any replacement or additional Selling Agents; and Terms and Conditions means these Terms and Conditions of the Coupon-Bearing LTNCDs as may be issued and amended from time to time. (b) All terms defined in these Terms and Conditions shall have their defined meanings when used herein, and in any certificate, report, or other document or instrument made or delivered pursuant hereto. All Annexes or attachments shall be considered integral parts of these Terms and Conditions. Titles of provisions in these Terms and Conditions are used for convenience of reference only, and do not limit or affect the interpretation of the provisions hereof. Words denoting persons shall include individuals, corporations, partnerships, joint ventures, trusts, unincorporated organizations, political subdivisions, agencies, or instrumentalities. Other than to a third party, references to “party”, “parties” or “parties hereto”, or similar references, and references to “Condition” or “Conditions” are to be construed as references to a party or the parties to these Terms and Conditions, and to a Condition or Conditions in these Terms and Conditions, respectively. No representation, undertaking, or promise shall be taken to have been given or be implied from anything said or written by the Bank prior to the execution of these Terms and Conditions, except as set out herein. (c) These Terms and Conditions representing the Coupon-Bearing LTNCDs sold shall be executed by the Bank and deposited with the Registrar on the Issue Date for the benefit of the LTNCD Holders. 2. Form, Denomination, and Title (a) Form and Denomination The LTNCDs shall be issued in denominations of P100,000.00 and integral multiples thereof, and shall be maintained in scripless and electronic form with the Registrar through the LTNCD Registry. Registry Confirmations will be issued in accordance with the LTNCD Regulations and the Registry and Paying Agency Agreement and will be serially numbered. (b) LTNCD Holders The Coupon-Bearing LTNCDs may only be issued and transferred to investors who are not Prohibited LTNCD Holders. (c) Title Title to the Coupon-Bearing LTNCDs shall be indicated in the LTNCD Registry maintained by the Registrar. The LTNCD Registry shall be the best evidence of ownership and transactions with respect to the Coupon-Bearing LTNCDs up to the level of the individual LTNCD Holders. 3. Status and Ranking The LTNCDs constitute direct, unconditional, unsecured, and unsubordinated peso-denominated obligations of the Bank, enforceable according to these Terms and Conditions, and shall at all times rank pari passu and ratably without any preference or priority amongst themselves, and at least pari passu with all other present and future direct, unconditional, unsecured, and unsubordinated obligations of the Bank, except for any obligation enjoying a statutory preference or priority established under Philippine laws. 4. Deposit Insurance Coverage The Coupon-Bearing LTNCDs are, and shall be, while outstanding, insured by the Bank at its own cost with the Philippine Deposit Insurance Corporation (PDIC), subject to applicable rules, regulations, terms and conditions, as the same may be amended from time to time, including the following: (a) Deposits are insured by the PDIC up to the maximum amount insurable by the PDIC which currently stands at Five

Hundred Thousand Pesos (P500,000.00) per depositor.

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(b) PDIC shall presume that the name/s appearing on the records of the LTNCD Registry is/are the actual/beneficial owner/s of the deposit, except as provided in PDIC Regulatory Issuance No. 2002-03, as the same may be amended from time to time.

(c) In case of transfers or break-up of deposits, PDIC shall recognize actual/beneficial ownership of transferees who are qualified relatives of the transferor-LTNCD Holder. For purposes hereof, the term “qualified relatives” refers to those transferees within the third degree of consanguinity or affinity of the transferor-LTNCD Holder.

(d) In case of (a) deposits in the name of, or transfers or break-up of deposits in favor of entities, either singly or jointly with individuals, and (b) transfers or break-up of deposits in favor of non- qualified relatives, whenever such transfers/ break up will result in increased deposit insurance coverage, PDIC shall recognize beneficial ownership of the entity or transferee; provided, that the records of the LTNCD Registry show the following:

i. details or information establishing the right and capacity or the relationship of the entity with the individual/s, or

ii. details or information establishing the validity or effectivity of the deposit transfer, or iii. copy of a Board Resolution, order of competent government body/ agency, contract or similar

document, as required/provided by applicable laws. In the absence of any of the foregoing, PDIC shall deem the outstanding deposit as maintained for the benefit of the transferor-LTNCD Holder although in the name of the transferee, subject to consolidation with the other deposits of the transferor-LTNCD Holder.

(e) PDIC may require additional documents from the depositor to ascertain the details of the deposit transfer or the right and capacity of the transferee or his relationship to the transferor-LTNCD Holder.

5. Interest (a) Interest Accrual

The Coupon-Bearing LTNCDs shall bear interest on its principal amount from and including the Issue Date, to, but excluding the Early Redemption Date or the Maturity Date (as the case may be). The Coupon-Bearing LTNCDs shall continue to bear interest in accordance with these Terms and Conditions until all sums in respect of such LTNCD are received by or on behalf of the relevant LTNCD Holder. (b) Interest Payment Dates Interest shall be payable on each Interest Payment Date; Provided that, if any Interest Payment Date or the Maturity Date is not a Banking Day, then interest will be paid on the next succeeding Banking Day without any adjustment as to the amount of interest to be paid. (c) Determination of Interest The amount of interest payable in respect of the Coupon-Bearing LTNCDs for each Interest Period shall be determined by the Paying Agent by applying the Interest Rate to the principal amount of the Coupon-Bearing LTNCDs, and calculating the result on a 30/360-day basis, and rounding the resultant figure to the nearest centavo (half a centavo being rounded upwards). 6. Redemption, Early Redemption, and Purchase (a) Redemption at Maturity Date

Unless previously preterminated and cancelled in accordance with these Terms and Conditions, the Coupon-Bearing LTNCDs shall be redeemed by the Bank at the Final Redemption Amount on the Maturity Date. (b) Early Redemption

(i) Early Redemption Option for Taxation Reasons. If any payment of principal or interest due under the Coupon-Bearing LTNCDs becomes subject to additional or increased taxes other than the taxes and rates of such taxes prevailing as of the Issue Date as a result of changes in law, rule, or regulation, or in the interpretation thereof, and such additional or increased rate of such tax cannot be avoided by the use of reasonable measures available to the Bank, the Bank, subject to the LTNCD Regulations, shall have the

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option (but not the obligation) to preterminate and redeem all and not part of the Coupon-Bearing LTNCDs on any Interest Payment Date before Maturity Date at the Early Redemption Amount.

(ii) Early Redemption for Increased Reserves. If the Coupon-Bearing LTNCDs become subject to additional or

increased reserves required by the BSP other than the statutory regular reserves required in the LTNCD Regulations prevailing as of the Issue Date, and such additional or increased amount of reserves required cannot be avoided by use of reasonable measures available to the Bank, the Bank, subject to the LTNCD Regulations, shall have the option (but not the obligation) to preterminate and redeem all and not part of the Coupon-Bearing LTNCDs on any Interest Payment Date before Maturity Date at the Early Redemption Amount.

(iii) Early Redemption for Other Reasons. Subject to the LTNCD Regulations, the Bank has the option (but not

the obligation) to preterminate and redeem all and not part of the Coupon-Bearing LTNCDs on any Interest Payment Date before the Maturity Date at the Early Redemption Amount on any other ground as may be approved by the BSP.

(iv) Manner of Exercising the Early Redemption Option. In exercising the Early Redemption Option, the Bank

shall give to the LTNCD Holders and the appropriate supervision and examination department of the BSP not more than sixty (60) days nor less than thirty (30) days’ prior notice, stating therein the ground relied upon for the exercise of the Early Redemption Option, which ground must be one of the grounds specified in Condition 6(b)(i), (ii), or (iii) above. The notice referred to in this Condition 6(b)(iv) shall be published in at least two newspapers of general circulation in the Philippines in accordance with SEC Memorandum Circular No. 1 (2008) for two consecutive days at any time prior. Once issued, said notice shall be irrevocable, and shall be binding on the Bank and each LTNCD Holder.

(v) Payments; Taxes; Reserves. After the issuance of the notice under Condition 6(b)(iv), the Bank shall be

obliged to repay all of the Coupon-Bearing LTNCDs at the Early Redemption Amount on the Early Redemption Date. On the Early Redemption Date and following payment of the Early Redemption Amount, the Registrar shall transfer all of the interests of the LTNCD Holders in the Coupon-Bearing LTNCDs to the Bank. All such Coupon-Bearing LTNCDs preterminated pursuant to this Condition 6(b) shall then be deemed fully redeemed and cancelled. As a consequence of the exercise of the Early Redemption Option, any incremental tax that may be due on the interest income already earned under the Coupon-Bearing LTNCDs prior to or as a result of the exercise by the Bank of its option for pretermination shall be for the account of the Bank. In addition, the Bank shall recompute its reserve positions retroactively based on the applicable reserve rate(s) for regular time deposits during the period between the Issue Date and the Early Redemption Date.

(vi) No Pretermination by LTNCD Holders. Except as otherwise contemplated under Condition 13(a), none of

the LTNCD Holders shall have the right to require the Bank to redeem and repay any or all of the Coupon-Bearing LTNCDs before the Maturity Date. In accordance with the LTNCD Regulations, transfers of the Coupon-Bearing LTNCDs to a person other than the Bank shall not constitute pretermination.

7. Payments (a) Principal and interest, and all other amounts payable on the Coupon-Bearing LTNCDs will be payable (i) in the case

of LTNCD Holders who maintain savings and/or current accounts with the Bank, and have opted to receive the principal and interest due to them under the Coupon-Bearing LTNCDs in such savings or current account, through a direct credit by the Bank of the proper amounts, net of taxes and fees, if any, to the accounts of the LTNCD Holders maintained with the Bank; or (ii) in the case of LTNCD Holders who maintain savings and/or current accounts with the other Cash Settlement Banks, and have opted to receive the principal and interest due to them under the Coupon-Bearing LTNCDs in such savings or current account, through a credit by each Cash Settlement Banks of the proper amounts, net of taxes and fees, if any, to the accounts of the LTNCD Holders maintained with them after receipt of such amount from the Paying Agent.

(b) All payments on the Coupon-Bearing LTNCDs shall be drawn by the Paying Agent from the Payment Account and

shall be made in Philippine Pesos.

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8. Taxation (a) If any payments of principal and/or interest in respect of the Coupon-Bearing LTNCDs shall be subject to deductions

or withholdings for or on account of any present taxes, duties, assessments, or governmental charges of whatever nature imposed, levied, collected, withheld, or assessed by or within the Philippines or any authority therein or thereof having the power to tax, including but not limited to stamp, issue, registration, documentary, value-added or similar tax, or other taxes, duties, assessments, or government charges, including interest, surcharges, and penalties thereon (the “Taxes”), then such Taxes shall be for the account of the LTNCD Holder concerned, and if the Bank shall be required by law or regulation (or any change in interpretation or implementation of such law or regulation prevailing) to deduct or withhold such Taxes, then the Bank shall make the necessary withholding or deduction for the account of the LTNCD Holder concerned; provided, however, that all sums payable by the Bank to tax-exempt persons shall be paid in full without deductions for Taxes or government charges, subject to the submission by the relevant LTNCD Holder claiming the exemption of reasonable and acceptable evidence of such exemption to the Registrar; and provided, further, that documentary stamp tax for the primary issue of the Coupon-Bearing LTNCD and the documentation, if any, shall be for the account of the Bank.

(b) In the event that (i) due to a change in tax status of the Coupon-Bearing LTNCD because of changes in tax statutes (and not merely a change in the interpretation or implementation of tax statutes and regulations currently prevailing), any payments of principal and/or interest under the Coupon-Bearing LTNCD shall be subject to deductions or withholdings for or on account of any taxes, duties, assessments, or governmental charges of whatever nature imposed, levied, collected, withheld, or assessed by or within the Philippines or any authority therein having the power to tax, including but not limited to stamp, issue, registration, documentary, value-added or similar tax, or other taxes, duties, assessments, or government charges, including interest, surcharges, and penalties thereon (the “New Taxes”), and (ii) the Bank does not redeem the Coupon-Bearing LTNCD prior to stated maturity pursuant to these Terms and Conditions, then all payments of principal and interest in respect of the Coupon-Bearing LTNCD shall be made free and clear of, and without withholding or deduction for, any such New Taxes, unless such withholding or deduction is required by law. In that event of the Bank preterminating the Coupon-Bearing LTNCDs under this Condition 8(b), the Bank shall pay to the LTNCD Holders concerned such additional amount as will result in the receipt by the LTNCD Holders of such amounts as would have been received by them had no such withholding or deduction for New Taxes been required.

(c) Notwithstanding the foregoing, the Bank shall not be liable for: (i) gross receipts tax under Section 121 of the National

Internal Revenue Code; and (ii) taxes on the overall income of any LTNCD Holder, whether or not subject to withholding.

(d) LTNCD Holders claiming exemption from any applicable tax shall be required to submit the following documents to

the Registrar upon the request of the Registrar no less than thirty (30) days prior to the relevant Interest Payment Date: (i) A certified true copy of the tax exemption certificate or ruling issued by the Bureau of Internal Revenue; (ii) A duly notarized undertaking, in the prescribed form, declaring and warranting its tax-exempt status,

undertaking to immediately notify the Bank of any suspension or revocation of the tax exemption certificates, and agreeing to indemnify and hold the Bank free and harmless against any claims, actions, suits, and liabilities resulting from the non-withholding of the required tax; and

(iii) Such other documentary requirements as may be reasonably required by the Registrar, or required under the applicable regulations of the relevant taxing or other authorities.

9. Transfers of Coupon-Bearing LTNCDs (a) Transfers All transfers of the Coupon-Bearing LTNCDs shall be executed only through the Market Makers or trading participants of the PDEx, as applicable, subject to inter alia the payment to the Market Makers, or the or trading participants of the PDEx (in connection with trading on PDEx), and/or the Registrar of any reasonable fees, as the agreements between them would dictate. Transfers of the Coupon-Bearing LTNCDs to a person other than the Bank shall not constitute pretermination. Upon listing of

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the Coupon-Bearing LTNCDs on the PDEx, trading and settlement shall be in accordance with the rules, conventions, and guidelines of PDEx. The Market Makers concerned or trading participants of the PDEx, as applicable, shall issue to such LTNCD Holder (with a copy to the Registrar) a Purchase Advice to evidence the transfer or assignment of such Coupon-Bearing LTNCDs. As a condition precedent for any transfer or assignment of the Coupon-Bearing LTNCDs, the Registry Confirmation, the Purchase Advice, and such transfer instructions required by the Registrar must be surrendered by the transferor-LTNCD Holder to the authorized Market Makers. (b) Closed Periods No person may require the transfer of any Coupon-Bearing LTNCDs to be registered by the Registrar in the LTNCD Registry: (i) during the period of three (3) Banking Days ending on (and including) the Early Redemption Date or the Maturity Date, as the case may be; and (ii) during the period of three (3) Banking Days preceding any Interest Payment Date. The Registrar will prevent any transfer of the Coupon-Bearing LTNCDs to be recorded in the LTNCD Registry during any Closed Period. The Registrar shall recognize and treat only those LTNCD Holders registered as such in the LTNCD Registry immediately prior to the start of the Closed Period as the owners of the corresponding Coupon-Bearing LTNCDs for any relevant payment or allocation purpose. (c) LTNCD Registry: Legal Title and Transfers

The LTNCD Registry shall be kept at the specified office of the Registrar, and shall contain the names and addresses of the LTNCD Holders, the particulars of the Coupon-Bearing LTNCDs held by them, as well as all records of purchases and transfers of LTNCDs. Title to the Coupon-Bearing LTNCDs shall be shown in the LTNCD Registry maintained by the Registrar. Upon any transfer of the Coupon-Bearing LTNCDs, title shall pass by registration of the transferee-LTNCD Holder in the LTNCD Registry. Subject to compliance with applicable conditions for transfers of the Coupon-Bearing LTNCDs, including, but not limited to the due execution and delivery by the transferor LTNCD Holder of a written instruction (in form and substance acceptable to the Market Maker concerned) from a transferor-LTNCD Holder to transfer the all or part of the Coupon-Bearing LTNCDs registered in its name, the delivery by the transferor LTNCD Holder of the Registry Confirmation, the Purchase Advice, and such transfer instructions required by the Registrar pertaining to the Coupon-Bearing LTNCDs intended to be transferred, and receipt of acceptable proof by the Market Makers and confirmation from the Bank that the correct taxes on the transfer as well as on the Coupon-Bearing LTNCDs have been withheld or paid, as applicable, transfers shall be recorded in the LTNCD Registry, and new Registry Confirmations will be issued by the Registrar in favor of the purchasers of the affected Coupon-Bearing LTNCDs. Any costs associated with the settlement in respect of such transfer of the Coupon-Bearing LTNCDs, including the settlement of taxes, if any, arising from subsequent transfers, shall be for the account of the transferor-LTNCD Holder or its counterparty, as market convention or the agreements between them would dictate. (d) Tax Status The Market Makers and/or the Registrar may, unless properly provided with satisfactory proof of the tax-exempt status of a LTNCD Holder, assume that said LTNCD Holder is taxable and proceed to apply the tax due on the Coupon-Bearing LTNCDs. The Market Makers, and/or the Registrar may request the LTNCD Holder claiming a preferential tax treatment to provide proof satisfactory to it of such preferential status. (e) Change in Status Subject to Condition 9(b), a transfer of a Coupon-Bearing LTNCD that will not result in a change in the taxability or non-taxability of its interest income may be done at anytime. On the other hand, a transfer of a Coupon-Bearing LTNCD that will result in a change in the taxability or non-taxability of the interest income due thereon may be done only on an Interest Payment Date. Once the system of the Registry can process transfers of a Coupon-Bearing LTNCD that will result in a change in the taxability or non-taxability of the interest income due thereon in between Interest Payment Dates, then such transfers can be done at any time.

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In the case of a transfer by a taxable or non-tax-exempt LTNCD Holder in favor of any transferee (whether taxable or not taxable), the final withholding tax on the interest income earned or deemed to be earned by the transferor-LTNCD Holder on the Coupon-Bearing LTNCDs during the Interest Period in which the transfer is made, based on the period that such Coupon-Bearing LTNCDs were actually held by the transferor-LTNCD Holder, shall be deducted from the purchase price due to it.

(f) Taxes Documentary stamp taxes as well as other taxes due on the transfer of a Coupon-Bearing LTNCD, if any, shall be for the account of the relevant LTNCD Holders and/or their counterparties, to be deducted from the purchase price due to it, and shall not be for the account of the Bank. Subject to Condition 8, the Bank may treat a transfer, assignment, sale, or negotiation of the LTNCDs as a pretermination for purposes of determining the applicable rate of withholding tax on the interest earned by the transferor-LTNCD Holder. In such instances, the Bank shall, directly or through the Market Makers, make the necessary withholding or deduction of the applicable withholding tax due on such interest from the purchase price to be received by the transferor-LTNCD Holder concerned. The foregoing notwithstanding, all sums payable by the Bank to tax-exempt persons, if applicable, shall be paid in full without deductions for such taxes, subject to the submission by the relevant LTNCD Holder claiming the exemption of such documentation as may be required under these Terms and Conditions. 10. Representations and Warranties The Bank hereby represents and warrants, as follows: (a) Incorporation: the Bank is duly incorporated and validly existing under the laws of its place of incorporation with full power and authority to conduct its business as described in the Offering Circular, and is lawfully qualified to do business in those jurisdictions in which business is conducted by it; (b) Title to property: except as otherwise disclosed in the Offering Circular, it has legal title to all its property in each case free and clear of all liens, encumbrances and defects; and any real property and buildings held under lease by it are held by it under valid, subsisting, and enforceable leases; (c) Corporate Power: the Bank has the corporate power under the laws of its incorporation and its constitutive documents to issue the LTNCDs and to enter into and perform its obligations under and to take all other actions and to do all other things provided for or contemplated in the LTNCD Agreements and these Terms and Conditions; (d) Capacity: the Bank (and, if applicable, any person on whose behalf it may act either as agent or in any representative capacity) has and will continue to have full capacity and authority to enter into the LTNCD Agreements and to carry out the transactions contemplated in the LTNCD Agreements and has taken and will continue to take all action (including the obtaining of all necessary corporate approvals and governmental consents) to authorize the execution, delivery, and performance of the LTNCD Agreements; (e) Validity of the LTNCD Agreements: the LTNCD Agreements have been duly authorized, executed, and delivered by the Bank and constitute its valid and legally binding and enforceable obligations; (f) Validity of LTNCDs: the LTNCDs have been duly authorized by the Bank and, when duly executed, authenticated, issued, and delivered in accordance with the Registry and Paying Agency Agreement, will constitute its valid and legally binding obligations; (g) Status: the LTNCDs constitute direct, unconditional, unsecured, and unsubordinated peso-denominated obligations of the Bank, enforceable against it according to these Terms and Conditions, and shall at all times rank pari passu and ratably without any preference or priority amongst themselves, and at least pari passu with all its other present and future direct, unconditional, unsecured, and unsubordinated obligations, except for any obligation enjoying a statutory preference or priority established under Philippine laws.

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(h) Consents: all necessary actions and things required to be obtained, taken, fulfilled, or done (including without limitation the obtaining of any consent, waiver, authorization, order or license or the making of any filing or registration) for the issue of the LTNCDs, the carrying out of the other transactions contemplated by the LTNCDs and the LTNCD Agreements or the compliance by it with the terms of the LTNCDs and the LTNCD Agreements, as the case may be, have been obtained, taken, fulfilled, or done, and such obtainment, taking, fulfillment, or doing are subsisting and unconditional; (i) BSP Approval: the Bank has obtained the final approval of the BSP to issue the LTNCDs, which approval has not been revoked, qualified, or restricted, and shall fully, timely, and unconditionally comply with all other terms and conditions imposed by the BSP regarding the issuance of the LTNCDs while any portion of the LTNCDs remain outstanding; (j) BSP Conditions: it is compliant with all qualifications and conditions of the LTNCD Regulations to issue, maintain, service, pay out, redeem, and cancel the LTNCDs, including the prohibitions of item H of BSP Circular No. 304, which qualifications and conditions continue to be complied with; (k) Compliance: the execution and delivery of the LTNCD Agreements, the issuance of the LTNCDs, the carrying out of the other transactions contemplated by the and these Terms and Conditions, and compliance with their terms do not and will not (i) conflict with or result in a breach of any of the terms or provisions of, or constitute a default or violation under, the documents constituting the Bank, or any contract, indenture, trust deed, mortgage, or other agreement or instrument to which the Bank or any of its subsidiaries is a party or by which it or any of its properties is bound; or (ii) violate or infringe any existing applicable law, rule, regulation, judgment, order, or decree of any government, governmental body or court, domestic or foreign, having jurisdiction over the it, any such subsidiary or any of their properties; (l) Offering Circular: (i) the Offering Circular contains all information with respect to the Bank and to the LTNCDs which is material in the context of the issue and offering of the LTNCDs (including, without limitation, all information required by the applicable laws and regulations of the Philippines and the information which, according to the particular nature of the Bank and of the LTNCDs, is necessary to enable depositors and their advisers to make an informed assessment of the assets and liabilities, financial position, profits and losses, and prospects of the Bank and of the rights attaching to the LTNCDs); (ii) the statements contained in the Offering Circular relating to the Bank, its subsidiaries, and affiliates are in every material respect correct, true, accurate, and not misleading, (iii) the opinions and intentions expressed in the Offering Circular with regard to them are honestly held, have been reached after considering all relevant circumstances, and are based on reasonable assumptions, (iv) there are no other facts or information in relation to the Bank, its subsidiaries, and affiliates, or the LTNCDs the omission of which would, in the context of the issue and offering of the LTNCDs, make any statement in the Offering Circular misleading, and (v) all reasonable enquiries have been made by the Bank to ascertain such facts and to verify the accuracy of all such information and statements; (m) Accounting Policies: the Offering Circular accurately describes (i) accounting policies which the Bank believes to be the most important in the portrayal of its financial condition and results of operations (the Critical Accounting Policies); (ii) material judgments and uncertainties affecting the application of the Critical Accounting Policies; and (iii) an explanation of the likelihood that materially different amounts would be reported under different conditions or using different assumptions, and the Board of Directors and audit committee of the Bank have reviewed and agreed with the selection and disclosure of the Critical Accounting Policies in the Offering Circular and have consulted with their independent accountants with regards to such disclosure; (n) Accounting Controls: it maintains systems of internal accounting controls sufficient to provide reasonable assurance that (i) transactions are executed in accordance with management’s general or specific authorizations; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with accounting principles generally accepted in the Philippines and to maintain asset accountability; (iii) access to assets is permitted only in accordance with management’s general or specific authorization; (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences; and (v) each of its subsidiaries, and affiliates has made and kept books, records and accounts which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets of such entity and provide a sufficient basis for the preparation of the Bank’s consolidated financial statements in accordance with generally accepted accounting principles of the Philippines; and (vi) its current management information and accounting control system has been in operation for at least 12 months during which none of the Bank, its subsidiaries, and affiliates has experienced any material difficulties with regard to (i) through (v) above;

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(o) Contingent Liabilities: it has no outstanding guarantees or contingent payment obligations of the Bank in respect of indebtedness of third parties except those issued in the ordinary course of business or as described in the Offering Circular; the Bank is in compliance with all of its obligations under any outstanding guarantees or contingent payment obligations as described in the Offering Circular; (p) Off-balance Sheet Arrangements: the Offering Circular accurately and fully describes: (i) all material trends, demands, commitments, events, uncertainties and risks, and the potential effects thereof, that it believes would materially affect liquidity and are reasonably likely to occur and (ii) all material off-balance sheet transactions, arrangements, and obligations; and neither it nor any of its subsidiaries or affiliates has any material relationships with unconsolidated entities that are contractually limited to narrow activities that facilitate the transfer of or access to assets by the Bank or any other subsidiary or affiliate, such as structured finance entities and special purpose entities that are reasonably likely to have a material effect on the liquidity of the Bank, its subsidiaries, or affiliates or the availability thereof or the requirements of the Bank, its subsidiaries, or affiliates for capital resources; (q) Provision of Information: all information provided by the Bank to its Auditors required for the purposes of their comfort letters in connection with the offering and sale of the LTNCDs has been supplied, or as the case may be, will be supplied, in good faith and after due and careful enquiry; such information was when supplied and remains (to the extent not subsequently updated by further information supplied to such persons prior to the date hereof), or as the case may be, will be when supplied, true and accurate in all material respects and no further information has been withheld the absence of which might reasonably have affected the contents of any of such letters in any material respect; (r) Independence of Auditors: the Auditors are independent public accountants, as required by the Philippine Institute of Certified Public Accountants and the applicable rules and regulations thereof; (s) Material Transactions: save as disclosed in the Offering Circular, all material transaction by the Bank with its directors, officers, management, shareholders, or any other person, including persons formerly holding such positions, are on terms that are available from other parties on an arms’-length basis; (t) Financial Statements: (i) its audited and unaudited consolidated financial statements as appearing in the Offering Circular were prepared in accordance with accounting principles generally accepted in, and pursuant to the relevant laws of, the Philippines consistently applied and present fairly its financial position as at the dates, and the results of operations and changes in its financial position for the periods, in respect of which they have been prepared, and (ii) since the date of its last audited consolidated financial statements, there has been no change, development or event involving a prospective change of which the Bank is, or might be expected to be, aware which would have an Adverse Effect on the Bank; (u) Licenses, Permits, and Conduct of Business: it (i) has all licenses, franchises, permits, authorizations, approvals, registrations and orders and other concessions that are necessary to own or lease its other properties and conduct its businesses as described in the Offering Circular, (ii) is conducting its business and operations in compliance with all applicable laws and regulations in each of the jurisdictions in which it conducts business and operations, including, without limitation, all regulations, guidelines, and circulars of the BSP, the Philippine Securities and Exchange Commission (the SEC), the Philippine Stock Exchange (the PSE) and the Bureau of Internal Revenue (the BIR), (iii) has complied with, corrected and successfully and effectively implemented, to the satisfaction of the BSP, all findings and recommendations of the BSP resulting from all past audits and examinations conducted by the BSP on the Bank; and (iv) is otherwise in compliance with all agreements and other instruments to which it is a party, except where any failure to be in compliance with any of which would not have an Adverse Effect; (v) Intellectual Property: except as specifically described in the Offering Circular, it legally and validly owns or possesses, all patents, licenses, inventions, copyrights, know-how, trademarks, service marks, trade names or other intellectual property (collectively, “Intellectual Property”) necessary to carry on the business now operated by it, and it has not received any notice or is otherwise aware of any infringement of or conflict with asserted rights of others with respect to any Intellectual Property or of any facts or circumstances which would render any Intellectual Property invalid or inadequate to protect its interests therein, and which infringement or conflict (if the subject of any unfavorable decision, ruling or finding) or invalidity or inadequacy, singly or in the aggregate, would reasonably be expected to result in an Adverse Effect;

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(w) Litigation: except as specifically described in the Offering Circular, there are no pending actions, suits or proceedings against or affecting the Bank, its subsidiaries, or affiliates or any of their properties which, if determined adversely would individually or in the aggregate have an Adverse Effect, or affect the ability of the Bank to perform its obligations under the LTNCD Agreements or the LTNCDs, or which are otherwise material in the context of the issue of the LTNCDs and, to the best of the Bank’s knowledge, no such actions, suits or proceedings are threatened or contemplated; (x) Default: no event has occurred or circumstance arisen which (whether or not with the giving of notice and/or the passage of time and/or the fulfillment of any other requirement) constitutes an event described under “Events of Default” hereunder; (y) Anti-money Laundering: it is in compliance with the Anti-Money Laundering Laws of the Philippines in all material respects; and (z) Solvency: the Bank is Solvent. As used in this paragraph, the term “Solvent” means, with respect to a particular date, that on such date (i) the present fair market value (or present fair saleable value) of its assets is not less than the total amount required to pay its liabilities on its total existing debts and liabilities (including contingent liabilities) as they become absolute and matured; (ii) the Bank is able to realize upon its assets and pay its debts and other liabilities, contingent obligations and commitments as they mature and become due in the normal course of business; (iii) the Bank is not incurring debts or liabilities beyond its ability to pay as such debts and liabilities mature; (iv) the Bank is not engaged in any business or transaction, and does not propose to engage in any business or transaction, for which its property would constitute unreasonably small capital after giving due consideration to the prevailing practice in the industry in which the Bank is engaged; (v) the Bank will be able to meet its obligations under all its outstanding indebtedness as it falls due; and (vi) the Bank is not a defendant in any civil action that would result in a judgment that the Bank is or would become unable to satisfy. These representations and warranties are true and correct as of the Issue Date and shall remain true and correct as long as the Coupon-Bearing LTNCDs remain outstanding. 11. Covenants The Bank hereby covenants and agrees that, for as long as the Coupon-Bearing LTNCDs remain outstanding: (a) Payment: it shall pay all amounts due under the Coupon-Bearing LTNCDs and the LTNCD Agreements at the times and in the manner specified in, and perform all its obligations, undertakings, and covenants under the Coupon-Bearing LTNCDs and the LTNCD Agreements; (b) Taxes: it shall pay and discharge all taxes, assessments, and government charges or levies imposed upon it or upon its income or profits or upon any properties belonging to it prior to the date on which penalties are assessed; pay and discharge when due all lawful claims which, if unpaid, might become a lien or charge upon any of its properties; and take such steps as may be necessary in order to prevent its properties from being subjected to the possibilities of loss, forfeiture, or sale; Provided, that it shall not be required to pay any such tax, assessment, charge, levy, or claim which is being contested by it in good faith and by proper proceedings; (c) Corporate Existence: it shall preserve and maintain its corporate existence, and all its rights, licenses, franchises, permits, concessions and privileges and it shall not change the nature of its business as presently conducted; (d) Financial Records: it shall maintain adequate financial records and prepare all financial statements in accordance with generally accepted accounting principles and practices in the Philippines consistently applied and in compliance with the regulations of the government body having jurisdiction over it, and, subject to receipt of a written request within a reasonable period before the proposed date of inspection, permit the LTNCD Holders or their duly designated representatives to inspect the books of accounts and records pertinent to the compliance by the Bank of its obligations under the Coupon-Bearing LTNCDs; (e) Compliance with Laws: it shall comply with all the requirements, terms, covenants, conditions, and provisions of all laws, rules, regulations, orders, writs, judgments, indentures, mortgages, deeds of trust, agreements, and other instruments,

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arrangements, obligations, and duties to which it, its business, or its assets are legally bound, where non-compliance would have an Adverse Effect; (f) Compliance with BSP Directives: it shall fully and promptly comply with all BSP directives, orders, issuances, findings, and letters, including those regarding its capital, licenses, risk management, and operations and promptly and satisfactorily take all corrective measures that may be required under BSP audit reports; (g) PDIC: it shall ensure that the Coupon-Bearing LTNCDs are insured with, and continue to be insured by the PDIC, and shall comply with all rules and regulations of the PDIC; (h) Use of Proceeds: it shall use the net proceeds from the Coupon-Bearing LTNCDs in accordance with the purpose of issuance provided in the Offering Circular; (i) Obligations: it shall pay all indebtedness and other liabilities and perform all contractual obligations pursuant to all agreements to which it is a party or by which it or any of its properties may be bound, except those being contested in good faith and by proper proceedings; (j) Notice of Proceedings: it shall give to the LTNCD Holders, through the Registrar and Paying Agent, written notice of all assessments, litigation, or administrative or arbitration proceedings before any court, tribunal, arbitrator, or governmental or municipal authority affecting the Bank or any of its assets regarding any claim which (i) is in excess of P500,000,000 or (ii) which might have an Adverse Effect, immediately upon becoming aware that the same is pending or has been commenced; (k) LTNCD Documents: it shall ensure that any documents related to the Coupon-Bearing LTNCDs will, at all times, comply in all material respects with the applicable laws, rules, regulations, and circulars, and, if necessary, make the appropriate revisions, supplements, and amendments to make them comply with such laws, rules, regulations, and circulars; (l) Other Information: it shall, upon written request of a LTNCD Holder, execute and deliver to such LTNCD Holder the reports, documents, and other information respecting the business, properties, condition, or operations, financial or otherwise, of the Bank as a LTNCD Holder may from time to time reasonably require; (m) Default: it shall, as soon as possible and in any event within three days after the occurrence of any default on any of the obligations of the Bank, or other event which, with the giving of any notice and/or with the lapse of time, would constitute a default under any agreement of the Bank with any party, including, without limitation the LTNCD Agreements, serve a written notice to the LTNCD Holders, through the Registrar and Paying Agent, of the occurrence of any such default, specifying the details and the steps which the Bank is taking or proposes to take for the purpose of curing such default, including the Bank's estimate of the length of time to correct the same; (n) Compliance with Reporting Obligations: it will duly and punctually comply with all reporting, filing, and similar requirements imposed by the BSP, the SEC, and the PSE or in accordance with any applicable Philippine law and regulations from time to time relating to the Coupon-Bearing LTNCDs and the LTNCD Agreements; (o) Information and Warranties: it will immediately notify the LTNCD Holders, and the Registrar and Paying Agent, if anything occurs which renders or may render untrue or incorrect in any respect any of the representations or warranties in Condition 10 of these Terms and Conditions or the Bank otherwise breaches or is alleged to breach any of its undertakings; (p) Agents: it shall ensure that there shall at all times be a Registrar and Paying Agent for the purposes of the Coupon-Bearing LTNCDs, as provided in the Registry and Paying Agency Agreement; (q) Request for Information: it shall, when so requested in writing, provide any and all information reasonably needed by the Market Makers, the Paying Agent and/or Registrar, as the case may be, to enable them to respectively comply with their respective responsibilities and duties under the LTNCD Regulations and the LTNCD Agreements; provided, that, in the event that the Bank cannot, for any reason, provide the required information, the Bank shall immediately advise the party requesting and shall perform such acts as may be necessary to provide for alternative information gathering;

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(r) Government Agency Orders: it shall promptly advise the LTNCD Holders, through the Registrar and Paying Agent of: (i) any request by any government agency for any information related to the Coupon-Bearing LTNCDs, or (ii) the issuance by any governmental agency of any cease-and-desist order suspending the distribution or sale of the Coupon-Bearing LTNCDs or the initiation of any proceedings for any such purpose and shall use its best efforts to obtain at its sole expense the withdrawal of any order suspending the transactions with respect to the Coupon-Bearing LTNCDs at the earliest time possible; and (s) Further Assurance: it shall execute and deliver such documents and perform such further acts as a relevant party may reasonably require in relation to the LTNCD Regulations or any of the LTNCD Agreements. These covenants of the Bank shall survive the issuance of the Coupon-Bearing LTNCDs, and shall be complied with and performed fully and faithfully by the Bank at all times while the Coupon-Bearing LTNCDs or any portion thereof remains outstanding. 12. Events of Default A LTNCD Holder shall have the right to declare the Bank in default (insofar as the Coupon-Bearing LTNCDs registered under such LTNCD Holder’s name is concerned) in accordance with Condition 13, in case any of the following events shall occur and be continuing: (a) The Bank fails to pay any principal and/or interest due on the Coupon-Bearing LTNCDs. (b) The Bank fails to perform or violates its covenants (other than Condition 12(a)) under these Terms and Conditions, and such failure or violation is not remediable or, if remediable, continues to be unremedied for a period of 15 days from receipt of written notice by the Bank of such failure or violation. (c) Any of the Bank’s representations and warranties under Condition 10 or any certificate or opinion submitted by it in connection with the issuance of the Coupon-Bearing LTNCDs is untrue, incorrect, or misleading in any material respect; (d) Any final and executory judgment, decree, or arbitral award for the sum of money, damages, fine, or penalty in excess of P500,000,000.00 or its equivalent in any other currency is entered against the Bank and the enforcement of which is not stayed, or is not paid, discharged, or duly bonded within 30 days after the date when payment of such judgment, decree, or award is due under the applicable law or agreement. (e) Any Indebtedness of the Bank with respect to borrowed money is not paid when due; or (ii) any Indebtedness of the Bank with respect to borrowed money becomes (or is capable of becoming) fully due and repayable prematurely by reason of a default under the document relating to such indebtedness; provided, that in any of the foregoing cases, the aggregate amount of Indebtedness exceeds P500,000,000.00, or its equivalent in any other currency. (f) Any judgment, writ, warrant of attachment or execution, or similar process shall be issued or levied against all or substantially all of the Bank’s assets and such judgment, writ, warrant, or similar process shall not be released, vacated, or fully bonded within 30 days after its issue or levy. (g) The government or any competent authority takes any action to suspend the whole or the substantial portion of the operations of the Bank, or condemns, seizes, or expropriates all or substantially all of the properties of the Bank. (h) The Bank voluntarily suspends or ceases operations of a substantial portion of its business for a continuous period of 15 days, except in the case of strikes or lockouts when necessary to prevent business losses, or when due to fortuitous events or force majeure, or when there is no material adverse effect on the business operations or financial condition of the Bank. (i) The Bank becomes insolvent or is unable to pay its debts when due, or commits or permits any act of bankruptcy, including (i) filing, in accordance with applicable laws and regulations, of a voluntary or involuntary petition by or against the Bank, as the case may be in any bankruptcy, reorganization, winding-up, suspension of payment, liquidation, or other analogous proceeding; (ii) the appointment of a trustee or receiver over all or a substantial portion of its assets, and such appointment is not lifted, discharged, or dismissed within thirty (30) days from the Bank’s receipt of notice of such appointment; (iii) the making of an assignment for the benefit of its creditors over all or substantially all of its assets; (iv) admission in writing

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of its inability to pay its debts; or (v) entry of any final and executory order or judgment of any court, tribunal, or administrative agency or body confirming the insolvency of the Bank, or approving any reorganization, winding-up or liquidation, of the Bank or a substantial portion of its assets. 13. Effects of Default Events (a) Declaration of Default

If any one or more of the Events of Default shall have occurred and be continuing, after any applicable cure period shall have lapsed, a LTNCD Holder may, without need of any notice, demand, presentment, waiver, consent, or approval from any other LTNCD Holder, by notice to the Bank and the Registrar and Paying Agent, stating the Event of Default relied upon, declare the principal and all accrued interest including default interest, as specified in Condition 13(b) below, and other charges (including any incremental tax that may be due on the interest income already earned under the relevant Coupon-Bearing LTNCDs) thereon, if any, insofar as the particular Coupon-Bearing LTNCDs registered under such LTNCD Holder’s name as appearing in the LTNCD Registry is concerned, to be immediately due and payable, and upon such declaration, the same shall be immediately due and payable by the Bank, notwithstanding anything contained in these Terms and Conditions to the contrary, without need for any further presentment, demand, protest, or further notice of any kind, all of which are hereby expressly waived by the Bank, without prejudice to the other remedies available to the other LTNCD Holders. For the avoidance of doubt, a LTNCD Holder need not be joined with any other LTNCD Holder to declare the Bank in default under these Terms and Conditions with respect to the particular Coupon-Bearing LTNCDs registered under its name as appearing in the LTNCD Registry. Nothing herein, however, shall be construed as conveying upon a LTNCD Holder the right and privilege to declare as immediately due and payable the principal or accrued interest including default interest, as specified in Condition 13(b) below, or other charges (including any incremental tax that may be due on the interest income already earned under the relevant Coupon-Bearing LTNCDs) thereon, if any, on any or all other Coupon-Bearing LTNCDs. (b) Default Interest In case of an Event of Default under Condition 13(a), the Bank shall, in addition to the payment of unpaid amount of principal and accrued interest, pay default interest at the rate of 1% per annum thereon, which shall accrue from the date the amounts payable under these Terms and Conditions became due until the same is fully paid. (c) Application of Payments

Subject to the Registry and Paying Agency Agreement, any money delivered to the Paying Agent upon the occurrence of an Event of Default under Condition 12 shall be applied by the Paying Agent in the order of preference as follows: first, to the pro rata payment to the Registrar and Paying Agent, Selling Agents, and Market Maker, of the costs, expenses, fees, and other charges of collection, including reasonable compensation to each of them, their agents, attorneys, and all reasonable expenses and liabilities incurred or disbursements made by them, without negligence or bad faith; second, to the payment of all outstanding interest owing to such LTNCD Holder, including any default interest as specified in Condition 13(b) above, in the order of maturity of such interest; third, to the payment of the whole amount then due and unpaid on the Coupon-Bearing LTNCDs for principal and interest; and fourth, the remainder, if any shall be paid to the Bank, its successors, or assigns, or to whoever may be lawfully entitled to receive the same, or as a court of competent jurisdiction may direct; Provided, that in the event more than one LTNCD Holder makes a demand for payment under Condition 13(a) at or about the same time, any money delivered to the Paying Agent by the Bank pursuant to such demands by the LTNCD Holders shall be applied by the Paying Agent to the pro rata payment of the amounts owing to such LTNCD Holders and in the order of preference stated above. 14. Remedies; Waiver; Ability to File Suit; Limitations

(a) All remedies conferred by these Terms and Conditions to the LTNCD Holders shall be cumulative and not exclusive, and shall not be so construed as to deprive the LTNCD Holders of any legal remedy by judicial or extra judicial proceedings appropriate to enforce such direct rights under these Terms and Conditions. (b) No delay or omission by the LTNCD Holders, or any one of them, to exercise any right or power arising from or on account of any Event of Default hereunder shall impair any such right or power, or shall be construed to be a waiver of any

39

such Event of Default or an acquiescence thereto; and every power and remedy given by these Terms and Conditions to the LTNCD Holders may be exercised from time to time and as often as may be necessary or expedient. (c) Nothing herein shall be deemed to create a partnership or collective venture between the LTNCD Holders. Each LTNCD Holder shall be entitled, at its option, to take independent measures with respect to its obligations and rights and privileges under these Terms and Conditions with respect to the particular Coupon-Bearing LTNCDs registered under its name as appearing in the LTNCD Registry, and it shall not be necessary for the other LTNCD Holders to be joined as a party in any judicial or other proceeding for such purpose. (d) Notwithstanding any other provisions in these Terms and Conditions, in no instance shall any of the parties be liable for special, indirect, consequential, nominal, exemplary, or punitive damages (including, without limitation, any loss of profits, business or anticipated savings). 15. Replacement Registry Confirmations In case any Registry Confirmation shall be mutilated, destroyed, lost, or stolen, the Registrar shall deliver to the LTNCD Holders a new Registry Confirmation of like denomination in exchange for, and upon cancellation of, the mutilated Registry Confirmation or in lieu of the Registry Confirmation so destroyed, lost or stolen only in the absence of any notice in writing to the Registrar that such Registry Confirmation has been acquired by a bona fide purchaser and upon presentation of the following: (a) the original Registry Confirmation (only in cases of mutilation); (b) evidence satisfactory to the Registrar of the destruction, loss, or theft of such Registry Confirmation; (c) a sworn affidavit of the LTNCD Holder attesting to the destruction, loss, or theft of any such Registry Confirmation, the

serial number of such Registry Confirmation and the amount of the deposit covered and undertaking to keep the Bank and the Registrar and Paying Agent fully indemnified and free from and harmless against any loss, liability, cost, claim, damage or expense caused by or connected with the substitution of such Registry Confirmation;

(d) in the case of corporate LTNCD Holders, a certificate from the Corporate Secretary of such LTNCD Holder on the resolution of the Board of Directors of such LTNCD Holder stating such fact of mutilation, destruction, loss, or theft, authorizing the application for a replacement of the Registry Confirmation and designating the authorized signatories for that purpose;

(e) the Purchase Advice issued by the Selling Agent or Market Makers to the LTNCD Holder requesting a replacement Registry Confirmation; and

(f) such other reasonable requirements or conditions as the Registrar and Paying Agent may deem appropriate to impose. 16. Notices (a) To the Bank Except for a notice to declare an Event of Default which must be personally delivered or sent by registered mail with postage prepaid, all notices, instructions, statements, and requests to the Bank shall be in writing and shall be sent by personal delivery, courier, registered mail with postage prepaid, confirmed facsimile to the Bank at its address, facsimile number, and secured electronic mail address, and for the attention of the specified representative as set forth below: Rizal Commercial Banking Corporation Yuchengco Tower, RCBC Plaza 6819 Ayala Avenue, Makati City, Makati City Attention: Jose Emmanuel U. Hilado Executive Vice President and Treasurer

Tel. No.: (632) 894 9992 Fax No.: (632) 894 9558 E-mail: juhilado@rcbc.com

Attention: Raul Victor B. Tan

First Vice President

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Tel. No.: (632) 894 9561 Fax No.: (632) 845 2766 E-mail: rvbtan@rcbc.com Attention: Paula Fritzie Z. Arteficio Vice President Tel. No.: (632) 894 9563 Fax No.: (632) 845 2766 E-mail: pzarteficio@rcbc.com (b) To the Registrar and Paying Agent All notices, instructions, and requests to the Registrar and Paying Agent shall be in writing and shall be sent by personal delivery, courier, or registered mail with postage prepaid, confirmed facsimile to the Registrar and Paying Agent at its address, facsimile number, and secured electronic email address, and for the attention of the specified representative, as set forth below:

Philippine Depository & Trust Corp.

37th Floor, Tower 1, The Enterprise Center 6766 Ayala Avenue, Makati City Attention: Sarena Baraan Manager

Tel. No: (632) 884 5000 Fax No: (632) 884 4405 email: sarah.baraan@pds.com.ph

(c) To the LTNCD Holders Except as otherwise provided in these Terms and Conditions, all notices to the LTNCD Holders shall be in writing and shall be sent by mail with postage prepaid to the name and last recorded address of the LTNCD Holders as appearing in the LTNCD Registry or by publication, at the Bank’s expense, for two (2) consecutive days in two (2) newspapers of general circulation in Manila in accordance with SEC Memorandum Circular No. 1 (2008). (d) Effect of Notice All notices, instructions, statements, and requests, where applicable, shall take effect, in the case of a letter, when delivered or, in the case of fax, when dispatched, provided that any communication by fax shall not take effect until 10:00 a.m. On the immediately succeeding Banking Day in the place of the recipient, if such communication is received after 5:00 p.m. On a Banking Day or is otherwise received on a day which is not a Banking Day. Communications not by letter shall be confirmed by letter but failure to send or receive the letter of confirmation shall not invalidate the original communication. The Parties shall maintain any electronic data, message, communication, or mail received pursuant to the electronic commerce act (Rep. Act No. 8792) and these terms and conditions. (e) Recording For security and quality of service purposes, all telephone and other communications between the parties and the LTNCD Holders may be recorded in any manner, and the LTNCD Holders shall be deemed to have consented to such recording and to the production of such recordings as evidence in any proceedings brought in connection with the coupon-bearing LTNCDs. 17. Amendment Any amendment of these Terms and Conditions is subject to the LTNCD Regulations. 18. Venue In the event of any legal action arising from, or by reason of, the interpretation and enforcement of the provisions of these Terms and Conditions, (a) the proper venue for such court action shall be any competent court of Makati City, Philippines, and

41

(b) the party adjudged by the court to be liable shall be obliged to pay the costs of litigation, as well as reasonable attorney's fees. 19. Prescription Any action upon the LTNCDs shall prescribe within 10 years from the time the right of action accrues. 20. Severability If any provision hereunder becomes invalid, illegal, or unenforceable under any law, the validity, legality, and enforceability of the remaining provisions of these Terms and Conditions shall not be affected or impaired. The Bank shall exert reasonable efforts to replace any invalid provision with a valid provision which most closely approximates the intent and economic effect of the illegal, invalid, or unenforceable provision. 21. Governing Law These Terms and Conditions shall be governed by and construed in accordance with the laws of the Republic of the Philippines

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CAPITALIZATION

The following table sets forth the audited consolidated capitalization and indebtedness of the Bank as at 31 December 2009

and as adjusted for the proposed issuance of the LTNCDs. This information has been extracted from the audited consolidated

financial statements of the Bank as at 31 December 2009. Such audited consolidated financial statements are not necessarily

indicative of the results of operations of the Bank for the full year.

As of 31 December 2009

Unadjusted Adjusted

(P millions) (P millions)

Short-term liabilities

Deposit liabilities......................................................................... 212,118.7 212,118.7

Bills payable and other liabilities................................................. 24,957.8 24,957.8

Total short-term liabilities .............................................................. 237,076.5 237,076.5

Long-term liabilities

Deposit liabilities......................................................................... 8,159.2 8,159.2

Estimated LTNCD liability(2) ........................................................ - 4,339.0

Bills payable and other liabilities ....................................................... 1,808.0 1,808.0

Subordinated Debt ............................................................................ 10,927.0 10,927.0

Total long-term liabilities ............................................................... 20,894.2 25,233.2

Minority Interest .............................................................................. (4.3) (4.3)

Capitalisation

Issued share capital(3) ................................................................. 10,112.5 10,112.5

Hybrid perpetual securities ......................................................... 4,883.1 4,883.1

Capital paid in excess of par value............................................. 6,039.8 6,039.8

Treasury shares, At cost............................................................. (952.7) (952.7)

Retained earnings

Appropriated ........................................................................... 285.7 285.7

Unappropriated....................................................................... 9,325.3 9,325.3

Others......................................................................................... 855.4 855.5

Total capital funds .......................................................................... 30,549.2 30,549.2

Total capitalization and indebtedness............................................... 288,515.6 292,854.6

Notes:

(1) As at 31 December 2009 – (i) 990,550,835 shares of common stock were issued and outstanding at P10 par value and (ii) 20,703,817shares of preferred stock were issued and outstanding at P10 par value.

(2) Amount represents total aggregate issue size of both Coupon-Bearing LTNCDs and Zero Coupon LTNCDs amounting to P4,339,032,000.

(3) As of 31 December 2009, the Bank had total outstanding contingent liabilities of P110.1 billion, which includes trust department accounts, forward exchange sold, inward bills for collection, forward exchange bought and others.

(4) There has been no material change in the capitalization or contingent liabilities of the Bank and its consolidated subsidiaries since 31 December 2009.

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CAPITAL ADEQUACY RATIOS

Banks in the Philippines are required by BSP guidelines to maintain a minimum total capital adequacy ratio of at least 10%. See

Banking Regulations and Supervision”. The following table sets forth the details of capital resources and capital adequacy

ratios of the Bank as at the dates indicated.

As at 31 December

2007 2008 2009

TIER 1 CAPITAL (in P millions except ratios)

Paid-up share capital .................................................. 16,592.2 16,592.3 16,684.9

Surplus........................................................................ 3,547.3 5,759.0 6,058.6

Undivided profit ........................................................... 3,042.3 2,026.4 3,372.9

Cumulative foreign currency translation...................... 106.3 71.9 81.9

Minority interest in subsidiary financial allied undertakings which are less than wholly-owned............................................... 116.7 56.3 60.0

Eligible Hybrid Tier 1 capital ....................................... 3,795.7 3,983.5 4,078.6

Less: Common shares treasury stock......................... - - (952.7)

Less: Unsecured DOSRI loans ................................... (138.5) (208.1) (229.5)

Less: Deferred tax asset ............................................. (1,602.8) (1,392.6) (1,390.0)

Less: Goodwill............................................................. (157.9) (335.8) (502.6)

Less: Other deductions ............................................... (157.4) (537) (133.3)

Net tier 1 capital ........................................................ 25,143.9 26,015.9 27,128.7

UPPER TIER 2 CAPITAL

Preference shares....................................................... - -

General allowance for bad and doubtful debts and financing 762.7 1,070.6 1,302.7

Net unrealized gains on available for sale equity securities purchased (subject to a 55% discount)....................... 56.9 37.9 79.6

Hybrid tier 1 capital (in excess of the amount permitted to be included in Tier 1 capital) ............................................ 250.3 674.2 449.7

Appraisal increment reserve – Bank premises ........... - - 28.8

Total upper tier 2 capital .......................................... 1,069.9 1,782.7 1,860.8

LOWER TIER 2 CAPITAL

Subordinated debt....................................................... 5,158.1 6,865.2 10,927.0

Paid-up redeemable preferred .................................... 0.1 0.1 4.4

Total lower tier 2 capital ........................................... 5,158.2 6,865.3 10,931.3

Total tier 2 capital ..................................................... 6,228.1 8,648.0 12,792.1

Less: Other deductions ............................................... (157.4) (537.0) (58.3)

Net tier 2 capital ........................................................ 6,070.7 8,111.0 12,733.8

Total qualifying capital ............................................. 31,214.6 34,126.9 39,862.5

CAPITAL RATIOS

Core capital ratio (Tier 1) ............................................ 15.06 13.19 12.6

Risk-weighted capital ratio .......................................... 18.70 17.30 18.47

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DESCRIPTION OF THE BANK

Introduction

The Bank is a universal bank in the Philippines that provides a wide range of banking and other financial products and services,

including commercial and retail banking, credit cards, asset management and treasury and investment banking products and

services. As of 31 December 2009, the Bank was the fourth largest private domestic commercial bank in the Philippines in

terms of total assets and capital based on the published Statements of Condition. In terms of branches, the Bank, excluding

Government-owned and foreign banks, ranked fourth in the Philippines, with a countrywide total of 338 branches as of 31

December 2009, including three extension offices.

As of 31 December 2009, the Bank’s audited consolidated total assets and capital funds amounted to P288.5 billion and P30.5

billion, respectively. The Bank’s audited consolidated pre-tax income and net income for the year ended 31 December 2009

amounted to P4.1 billion and P3.3 billion, respectively.

As of 31 December 2009 and 2008, the Bank had a market capitalization on the PSE of P15.5 billion and P15.7 billion,

respectively. The Bank’s Tier 1 capital adequacy ratio and total capital adequacy ratio were 12.6% and 18.5%, respectively as

of 31 December 2009, respectively, and 13.2% and 17.3%, respectively, as of 31 December 2008.

The Bank offers commercial, corporate and consumer banking products and services throughout the Philippines, as well as

treasury, cash management and remittance services.

The RBG provides a range of banking products and services mainly sold through the Bank’s branch network. These include

deposit products, cash management solutions, investments including trust products, and bancassurance. Aside from managing

the Bank’s branches, RBG also manages the Bank’s nationwide automatic teller machine (“ATM”) network.

The Bank’s corporate banking group focuses on leading Philippine and multinational corporations, Filipino-Chinese businesses,

and international corporate clients in special economic zones. Through its current with affiliation with YGC and past affiliation

with UFJ, it has established long-standing relationships with Japanese companies in special economic zones in the country.

The Bank also provides a full range of consumer banking products and services in the Philippines, primarily through its

subsidiary, RSB. The Bank’s international operations consist of its wholly-owned subsidiaries, RCBC North America and RCBC

TeleMoney Europe in the United States and Italy, respectively, and its majority- owned subsidiaries RCBC IFL and RCBC

Investments in Hong Kong. The Bank’s relationship with other banks, exchanges and other international money transfer

agencies has strengthened its remittance business used primarily by OFWs. The Bank estimates it had an approximate 8.7%

share of the remittance business in the Philippines as of 30 September 2009, based on remittance volumes published by the

BSP.

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The organizational structure of the Bank and its key subsidiaries is as follows:

History

The Bank, incorporated under the name Rizal Development Bank, began operations as a private development bank in the

province of Rizal in 1960. In 1962, the Bank received approval from the BSP to operate as a commercial bank and on 2

January 1963, the Bank began operations under its present name. In 1973, the Bank formed alliances with two foreign banks,

Continental Illinois Bank and UFJ (then known as Sanwa Bank). The relationship with Continental Illinois ended in 1985 after it

sold its shareholding to UFJ. In December, 2006, UFJ (now The Bank of Tokyo-Mitsubishi UFJ Limited) disposed of its entire

shareholdings in the Bank, with the majority being sold to Spinnaker.

As of 31 December 2009, Yuchengco family, primarily through a holding company, the Pan Malayan owned approximately

48.1% of the Bank’s outstanding shares. In addition, other members of YGC owned or controlled an additional 5.6% of the

Bank’s issued and outstanding shares. In the early part of 2009, Spinnaker Group sold its entire stake in the Bank. The equity

interest was primarily bought back by the Bank to have the flexibility to look for a strategic investor that agreed with the Bank’s

current business direction.

The Bank acquired Merchants Savings and Loan Association, Inc. (“Merchants Bank”) in mid-2008 in order to expand the

Bank’s branch network. Importantly, the acquisition also allowed the Bank to take over Merchant Bank’s thrift banking license

which allowed the Bank to commence microfinance deposit taking operations in Mindanao. On 13 February 2009, to further

bolster its entry into the microfinance business in the Philippines, the Bank acquired JP Laurel Rural Bank in Batangas.

The Bank obtained its commercial banking license in 1963 and its universal banking license in 1989 and has been listed on the

PSE since 1986.

RECENT DEVELOPMENTS

Disposal of shares in Great Life Financial Assurance Corporation

On 11 November 2009, the Board of Directors approved a proposed sale by the Bank of its one million shares in Great Life

Financial Assurance Corporation (“Great Life”), representing 20% of the total outstanding shares of Great Life, to Great Pacific

Life Assurance Corporation (“Grepalife”). This sale will facilitate the merger of Great Life and Grepalife thereby allowing

Grepalife to enjoy the benefits of a stronger company with economies of scale, a wider customer base and market reach. The

Bank has a 5% interest in Grepalife and through such ownership will retain its bancassurance partnership with Grepalife. The

merger of Great Life into Grepalife will allow the Bank to continue to grow its bancassurance partnership with a more effective

and bigger Grepalife.

US$ Negotiable Certificates of Time Deposit

RIZAL COMMERCIAL BANKING CORPORATIONUniversal Bank

RCBC SAVINGS BANK

Thrift Bank

RCBC INT'L FINANCE LIMITED

Hong Kong

Financing Company

RCBC NORTH AMERICA INC.

US Remittance

Company

RCBC TELEMONEY EUROPE SpA

European

Remittance Company

RCBC FOREX BROKERS

CORPORATION

Foreign Exchange Broker

BANKARD, INC.

Card Services Provider

MERCHANTS BANK

Thrift Bank

JP LAUREL RURAL BANK

Rural Bank

RCBC SECURITIES INC.

Securities Brokerage

RCBC INVESTMENT

LTD.

Remittances

RCBC CAPITAL CORPORATION

Investment Bank

46

On 30 September 2009, in order to expand its banking operations and offer an alternative investment instrument to depositors,

RCBC issued US$ 85 million worth of US$ denominated Negotiable Certificates of Time Deposit (“September NCTD”). On 19

October 2009, RCBC issued a second offering worth US$ 13.2 million of US$ denominated Negotiable Certificates of Time

Deposit (“October NCTD”). The September NCTD and the October NCTD carry a fixed annual interest rate of 3.75% per

annum, payable quarterly until they mature 30 September 2012.

Retail Treasury Bonds

The Bank through RCBC Capital was mandated to act as one of the Joint Issue Managers and Arrangers of the Retail Treasury

Bond issuance of the Republic of the Philippines, launched on 15 September 2009. Other arrangers included Banco de Oro

Universal Bank Inc., BPI Capital Corporation, Development Bank of the Philippines, First Metro Investment Corporation, Land

Bank of the Philippines, and Metropolitan Bank & Trust Company. RCBC was one of the top 5 selling agents in terms of total

sales amounting to P114.4 billion.

Dividends Paid for Ordinary or Other Shares

In its meeting held on 29 June 2009, the Bank’s Board of Directors approved the declaration and payment of cash dividends,

subject to BSP approval, amounting to P0.0667 per share or approximately P4.524 million payable to holders of convertible

preferred shares. The Bank received the approval of the aforementioned cash dividends from the BSP on 10 September 2009.

On 28 September 2009, the Bank’s Board of Directors approved the declaration and payment of cash dividends amounting to

P0.0579 per share or approximately P146 thousand payable to holders of common shares. The BSP approved the cash

dividends to holders of the common shares on 7 December 2009. The Board of Directors also approved the declaration and

payment of dividends amounting approximately P228.1 million payable to holders of hybrid perpetual shares. The BSP has not

yet approved the cash dividends to holders of hybrid perpetual shares as of date.

Lower Tier 2 Issuance

On 15 May 2009, RCBC issued P4 billion of Tier 2 (or supplementary) capital through the issuance of 7.75% subordinated

notes due in 2019, callable at par in 2014. Following the issuance, the Bank reported a total CAR of 19.35%.

Share swap with MICO Equities, Inc.

Under BSP regulations on cross-selling, an investment of at least 5% in an insurance company will allow the bank to widen its

product offering to include bancassurance business for non-life insurance products. On 9 March 2009, the Board of Directors

approved a proposed purchase by the Bank of a 5.6% equity interest in MICO Equities, Inc. (“MICO”), Yuchengco group’s

holding company for its non-life insurance business, through a swap of 41,993,389 common shares of the Bank in exchange for

169,059 shares in MICO. On 1 September 2009, the shareholders of the Bank approved by written resolution the re-issuance

by the Bank of the 41,993,389 common shares. This share swap paves the way for the Bank to enter into a bancassurance

partnership with MICO’s subsidiary, Malayan Insurance Co. Inc. (“Malayan Insurance”). Under this partnership arrangement,

Malayan Insurance’s insurance products may be sold through the Bank’s branch network throughout the Philippines.

Acquisition of JP Laurel Rural Bank

In February 2009, RCBC acquired the 10-branch JP Laurel Rural Bank of Batangas, which it took over from the Laurel family,

for P375 million. The acquisition is in line with the Bank’s strategy to build up its microfinance business.

Divestment by Spinnaker of its Interest in the Bank and Change in Directors

In the early part of 2009, Spinnaker Global Strategic Fund Ltd. and Spinnaker Global Emerging Markets Fund Ltd. (collectively,

“Spinnaker”) sold its entire stake amounting to approximately 16% of the outstanding share capital of the Bank. The equity

47

interest was primarily bought back by the Bank to have the flexibility to look for a strategic investor that agreed with the Bank’s

current business direction. With the divestment by Spinnaker, its nominees to the Board of Directors of the Bank, Mr.

Christopher Teague and Mr. Robert McCarthy resigned and were replaced by Mr. Reynaldo B. Vea and Ms. Yvonne S.

Yuchengco.

Competitive Strengths

The Bank considers the following to be its principal competitive strengths:

Sustainable size with an established operating history

The Bank is a prominent universal bank in the Philippines with extensive experience in the financial services sector extending

over 49 years. The Bank offers a diversified range of banking and other financial products and services, including commercial

and retail banking, credit cards, asset management and treasury and investment banking products and services. This range of

products and services provides the Bank with an extensive asset base.

Leading positions in key products

As of 30 September 2009, the Bank is a market leader in key business segments including investment banking, trusts (where it

ranks fifth in the Philippines in terms of total trust assets under management), treasury operations and foreign exchange, and

trade finance and international banking. In addition, the Bank is an established and well recognized provider of banking

services to Filipino-Chinese businesses, foreign investors in the export processing zone areas, as well as Japanese

multinationals. It has the most number of branches in export processing zones among banks in the Philippines.

Strong group synergies and support

As part of the YGC, the Bank is able to leverage a group-wide sales force to assist it in offering a wide range of products and

services provided by other members of YGC, making it a “one-stop” financial center for its customers. At the Bank’s branches,

customers may be referred to other YGC companies where, insurance products and other services are being offered.

Proven and experienced management team

The Bank has an experienced management team with a proven ability to execute a business plan and achieve results. In

February 2007, the Bank appointed Mr. Lorenzo Tan as Executive Vice Chairman and Chief Executive Officer and eventually

as President and CEO on April 2007, who, along with a team of established professionals who have joined him at the Bank,

previously headed Sun Life Financial Inc. and led the successful rehabilitation program for Philippine National Bank. Mr. Tan is

implementing a number of strategies, including those described in “—Business Strategies” to grow the Bank’s business and

enhance its profitability.

Extensive and strategically located banking infrastructure and network

The Bank has an extensive and strategically located branch network throughout the Philippines. As of 30 September 2009, the

Bank, excluding Government-owned and foreign banks, had the fourth largest branch network in the Philippines, with a

nationwide network of 334 branches, including three extension offices nationwide, supplemented by 466 ATMs. In addition,

through its Overseas Filipino Banking/TeleMoney Group (OFB/TeleMoney), the Bank has an approximate 8.7% market share in

OFW remittances as of 30 September 2009. It is present in 23 countries through a number of centers, tie-ups and agents. It has

the largest number of accredited door-to-door delivery couriers in the Philippines. In addition, remittances transacted through

OFB/TeleMoney can be collected from any of the 334 branches of the Bank.

48

Business Strategies

The Bank aims to continue to grow its core business lines through the execution abilities of its experienced and revitalized

management team, deepening relationships in the current markets that it services and expanding to selected new market

segments through new and innovative products and an expanded distribution platform that will service the customer’s wide

range of needs.

The key elements of the Bank's strategy are as follows:

Increase profitability from existing businesses while building a diversified franchise

The Bank intends to implement a number of measures that it considers will either increase revenue derived from its existing

businesses or will reduce its existing costs. These include the following:

• Build-up of loan portfolio, with direct emphasis on the less cyclical consumer segment and build-up of the middle

market;

The Bank shall continue to build-up its loan portfolio by actively pursuing opportunities in growth industries and

refinancing activities as well as loan syndications in the corporate market. It shall also continue servicing the top tier

corporate market in a primary or secondary role. Strong focus will be given to building a strong consumer franchise

inclusive of a large consumer credit portfolio. The Bank will increase its relationships in the growing middle market

and further improve credit/portfolio quality thru improved risk management capabilities.

• Increase in volumes of low-cost current account and savings account deposits;

The Bank plans to increase deposit volume by growing the customer base through various initiatives across different

segments. Specifically, the Bank aims to increase its middle market customers to 300,000 and target 200,000

customers transacting through electronic channels. ATM based products for retail depositors shall be aggressively

offered. By growing the ATM network and electronic channels, RCBC will be more attractive to corporate clients to

open CA/SA accounts with us. The bank’s plan is to expand CA/SA in order to bring down average funding cost.

Aside from growing customer base, the bank will also build up cash management products and services to capture

the bigger corporate CA/ SA accounts.

• Increase in fee based income from the Bank’s corporate, consumer and investment banking businesses, trust

banking and bancassurance products;

The Bank’s electronic business solutions shall be enhanced to support the customer’s requirements by adding more

features to the Bank’s internet banking platform and ATMs as well as introduce mobile phone banking to generate

funding /transfer and payment fees. Increasing the volume of trust banking business such as retirement funds,

institutional and personal trusts will be actively pursued. The Bank’s credit card business shall be grown by

increasing customer base and focusing on targeted customer segments to generate additional membership and

related fees.

• Broadening of the Bank’s skill base and expertise in financial product development, investment banking, stock

brokerage and asset disposal;

The Bank continues to strengthen its employee base by conducting and facilitating internal and external training

programs and seminars. The development of technology based tools to help increase employee efficiency is likewise

being undertaken.

49

• Explore continued investment banking deals and stock brokerage activities;

The Bank continues to play an active role in the Capital Markets by participating in upcoming debt and equity

offerings. The Bank will also actively pursue Corporate Finance deals. To shore up stock brokerage trading volume,

the Bank will continue to tap overseas Filipino workers, branch clients, institutional clients and employees of the YGC

Group.

• Build-up of IT capabilities.

The introduction of new electronic channels, core banking platform, stabilizing core applications and development of

Business Intelligence capability shall be the backbone in improving the Bank’s IT capabilities.

In addition to these specific measures, the Bank is also striving to reposition itself in the banking industry by improving its ability

to act as a provider of a full range of financial services via a strong capability on a wide range of operational transactions

through IT.

Further expand the Bank’s existing branch network while enhancing the effectiveness of the distribution network

through the introduction of more electronic channels

The Bank considers its branch network of 334 branches, including extension offices, representative of a significant

infrastructure through which to sell its financial services. While the branch network is currently used mainly to provide traditional

banking services, the Bank plans to continue to train and develop its employees to enable them to focus on maximizing

revenue through the sale of supplementary financial products, provided by both the Bank and YGC. In particular, the Bank is

emphasizing the segregation of functions within branches to allow for greater focus on particular products. The Bank has

dubbed its branches business centers to highlight the sales nature of its branch network. In order to coordinate this and to

increase its efficiency, the Bank intends to continue developing technology that will centralize the coordination and selling

efforts of its branch network.

To complement the branches the Bank plans to significantly increase the number of multifunction ATMs in the next three to five

years. This will be supplemented by the development of new electronic channels that will serve key needs of clients without

going to a branch. In addition, the improvement of the bank’s delivery channels via internet and mobile banking will be actively

pursued. The utilization of more electronic channels will contribute to reduction of operating costs per customer even as the

bank serves a much larger customer base.

Expand focus on providing a wider range of services to non-resident Filipinos

The Bank shall expand and continue to provide financial products and services to the non-resident Filipino market, with the

introduction of products particularly tailored and branded to satisfy their requirements. These products and services include

consumer loans, deposits, investment services, credit and cash cards, bill payment services, on-line and phone remittance, and

money transfer services. The Bank shall continue to expand its presence where there is a high concentration of Overseas

Filipinos. The Bank will continue to introduce state of the art technologies to allow for fast and efficient remittance services and

to introduce services tailored to the parties receiving the remittances. The Bank considers this market to be a key driver of

growth and is striving to increase its existing market presence.

Invest in Technology

Build an infrastructure for superior productivity and efficient process that will result in superior quality through technology.

Invest in People

50

Build a well trained and skilled employee force in order to serve clients better. Given the fast changing environment that the

Bank operates in, there is conscious effort to continuously improve on risk management, credit management, treasury and

other core banking capabilities. There is also a continuing focus on management and skills training.

Accelerate disposition of non-performing assets (“NPAs”)

In addition to increasing revenues and cost management, the Bank also intends to seek ways to reduce its opportunity costs.

One key component of the Bank’s cost reduction is to continue implementing steps to accelerate the recovery of its NPAs. The

Bank intends to continue the active disposition of NPAs through several options: intensified measures for collection,

foreclosure, restructuring and debt for asset swaps; enhancement of the Bank’s property information database; introduction of a

method of systematic enforcement of ownership control of assets; introduction of measures to ensure the cost effective

administration of properties; and clearly defining financial exit strategies for certain groups of assets.

Where suitable opportunities arise, seek to pursue a prudent acquisition strategy

The Bank considers the Philippine banking industry to be going through a period of consolidation. As such, it anticipates that

there will continue to be opportunities to acquire Filipino banks in the coming years. The Bank will continue to consider

acquisition opportunities, particularly focusing on well-managed mid-sized banks and thrift banks which may enable the Bank to

increase its resource base and expand its branch network and reach in a cost-efficient manner.

Business Operations

The Bank is a universal bank that offers a wide range of commercial, retail and corporate banking products and services. The

principal products and services of the Bank include traditional loan and deposit products, treasury, trust banking, investment

banking, cash management and credit card services. These businesses are categorized into seven operating groups: Retail

Banking, Corporate Banking, Trust and Investments, Treasury Group, Consumer Banking (principally through RSB) and

Overseas Remittance.

For financial reporting purposes, the “Treasury Group” includes Trust and Investments and the “Others” business segment

includes the Overseas Remittance Unit and Consumer Banking (including RSB). See “Management’s Discussion and Analysis

of Financial Condition and Results of Operations—Segment Information”.

The following table sets out the consolidated pre-tax and minority interest income of the Bank’s divisions and as a percentage

of the total net income for the periods indicated:

As of 31 December As of 30 September

2006 2007 2008 2008 2009

(in P millions) Amount % Amount % Amount % Amount % Amount %

Retail Banking.... 1,459 58.0 1,596 39.0 1,951 63.1 1,358 53.1 1,256 36.5 Corporate Banking .............. 1,779 70.7 3,468 84.8 1,067 34.5 941 36.8 1,388 40.3 Treasury Group.. 3,290 130.7 1,860 45.5 1,098 35.5 1,177 46.0 2,246 65.2 Others ................ (4,011) (159.4) (2,834) (69.3) (1,024) (33.1) (918) (35.9) (1,446) (42.0) Total Income before tax and minority interest.. 2,517 100.0 4,090 100.0 3,092 100.0 2,558 100.0 3,444 100.0 Income Tax Provision ............ (627) (846) (919) (623) (618) Minority Interest in net loss (income) ............. 163 (36) (19) (18) (7) Net Income......... 2,053 3,208 2,154 1,917 2,819

51

Retail Banking

The Bank’s RBG accounted for 63.1% and 36.5% of its consolidated pre-tax income in the year ended 31 December 2008 and

the nine months ended 30 September 2009. The RBG operates through 218 branches and extension offices (excluding RCBC

Savings Bank branches) offering a wide range of products and services. The banking products and services offered by the

RBG include deposit and investment products, term loans, revolving credit lines, overdraft facilities, trade finance, payment

remittances, cash management services and foreign exchange.

To attract and retain customers, the RBG has expanded its product offering while continuously enhancing or repackaging the

existing products as it began offering more services electronically. Certain deposit products have special features including a

tiered interest rate scheme whereby higher rates of interest are paid to deposit balances that exceed certain threshold amounts.

The current deposit products offered by the Bank include (i) the Regular Savings Account; (ii) the Regular Checking Account;

(iii) the Dragon Savings Account; (iv) the Super Earner Account; (v) the eWMN Savings and Checking Account and (vi) other

foreign currency deposits. The RBG also promotes other YGC products and services through a group-wide referral programme.

Corporate Banking

The Bank’s Corporate Banking Group (“CBG”) accounted for approximately 56.8% of the Bank’s loan portfolio and 34.5% of the

Bank’s consolidated pre-tax income in the year ended 31 December 2008. The CBG accounted for approximately 60.2% of the

Bank’s loan portfolio and 40.3% of its consolidated pre-tax income for the nine months ended 30 September 2009 compared to

60.1% and 36.8% as of 30 September 2008. The CBG provides its corporate customers with a wide range of banking products

and services, including deposit products, cash management services, revolving credit lines, medium and long-term loans,

project finance loans, foreign currency loans, trade related financing, payment remittances and foreign exchange transactions.

CBG caters to four customer segments: (i) Large Corporations, which play a major role both the local and global economy, (ii)

Japanese Multinationals with strong presence in the country, (iii) Filipino-Chinese businesses, and (iv) SMEs. The Bank also

has an established track record of servicing clients in special economic zones.

The Bank views the corporate market to remain a growth area. To further enhance relationships with large corporate clients,

assistance in the form of loans have also been offered to key suppliers, distributors, and other business partners of these

clients under the Bank’s supply chain financing program. Many of CBG’s corporate clients are included in the list of the

“Philippines’ Top 1000 Corporations”.

The Bank provides corporate lending and cash management services to Japanese entities that operate in the Philippines, many

with whom the Bank has had long standing relationships. The Bank established many of its relationships with Japanese clients

through its affiliation with UFJ. The Bank believes that it has established a strong reputation among Japanese entities and that

it will continue to be competitive in this sector following UFJ’s disposal of the Bank’s shares. The Bank has hired two former

UFJ executives to help manage this sector.

CBG also specializes in providing banking services to clients located in special economic zones, particularly Japanese clients.

Special economic zones, or “ecozones”, are independent communities within the Philippines that administer their own

economic, financial, industrial and tourism development. Companies that operate within ecozones receive certain tax benefits

and must meet certain standards of operations. The Bank has established 17 branches within certain of the ecozones to better

serve its customers.

CBG is also a leading provider of corporate banking services to Filipino-Chinese clients focusing on trade finance to finance

import requirements. The Bank believes that its membership in YGC, which includes a number of Filipino-Chinese companies,

is an asset in attracting and maintaining Filipino-Chinese customers. This is therefore an area that the Bank will continue

maintain a strong presence.

52

The Bank’s SME operations were recently consolidated with the CBG from its RBG so that its lending activities can be

synchronized with the overall lending thrust and objectives of the Bank. The Bank’s SME organization is composed of lending

centers in Metro Manila, provincial Luzon, Visayas, and Mindanao and there are ongoing efforts to strengthen the service

capabilities of these centers. As of 30 September 2009, the middle-market loan portfolio amounted to P8.4 billion or 6.4% of the

Bank’s consolidated total loan portfolio compared to P8.2 billion or 6.2% as of 30 September 2008.

The short-term credit facilities that CBG provides are principally for working capital. Trade-related credit facilities include foreign

and domestic letters of credit and trust receipt lines as well as export advance lines and the discounting of commercial bills.

Long-term loans (i.e. those with maturities in excess of one year) are generally in the form of project financing loans. These

include loans to finance the construction or acquisition of plant, factories or buildings, the acquisition of equipment, and other

capital expenditures.

CBG offers both Peso-denominated and foreign currency-denominated (primarily U.S. dollar) loans. The Bank’s policy is to

extend foreign currency loans only to exporter customers who have foreign currency revenues or are otherwise hedged. Most

of CBG’s corporate loans are made on a floating rate basis. CBG’s corporate lending is made on both syndicated and non-

syndicated bases.

The Bank also offers products from the Treasury Group to support its corporate clients’ increasingly sophisticated needs

through equity, quasi-equity, swaps, options, and other similar funding and hedging products. CBG has successfully assisted

clients in accessing long-term capital via public market offerings and other debt and quasi-equity funding structures.

The Bank also offers a cash management system known as a Bills Payment Machine (“BPM”) to corporate clients in the utilities

industry. BPMs function as fully automated electronic payment facilities whereby the utilities’ clients can make payments. As of

30 September 2009, the Bank had 80 BPMs in service. Provision of these services has increased fee-based income and also

led to an increase in the volume deposits from utility clients who leave such payments in accounts held with the Bank.

Treasury Group

The Bank’s Treasury Group accounted for 35.5% of the Bank’s consolidated pre-tax income for the year ended 31 December

2008 and 65.2% and 46.0% respectively, for the nine months ended 30 September 2009 and 2008.

Treasury Group is comprised of the following: the Trading Segment (comprised of the Foreign Exchange Risk Division, the

Foreign Interest Rate Risk Division, the Domestic Interest Rate Risk Division and the Derivatives Trading Department), the

Balance Sheet Segment (comprised of the Investment Portfolio Management Division, and the Asset & Liability Management

Division), the Global Distribution and Advisory Division, and the Financial Institutions Management Division. The following

describes the key functions of each of the divisions:

• The Foreign Exchange Risk Division engages in foreign exchange spot, forward and swap transactions. Because the

Bank does not have an expanded derivatives license, it is limited in the types of derivative products it can offer. The

Bank’s trading and foreign exchange gains amounted to P1.2 billion and P0.3 billion for the years ended 31

December 2007 and 2008, respectively. For the nine months ended 30 September 2009 and 2008, the Bank’s

income from trading and foreign exchange gains amounted to P2.1 billion and P0.2 billion, respectively.

• The Foreign Interest Rate Risk Division trades foreign currency denominated bonds while the Domestic Interest Rate

Risk Division trades domestic treasury bills and bonds and domestic corporate bonds. Both are supported by the

Derivatives Trading Department, which evaluates and recommends structured products, among others.

• The Investment Portfolio Management Division oversees the Bank’s investment portfolio, while the Asset & Liability

Management Division manages the Balance Sheet and ensures that the funding requirements of the Bank.

53

• The Global Distribution and Advisory Division acts as Treasury Group’s marketing arm, and works closely with the

other divisions as well as the Bank’s Business Managers to market treasury products and services to corporate

clients.

• The Financial Institutions Management Division is responsible for the correspondent banking business, including

expanding liability sources and exploring new trade product structures from its relationships with other financial

institutions.

With low loan demand from creditworthy corporate borrowers in the Philippines in recent years, the Bank generated interest

income from low-risk investment opportunities, such as securities issued by the Government. In addition, by holding a

substantial portion of its trading and investment securities in Pesos, the Bank has been able to manage its liquidity risk.

Total Investment Portfolio

The following tables set forth, as of the dates indicated, information relating to the Bank’s total investment portfolio.

As of 31 December

2006 2007 2008

(in P million)

Book Value

Market Value

Unrealized Gain

Unrealized Loss

Book Value

Market Value

Unrealized Gain

Unrealized Loss

Book Value

Market Value

Unrealized Gain

Unrealized Loss

Government Securities...

43,640 43,640 2,870 0 46,561 46,561 462 0 39,987 38,806 0 1,367

Other debt securities ...

14,319 14,319 62 106 16,510 16,510 473 0 5,509 5,500 0 48

Total debt securities ...

57,959 57,959 2,932 106 63,071 63,071 935 0 45,496 44,306 0 1,415

Non-debt securities ...

947 947 82 0 1,514 1,514 97 0 1,315 1,315 0 153

Total .......... 58,906 58,906 3,014 106 64,585 64,585 1,032 0 46,811 45,621 0 1,569

As of 30 September 2009 As of 30 September 2008

(in P million) Book Value Market Value

Unrealized Gain

Unrealized Loss Book Value

Market Value

Unrealized Gain

Unrealized Loss

Government Securities......

58,191 58,826 347 0 38,296 37,785 174 0

Other Debt Securities......

11,247 11,248 0 95 5,430 5,428 0 1,351

Total Debt Securities......

69,438 70,074 347 95 43,727 43,213 174 1,351

Non-debt Securities......

2,341 2,341 172 1,855 1,855 51 0

Total ............. 71,779 72,415 519 95 45,582 45,069 225 1,351

54

Available for Sale Investments

The following tables set forth, as of the dates indicated, information related to the Bank’s investments that were classified as

available-for-sale securities.

As of 31 December

2006 2007 2008

(in P million) Book Value

Market Value

Unrealized Gain

Unrealized Loss

Book Value

Market Value

Unrealized Gain

Unrealized Loss

Book Value

Market Value

Unrealized Gain

Unrealized Loss

Government Securities... 38,109 38,109 2,870 0 42,287 42,287 462 0 17,425 17,425 0 1,367

Other debt securities ...

9,009 9,009 62 106 11,546 11,546 473 0 3,992 3,992 0 48

Total debt securities ... 47,118 47,118 2,932 106 53,834 53,834 935 0 21,417 21,417 0 1,415

Non-debt securities ... 699 699 82 0 792 792 97 0 1,283 1,283 0 153

Total .......... 47,817 47,817 3,014 106 54,625 54,625 1,032 0 22,700 22,700 0 1,569

As of 30 September 2009 As of 30 September 2008

(in P million) Book Value

Market Value

Unrealized Gain

Unrealized Loss Book Value

Market Value

Unrealized Gain

Unrealized Loss

Government Securities......

26,673 26,673 347 15,950 15,950 174

Other Debt Securities......

9,178 9,178 95 4,216 4,216 1,351

Total Debt Securities......

35,582 35,582 347 95 20,166 20,166 174 1,351

Non-debt Securities......

2,282 2,282 172 1,346 1,346 51

Total ............. 38,134 38,134 519 95 21,512 21,512 225 1,351

55

Held to Maturity Investments

The following tables set forth, as of the dates indicated, information related to the Bank’s investments that were classified as

held to maturity securities.

As of 31 December

2006 2007 2008

(in P million) Book Value

Market Value

Unrealized Gain

Unrealized Loss

Book Value

Market Value

Unrealized Gain

Unrealized Loss

Book Value

Market Value

Unrealized Gain

Unrealized Loss

Government Securities... 0 0 0 0 0 0 0 0 20,622 19,441 0 0

Other debt securities ...

0 0 0 0 0 0 0 0 52 43 0 0

Total debt securities ... 0 0 0 0 0 0 0 0 20,674 19,484 0 0

Non-debt securities ... 0 0 0 0 0 0 0 0 0 0 0 0

Total .......... 0 0 0 0 0 0 0 0 20,674 19,484 0 0

As of 30 September 2009 As of 30 September 2008

(in P million) Book Value

Market Value

Unrealized Gain

Unrealized Loss Book Value

Market Value

Unrealized Gain

Unrealized Loss

Government Securities....

20,190 20,825 0 0 21,352 20,841 0 0

Other Debt Securities....

51 53 0 0 51 49 0 0

Total Debt Securities....

20,241 20,878 0 0 21,403 20,890 0 0

Non-debt Securities....

0 0 0 0 0 0 0 0

Total ........... 20,241 20,878 0 0 21,403 20,890 0 0

56

Financial Assets at Fair Value Through Profit or Loss

The following table sets forth, as of the dates indicated, information related to the Bank’s financial assets at fair value through

profit or loss.

As of 31 December

2006 2007 2008

Book Value

Market Value

Unrealized Gain

Unrealized Loss

Book Value

Market Value

Unrealized Gain

Unrealized Loss

Book Value

Market Value

Unrealized Gain

Unrealized Loss

Government Securities.. 5,531 5,531 0 0 4,274 4,274 0 0 1,940 1,940 0 0

Other debt securities ..

5,310 5,310 0 0 4,963 4,963 0 0 1,465 1,465 0 0

Total debt securities .. 10,841 10,841 0 0 9,237 9,237 0 0 3,405 3,405 0 0

Non-debt securities .. 248 248 0 0 722 722 0 0 32 32 0 0

Total ......... 11,089 11,089 0 0 9,959 9,959 0 0 3,437 3,437 0 0

As of 30 September 2009 As of 30 September 2008

(in P million) Book Value

Market Value

Unrealized Gain

Unrealized Loss Book Value

Market Value

Unrealized Gain

Unrealized Loss

Government Securities......

11,328 11,328 0 0 994 994 0 0

Other Debt Securities......

2,017 2,017 0 0 1,163 1,163 0 0

Total Debt Securities......

13,345 13,345 0 0 2,157 2,157 0 0

Non-debt Securities......

59 59 0 0 509 509 0 0

Total ............. 13,404 13,404 0 0 2,666 2,666 0 0

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Trust and Investments

Trust and Investments has an established track record in trust and asset management. As of 30 September 2009, the Bank

ranked ninth among local and foreign trust entities doing business in the Philippines with P51.1 billion in trust assets. Trust,

investment management and other fiduciary accounts continued to account for the bulk of the Bank’s trust arrangements.

These consist of retirement funds, institutional trust funds, pre-need accounts, personal trusts and investment management

arrangements, which accounted for 96% of total trust assets as of 30 September 2009. The balance consists of the volume of

pooled funds. The Bank offers its trust products to corporate and institutional investors as well as to high-net individuals and, for

funds requiring low minimum thresholds, retail investors.

Previously, the Bank offered various common trust fund (“CTF”) products to clients. The Bank’s CTF products registered strong

growth from 2000 to 2004 primarily due to the products’ competitive returns and aggressive selling efforts. In September 2004,

the BSP issued directives requiring trust entities to phase out CTFs by 1 October 2006, except for long term tax exempt CTFs

which are required to be phased out by 1 October 2009. Trust entities were no longer allowed to accept new CTF investors with

effect from 1 January 2005 and were requested to stop accepting additional investments from existing CTF investors effective 1

April 2005. These phase out directives caused CTF volume to decline.

In September 2004, the BSP issued Circular 447, which provided guidelines for the launching and offering of new products to

be known as Unit Investment Trust Funds (“UITFs”). UITFs are open-ended pooled trust funds denominated in any acceptable

currency that are to be operated and administered by trust entities. Eligible assets of UITFs include bank deposits, securities

issued by or guaranteed by the Republic of the Philippines or the BSP, tradable securities issued by the government of a

foreign country, exchange listed securities, marketable instruments that are traded in an organized exchange, loans traded in

an organized market and such other tradable instruments as the BSP may allow. These funds are subject to mark-to-market

valuation on a daily basis. In issuing this circular, the stated objective of the BSP is to align the operation of pooled funds with

international best practices and enhance the credibility of pooled funds to investors. To allow CTF investors to transition to

UITFs, the Bank launched five UITF products in March 2005. These products include Peso and U.S. dollar denominated money

market and fixed income funds as well as a local equity fund. The Bank has made an active effort to promote and educate

investors regarding UITFs and increased its UITF volume by 81% from 31 December 2005 to 31 December 2006. Beginning in

May 2007, however, UITF volume showed a declining trend from the end-2006 level as a result of the shift in clients’ interest to

the BSP’s Special Deposit Accounts, which were made available to investors through trust institutions. in 2009, UITF volume

increased by 7% as of 30 September 2009 compared to 31 December 2008-levels due to the attractive returns generated by

RCBC fixed income funds versus competition and/or the prescribed benchmarks. The Bank launched its sixth UITF known as

the Rizal Balanced Fund in June 2009 to expand its product offerings.

The Bank also re-launched RCBC Crest Fund in 2009. The Crest Fund is a revocable personal living trust account or an

investment management account designed to address the long-term investment needs of high net worth individuals. The Crest

Fund allows individuals (Filipino citizens or resident aliens) to take advantage of the tax benefits granted by the Internal

Revenue Code. If a trust account is kept for a period of at least five years, interest income earned on the account is not subject

to 20% final withholding tax generally imposed on income from trust and similar arrangements. Aside from the tax savings, the

Crest Fund offers several opportunities to customers such as potentially higher returns, a trust portfolio customized to the

customer’s investment objectives and risk tolerance, and the services of a team of seasoned portfolio officers to manage the

account.

In accordance with BSP regulations, the Bank is required to deposit government securities with a value equivalent to 1.0% of

the book value of the total volume of trust, fiduciary and investment management assets with the BSP as security for the faithful

performance of its trust duties. In addition, an amount equal to 10.0% of the CTFs is required to be maintained as statutory

reserves and an amount equal to 11.0% is required to be maintained as liquidity reserves. Loans granted by trust accounts to

the Bank’s directors, officers, stockholders and related interests (“DOSRI”) are included in determining the Bank’s compliance

with the regulatory limits on DOSRI loans. In managing CTFs and UITFs, the combined exposure of the fund in any entity and

its related parties shall not exceed 15% of the market value of the fund, except in the case of exchange traded equity securities

58

where the maximum exposure of UITFs is the actual benchmark index weighting of the issue or 15%, whichever is higher.

These exposure limits prescribed for CTFs and UITFs do not apply to non-risk assets as defined by the BSP.

Aside from its asset management products, Trust and Investments actively offers non-fund management services such as

mortgage trust indentures, escrows, bond trusteeships and paying agency arrangements for bonds and commercial paper

issuances and stock transfer services.

Consumer Banking

The Bank offers its customers a wide range of banking products to consumers. Deposit products offered include current

accounts (non-interest bearing demand deposits), savings accounts (including fixed amount savings accounts and savings and

overdraft combination accounts) and time deposits in Pesos, U.S. dollars, and certain other foreign currencies. Loan products

offered include general purpose personal loans, home mortgage loans, automobile loans, small business or multipurpose loans

secured by real property, and credit cards.

The Bank’s Consumer Banking primarily provides mortgage loans and auto loans through RSB and issues credit cards. The

Bank’s branches, both commercial and savings, provide promotional materials on consumer loans, credit cards and insurance

products.

RCBC Savings Bank

In 1996, RSB was established as the Bank’s thrift banking arm and was subsequently bolstered by the acquisition of Capitol

Development Bank, a thrift bank, in 1998. RSB is a wholly-owned subsidiary of the Bank and is operated separately and

branded differently from the Bank. As of 30 September 2009, RSB has 116 branches (48 in Metro Manila, 48 in the Luzon

region, 13 in the Visayas region and 7 in the Mindanao region) through which it takes deposits and offers consumer loans

products.

RSB offers its customers a wide variety of deposit products and also offers consumer loan products such as home mortgage

loans, auto loans, and personal/salary-deducted loans, which made up approximately 58% (P20.4 billion), 35% (P12.4 billion)

and 2% (P759 million), respectively, of its total loan portfolio as of 31 December 2008; and 58% (P20.2 billion), 36% (P12.6

billion), and 2% (P592 million), respectively, of its total loan portfolio as of 30 September 2009.

The following table indicates total consumer loans in millions of Pesos as of the dates indicated:

As of 31 December As of 30 September

2006 2007 2008 2008 2009

(in P millions)

Home mortgage loans ................................................... 16,053.2 16,852.1 20,397.3 19,080.7 20,200.9

Auto loans ..................................................................... 8,307.4 10,426.1 12,385.2 12,430.8 12,552.9

Salary/Personal loans.................................................... 985.0 940.1 759.2 885.6 592.1

Others............................................................................ 2,097.5 1,702.1 1,724.8 1,788.7 1,595.0

Total .............................................................................. 27,443.1 29,920.4 35,266.5 34,185.9 34,940.9

RSB’s total assets amounted to P46.6 billion as of 31 December 2008 and P50.7 billion as of 30 September 2009, making it the

third largest thrift bank in terms of assets. Likewise, RSB was the third largest thrift bank in terms of deposits and loans as of

the same period. In December 2004, the Board of Directors of the Bank approved a contribution of additional capital amounting

to P500.0 million to RSB to fund expansion of loans, which was completed in January 2005. Additional capital infusion of P1.0

billion was done in October 2007.

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Total net income for RSB amounted to P691 million for fiscal year 2007 and P776 million for fiscal year 2008, accounting for

16.9% and 25.1%, respectively, of the Bank’s consolidated pre-tax income. For the nine months ended 30 September 2009 and

2008, total net income amounted to P639.0 million and P542.4 million, respectively, accounting for 18.6% and 21.2%,

respectively, of the Bank’s consolidated pre-tax income.

As of 31 December 2008 and 30 September 2009, RSB’s capital adequacy ratio was 14.85% and 16.38%, respectively.

Residential Mortgage Loans

Residential mortgage loans to individuals averages at P1.5 million and have maturities between five and twenty years. Home

mortgage loans are secured by a first mortgage on the property being purchased. Such loans are insured with the Home

Guaranty Corporation (the “HGC”) and may be called upon if the borrower misses payments for six months or more. Home

mortgage loans are typically payable in monthly amortizing payments based on market-linked interest rates with terms of one to

five years. The Bank may lend up to 80.0% of the internally-appraised value of house and lots. The Bank requires home

mortgage borrowers to obtain both fire insurance and mortgage redemption insurance and will generally refer these customers

to the Bank’s insurance brokerage.

All RSB home mortgage loans are secured by a first legal charge on the property. In addition, RSB generally requires

residential mortgage borrowers to have an equity interest of at least 30.0% of the value of the property, including loans

guaranteed by the HGC. As of 30 September 2009, residential mortgage loans guaranteed by the HGC represented 1.0% of

RSB’s total residential mortgage loans.

Interest rates on RSB’s residential mortgage loans range from 8.0% to 13.5%. In accordance with industry practice in the

Philippines, interest rates on RSB’s residential mortgage loan portfolio are agreed with the relevant borrower at a fixed rate

applicable for an initial period of one to five years. Following the expiry of this initial period, the interest rate is reset at a fixed

rate applicable for succeeding periods.

When a borrower falls into arrears with its mortgage payments, it can either agree to a voluntary disposal of the property to

RSB or RSB may commence foreclosure proceedings. Foreclosure of the property commences when the account becomes

180 days past due. Once mortgaged collateral is foreclosed, RSB classifies such collateral as ROPA and will be managed by

the Retail Asset Management Division of RSB. However, the mortgagor continues to have the right to redeem such collateral

within a year from the date of foreclosure in return for payment of principal and interest owed plus RSB’s out-of-pocket

expenses. Sale of mortgaged collateral is generally sold through public auctions. In the case of residential mortgage loans

guaranteed by the HGC, RSB does not foreclose on the mortgaged collateral. Instead, RSB files a claim with HGC if an HGC-

guaranteed residential mortgage loan is in default for at least six consecutive months. To date, RSB has not yet filed any claim

with the HGC.

Auto Loans

RSB also provides auto financing to individuals, mainly for the acquisition of new vehicles, although RSB also finances the

acquisition of second-hand vehicles and provides general purpose loans secured by customer’s vehicles. As of 30 September

2009, the Bank had P11.9 billion in new auto loans and P634.0 million in second-hand auto loans. RSB’s auto loans are

typically between P100,000 and P600,000 in amount and for terms of between 24 and 36 months on average. The minimum

and maximum terms are 12 and 60 months, respectively. The applicable interest rate is generally fixed with an amortizing

repayment schedule over the term of the loan. RSB also typically lends up to 70.0% of the value of a new car. For second-hand

vehicles, RSB lends up to 70.0% of the appraised value or selling price (whichever is lower) for vehicles between one and two

years old, and up to 50%-60% of the appraised value or selling price, (whichever is lower), for vehicles older than two years.

The maximum amount varies, depending on the model and year of the car and is based on RSB’s internal assessments of the

resale value.

60

RSB’s auto loans are generated from car dealerships, independent sales agents, and sourced internally through branch

referrals, walk-in clients and refinancing. RSB also provides economic incentives to car dealerships and independent sales

agents based on each approved auto loan amount.

All of RSB’s auto loans are secured by a first legal charge over the cars being purchased. In addition, RSB generally requires

car buyers to make a minimum down payment of between 30.0% and 40.0% of the purchase price. The prevailing effective

interest rates of RSB’s auto loans range from 10.0% to 14.0% for new cars and 15.0% to 19.0% for second-hand vehicles.

RSB’s policy towards foreclosure proceedings on auto loans is more conservative than that typically followed in the Philippine

banking industry. RSB commences foreclosure proceedings when an installment payment falls past due for 90 days, as

opposed to 121 days for most banks. It generally takes between five to eight months from the past due date to foreclose on the

car, which is then sold through a public auction.

Personal and Salary Loans

The Bank offers two products: personal loans and salary loans. Personal loans are offered to prospective customers who apply

on an individual basis, while the Bank offers salary loans through the employees’ respective companies. As of September 2009,

the personal loan portfolio stood at P484.7 million while salary loan portfolio stood at P107.3 million.

The Bank offers unsecured personal loans in amounts from P100,000 to P1 million, although the current average is at

P200,000. Payment is through issuance of post-dated checks. Salary loans, which are only offered to accredited companies, in

the other hand, range from P20,000 to P500,000 with a current average of P75,000. Payment is through salary deduction.

Micro Finance

High, but sustainable growth in the high yielding microfinance market is a key part of the Bank’s strategy, capturing market

share in what the Bank views as the major engine of growth in the Philippine banking sector, a segment that is generally

regarded as under-banked. That growth will be assisted by the Bank’s strategy of cross-selling across business segments, to

similar and overlapping customer segments. In order to preserve asset quality, the Bank is focused on targeted growth, and

carefully selects the customer segments it markets to in each business sector to ensure sustainable growth, with carefully

managed NPL rates and low cost of credit.

With the Bank’s recent acquisition of JP Laurel Rural Bank in Batangas and Merchants Bank in Mindanao, the Bank is able to

leverage off JP Laurel Rural Bank’s 10 branch network in Batangas and Merchants Bank’s 20 branch network in Mindanao in

order to expand its micro-lending operations. Micro finance loans are provided in amounts of a minimum of P5,000 and

maximum of P150,000 and with an average maturity of 90 days. As at 30 September 2009, the total outstanding loans under its

microfinance operations amounted to P2.4 million with 108 borrowers.

Deposit Products

RSB provides its customers with a variety of deposit accounts, including non-interest bearing demand deposits, interest-bearing

combination of check book and savings accounts (including savings accounts, checking accounts, time deposits, and premium

time deposits) and fixed and floating rate savings accounts. In addition to offering conventional deposit products, RSB offers a

variety of special value-added products and services thereby increasing product offerings and providing greater convenience

for customers, including products tailored for OFWs and their beneficiaries who remain in the Philippines and U.S. dollar time

deposits.

With total deposits of P41.8 billion, RSB ranked third in terms of total deposits among other thrift banks as of 30 September

2009. This represented 21.3% of the Bank’s consolidated deposits. Total net income of RSB amounted to P776.2 million and

P690.6 million for the period ended 31 December 2008 and 2007 accounting for 36.0% and 21.5%, respectively, of the Bank’s

61

consolidated net income. For the periods ended 30 September 2009 and 2008, total net income of RSB amounted to P639.0

million and P542.4 million, accounting for 22.7% and 28.3%, respectively, of the Bank’s consolidated net income.

Credit Card Operations

Until December 2006, the Bank operated its credit card business through Bankard. RCBC Capital acquired Bankard in 2000

and recorded goodwill from the transaction amounting to P822.0 million. The Bank amortized such goodwill up until 2004 over a

period of 20 years. Following implementation of PFRS 3 Business Combinations for fiscal year 2005, the Bank subjected such

goodwill to a regular impairment test. As a result of such impairment testing, RCBC Capital wrote-off the remaining book value

of such goodwill in fiscal year 2005.

In December 2006, RCBC acquired substantially all of the assets of Bankard and going forward will conduct credit card

operations at the parent company level. Under the terms of the sale, RCBC acquired, among other things, P7.2 billion of credit

card receivables and certain building units. The consideration for the sale included the assumption of certain liabilities and the

set-off of certain debts owed by Bankard. Following the sale, RCBC wrote off P2.6 billion of credit card receivables acquired

from Bankard against allowances for impairments. Bankard maintained P3.2 billion of overdue receivables for which it has

made full provision.

Bankard and RCBC entered into a services agreement wherein RCBC outsourced the servicing of its credit card business to

Bankard. These services include card acquisition and marketing services, verification and collection services.

The Bank is engaged in two principal credit card activities: card issuing and merchant acquiring. The Bank derives income from

annual fees charged to cardholders, transaction commissions from merchants, fees on cash advances and interest payable on

outstanding card receivables, currently at the rate of 3.5% per month and, on penalties for past due accounts, 7.0% per month.

Annual cardholder fees range from P800 to P3,500. The interest rates on deferred and installment payments range from 21.0%

to 42.0% per annum. The total amount of cash advance is limited to 30.0% to 50.0% of credit limit. Interchange fees range from

0.5% to 2.3%. Funding for the Bank’s credit card operations is provided by a combination of internally generated funds and

retained earnings.

Credit Card Issuance

The Bank has been licensed by each of Visa International (“Visa”), Mastercard International Inc., and Japan Credit Bureau to

issue credit cards under each respective brand. According to the Credit Card Association of the Philippines’ industry report for

September 2009, RCBC Bankard was the eighth largest credit card brand in the Philippines with a market share of

approximately 6.6% of the total credit cards in issue and 3.8 % of total billings in the industry as of 30 September 2009.

The Bank’s strategic plan focuses on increasing its credit cards in force while continuing to improve the credit quality of its

portfolio. Initiatives to improve the quality of its credit card portfolio and to strengthen its credit card policies and procedures

include the following:

• Tightening acceptance standards for credit card applications through the implementation of behavioral scoring on top

of the credit scoring model with constant and automated monitoring and evaluation of its delinquency profile which

was implemented this year;

• Rationalizing direct sales agencies’ and agents’ commission structure to attract quality applications. Commissions are

given only on approved applications instead of on submitted applications with complete documentation;

• Launching a new group synergy program aimed to attract productive leads and less delinquent accounts;

• Systemizing the collection process with the use of collector productivity standards and regular tracking/monitoring of

collection effectiveness;

62

• Institutionalizing the use of credit MIS in monitoring and evaluating loan portfolio performance;

• Streamlining the collection process to focus on delinquencies at their earliest stages.

As a necessary support to credit card issuance, the Bank offers its customers an Interactive Voice Response System, a

customer hotline service through a call center operated 24 hours a day each day of the week, on-line statement-of-account

viewing and statement fax-on-demand all free of charge.

The following table sets out Bankard’s total credit card balance, credit card numbers, revenue, net income, total credit billings

and delinquency rates for the periods indicated:

As of and for year ended 31 December

As of and for the nine months ended 30 September

2006(1) 2007(1) 2008(1) 2008(1) 2009(1)

(P millions, except credit card charge-off rate, credit cards outstanding and delinquency rate)

Cardholder fees and commission income. 439 370 412 305 351

Merchant acquirer commissions ............... 208 71 63 46 56

Net Interest Income (loss) (2) ..................... 714 1,035 1,055 748 758

Operating income...................................... 403 644 584 458 487

Provision for loan losses ........................... 979 517 415 320 324

Credit card balances(3) .............................. 4,367 4,196 4,363 4,176 4,184

Credit card charge volume(4) ..................... 7,521 8,624 11,009 7,885 8,537

Credit cards outstanding (in thousands) ... 327 309 407 360 443

Delinquency rate(5) .................................... 11.4 9.3 7.9 7.9 8.7

Notes: All amounts are based on consolidated Bankard, Inc. and the credit card business in RCBC’s books (based on simple

summation of the amounts) (1) The figures in the above table as of and for the year ended 31 December 2006 include the results of Bankard and the

Bank’s credit card operations at the parent company level. In December 2006, RCBC acquired substantially all of the assets of Bankard. Figures as of 31 December 2007 onwards include the results of RCBC Credit Card Division’s operations only.

(2) Includes financing income net of funding cost

(3) Includes credit card loans, which earn interest of between 3.5% and 7.0% (penalty for past due accounts) per month.

(4) Charge volume is equivalent to gross billings of cardholders

(5) Delinquent balances are those that are overdue 30 to 179 days. Delinquency rate equals the total delinquent balance divided by total credit card receivables current to 179 days past due.

As of 31 December 2008 and 30 September 2009, total outstanding credit balances amounted to P5.0 billion and P4.1 billion,

respectively. The delinquency rate on balances overdue for more than 30 days has increased from 7.9% in fiscal year 2008 to

8.7% as of 30 September 2009. In August 2003, the BSP issued a circular under which credit card companies were required to

move from measuring delinquencies by bucketed aging, which classifies outstanding balances depending on when the balance

becomes due, to accelerated aging whereby all the receivables from a single cardholder are aged based on the longest dated

overdue charge, even if there are other charges for such account which may not be overdue.

RCBC Bankard credit cards are sold by agents in direct sales, through marketing in direct mailings, magazines, newspaper

inserts and other solicitations, and through the RCBC and RSB branch network and other YGC companies.

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Merchant Acquiring

The Bank has relationships with approximately 500 merchants, 100 of which provide more than 80.0% of its total credit card

billings. From April 2004, the Bank shifted its focus to concentrate resources on its larger and more profitable customers and

scaled down its number of merchant customers, from approximately 30,000 in 2002 to approximately 500 as of 31 December

2008. As a result of this rationalization and other procedural improvements, the Bank’s credit card operations unit reduced its

headcount and has since closed three provincial service centers.

For fiscal year 2008 and the nine months ended 30 September 2009, the Bank’s gross merchant discount in respect of

merchant acquiring was P247.8 million and P188.7 million respectively, or 13.4% and 19.5% of its total fee income.

Overseas Remittance Group

TeleMoney, the Bank’s core remittance business, is a leading provider of international remittance service. Prior to fiscal year

2004, the Bank’s remittance operations were part of its Commercial Banking Group. Recognizing that remittance products and

services have become more important to the Bank’s operations, the Bank transformed its remittance operations into an

independent business group in fiscal year 2004. The Bank provides remittance services to the wide network of Overseas

Filipino Workers (OFWs) and their beneficiaries in the Philippines who receive the remittances. In 2005, the BSP named

TeleMoney an Outstanding Commercial Bank Reporter of OFW Remittances.

As of September 2009, TeleMoney had expanded to more than 23 countries through its subsidiaries as well as numerous

remittance centers, tie-ups and agents. TeleMoney offers a broad range of value-added products and services such as Tele-

Credit (credit to accounts), Tele-Remit (cash pick-up anywhere), Tele-Cash Card (re-loadable prepaid card), Tele-Pay (bills

payment facility) and Tele-D2D (door-to-door delivery at beneficiary’s address). It continues to enhance its products and

services as it embarked in offering internationally accepted ATM card, internet and phone remittance service.

In 2004, TeleMoney introduced re-loadable Tele-Cash Card and TeleMoney Direct, the first internet-based remittance service in

the Philippines which allows the remitting party to transfer funds instantly in a secured environment via “Verified by Visa” credit

card. In 2005, TeleMoney introduced Tele-Remit with a “pay anywhere” feature (pick up at any RCBC or RSB branch) and the

free text notification service for all TeleMoney products. In 2006, Tele-Remit was also made available in 400 outlets of the

Cebuana Lhuillier Pawnshop which allowed its products to be available during non-banking hours. From 2005 to 2007, the

Bank‘s total inward remittances from OFWs grew by 30%. The Bank has maintained its estimated 10% share of the total OFW

remittance market in the Philippines for fiscal year 2008 based on the remittance volume of US$16.3 billion published by the

BSP. TeleMoney’s primary sources of income are foreign exchange gains made when foreign currencies are converted into

Pesos and commission and fees.

From 2007 to 2008, the Bank’s total inward remittances from OFWs grew by 21.4%. The Bank has maintained its estimated

10% share of the total OFW remittance market in the Philippines for fiscal year 2008 based on the remittance volume of

US$16.3 billion published by the BSP. TeleMoney’s primary sources of income are foreign exchange gains made when foreign

currencies are converted into Pesos and commission and fees.

The Bank processed approximately 2 million transactions in fiscal year 2008 and 1.5 million transactions in the nine months

ended 30 September 2009. Fee income from the Bank’s remittance business accounted for 15.2% and 17.5% of the Bank’s

consolidated service fee income for the year ended 31 December 2008 and the nine months ended 30 September 2009,

respectively.

The Bank offers remittance services in over 24 countries, including Saudi Arabia, the United Arab Emirates, Kuwait, Bahrain,

Qatar, Oman, Brunei, United Kingdom, Greece, Ireland, the United States, Italy and Hongkong. Its foreign remittance

operations are primarily conducted through subsidiaries and tie-up agreements with local banks and exchanges or money

transfer agents. Tie-ups are typically entered into in jurisdictions wherein the Bank cannot establish its own subsidiaries or

64

deploy direct agents. These agreements govern, among other things, fee sharing arrangements and service commitments. The

majority of the agreements do not include exclusivity obligations by either party. The Bank’s foreign subsidiaries, namely RCBC

North America, Inc., RCBC Telemoney Europe SpA, RCBC International Finance Limited and RCBC Investments Ltd., operate

largely as foreign exchange remittance offices.

The Bank has targeted its remittance operations as one of its key drivers of growth. As part of its strategy to expand its

remittance business, the Bank plans to expand the scope of the jurisdictions in which it offers its products and services and

started offering its services to non-Filipino overseas workers.

Branch Banking

As of 30 September 2009 the Bank had a total of 331 branches excluding three extension offices, of which 213 belonged to the

Bank (excluding three extension offices) and the remaining 116 to RSB. As of such date the Bank had a total of 466 ATMs, of

which 363 belonged to the Bank and the remaining 103 to RSB. Each of the Bank’s and RSB’s branches is connected and

networked to the Bank’s IT systems and infrastructure located in the Bank’s head office. The Bank plans to expand its branch

network through the opening of new branches and the acquisition of small- to medium-sized banks with networks that will

complement RCBC’s existing network.

The Bank has endeavored to transform the branches into effective sales and service channels that will focus on low-cost

deposits generation, acquisition of retail customers, and referral of bank and other YGC products. Alternative development

channels will be developed to migrate customer transactions from the counter, thereby freeing up branch personnel to

concentrate on selling and more value-adding activities. In the medium-term, the Bank expects to boost other income by

offering more fee-based services. The following table sets out details of the Bank’s branches (excluding RSB) in the Philippines

in operation as of the specified dates (not including extension offices):

As of 31 December

As of 30 September

2006 2007 2008 2009

Metro Manila (incl. Cainta and Taytay) ........................... 67 67 73 78 Luzon .............................................................................. 53 56 65 67

Visayas ........................................................................... 31 33 36 38

Mindanao ........................................................................ 28 30 32 32

Total ................................................................................ 179 186 206 215 ATMs............................................................................... 258 228 286 363

65

The following table sets out the details of RSB’s branches in operation as of the specified dates:

As of 31 December

As of 30 September

2006 2007 2008 2009

Metro Manila (incl. Cainta and Taytay) ....................... 48 48 48 48 Luzon .......................................................................... 44 44 48 48

Visayas ....................................................................... 12 12 13 13

Mindanao .................................................................... 6 6 6 7

Total ............................................................................ 110 110 115 116 ATMs........................................................................... 55 72 94 103

The Bank provides 24-hour banking services through its ATM facilities, which are located in various branches and at off-site

locations, such as client sites to render payroll service, and shopping malls. Customers are given access to the ATM facilities

through ATM cards, which are issued to checking and savings account holders. The Bank is a member of the Bancnet ATM

consortium, which allows its customers to use the ATMs of other banks in the Philippines and similarly allows other banks’

customers to use the Bank’s ATM network.

Customer service is further improved through tight management and close monitoring of each branch. The RBG manages the

branch network of the Bank, while RSB monitors its branches. The Bank’s management information system monitors each

branch’s profitability, and each branch accounts for its own expenses and revenues. Branch managers, through their respective

area and region heads, regularly communicate with the head of the RBG to discuss branch performance. In addition, each

branch is subject to monitoring by the Bank’s Anti- Money Laundering Act Committee and an annual operations review by the

Bank’s Compliance Division as well as a comprehensive audit every 18 to 24 months.

Each of the Bank’s branches has electronic security systems and armed guards, provided by independent contractors. The

Bank also ensures that the amount of cash held in the vaults of its branches is maintained within authorized limits.

The operations support of the Branches such as the Branch Services Division, Cash Services Division and ATM Center are

under the umbrella of the Retail Banking Group (RBG) The Branch Services Division is responsible for the overall control and

management of branch operations and efficient customer service delivery at the branches. The Cash Services Division is

responsible for the supervision of the operations of Cash Centers in the distribution of cash services and optimization of cash

levels bankwide. The ATM Center is responsible for efficient management of the ATM Center operations particularly, card

production, ATM performance monitoring, customer service, accounting and reconciliation.

Alternative Delivery Channels

Branch Delivery System

The Bank has implemented its online teller system in all of its branches. The Branch Delivery System (“BDS”) allows the tellers

to process transactions using a browser-based facility. This augments the use of the Bank’s internet channel to facilitate

multiple payment methods, including manager’s checks, direct deposit to accounts as well as retail payments through

commercial checks. Features of the BDS include a signature verification system, paperless transaction processing, and

electronic data transmission from tellers to merchants or clients.

Internet Banking

The Bank re-launched the retail internet banking service in June 2008 called RCBC AccessOne. RCBC Access One is an

internet-based channel for RCBC’s retail customers and can be used by any RCBC customer who has a current or savings

account.

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The myRCBC Internet Banking was designed to complement the traditional over-the-counter and ATM channels. Further to

this, the Bank has embarked on a project to further upgrade the internet banking system. The Bank re-launched the retail

internet banking service in June 2008 called RCBC AccessOne, a re-branded and enhanced version of MyRCBC Internet

Banking. Like its predecessor, RCBC AccessOne is an internet-based channel for RCBC’s retail customers and can be used by

any RCBC customer who has a current or savings account.

To further expand the alternative electronic channels, the Bank is also in the process of developing mobile banking services. At

present, cardholders can use the Bancnet Mobile Banking facility but the proprietary system will still be developed.

Enterprise Banking

The Bank offers cash management products and services including an internet-based cash management system known as the

RCBC Enterprise Banking Solutions (“EBS”). EBS provides commercial and corporate customers with more efficient

management of their cash flows by giving them access to information on their deposits, loans and trade finance through the

internet. In addition to desktop banking, the services provided assist customers with payroll, collections and disbursements. As

of 30 September 2009, approximately 1,300 corporate accounts had registered for the corporate internet banking solution of the

Bank, which includes both RCBC AccessOne and EBS.

In October 2007, the Rizal Enterprise Checking Account (“RECA”) was launched to compliment the electronic banking products

and solutions. RECA aims to automate the disbursement processes of companies (including SME and large corporations) by

providing them with free accounts payable software each time they open an account. This allows them to reconcile payment

details, and to automate the process of check printing until its eventual release.

The eCheck Payment Solution (“eCPS”) was re-launched on October 2008. eCPS allows the customer to completely outsource

the preparation, processing and releasing of Manager’s Checks to the branches. This initiative is coupled with an enhancement

of the backroom support to streamline the process of implementing the service.

Call Center

In October 2003, the Bank established a 24-hour call center, which handles inbound inquiries for current and savings accounts,

bank’s products and services information, as well as ATM, remittance and stock transfer services offered by the Bank. The

RCBC Contact Center does not handle credit card products and services, which are handled by Bankard call center.

Operations

The Operations Group (“Operations”) is responsible for managing the entire Bank’s back-office processing functions.

Operations is divided into three divisions: 1) Retail and Channels Division; 2) Operations Control Division; and, 3) Head Office

Operations Division.

Retail and Channels Division – covers retail operations for funds transfers, central clearing and channel management. The

division will transition to provide oversight for international backroom operations as well as establish back-office support for all

e-banking initiatives.

Operations Control Division – focuses on system administration and support; business continuity and operations risk

administration within the framework of the overall risk and control management of the Bank.

Head Office Operations Division – covers all corporate head office based operations including credit and loans, trade services,

imports and exports services, central liability and loans processing.

As of 30 September 2009, there were 297 employees under Operations.

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Marketing

The Bank operates a separate product development and marketing division that is responsible for the overall marketing strategies, product conceptualization and management of deposit-related products and services.

The Bank focused on the promotion of cash management, deposit development, fee-based products and services and consumer lending in its 2009 marketing campaign. The Corporate Communications office handles the branding strategy and publicity campaigns of the Bank and makes use of an internal YGC advertising agency.

Information Technology Group

The Bank’s Information Technology Group (“ITG”) is responsible for the proper and efficient functioning of the Bank’s IT

systems and infrastructure. As of 30 September 2009, ITG had 199 employees. ITG manages the Bank’s ATM network

composed of 466 ATMs and oversees the Bank’s system and office automation software, hardware and network facilities.

Currently, the Bank’s uses Fidelity’s (formerly Alltel) Systematics to process its deposit systems, and, its ATM network uses

ACI’s Base/24 running on a Tandem. The Bank’s IT infrastructure is centralized group-wide, with the exception of some Bank’s

subsidiaries, including RSB and the Bank’s international operations.

The Bank continues to invest heavily in IT. It aims to become a leaner organization that is more cost efficient and service- and

customer-oriented. The Bank’s three year plan for 2007 to 2009 has focused thus far on the following strategies:

• Integrate the IT services of the Group to increase efficiency and reduce costs;

• Develop mobile applications to achieve a niche leadership in the Philippine banking industry in strategic

communications infrastructure;

• Strengthen relationships with corporate clients by providing fast and easy access to key information, such as data on

payrolls, supplier payments and trade payment, through interfaces to the customer’s automated systems;

• Increase system availability and performance to strengthen customer goodwill; and

• Upgrade core banking applications, including deposit, lending, and trade finance technologies.

The core objective of the Bank’s IT program is to use technology to transform present business and operating models to being

more adaptive, agile and customer-centric, improve the Bank’s service to its clients by offering internet banking and electronic

payment services and using technology to capture customer information and to train the Bank’s employees.

The Bank’s objectives for its IT program include using investments in technology to improve training and service to its clients.

The Bank has implemented e-learning, a computer-based training system available on its intranet for its associates and it aims

to eventually have all of its training programs available on the Bank’s intranet to standardize associate training and reduce

provision costs.

The Bank’s IT program is also focused on using technology to achieve greater productivity in the Bank’s businesses allowing

the Bank to have faster access to information used for decision making, efficient and secure storage, access and retrieval of

company data, and end-user computing at fingertips. The Bank believes its IT investments have led and will lead to greater

efficiency among its business divisions as they increase the volume of transactions processed at a diminishing cost per

transaction. The Bank intends to continue to invest in these application systems and plans to match competition in terms of

product and service features and availability.

Investments in technology augmented by process improvements through ongoing business process reviews have resulted in

rightsizing the organization. Manpower movements resulting from the above initiatives have allowed the Bank to redirect people

to specific strategic areas of the business such as sales and relationship management.

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Service-Oriented Technology

The core objective of the Bank’s IT program is to use technology to transform present business and operating models to being

more adaptive, agile and customer-centric, improve the Bank’s service to its clients by offering internet banking and electronic

payment services and using technology to capture customer information and to train the Bank’s employees.

The introduction of software packages for the Bank’s Integrated Delivery System (“IDC”) has facilitated the conversion of all

former branch offices into branches or sales outlets. IDCs refer to the bank’s expansion of its network from branches to wider-

reaching electronic based delivery channels. IDCs have been integrated into a common platform that facilitates access between

the Bank and its corporate customers. The Bank intends to invest further in the IDCs in order to provide customers with fast

over-the-counter services and access to their accounts through a wide range of electronic delivery channels. All of the Bank’s

branches are connected to its core banking system.

In 2000, the Bank implemented its Enterprise Banking Program, which allows its corporate clients to use internet banking to

perform a variety of functions, including funds transfer, supplier payments and payroll processing. The Bank also provides (i) a

branch delivery system, which handles all financial transaction;

(ii) platform banking, which handles non-financial transactions such as client information and demographics;

(iii) phone banking; and (iv) retail internet banking, through its IDC platform.

In 2001, the Bank acquired new data warehousing and customer information systems to provide a flexible database and allow

the Bank’s managers to obtain better information on product, business unit, and client profitability.

The Bank’s objectives for its IT program include using investments in technology to improve training and service to its clients.

The Bank has implemented e-learning, a computer-based training system available on its intranet for its associates and it aims

to eventually have all of its training programs available on the Bank’s intranet to standardize associate training and reduce

provision costs.

Productivity-Oriented Technology

The Bank’s IT program is also focused on using technology to achieve greater productivity in the Bank’s businesses allowing

the Bank to have faster access to information used for decision making, efficient and secure storage, access and retrieval of

company data, and end-user computing at fingertips. The Bank believes its IT investments have led and will lead to greater

efficiency among its business divisions as they increase the volume of transactions processed at a diminishing cost per

transaction. The Bank intends to continue to invest in these application systems and plans to match competition in terms of

product and service features and availability.

Investments in technology augmented by process improvements through ongoing business process reviews have resulted in

rightsizing the organization. Manpower movements resulting from the above initiatives have allowed the Bank to redirect people

to specific strategic areas of the business such as sales and relationship management.

Security

The Bank is dedicated to ensuring security in its IT systems. The Bank maintains a comprehensive Information Security

Program that ensures the integrity and recoverability of vital records of the Bank, including the use of firewalls, anti-virus and

anti-spam solutions, intrusion detection systems and access control solutions as well periodically contracting consultants to test

these security measures.

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Insurance

The Bank’s policy is to adequately insure all of its properties against fire and other usual risks. The Bank also maintains

insurance for operational risks such as the loss of cash or securities through loss or theft and obtains assistance in obtaining

appropriate policies and recommendations from Malayan Insurance, a member of YGC. Consistent with standard practice in

the Philippine banking system, the Bank does not have business interruption insurance covering loss of revenues in the event

that its operations are affected by unexpected events.

The Bank also has a policy of requiring appropriate insurance coverage based on the market value of collateral provided by its

customers. The Bank’s insurance policies are subject to exclusions which are customary for insurance policies of the type held

by the Bank, including those exclusions which relate to war and terrorism-related events. The Bank believes that its insurance

polices as described above are appropriate for its business.

Intellectual Property

The Bank has not registered any of its intellectual property rights in the Intellectual Property Office at the Department of Trade

and Industry of the Philippines. However, the Bank believes that this is a common practice in the local banking industry. The

Bank has not been the subject of any disputes relating to its intellectual property rights.

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 arising in the ordinary course, either individually or in the aggregate, are expected to have a material adverse

effect on the Bank or its consolidated financial condition.

In June 2003, RCBC Capital, a wholly-owned subsidiary of the Bank, filed an arbitration claim with the International Chamber of

Commerce against Equitable PCI Bank (“Equitable”) relating to RCBC Capital’s acquisition of Bankard shares from Equitable in

May 2000 for a purchase price of approximately P1.8 billion. The claim was based on alleged deficiencies in Bankard’s

accounting practices and non-disclosure of material facts in relation to the acquisition. RCBC Capital sought a rescission of the

sale or damages of approximately P1.0 billion, including interest and expenses. The arbitration hearings were held before the

ICC Arbitral Tribunal (“Tribunal”), being the body organized by the International Chamber of Commerce. In September 2007,

the Tribunal ruled that RCBC Capital was entitled to damages from Equitable arising from the breach, the amount of which

would be determined by an expert appointed by the Tribunal. The hearings concerning the amount of damages due to RCBC

Capital were concluded in October 2009, and RCBC Capital’s Memorandum and Reply Memorandum were submitted on 1

December 2009 and 15 December 2009, respectively. On 15 January 2010, final evidence on RCBC Capital’s arbitration costs

were submitted by external counsel and the case was submitted for resolution. A final decision is expected to be published in

April or May 2010.

Involvement of the Company or its Directors and Officers in Certain Legal Proceedings

To the knowledge and/or information of the Bank, the present members of the Board of Directors and the Bank’s executive

officers are not involved, and during the last five years have not been involved, in any criminal, bankruptcy or insolvency

investigation or proceedings adversely affecting or involving themselves and/or their property before any court of law or

administrative body in the Philippines or elsewhere. To the knowledge and/or information of the Bank, such persons have not

been convicted by final judgment of any offence punishable by the laws of the Philippines or of the laws of any other country.

Capital Expenditure

The Group’s capital expenditures for the year ended 31 December 2008 and the nine months ended 30 September 2009 was

P1.0 billion and P1.4 billion respectively. The Bank does not expect any material capital expenditures for 2010 and 2011.

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Capital expenditures during the next two years will primarily be investments in technology for implementing upgrades and

improvements to its delivery channel network as described in the section entitled “Information Technology Group” above.

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ASSETS AND LIABILITIES

The tables below and accompanying discussions provide selected financial highlights regarding the Bank’s assets and liabilities. The following audited information should be read together with the Bank’s financial statements included in this Offering Circular as well as “Risk Management” and “Business”.

Funding

The Bank’s main sources of funding are time, savings and demand deposits. Deposits represented 73.9% of the Bank’s total

assets as of 30 September 2009. As of 30 September 2009, time, savings and demand deposits represented 50.5%, 44.0%

and 5.5%, respectively, of total consolidated deposits of P195.9 billion. In recent years, the Bank has made directed efforts to

increase its deposit base. The Bank also sources its funding requirements from the interbank market and general financings.

Sources of Funding

The following table sets forth an analysis of the Bank’s principal funding sources and the average cost of each funding source

for the periods indicated:

For the years ended 31 December For the nine months ended 30 September

2006 2007 2008 2008 2009

Amount Cost Amount Cost Amount Cost Amount Cost Amount Cost

(in P millions, average cost of funding in percentage)

Deposits by type

Demand....................... 9,878.1 1.0 10,765.2 0.5 11,125.1 0.4 10,366.1 0.4 10,772.4 0.5

Savings........................ 57,975.9 1.1 66,769.8 0.7 75,738.4 0.8 73,545.4 0.8 86,297.1 0.7

Time ............................ 89,696.2 4.9 98,393.8 4.2 109,363.5 4.6 95,802.6 4.6 98,856.5 4.2

Total............................ 157,550.2 3.1 175,928.8 2.6 196,227.0 2.8 179,714.1 2.8 195,926.0 2.6

Deposits by Currency

Peso ............................ 113,829.7 3.4 137,206.4 2.6 143,446.9 3.0 132,428.6 3.2 141,717.1 3.0

Foreign Currency......... 43,720.5 2.2 38,722.5 2.8 52,780.1 2.2 47,285.5 1.7 54,208.9 1.5

Total............................ 157,550.22 3.1 175,928.9 2.6 196,227.0 2.8 179,714.1 2.8 195,926.0 2.6

Borrowing

Peso ............................ 692.0 8.8 399.0 6.2 7,816.0 5.6 4,165.2 5.2 3,656.7 4.5

Foreign Currency......... 16,942.0 6.5 12,421.5 6.4 13,636.6 4.9 12,577.6 4.9 11,713.0 5.1

Total............................ 17,634.0 6.5 12,820.5 6.4 21,452.6 5.2 16,742.8 4.9 15,369.7 4.9

DEPOSITS

The Bank’s principal source of deposits is private individuals. As of 30 September 2009, individual, partnership and association

depositors accounted for approximately 69.9% of the Bank’s consolidated total Peso-denominated deposit liabilities. The

remainder of the deposits is principally wholesale deposits. The Bank’s foreign currency-denominated deposits and funding are

primarily handled through its FCDU operation, which is permitted to accept deposits and extend credit in foreign currencies. As

of 30 September 2009 and 31 December 2008, the Bank’s foreign currency deposits made up 27.7% and 26.9% of its total

deposits, respectively.

The Bank has expanded its sources of funding in order to diversify the scheduled maturities of deposits and maintain a funding

portfolio that will enable it to achieve funding stability, liquidity, and reduce the discrepancies between its loan and deposit

maturities. The Bank has also introduced, or plans to introduce, internal and external programs to encourage increases in

deposits, particularly traditional demand and savings deposits. Although the majority of the Bank’s customer deposits are short-

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term, the Bank’s depositors typically roll over their deposits at maturity, effectively providing the Bank with a source of long-term

funds.

As of 30 September 2009, 49.5% of the Bank’s outstanding deposits were demand and savings deposits which can be withdrawn on demand without any prior notice from the customer. This compares to 44.3% as of 31 December 2008. The following table sets out an analysis of the maturities of the deposit base of the Bank:

For the years ended 31 December For the nine months ended 30

September

Deposits by Type 2007 2008 2008 2009

Demand ....................................................................... 10,765.2 11,125.1 10,366.1 10,772.4

Savings ........................................................................ 66,769.8 75,738.4 73,545.4 86,297.1

Time

Up to 1 year............................................................. 94,192.3 105,011.8 91,403.6 86,627.0

Over 1 year to 5 years ............................................. 2,762.8 4,343.4 3,161.8 8,398.6

Over 5 years............................................................ 1,438.7 8.3 1,237.1 3,830.9

Total time deposits ......................................... 98,393.8 109,363.5 95,802.5 98,856.5

Total ............................................................................. 175,928.9 196,227.0 179,714.0 195,926.0

The Bank also maintains credit lines with domestic commercial banks and financial institutions in the interbank market primarily

for treasury management purposes. Interbank borrowings are typically for short-term duration of between one day and a few

weeks. Interbank deposits do not usually form a significant part of the Bank’s funding base but, together with the Philippine

government bond market, are important in the management of the Bank’s liquidity. The BSP is a lender of last resort to the

Philippine banking industry. The Bank has not had to resort to this facility but has managed its liquidity through its participation

in the interbank market in the Philippines.

The Bank is a member of the Philippine Deposit Insurance Corporation (the “PDIC”) which insures all deposits up to a

maximum of P500,000 per depositor. The PDIC is funded by semi-annual assessment fees at a prescribed percentage of the

Bank’s deposit liabilities less certain exclusions.

BILLS PAYABLE AND SUBORDINATED DEBT

The Bank also sources funds through bills payable and subordinated debt. Bills payable which represent borrowings from local

and foreign banks amounted to P15.4 billion while Senior notes was P6.0 billion. As of 30 September 2009, approximately

76.2% of bills payable were denominated in foreign currencies, respectively. The Bank also issues subordinated debt from time

to time in order to strengthen its capital base as well as to raise funds. The following describes certain details of the Bank’s

outstanding senior notes and subordinated debt.

Lower Tier 2 Notes. In February 2008, the Bank issued Lower Tier 2 Notes, which are unsecured and subordinated, in the

principal amount of P7.0 billion with the following significant terms and conditions:

• The Lower Tier 2 Notes shall mature on 22 February 2018, provided that they are not previously redeemed;

• Subject to satisfaction of certain regulatory approval requirements, the Bank may redeem all of the outstanding Lower

Tier 2 Notes on 22 February 2013 at a redemption price equal to 100.0% of the face value of the Tier 2 Notes

together with accrued and unpaid interest thereon;

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• Up to 22 February 2013, the Lower Tier 2 Notes bear interest at the rate of 7.0% per annum, payable semi- annually;

and

• Unless the Lower Tier 2 Notes are previously redeemed, the interest rate from 22 February 2013 to maturity will be

reset at the equivalent of the five-year Fixed Rate Treasury Note yield, as of 22 February 2008 multiplied by 80% plus

3.5% per annum.

The Bank also issued Lower Tier 2 Notes in May 2009, in the principal amount of P4.0 billion with the following significant terms

and conditions:

• The Lower Tier 2 Notes shall mature on 15 May 2019, provided that they are not previously redeemed;

• Subject to satisfaction of certain regulatory approval requirements, the Bank may redeem all of the outstanding Lower

Tier 2 Notes on 15 May 2014 at a redemption price equal to 100.0% of the face value of the Tier 2 Notes together

with accrued and unpaid interesting thereon;

• Up to 15 May 2014, the Lower Tier 2 Notes bear interest at the rate of 7.75% per annum, payable semi-annually; and

• Unless the Lower Tier 2 Notes are previously redeemed, the interest rate from 15 May 2014 to maturity will be reset

at the equivalent of the five-year Fixed Rate Treasury Note yield, as of 15 May 2009 multiplied by 80% plus 3.7295%

per annum.

Senior Notes. In February 2005, the Bank issued U.S.$150.0 million of senior notes, which are unsecured and unsubordinated,

with the following significant terms and conditions:

• The senior notes shall mature on 24 February 2010, provided that they are not previously redeemed;

• Upon notice by any holder of the senior notes to the Bank in accordance with the terms and conditions of the senior

notes, the Bank will, upon expiry of such notice, redeem in whole (but not in part) the senior notes subject of such

notice on 23 February 2008; and

• The senior notes bear interest at the rate of 6.9% per annum payable semi-annually in arrear.

Hybrid Perpetual Securities. In October 2006, the Bank issued U.S.$100.0 million of non-cumulative step-up callable

perpetual securities, which are unsecured and subordinated, with the following significant terms and conditions:

• The securities are perpetual but may be redeemed by the Bank in October 2016 and every interest payment date

thereafter;

• The securities may be redeemed in the event of certain tax and regulatory events;

• Up to 27 October 2016, the securities bear interest at the rate of 9.875% per annum;

• Unless the securities are previously redeemed, the interest rate from 27 October 2016 will be reset quarterly at the

rate of 7.02% per annum above the London interbank offered rate for three-month U.S. dollar deposits; and

• The Bank may elect to not make payments on the securities upon the occurrence of certain events; should the Bank

elect to not make such payments, it shall not declare or pay any distribution or dividend or make any other payment

on certain junior securities, including the Shares, until it has made payments on the securities for a period of 12

months.

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Short-term Borrowings

The following table sets forth, for the periods indicated, information related to the Bank’s short-term borrowings, which are

comprised primarily of money-market borrowings. Short term borrowings exclude deposits and securities sold under repurchase

agreements.

For the years ended 31 December

For the nine months ended 30 September

2006 2007 2008 2008 2009

(In P millions except for percentages)

Period-end balance ...................................... 17,634 12,821 21,453 16,743.0 15,369.3

Average balance during the period ............... 15,382 15,401 15,373 13,442.6 15,743.1

Maximum outstanding................................... 17,633 17,779 21,536 16,742.8 19,345.4

Average interest rate during the period......... 6.5% 8.1% 5.9% 4.9% 4.9%

Liquidity

The Bank must manage its liquidity to meet financial liabilities arising from the withdrawal of deposits, repayments of deposits at

maturity and working capital needs. Funds are required to create assets in the form of loans and extensions of other forms of

credit, investments in securities, trade financing, and capital investments. The Bank seeks to ensure sufficient liquidity through

a combination of active management of liabilities, a highly liquid asset portfolio, the securing of an ample money market line,

and the maintenance of repurchase facilities to protect against any unexpected liquidity shortages.

Pursuant to BSP regulations, commercial banks are required to maintain a statutory legal reserve of 8.0% of peso deposits and

deposit substitutes and a liquidity reserve of 11.0% of the same base. At least 25.0% of the statutory reserve requirement must

be deposited with the BSP. The remaining portion of the required reserve may be held by all banks in the form of cash in vault

and/or Government securities or evidence of indebtedness of the Government. Up to 40.0% of the amount deposited with the

BSP earns interest at the rate of 4.0% per annum. Under BSP Circular No. 539, the liquidity reserve is required to be in the

form of three-, six- or twelve-month deposits in reserve deposit accounts with the BSP. The BSP also requires banks to

maintain asset cover of 100.0% for foreign currency liabilities of their FCDUs, of which 30.0% must be in liquid assets. The

Bank has complied with the legal and liquidity reserve requirements for both peso and FCDU deposits. The Bank currently

complies with all of the requirements described above.

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As of 30 September 2009, the Bank’s liquid assets amounted to P89.3 billion, representing 33.3% of the Bank’s total assets.

Liquid assets include cash and other cash items, amounts due from BSP, amounts due from other banks, interbank loan

receivables and trading and investment securities (excluding held-to-maturity investments). The following table sets forth

information with respect to the Bank’s liquidity position as of the dates indicated:

For the years ended 31 December

For the quarter ending 30 September

2006 2007 2008 2008 2009 (in P millions, except percentages)

Liquid assets(1).............................................. 106,365 104,237 77,797 65,943 89,310

Financial ratios ...........................................

Liquid assets-to-total assets ......................... 47.6% 43.6% 29.0% 29.7% 33.3%

Liquid assets-to-total deposits ...................... 67.5% 59.3% 39.7% 36.7% 45.6%

Net loans-to-total deposits ............................ 67.9% 67.0% 81.1% 74.7% 72.0%

Notes:

(1) Liquid assets includes cash and cash items, deposits with the BSP and deposits with other banks, interbank loan

receivables and FVPL and AFS securities.

Loan Portfolio

As of 30 September 2009 and 31 December 2008, the Bank’s total loan portfolio amounted to P123.8 billion and P132.1 billion,

respectively, representing approximately 46.2% and 49.3% of its total assets. The Bank’s total consolidated loan portfolio

increased by 26.8% from 31 December 2007 to 31 December 2008 primarily due to increases in corporate loans.

As of 30 September 2009, the Bank’s total consolidated loan portfolio including credit card receivables stood at P132.2 billion.

Consumer loans, including home mortgage, auto loans, and salary deducted loans and credit card receivables grew at an

annual growth rate of 17.7% from fiscal year 2007 to the end of fiscal year 2008 due to increased home mortgage and auto

loans. As of September 2009, the Bank’s consumer loans decreased by 1.1% to P34.9 billion from P35.3 billion as of 31

December 2008 as a result of a more conservative approach towards consumer lending adopted by the Bank in light of the

impact of the global financial crisis towards the end of 2008 and continuing into 2009.

Loans to the corporate market dropped to P79.0 as of 30 September 2009 from P79.6 billion as of 31 December 2008.

Corporate lending accounted for 60.2% of the total gross loan portfolio of the Bank as of 30 September 2009. Lending to SMEs

totaled P8.4 billion as of 30 September 2009. As of 30 September 2009, loans to SMEs accounted for 6.4% of the Bank’s total

gross loan portfolio.

Industry Concentration

As of 30 September 2009, the real estate industry represented the largest sectors of the Bank’s consolidated loan portfolio at

33.8%. The majority of real estate lending are mortgage loans to consumers and working capital loans to private real estate

developers. The majority of lending to the manufacturing sector takes the form of working capital loans and trade financing to

manufacturers while the majority of lending to the services industry takes the form of loans to the government and financial

sectors. The Bank has set industry limits reviewed on a periodic basis to manage risk concentrations.

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The following table sets forth an analysis of the Bank’s loan portfolio by economic activity, as defined and categorized by the

BSP:

As of 31 December As of 30 September

2006 2007 2008 2008 2009

Amount % Amount % Amount % Amount % Amount %

(in P millions, except percentages)

Real estate, renting and other related activities.. 36,336.9 42.9 39,780.2 38.2 46,547.8 35.2 39,798.0 32.3 41,849.9 33.8

Manufacturing (various industries) ..................... 14,392.1 17.0 21,236.3 20.4 30,281.2 22.9 28,074.7 22.8 24,944.6 20.2

Wholesale and retail trade ................................. 9,162.6 10.8 10,415.2 10.0 10,165.0 7.7 11,198.5 9.1 10,110.0 8.2

Financial intermediaries ..................................... 8,755.9 10.3 14,175.8 13.6 7,481.3 5.7 16,422.7 13.3 3,081.8 2.5

Other community, social and personal activities. 3,112.3 3.7 3,838.4 3.7 13,925.3 10.5 11,633.1 9.4 11,336.6 9.2

Transportation and communication .................... 1,473.7 1.7 1,377.1 1.3 7,503.1 5.7 2,532.6 2.0 9,018.2 7.2

Agriculture, fishing and forestry.......................... 815.1 1.0 1,839.4 1.8 663.7 0.5 759.0 0.6 1,114.0 0.9

Others................................................................ 10,607.8 12.5 11,465.1 11.0 15,517.6 11.8 12,921.9 10.5 22,311.5 18.0

Total .................................................................. 84,656.3 100.0 104,127.6 100.0 132,085.0 100.0 123,340.5 100.0 123,766.6 100.0

The Bank intends to continue to focus its lending activities on lower risk areas such as Government guaranteed loans, top tier

corporate loans, trade finance loans, and mortgage loans.

The Bank maintains a flexible policy toward exposure to the Philippine economy, in principal avoiding exposure of more than

30.0% to a particular individual sub-sector of the economy. The Bank also monitors its exposure to specific sectors of the

economy to ensure compliance with specific pre-determined lending requirements imposed by law on all Philippine banks. The

Bank must comply with legal requirements to make loans available to SMEs. Mandatory credit allocation laws require all

Philippine banks to allocate 6.0% of their loan portfolios to small-sized enterprises and 2.0% to medium-sized enterprises. The

Bank is in compliance with these requirements.

BSP regulations require banks to allocate 25.0% of their loanable funds for agricultural credit in general, of which at least

10.0% must be made available for agrarian reform credit. Alternatively, a bank may temporarily meet all or a portion of its

agrarian reform and agricultural lending requirements by investing in eligible government securities under certain conditions.

The Bank has historically complied with these requirements by allocating the required percentage of loans to the agricultural

sector and investing in eligible securities. As of 30 September 2009, the Bank satisfied these requirements as it provided P27.5

billion in loans to borrowers in the agricultural sector and held P1.2 billion in securities that were eligible to qualify as agricultural

credit.

Maturity

Loans repayable on demand principally comprise inter-bank loans, while short-term loans principally comprise loans to

corporates for working capital and loans to consumers and SMEs. Medium- and long-term loans are typically granted to

corporations and businesses to finance capital expenditures and mortgages advanced for property purchases. The percentage

of the Bank’s loans with longer maturities has increased recently due primarily to increases in mortgage loans.

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The following table sets out an analysis of the Bank’s consolidated loans by maturity:

As of 31 December As of 30 September

2006 2007 2008 2008 2009

Amount (%) Amount (%) Amount (%) Amount (%) Amount (%)

(in P millions, except percentages)

Within one year ......... 42,666.7 50.4 57,364.4 55.1 52,498.0 39.7 53,834.9 43.6 62,673.2 50.6

More than one year ... 41,989.7 49.6 46,763.1 44.9 79,587.0 60.3 69,505.6 56.4 61,093.4 49.4

Total ......................... 84,656.3 100.0 104,127.6 100.0 132,085.0 100.0 123,340.5 100.0 123,766.6 100.0

Foreign Currencies

The Bank maintains its practice of extending foreign currency loans primarily to exporters who have an identifiable source of

foreign currency earnings from which to repay the loans or otherwise hedged, and to importers who have authorization from the

BSP to purchase foreign currency to service their foreign currency obligations.

As of 30 September 2009, 87.3% of the Bank’s loan portfolio was denominated in Pesos with 12.7% being denominated in

foreign currencies, the majority of which comprised U.S. dollars. The following table shows an analysis of the Bank’s gross

loans and receivables by currency:

As of 31 December As of 30 September

2006 2007 2008 2008 2009

Amount (%) Amount (%) Amount (%) Amount (%) Amount (%)

(in P millions, except percentages)

Pesos ..................................... 53,703 63.4 82,281 79.0 106,478 80.6 97,333.8 78.9 108,017.7 87.3

Foreign Currency.................... 30,953 36.6 21,845 21.0 25,607 19.4 26,006.7 21.1 15,748.9 12.7

Total....................................... 84,656 100.0 104,127 100.0 132,085 100.0 123,340.5 100.0 123,766.6 100.0 Interest Rates

An important component of the Bank’s asset and liability policy is its management of interest rate risk, which is the relationship

between market interest rates and the Bank’s interest rates on its interest-earning assets and interest-bearing liabilities. See

“Risk Management—Interest Rate Risk Management”. The Bank’s loan pricing is set by the Bank’s Asset and Liability

Committee (“ALCO”) on a weekly basis and is driven by market factors, the Bank’s funding position and the credit risk

associated with the relevant borrower. The lending market in the Philippines is principally based on floating rate lending. The

Bank’s floating rate loans are re-priced periodically by reference to the applicable Philippine Treasury Bill rate/Philippine

dealings system rate and to the Bank’s internal cost of funds plus a spread. As a result, the Bank’s exposure to interest rate

fluctuations is significantly reduced. See “Risk Management—Interest Rate Risk Management”. The following table shows the

total amount of the Bank’s loans that have fixed interest rates and variable or adjustable interest rates as of 31 December 2007

and 2008:

As of 31 December As of 30 September

2007 2008 2008 2009

Amount (%) Amount (%) Amount (%) Amount (%)

(in P millions, except percentages)

Fixed rate ................................. 31,220.1 30.0 39,533.4 29.9 27,030.6 21.9 19,260.0 15.6

Variable or adjustable rates...... 72,907.5 70.0 92,551.6 70.1 96,310.0 78.1 104,506.6 84.4

Total loans .............................. 104,127.6 100.0 132,085.0 100.0 123,340.5 100.0 123,766.6 100.0

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The Bank’s pricing policy with respect to its interest-bearing liabilities is also set by ALCO at its weekly meetings. Current

account deposits do not pay any interest and savings account deposits typically pay no interest for deposits falling below a

maintaining balance. The basic rate for savings account deposits that are above the minimum threshold was 1.0% per annum

until January 2007 when it was reduced to 0.75%. The basic rate was further reduced to 0.5% in February 2007. The Bank also

offers special interest rates for deposits under its time deposits account. These larger deposits are placed on pre-agreed terms

and pay interest rates that generally track Philippine Treasury Bill rates.

Size and Concentration of Loans

The BSP generally prohibits any bank from maintaining a financial exposure to any single person or group of connected

persons in excess of 25.0% of its net worth. As of 30 September 2009, the Bank’s single borrower limit (“SBL”), set by the BSP,

was P5.9 billion. In determining whether the Bank meets the SBL, the Bank includes exposure to related accounts (including

accounts of subsidiaries and parent companies of the borrower). This limit does not apply to loans which are secured with non-

risk assets, including cash deposits and government securities. The Bank has complied with the SBL on all of its loans.

As of 30 September 2009, the Bank’s single largest corporate borrower as at the date in question accounted for 6.3% of the

Bank’s outstanding loan portfolio. As of 30 September 2009, the Bank’s ten largest performing borrowers (including groups of

individuals and companies) accounted for P25.3 billion, or 20.4% of the Bank’s outstanding loan portfolio.

The following table presents a breakdown of total loans by principal amount as a percentage of total loans as of the periods

indicated:

For years ended 31 December

For the nine months ended 30

September

2007 2008 2008 2009

(in percentage)

P5,000,000 or less .............................................................................. 34.9 31.6 30.9 31.2

P5,000,001 to P10,000,000................................................................. 4.2 3.4 3.9 3.8

P10,000,001 to P15,000,000............................................................... 2.2 1.8 1.8 1.7

More than P15,000,000....................................................................... 58.7 63.2 63.5 63.3

Total ................................................................................................... 100.0 100.0 100.0 100.0

Secured and Unsecured Loans

The Bank principally focuses on cash flows and cash generating capabilities in assessing the creditworthiness of borrowers.

However, the Bank will secondarily seek to minimize credit risk with respect to a loan by securing loans with collateral or

guarantees. Acceptable collaterals include real estate mortgages (with loan values ranging from 50.0% to 60.0% of appraised

value), unconditional guarantee from fully-owned government institutions, Landbank/agrarian reform bonds (with loan value of

70% if face value or unmatured value at the time of acceptance, standby LCs issued by internationally-renowned banks,

chattels (with loan values ranging from 30.0% to 50.0% of appraised value), land bank / agrarian reform bonds (with loan value

of 70% of face value or unmatured value at the time of acceptance), shares of stocks and corporate bonds (with loan value of

50.0% of market value) and club shares (with loan value of 50% of market value after transfer costs). An unconditional

guarantee from fully-owned government institutions and standby letters of credit issued by internationally-renowned banks are

also accepted as collaterals. As of 30 September 2009, approximately 62.3% of the Bank’s total loans were extended on a

secured basis, with approximately 63.2% of the secured loans backed by real estate mortgages.

The following table sets forth the Bank’s secured and unsecured loans, classified (in the case of secured loans) according to type of security:

79

As of 31 December As of 30 September

2006 2007 2008 2008 2009

Amount % Amount % Amount % Amount % Amount %

Secured (in P millions, except percentages)

Real estate Mortgage ..................... 31,777.4 37.5 28,704.5 27.6 47,740.0 36.1 46,402.2 37.6 48,694.1 39.3

Chattel mortgage............................ 10,342.2 12.2 10,998.4 10.6 12,549.3 9.5 12,624.0 10.2 12,702.2 10.3

Deposit hold-out ............................. 8,938.7 10.6 15,506.7 14.9 11,731.6 8.8 18,708.0 15.2 15,646.7 12.6

Other securities .............................. 11,647.9 13.8 14,666.3 14.1 6,207.2 4.8 584.0 0.5 43.1 0.1

Total secured.................................. 62,706.2 74.1 69,875.9 67.1 78,228.1 59.2 78,318.2 63.5 77,086.1 62.3

Unsecured..................................... 21,950.1 25.9 34,251.7 32.9 53,856.9 40.8 45,022.3 36.5 46,680.5 37.7

Total ............................................... 84,656.3 100.0 104,127.6 100.0 132,085.0 100.0 123,340.5 100.0 123,766.6 100.0

In the Philippine banking industry as a whole and in the Bank’s loan portfolio, secured loans are predominantly secured by real

estate. Other forms of collateral include collateral over machinery and inventory and cash collateral. Personal guarantees are

accepted from time to time as an additional source of collateral enhancement.

Loan Administration and Loan Loss Provisioning

Loan Classifications

The Bank classifies loans as non-performing in accordance with BSP guidelines. The guidelines require banks to classify their

loan portfolios based on perceived levels of risk to encourage timely and adequate management action to maintain the quality

of their loan portfolios. These classifications are then used to determine the minimum levels of allowances for loan losses which

banks are required to maintain. All of the Bank’s risk assets, in particular the Bank’s loan portfolio, are either classified or

unclassified. Those loans which do not have a greater than normal risk, and for which no loss on ultimate collection is

anticipated, are unclassified. All other loan accounts, comprising those loan accounts which have a greater than normal risk,

are classified, as follows:

LOANS ESPECIALLY MENTIONED

These are loans that the Bank believes have potential weaknesses that deserve management’s close attention, and which

deficiencies, if left uncorrected, could affect repayment. Weaknesses include repayment capability which may be endangered

by economic/market conditions as reflected in the borrower’s deteriorating financial performance, the existence of technical

defects in the supporting collateral, and insufficient credit information about the borrower. Loans falling under this classification

are given a 5% loan loss allowance.

SUB-STANDARD LOANS

This classification includes loans that the Bank believes represent a substantial and unreasonable degree of risk to the Bank.

Those loans classified as sub-standard have a weakness that is well-defined that jeopardizes their liquidation. Such

weaknesses may include adverse trends of a financial, managerial, economic or political nature, or a significant weakness in

collateral.

80

DOUBTFUL LOANS

These are sub-standard loans for which the Bank believes collection in full, either according to their terms or through

liquidation, is highly improbable, and substantial loss is probable.

LOSS LOANS

Loans which fall under this category are considered uncollectible or of insufficient value to warrant classification as bankable

assets. The appropriate classification is generally made once payments on a loan are in arrears for more than 90 days, but may

be made earlier when the loan is not yet past due if there are, among other things, indications of the deterioration of the

creditworthiness of the borrower. Once interest on a loan is past due for 90 days, the Bank will classify the entire principal

outstanding under such loan as past due, and it may initiate calling on all loans outstanding to that borrower as due and

demandable.

Provisions

Under existing BSP regulations, a general provision for loan losses shall be established as follows: (i) 5.0%

of the outstanding balance of unclassified restructured loans less the outstanding balance of restructured loans which are

considered non-risk under existing laws and regulations; and (ii) 1.0% of the outstanding balance of unclassified loans other

than restructured loans less loans which are considered non-risk under existing laws and regulations.

In accordance with BSP guidelines, the Bank makes the appropriate specific loan loss allowance as follows:

Loan loss allowance (% of principal amount of loan)

Risk classification

Especially mentioned........................................................................ 5.0% Sub-standard (secured) .................................................................... 10.0% Sub-standard (unsecured) ................................................................ 25.0% Doubtful ............................................................................................ 50.0% Loss.................................................................................................. 100.0%

The specific loan loss provision determined under BSP guidelines may differ from that determined under PAS 39. PAS 39

requires the level of loan loss provisioning to be determined on the basis of future recoverable amounts of the loans and

receivables discounted at their original effective interest rates. If the loan or receivable has a variable interest rate, the discount

rate for measuring the recoverable amount is the current effective interest rate determined under the contract. If the loan or

receivable is collateralized and foreclosure is probable, the Bank should measure the level of loan loss provisioning based on

the fair value of the collateral.

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The BSP conducts an annual audit on the Bank’s individual loans to determine the classifications the Bank must apply to its

loans when reporting classified loans to the BSP. The following is a summary of the risk classification of the aggregate loan

portfolio (as a percentage of total outstanding loans) and allowance for impairment of the Bank as reported to the BSP on a

non-consolidated basis as of the dates indicated below:

As of 31 December As of 30 September

2006 2007 2008 2008 2009

Amount % Amount % Amount % Amount % Amount %

Risk classification (in P millions, except percentages)

Especially mentioned ...................... 2,993 5.3 3,177.2 4.3 6,059.9 6.3 4,418.1 5.0 158.7 0.2

Sub-standard – secured .................. 8,105 14.2 6,626.2 9.0 2,808.9 2.9 3,229.2 3.6 2,326.1 2.6

Sub-standard – unsecured .............. 1,356 2.4 1,446.7 2.0 1,524.1 1.6 1,207.5 1.4 1,140.9 1.3

Doubtful........................................... 49 0 54.5 0 579.6 0.6 565.3 0.6 594.3 0.7

Loss ................................................ 439 0.8 458.1 0.6 176.8 0.1 178.6 0.2 255.9 0.3

Total classified ................................ 12,942 22.7 11,762.7 15.9 11,149.4 11.5 9,598.7 10.8 4,475.8 5.0

Unclassified..................................... 43,982 77.3 62,154.1 84.1 85,547.8 88.5 79,335.5 89.2 84,721.0 95.0

Total ............................................... 56,924.3 100.0 73,916.8 100.0 96,697.2 100.0 88,934.2 100.0 89,196.8 100.0

Allowance for impairment

Classified ........................................ 1,763 29.3 1,661 28.6 1,433 29.0 1,338.3 31.8 1,109.5 22.4

Unclassified..................................... 4,248 70.7 4,152 71.4 3,516 71.0 2,871.8 68.2 3,840.1 77.6

Total ............................................... 6,011 100.0 5,813 100.0 4,943 100.0 4,210.1 100.0 4,949.6 100.0

Allowance for impairment on classified accounts is based on the total principal balance outstanding. Loans classified as “loss”

assets are generally written off by the Bank in accordance with BSP guidelines. The Board of Directors of the Bank has

discretion as to the frequency of write-off provided that these are made against provisions for impairment or against current

operations. The prior approval of the Monetary Board is required to write off loans to the bank’s directors, officers, stockholders

and their related interests. As of 30 September 2009, the Bank’s allowance for impairment for NPLs to total NPLs ratio was

54.3%.

In addition to making specific allowances for impairment based on the risk classification of its loan portfolio, the Bank’s

allowances for impairment also include general allowances of 1.0% of the gross loan portfolio plus 5.0% of unclassified

restructured loans. Generally, movements in the Bank’s allowances for impairment represent provisions charged to operations.

On a monthly basis, all past-due accounts are updated for movements according to “Aging Of Past Due Accounts” reports,

which are summarized for portfolio tracking purposes and used to implement proactive strategies in accounts management.

EFFECTS OF SALES OF NPAs

In connection with the sale of certain NPAs to SPVs by the Bank, the Bank is permitted to reallocate the provisions taken with

respect to the sold NPLs for general loan loss provision and/or for specific provision of loan accounts that may be classified in

the future. The BSP allowed the Bank to reallocate an aggregate of P5.6 billion for such purposes, P2.6 billion of which was

used to write-off receivables of Bankard that RCBC acquired in December 2006.

As permitted under BSP Resolution No. 135, the Bank had deferred over ten years the recognition of the required additional

allowance for impairment as determined from the NPAs transferred to PIOI, and the losses determined from the NPAs

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transferred to other SPVs, totaling P1.3 billion in fiscal year 2006. The schedule of amortization of the required additional

allowance for impairment and losses as prescribed under BSP Resolution No. 135 are 5.0% for the first three years, 10.0% for

the next four years, and 15.0% for the remaining three years. The Bank recorded the amortization determined in accordance

with BSP Resolution No. 135 amounting to P604.84 million in fiscal years 2006 and P503.27 million and P536.68 million in

fiscal years 2007 and 2008, respectively and P626 million in the nine months ended 30 September 2009

While the accounting treatment discussed above is allowed under BSP Resolution No. 135, applicable accounting standards,

however, require the full recognition of the required additional allowance for impairment and losses against the current

operations in the period such impairment and losses were determined instead of capitalizing it as deferred charges and

amortizing it over future periods. Had the Bank fully recognized the required additional allowance for impairment and losses

amounting to P1.3 billion in fiscal year 2006, as determined at the time the NPAs were transferred in accordance with

applicable accounting standards, the Bank’s consolidated net income would have decreased by the same amount. Conversely,

allowances for impairment would have also decreased by P1.8 billion in fiscal year 2006 relating to NPAs transferred that

qualified for derecognition.

BANKARD

In 2006, Bankard sold and transferred to RCBC certain credit card receivables, P2.8 billion of which were approved by the BSP

for the staggering scheme. After the sale and transfer of the receivables, the Bank charged in fiscal year 2006 an impairment

loss for P162.1 million of such receivables and wrote-off the remaining balance of P2.6 billion. On 15 March 2007, the BSP

formally informed the Bank that it interposes no objection on the foregoing transaction.

Allocation of Provisions

The following table sets out the Bank’s reconciliation of its balance of reserves for loan losses on a consolidated basis over the

periods indicated:

For the years ended 31 December For the nine months ended

30 September

2006 2007 2008 2008 2009

(in P millions)

Balance of reserves at beginning of period ............... 12,213 10,395 9,935 9,935 7,943

Provisions during the year........................................ 1,566 860 1,928 1,558 1,205

Account written off / others........................................ (3,384) (1,320) (2,865) (2,119) (1,015)

Recovery of impairment losses ................................. - - 1,055 (1,000) -

Balance at the end of the period ............................... 10,395 9,935 7,943 8,374 8,133

Non-performing Assets

In accordance with BSP guidelines, loans and other assets in litigation are classified as NPAs. The Bank’s NPAs principally

comprise ROPA and NPLs. The table below sets out details of the Bank’s NPLs, non-accruing loans, ROPA, NPAs,

restructured loans, and write-offs for loan losses for the specified periods on a consolidated basis excluding the NPLs

transferred by the Bank to PIOI and NPRMI (see “—Sales of NPLs”):

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For the years ended 31 December

For the nine months ended 30 September

2006 2007 2008 2008 2009

(in P millions, except percentages)

Non-performing loans – net ...................................... 6,334 6,480 3,931 5,576 5,920

Classified loans ........................................................ 12,942 11,763 11,149 9,599 4,476

Total loans – net ....................................................... 112,662 122,922 162,140 138,637 144,359

Total non-performing loans-to-total loans(1)............... 5.6% 5.3% 2.4% 4.0% 4.1%

Classified loans / total loans ..................................... 11.5% 9.6% 6.9% 6.9% 3.1%

Non-accruing loans................................................... 12,942 11,763 11,149 9,599 4,476

Non-accruing loans-to-total loans ............................. 11.5% 9.6% 6.9% 7.0% 3.1%

ROPA – gross........................................................... 12,084 9,894 9,013 9,338 7,328

ROPA / total tangible assets ..................................... 5.4% 4.2% 3.4% 3.8% 2.8%

ROPA / total tangible equity

(excluding intangibles and deferred tax assets) ........

56.8% 35.6% 34.9% 35.7% 25.8%

Non-performing assets

(NPL – net plus ROPA, gross)..............................

18,418 16,374 12,944 14,914 13,248

Non-performing assets as a percentage of

tangible assets (excluding intangibles and

deferred tax assets)..............................................

8.3% 6.9% 4.9% 6.1% 5.0%

Allowance for impairment (total loans, ROPA) .......... 6,726 7,218 4,685 6,146 4,344

Allowance for impairment (loans).............................. 4,627 5,086 3,060 4,427 3,215

Allowance for impairment (ROPA) ............................ 2,099 2,133 1,626 1,719 1,128

Allowance for impairment (loans) as a

percentage of total non-performing loans .............

73.0% 78.5% 77.8% 79.4% 54.3%

Allowance for impairment (total) as a

percentage of non-performing assets ...................

36.5% 44.1% 36.2% 41.2% 32.8%

Total restructured loans ............................................ 3,560 4,530 1,976 2,702 1,652

Classified as performing ........................................... 2,269 3,097 1,606 1,760 1,433

Classified as non-performing .................................... 1,291 1,433 370 942 220

Restructured loans as a percentage of total loans .... 3.2% 3.7% 1.2% 2.0% 1.1%

Allowance for impairment (total) as a

percentage of non-performing assets and

restructured loans classified as performing ..........

32.5% 37.1% 32.2% 36.9% 29.6%

Allowance for impairment (total) as a

percentage of non-performing assets and

restructured loans classified as non-performing ...

34.1% 40.5% 35.2% 38.8% 32.3%

Loans – written off .................................................... 3,383.5(2) 1,319.8 2,865.3 2,119.0 1,015.5

Notes:

(1) The BSP issued Circular No. 351 on September 2002 allowing banks that have no unbooked valuation reserves to exclude from non-performing classification loans classified “loss” in the latest examination of the BSP which are fully covered by allowance for impairment, provided that interest on said loans shall not be accrued. As of 30 September 2009, NPLs fully covered by allowance for impairment amounted to P2.2 billion resulting in a 4.1% NPL ratio.

(2) Includes Bankard and RSB only. For the periods described in the table, the Bank (on a non-consolidated basis) did not write off any loans.

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Loans are classified as non-accruing (or past due) if (i) any repayment of principal at maturity or any scheduled payment of

principal or interest due quarterly (or longer) is not made when due and (ii) in the case of any principal or interest due monthly,

if the amount due is not paid and has remained outstanding for three months. In the case of (i), such loans are treated as non-

performing if the payment is not made within a further 30 days. In the case of (ii), such loans are treated as non-performing

upon the occurrence of the default in payment.

Loans which have been foreclosed or have been transferred to the Bank’s ROPA account are no longer classified as NPLs.

Accrued interest arising from loan accounts are classified according to the classification of their corresponding loan accounts

except for those which remain uncollected after six months from the date such loans or installments have matured or have

become past due for which a 100.0% allowance is made for uncollected accrued interest receivables.

Sectoral Analysis of Non-Performing Loans

The following table sets forth the Bank’s gross NPLs by the respective borrowers’ industry or economic activity and as a

percentage of the Bank’s gross NPLs on a non-consolidated basis as of the dates indicated:

As of 31 December As of 30 September

2006 2007 2008 2008 2009

Amount % Amount % Amount % Amount % Amount %

(in P millions, except percentage)

Agriculture, hunting, forestry and fishing 77.9 1.5 67.0 1.5 16.8 0.6 16.7 0.4 20.6 0.4

Mining and quarrying ......................... 45.7 0.9 3.3 0.1 3.3 0.1 3.3 0.1 6.7 0.1

Manufacturing ................................... 690.6 13.3 768.7 16.9 601.2 19.9 799.1 17.3 1,010.2 21.2

Electricity, gas and water ................... 243.6 4.7 - 0.0 3.0 0.1 2.9 0.1 1.0 0.0

Wholesale and retail trade ................. 1,240.7 23.8 1,211.0 26.8 1,229.2 40.7 1,254.6 27.2 1,198.8 25.2

Hotels and restaurants....................... 27.2 0.5 9.6 0.2 3.0 0.1 8.9 0.2 3.6 0.1

Transportation, storage

and communication.......................... 152.2 2.9 145.5 3.2 40.9 1.4 44.3 1.0 38.1 0..8

Financial intermediation ..................... 296.9 5.7 21.6 0.5 18.4 0.6 24.6 0.5 29.1 0.6

Real estate and other

business services............................. 1,988.2 38.2 1,306.2 28.9 770.4 25.5 783.4 17.0 671.5 14.1

Health and social work, education and

Other community, social and

personal services.............................. 35.7 0.7 27.6 0.6 30.7 1.0 30.3 0.6 27.7 0.6

Others(1) ............................................. 406.6 7.8 965.5 21.3 302.5 10.0 1,644.5 35.6 267.7 5.6

Total................................................... 5,205.3 100.0 4,526.0 100.0 3,019.4 100.0 4,612.6 100.0 3,275.0 68.8

Notes:

(1) Includes employees’ car / housing / salary loans, consumer loans and bills purchased. Excludes Credit Card Receivables.

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The Bank’s NPLs on a consolidated basis represented approximately 4.1% of the Bank’s total consolidated gross loan portfolio

of as of 30 September 2009. There were no loans to DOSRI within the Bank’s portfolio of NPLs as of 30 September 2009.

Ten Largest NPLs

As of 30 September 2009, the Bank’s ten largest NPLs accounted for 1.6% of its total loans to customers and 24.0% of its

gross NPLs to customers. As of this same date, the Bank’s exposure to its ten largest NPLs ranged from P44.5 million to

P524.3 million, and amounted to approximately P2.0 billion in aggregate.

As of 30 September 2009, no individual borrower or group accounted for more than 10% of the Bank’s total amount of gross

NPLs.

Loan Restructuring

In order to manage its loan portfolio and reduce its exposure to NPLs, the Bank’s practice is to restructure those classified

loans which it considers suitable for restructuring. The Bank restructures loans on a case-by-case basis. Restructuring methods

used by the Bank have included extending the maturity of loans beyond their original maturity date and providing for

rescheduled payments of principal consistent with the expected cashflows of the borrower in question. The Bank has also

agreed to debt-for-equity swaps, but rarely uses this as a restructuring solution. In certain instances, the Bank has also

favorably considered discounted compromise loan settlement schemes, provided the corresponding net present value analyses

result in better returns and risk considerations versus yields and risks posed by longer-term restructures or litigation.

In accordance with BSP guidelines, NPLs which are successfully restructured are considered to be current and are no longer

treated by the Bank as non-performing, generally following a period of three months of continued payments on the restructured

loans. As of 30 September 2009, the Bank had a consolidated portfolio of approximately P1.7 billion of total restructured loans,

including both performing and non-performing amounts.

The following table sets out the Bank’s consolidated restructured loans for the specified periods:

As of 31 December As of 30 September

2006 2007 2008 2008 2009

(in P millions)

Non-performing restructured loans................................ 1,291 1,433 370 1,760 220

Performing Restructured Loans .................................... 2,269 3,097 1,606 942 1,432

Total ............................................................................. 3,560 4,530 1,976 2,702 1,652

Foreclosure and Disposal of Assets

The Bank’s preferred strategy for managing its exposure to NPLs that are secured is to restructure the payment terms of such

loans. The Bank will only foreclose on mortgage securing an NPL if restructuring is not feasible or practical, or if the borrower

cannot or will not repay the loan on acceptable terms. The Bank may also consider accepting a payment in kind (or dacion en

pago) arrangement. Generally, the Bank will pursue foreclosure options if it concludes that no restructuring option is available

after 45 to 60 days of negotiations. Foreclosure procedures may then require 30 to 60 days to complete, particularly

considering legal procedures mandated by law.

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The Bank’s Remedial Management Division (“RMD”) is responsible for the remedial management, loan restructuring and asset

recovery activities of all potentially problematic and defaulted credits regardless of principal size. Once the mortgage over the

collateral provided by either retail or corporate borrowers is foreclosed, the Bank’s ROPA is turned over to and managed by the

Asset Disposition Division (“ADD”). The Asset Management Support Division (“AMSD”) handles the documentation,

administration and preservation requirements of the properties.

The Bank had net ROPA of P10.0 billion, P7.8 billion, and P7.4 billion as of 31 December 2006, 2007 and 2008, respectively.

As of 30 September 2009, the Bank had net ROPA of P6.2 billion. On a non-consolidated basis, of total ROPA as of 30

September 2009, P28.7 million consisted of the Bank’s holdings in shares of stocks and chattels and P3.6 billion represented

the Bank’s holdings in real property, which comprised 2,008 properties.

BSP rules recommend immediate disposal through sale of ROPA assets. If such immediate sale is not possible, BSP rules

recommend that such ROPA assets be charged-off annually providing a 10.0% valuation reserve beginning on the sixth year

after the ROPA is booked. The Bank’s valuation reserves on ROPA amounted to P2.1 billion as of 31 December 2007, P1.6

billion as of 31 December 2008, and P1.1 billion as of 30 September 2009.

The Bank sells its ROPA through public and private sealed bidding, public auctions and negotiated sales. Installment sales

have a term of up to ten years and the Bank requires purchasers to make a forfeitable deposit of at least 10.0% of the sales

price or P25,000, whichever is higher. The Bank generally charges fixed interest of 9.5% to 13.5% per annum for the remaining

term. Title to ROPA remains with the Bank until it receives full payment of the purchase price. Under ROPA sales contracts, if

any installment payment falls in arrears, the purchaser is deemed to forfeit all of its prior payments and the Bank treats such

prior payments as reductions in the book value of the ROPA. For the nine months ended 30 September 2009, the Bank

experienced a default rate of approximately 8.0% with respect to ROPA sold on an installment basis.

For the nine months ended 30 September 2009, on a non-consolidated basis, the Bank sold P149.0 million of ROPA in private

sales and awarded P263.0 million in auction sales. Of the total ROPA sales, P189.0 million represented cash sales and P223.0

million represented installment sales. The Bank also generates earnings from its ROPA by leasing them on a short-term basis.

Transfer of NPAs

The overall asset quality of the Bank’s loan portfolio has changed significantly in recent years as a result of transfers of NPAs,

particularly NPLs. These transfers have been made primarily to SPVs. The NPLs sold to SPVs (other than those sold by RSB)

are not reflected on the Bank’s statements of condition. The following table sets forth the principal amount of NPAs transferred

to SPVs by RCBC for the periods indicated:

Principal amounts for the years ended 31 December 2006

2007

2008

(in P millions)

Star Two (SPV-AMC), Inc 3,878.8 ─ ─

New Pacific Resources Management ─ 1,698.6 50.7

As part of certain of the transfers of the NPAs, the Bank received subordinated notes issued by the SPV. The subordinated

notes issued by PIOI in 2004 and 2005 and NPRMI in 2007 and 2008 included a provision that the amount and schedule of

payments on the notes is contingent and dependent on the amount and timing of collections made by the SPV on the NPAs

transferred. Under the applicable accounting standards, these provisions are indicative of an incomplete transfer of the risks

and rewards of ownership of the NPAs. Applicable accounting standards requires that (a) an entity retaining majority of the

residual risks and rewards of ownership of certain assets of an SPV should reflect in its financial statements its proportionate

interest in such SPV and (b) an entity should substantially transfer all the risks and rewards of ownership of an asset before

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such asset could no longer recognized on its balance sheet. Had the Bank reflected in its financial statements its interest in

PIOI and NPRMI and continued to recognize the NPAs transferred in accordance with PFRS/PAS, the gross balance of the

Bank’s consolidated loans and receivable account as of 31 December 2007 and 2008 would have increased by P5.2 billion and

the related allowance for impairment would have been recognized amounting to P1.4 billion in fiscal year 2007 and P2.0 billion

in fiscal year 2008. Investment Property would have increased by P1.4 billion in fiscal years 2007 and 2008.

The following sets out details of the Bank’s NPLs, non-accruing loans, ROPA, NPAs, restructured loans, and write-offs for loan

losses including the NPLs transferred by the Bank (not including those transferred by RSB) to PIOI and NPRMI as of and for

the periods indicated:

As of 31 December As of 30 September

2006 2007 2008 2008 2009

(in P millions, except percentages)

Non-performing loans – net 11,031 10,901 7,875 9,650 9,474

Classified loans 23,612 16,184 15,093 13,672 8,030

Total loans – net 117,358 127,343 166,084 142,711 147,914

Total non-performing loans-to-total loans(1) 9.4% 8.6% 4.7% 6.8% 6.4%

Classified loans / total loans 20.1% 12.7% 9.1% 9.6% 5.4%

Non-accruing loans 23,612 16,184 15,093 13,672 8,030

Non-accruing loans-to-total loans 20.1% 12.7% 9.1% 9.6% 5.4%

ROPA – gross 12,084 11,583 10,750 11,027 9,065

ROPA / total tangible assets 5.5% 4.9% 4.0% 4.5% 3.4%

ROPA / total tangible equity (excluding

intangibles and deferred tax assets) 56.8% 42.7% 41.6% 42.1% 31.9%

Non-performing assets (NPL – net plus

ROPA, gross) 23,115 22,485 18,625 20,677 18,539

Non-performing assets as a percentage

of tangible assets (excluding intangibles

and deferred tax assets) 10.4% 9.5% 7.0% 8.4% 7.0%

Allowance for impairment (total loans, ROPA) 6,726 7,508 4,999 6,436 4,657

Allowance for impairment (loans) 4,627 5,086 3,060 4,427 3,215

Allowance for impairment (ROPA) 2,099 2,423 1,939 2,009 1,442

Allowance for impairment (loans) as a

percentage of total non-performing loans 41.9% 46.7% 38.9% 45.9% 33.9%

Allowance for impairment (total) as a

percentage of non-performing assets 29.1% 33.4% 26.8% 31.1% 25.1%

Total restructured loans 3,560 4,530 1,976 2,702 1,652

Classified as performing 2,269 3,097 1,606 1,760 1,433

Classified as non-performing 1,291 1,433 370 942 220

Restructured loans as a percentage of

total loans 3.0% 3.6% 1.2% 1.9% 1.1%

Allowance for impairment (total) as a

percentage of non-performing assets and

restructured loans classified as performing 26.5% 29.4% 24.7% 28.7% 23.3%

Allowance for impairment (total) as a percentage

of non-performing assets and restructured 27.6% 31.4% 26.3% 29.8% 24.8%

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As of 31 December As of 30 September

2006 2007 2008 2008 2009

loans classified as non-performing

Loans – written off 3,383.5(2) 1,319.8 2,865.3 2,119.0 1,015.5

Notes:

(1) Inclusive of the P3.8 billion loans transferred to PIOI in 2004 and P1.4 billion transferred to PIOI in 2005, and P1.7 billion and P50.7 million ROPAs transferred to NPRMI in 2007 and 2008, respectively.

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RISK MANAGEMENT

The Bank is exposed to risks that are particular to its lending and trading businesses and the environment in which it operates.

The Bank’s goal in risk management is to ensure that it understands, measures and monitors the various risks that arise from

its business activities, and that it adheres strictly to the policies and procedures which are established to address these risks.

The Bank employs a committee system as a fundamental part of its process of managing risk. Each committee consists of the

Chief Executive Officer, the President, and other senior executives. The key committees are as follows:

• The Executive Committee, which sets documentation and credit support standards and reviews and approves large

counterparty credit limits and considers new or unusual credit-related transactions;

• The Risk Management Committee, which ensures portfolio diversification, establishes risk policies reflecting business

priorities, approves exposure measurement standards and reviews concentrations of credit risk;

• The Senior Management Committee, which oversees the Bank’s overall strategic objectives and reviews strategies,

action plans, business plan gaps, financial performance, regulatory issues, operating issues, and competitive and

business developments; and

• ALCO, which appraises market trends, economic, and political developments and provides strategic direction in the

management of interest rate risk, liquidity risk, and trading and investment portfolio decisions.

The Bank has established CRISMS, headed by a chief risk officer, to identify, measure and assist in controlling and monitoring

the risks inherent in its activities. CRISMS is independent of all business segments and reports directly to the Risk Management

Committee.

Liquidity Risk Management

Liquidity risk is the risk that there are insufficient funds available to adequately meet all maturing liabilities, including demand

deposits and off-balance sheet commitments, due to: (a) the inability to liquidate assets or obtain adequate funding (funding

liquidity risk) and (b) the inability to easily unwind or offset specific exposures without significantly lowering market prices

because of inadequate market depth or market disruptions (market liquidity risk).

The Bank’s liquidity policy is to manage its operations to ensure that funds available are more than adequate to meet credit

demands of its customers and to enable deposits to be repaid on maturity. The main sources of the Bank’s funding are capital,

core deposits from retail and commercial clients and wholesale deposits. The Bank also maintains a portfolio of readily

marketable securities to further strengthen its liquidity position. The Bank’s liquidity policies and procedures are set out in its

Funding and Liquidity Plan. At least once annually, the Bank’s Treasurer presents a business plan containing a request for

liquidity limits to ALCO for final approval and ratification by the Board of Directors. The funding plan effectively serves as a

projected funding requirement based on assumptions from the forecasted balance sheet.

As of 30 September 2009, 50.6% of the Bank’s total portfolio was represented by loans with remaining maturities of less than

one year. Of the Bank’s P61.1 billion total unconsolidated portfolio of investment securities as of 30 September 2009, P12.7

billion, or 20.8%, was invested in investment securities with remaining maturities of one year or less. The Bank’s trading and

investment securities account includes securities issued by sovereign issuers, primarily Government treasury bills, fixed rate

treasury notes and floating rate treasury notes, and foreign currency denominated bonds issued by the Government.

Other resources include amounts due from the BSP, amounts due from other banks and interbank loans receivables, which

accounted for 5.7%, 1.3% and 5.4%, respectively, of the Bank’s total assets as of 30 September 2009. Deposits with banks are

made on a short- term basis with almost all being available on demand or within one month.

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The primary responsibility of managing liquidity risk lies with the ALCO, which disseminates its liquidity strategy across all

business units within the Bank that conduct activities that impact liquidity. ALCO’s primary responsibilities include: (a) ensuring

that the Bank and its legal vehicles maintain adequate liquidity, sufficient capital and the appropriate funding to meet all

business requirements and comply with all regulatory requirements; (b) building a stable funding structure by managing the

long-term profiles of the Bank’s asset and liability maturities (the structural gap); (c) managing the balance sheet and ensuring

that the strategies are in accordance with adequate liquidity, capital and diversified funding; (d) determining asset/liability

pricing consistent with the strategies for the balance sheet; (e) diversifying the funding of each legal vehicle of the Bank by

source, maturity, instrument and currency; (f) implementing policies of the Board of Directors on all issues that affect capital,

funding or liquidity; and (g) informing the Board of Directors regularly of the liquidity situation of the Bank and informing the

Board of Directors immediately if there are any material changes in the Bank’s current or prospective liquidity position.

ALCO measures liquidity risk by assessing all of its cash inflows against its outflows to identify the potential for any net

shortfalls going forward, including funding requirements for off-balance-sheet commitments. The Bank’s core measure of

liquidity, the Maximum Cumulative Outflow (“MCO”), is defined as the amount of prospective funding that the Bank will require

at pre-specified future dates in normal operating requirements and measures the liquidity gap between maturing liabilities and

assets. The MCO Limit is proposed by the Treasurer and CRISMS, reviewed by the Risk Management Committee and

approved by the Board of Directors.

To ensure that the Bank has sufficient liquidity at all times, the Bank’s Treasurer and CRISMS formulates a contingency plan

using extreme scenarios of adverse liquidity and evaluates the Bank’s ability to withstand these prolonged scenarios. The

contingency plan focuses on the Bank’s strategy for coordinating managerial action during a crisis and includes procedures for

making up cash flow shortfalls in adverse situations. The plan details the amounts of funds (such as unused credit facilities) the

Bank has available to it and the scenarios under which it could use them.

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The following tables set forth the asset/liability gap position for the Bank’s operations on a non-consolidated basis as of 30

September 2009:

As of September 2009

Balance

One to three

months Three months

to one year One year to five years

Greater than five

years Non-maturity

(in P millions)

Assets

Cash 3,687.6 6.9 3,680.7

Cash Equivalents 15,715.7 1,908.2 13,807.5

Loans and Receivables 113,160.2 31,081.7 15,822.1 25,356.0 13,943.5 26,956.9

Investments 75,833.2 34,089.1 4,594.1 264.4 20,787.5 16,068.0

Other Assets 17,579.0 17,579.0

Total Assets 225,975.7 67,085.9 20,416.2 25,620.4 34,731.0 78,122.2

Liabilities and Capital

Deposit Liabilities 156,111.1 20,075.5 4,014.0 5,811.9 - 126,209.7

Bills Payable and Due to Other Banks 15,132.5 5,607.2 4,412.0 - 761.3 4,352.0

Bonds Payable 5,986.4 - 5,986.4 - - -

Subordinated Debt 10,922.5 - - 10,922.5 - -

Other Liabilities 7,600.3 1,661.2 123.3 101.8 0.2 5,713.8

Total Liabilities 195,752.8 27,343.9 14,535.7 16,836.2 761.6 136,275.5

Capital Funds 30,166.6 - - - - 30,166.6

Total Liabilities and Capital Funds 225,919.4 27,343.9 14,535.7 16,836.2 761.6 166,422.0

On-Book Gap 56.3 39,742.0 5,880.5 8,784.2 33,969.4 (88,319.9)

Cumulative On-Book Gap - 39,742.0 45,622.5 54,406.7 88,376.2 -

Contingent Assets 29,024.7 23,341.2 5,683.5 - - -

Contingent Liabilities 31,928.6 24,946.9 5,632.4 - - 1,349.3

Off-Book Gap (2,903.9) (1,605.7) 51.2 - - (1,349.3)

Total Cumulative Off-Book Gap 0 (1,605.7) (1,554.6) (1,554.6) (1,554.6) (2,903.9)

Cumulative Total Gap 0 38,136.3 44,067.9 52,852.1 86,821.6 2,847.6

Interest Rate Risk Management

The Bank follows a policy on managing its assets and liabilities so as to ensure that exposure to fluctuations in interest rates is

kept within acceptable limits. The Bank’s risk measurement system incorporates different risk factors for different categories of

instruments (e.g., fixed income or money market) within each currency where the Bank holds interest rate sensitive positions.

ALCO meets at least weekly to set rates for various asset and liability and trading products. In pricing interest rates, foreign

exchange and fee based products, ALCO considers funding costs, market conditions, transaction volume, competitor’s rates,

among others, when pricing interest rates, foreign exchange and fee based products.

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A majority of the Bank’s total loan portfolio is on a floating rate based on an internal cost of funds. The spread varies for various

types of loans and credit quality. Loan rates and the bulk of the deposit liabilities which are in special savings account are reset

every 30 to 90 days. Hence, exposure to interest rate fluctuations is significantly reduced. No interest is paid on nearly all

current accounts while regular savings accounts earn a fixed rate of 0.5% per annum.

The interest rate sensitive instruments of the Bank’s trading and investment portfolio are managed by a system of loss limit and

Management Action Trigger (“MAT”) controls which quantify management’s tolerance for losses on and month to date

cumulative loss. In addition value-at-risk (“VaR”) (i.e., potential loss) is computed to determine potential losses.

The Bank employs a “gap analysis” to measure the interest rate sensitivity of its assets and liabilities. The asset/liability gap

analysis measures, for any given period, any mismatch between the amounts of interest-earning assets and interest-bearing

liabilities which would re-price, during that period. If there is a positive gap, there is asset sensitivity, which generally means that

an increase in the interest rates would have a positive effect on the Bank’s net interest income. If there is a negative gap, this

generally means that an increase in the interest rates would have a negative effect on the Bank’s net interest income.

Credit Risk Management

Credit risk is the risk that the borrower, issuer or counterparty in a transaction may default and cause a potential loss to the

Bank. The Bank is exposed to credit risk as trading counterparty to dealers and customers, as direct lender and as a holder of

securities. Categories of credit risk include contingent credit risk (the risk that potential counterparty or customer obligations

become actual and will not be repaid on time), country risk (the risk that actions of sovereign governments or other

uncontrollable events will adversely affect the ability of counterparties or customers to fulfill obligations to the Bank), event risk

(the risk that the Bank will incur risk in unusual situations which are not captured in the daily risk management tools),

underwriting risk (the risk that an issue will lose value after launching but before trading in the secondary markets), and custody

risk (the risk that arises when the Bank has assets in the form of securities entrusted to a third party as a custodian).

The Bank’s overall goal of credit risk management is to maximize its risk-adjusted rate of return by maintaining credit risk

exposure within approved parameters. The Bank’s credit policies are established by the Executive Committee and/or the Board

of Directors and are set out in the Bank’s Credit Policy Manual. As described in the Credit Policy Manual, the Bank’s credit

objectives are:

• To maintain, as much as possible, a consciously-designed, balanced loan portfolio in terms of industry exposure and

maturities;

• To continue to upgrade the quality of the loan portfolio;

• To increase the risk assets in a systematic way to the extent allowed under the risk assets to net worth ratio required

by the BSP but with a comfortable margin for contingencies;

• To favor well-rounded, long-term relationships over short term or one-time relationships; and

• To maintain profitability without being uncompetitive but within the guidelines on returns set by management.

Credit Risk Assessment

The Bank maintains a formalized internal rating system to differentiate the degree of credit risk in the different credit exposures

of the Bank.

In mid-2004, the bank shifted from an alphanumeric credit rating system, which made use of a qualitative approach to

classifying loans, to a ten-level numeric rating model, which employed a credit scoring methodology to determine asset quality.

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This was in response to the requirements of Basel II and was adapted from the BAP-BSP framework. In 2005 and 2007, further

refinements to the rating model were introduced.

The Bank’s Revised Internal Credit Risk Rating System is based on a scoring system, which classifies borrowers into a 10-level

risk classification. This is primarily derived from the Borrower Risk Rating, which serves as an assessment of the credit

worthiness of the borrower based on its financial condition, access to financial markets, balance sheet strength, ability to

service debt, industry position and management quality. Adjustments are then made to take into account the credit

package/structure and other risk factors to arrive at the Composite Risk Rating. The risk rating is then taken into consideration

when determining the credit package, the provisioning requirements as well as the pricing for the loan.

Borrower Risk Rating

Description

Allowance for Probable Loss

1 Excellent ─

2 Strong ─

3 Good ─

4 Satisfactory ─

5 Acceptable ─

6 Watchlist ─

7 Special mention 5.0%

8 Substandard

Secured (10.0%) Unsecured (25.0%)

9 Doubtful 50.0%

10 Loss 100.0%

The Bank’s Credit Risk Division is responsible for monitoring the overall composition and quality of the credit portfolio, with the

goal of identifying and minimizing concentration risk. Credit limits are set in order to avoid risk concentration. The bank has

existing credit policies setting limits for local and foreign counterparties, for various industry sectors as well as for different

countries, which serve as guides for business initiatives. These are regularly updated to ensure efficient loan portfolio

management.

Credit Approval Process

The Bank has three Credit Committees for loans, two under CBG (one apiece for Corporate Accounts and for SMEs) and the

Treasury Group, which screen and evaluate credit proposals originating from lending units before these are presented to the

approving bodies. These Credit Committees have identified support units which monitor and review the Bank’s credit

exposures. The lending units evaluate the borrower and the purpose of the loan and negotiate the terms of the loan with the

borrower. At the post-approval stage, lending officers conduct regular client calls in order to monitor the account’s performance.

Borrowers are required to submit on a regular basis their interim and audited financial statements to monitor the borrowers’

financial viability. Credit reviews on borrowers are also conducted regularly to assess the creditworthiness of accounts and their

compliance with the Bank’s policies and procedures. Movements in the total loan portfolio and exposures to various industries

are also regularly monitored.

Credit Approval Authority

The authority to extend credit or commit the Bank to extend credit rests on the Board of Directors, which has delegated its

authority, subject to certain approval limits, to certain designated credit authorities. All substantial transactions are subject to

94

review and approval by the Executive Committee. In addition, a clear separation of duties exists between the officers

recommending credit-related transactions and those who authorize them.

For the granting of credit facilities, the Bank has a delegation of authority hierarchy based on the amount of the credit facility,

whether the facility is secured and/or guaranteed, and the tenor of the credit facility (i.e. short term or long-term).

OFW Remittances

Different approval authority levels and limits apply to the establishment of lines for releasing remittance funds to TeleMoney

couriers, depending on the type of collateral offered.

Consumer Loans

The approval authority levels and limits differ among the different consumer loan products. The approval limits range from a

minimum of P0.3 million (for personal loans) up to P5.0 million, with approving authorities ranging from the Region Head to the

President. For amounts of P10.0 million and above, approval is elevated to the bank’s Credit and Collection Committee.

Approval should conform with the credit policies set forth for the respective product line.

Credit Monitoring and Review Process

The Bank’s credit review function is independent of the credit granting process and reports directly to the Board of Directors. It

is the Bank’s policy that credit performance be systematically monitored by staff other than the officer who initially reviewed the

transaction. The credit review process also involves conducting periodic internal evaluations of credit risk processes to

determine that credit activities are in compliance with the Bank’s credit policies and procedures, credits are authorized within

the guidelines established by the Bank’s Board of Directors and the quality and value of individual credits are being accurately

reported to senior management.

The Bank performs an Account Profitability Analysis (“APA”) on borrower upon origination and renewal of lines or often more

frequently for important relationships. The methods of profitability analysis used in the APAs include return on funds employed,

which intends to measure returns on risk asset taking into consideration the capital charge of the risk asset.

As part of its loan portfolio management, the Bank closely monitors past due accounts and their developments. On a monthly

basis, the Loan Portfolio Monitoring Section prepares an Aging of Past Due report, which contains the principal past dues

outstanding on a per account basis, the aging of the past due and the latest status of the account. On a weekly basis, newly

booked past due accounts and potential past due accounts are presented to the Bank’s Executive Committee for proactive

management of the account. Unfavorable information and developments on a borrower or business environment are

immediately processed for the purpose of instituting early remedial measures and renewed relationship strategies. The Bank’s

RMD provides assistance in handling problem and potential problem accounts, while directly managing those with exposures

above P5.0 billion.

The Bank policies provide for stress testing to determine the potential for extreme conditions to affect both individual credits and

the sectors of the credit portfolios. The three areas of focus for stress testing are: (a) economic or industry down-turns, (b)

market-risk events, and (c) liquidity conditions. Stress-test analyses also include contingency plans regarding the actions

management may take given certain scenarios, such as hedging against outcome or reducing the size of the portfolio. Credit

Risk Officers and Risk Managers document and report to the Board of Directors the output of the tests.

The Bank has also has implemented an ongoing Loan Portfolio Rationalization Program which initiates strategies and

repayment plans for accounts which have been identified for phase-out or phase-down. Compliance and status of these

accounts are monitored and reported to senior management on a quarterly basis.

Consumer Loans

95

The approval authority levels and limits differ among the different consumer loan products under RCBC Savings Bank.

Approval authority of Division Heads and all other lower officers pertain only to the loan products carried. Approval limits range

from a minimum of P0.3 million (for personal loans) to P5.0 million, with approving authorities ranging from the Region Head to

the President. For amounts of P10.0 million and above, approval is elevated to the bank’s Loan Committee and the Executive

Committee. Approvals should conform with the credit policies set forth for the respective product line.

Credit Monitoring and Review Process

The Bank’s credit review function is independent of the credit granting process and reports directly to the Board of Directors. It

is the Bank’s policy that credit performance be systematically monitored by staff other than the officer who initially reviewed the

transaction. The credit review process also involves conducting periodic internal evaluations of credit risk processes to

determine that credit activities are in compliance with the Bank’s credit policies and procedures, credits are authorized within

the guidelines established by the Bank’s Board of Directors and the quality and value of individual credits are being accurately

reported to senior management.

The Bank performs an Account Profitability Analysis (“APA”) on its existing facilities at least when such facilities are renewed

and often more frequently for important relationships. The methods of profitability analysis used in the APAs include return on

funds employed, which intends to measure returns on risk asset taking into consideration the capital charge of the risk asset.

As part of its loan portfolio management, the Bank closely monitors past due accounts and their developments. On a monthly

basis, the Loan Portfolio Monitoring Unit prepares an Aging of Past Due report, which contains the principal past dues

outstanding on a per account basis, the aging of the past due and the latest status of the account. On a weekly basis, newly

booked past due accounts and potential past due accounts are presented to the Bank’s Executive Committee for proactive

management of the account. Unfavorable information and developments on a borrower or business environment are

immediately processed for the purpose of instituting early remedial measures and renewed relationship strategies. The Bank’s

RMD provides assistance in handling problem and potential problem accounts, while directly managing those with exposures

above P5.0 million.

The Bank policies provide for stress testing to determine the potential for extreme conditions to affect both individual credits and

the sectors of the credit portfolios. The three areas of focus for stress testing are: (a) economic or industry down-turns, (b)

market-risk events, and (c) liquidity conditions. Stress-test analyses also include contingency plans regarding the actions

management may take given certain scenarios, such as hedging against outcome or reducing the size of the portfolio. Credit

Risk Officers and Risk Managers document and report to the Board of Directors the output of the tests.

The Bank has also has implemented an ongoing Loan Portfolio Rationalization Program which initiates strategies and

repayment plans for accounts which have been identified for phase-out or phase-down. Compliance and status of these

accounts are monitored and reported to senior management on a quarterly basis.

Market Risk Management

The Bank considers market risk as risk resulting from adverse movements in the level or volatility of market rates or prices or

commodity/equity prices which will affect the Bank’s financial condition. The primary determinant of market risk is the volatility

of the relevant market for a business line. The market risks of the bank are: (a) foreign exchange rates, (b) interest rates, (c)

equity prices, and (d) commodity prices.

To manage market risk inherent in the Bank’s portfolio, three related measures of risk values are estimated or established:

• The sensitivity of the position or portfolio to a movement in the market risk factor to which it is exposed;

• The volatility of the position (the maximum expected movement in the market risk factor for a given time horizon at a

specified level of confidence); and

96

• The value-at-risk (the likely impact on earnings for a given time horizon due to expected movements in the market

factors).

All risk-taking activities of the Bank are subject to approved limits. In general, market risks are measured by the VaR or Earning

at Risk (“EaR”) models, for which a maximum exposure for the Bank is recommended to the Risk Management Committee and

approved by the Board of Directors. As a matter of policy, all positions classified as “trading” (non-accrual or non-banking) are

managed daily on a marked-to-market basis, even when legal and regulatory procedures do not require a marked-to-market

profit and loss.

The Bank’s market risk limits primarily include the following:

• VaR Limits—establish the monetary amount of risk (potential loss) deemed tolerable by management for open risk

positions from the Bank’s daily risk-taking activities. VaR limits are the Bank’s primary measure of market risk in

trading activities. VaR is calculated daily from open risk positions and compared against approved VaR limits. VaR

limits must be supported by unit heads, recommended to the Risk Management Committee at least annually;

• EaR Limits—establish the monetary amount of risk (potential loss) deemed tolerable by management for the accrual

portfolios (the interest rate re-pricing gaps). EaR limits are the Bank’s primary measure of market risk in the accrual

portfolios. EaR is calculated daily from interest rate gap positions and compared against approved EaR limits. EaR

limits are supported by unit heads recommended to the Risk Management Committee and approved by the Board of

Directors at least annually;

• Stop Loss Limits—place a ceiling on the maximum monetary amount for market-related losses for a specified time

period (monthly, quarterly and yearly) that management deems acceptable for the Bank. If a Stop Loss Limit is

reached or exceeded for a given time period, all open risk positions must be closed and further risk-taking activities of

a unit must cease. Stop Loss Limits are based on a percentage of budgeted profits for each risk-taking unit’s trading

activities for a given year;

• MATs—place a ceiling on accumulated marked-to-market losses that management deems tolerable for a specified

time period (normally monthly). When a MAT level is reached or exceeded, risk-takers must consult with

management which will approve a course of action for managing the loss. MATs are approved for each portfolio

category (regular and FCDU balance sheets, proprietary trading in foreign exchange money markets, securities,

equities and derivatives exposures). MATs are independently monitored and reported by the CRISMS and

Compliance Departments; and

• Nominal Position Limits—establish the maximum size of open risk positions that can be held within a set time period

for each market risk exposure of the Bank. Nominal Position Limits are divided into overnight position limits

(controlling the maximum size of portfolios or open risk positions that can be held overnight) and intra-day limits

(controlling the maximum position sizes that can be held prior to an overnight cut-off time). All Nominal Position Limits

must conform to the regulatory limits set by the BSP.

The Bank uses stress testing that is both quantitative and qualitative in nature to determine the earnings impact of market

movements deemed “extreme” (beyond normal occurrence). All assumptions and results of stress tests must be documented

and routinely reported to the Risk Management Committee. The Bank’s stress testing techniques include:

• Simple Sensitivity Tests—determine the impact on income of movements of one or more market risk factors using set

percentage changes;

• Scenario Analysis—describes scenarios (based on historical or hypothetical scenarios) that the Bank’s risk managers

deem may happen in the foreseeable future and the consequences thereof; and

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• Maximum Loss Approach—uses a combination of events that risk managers believe would be most damaging to the

Bank’s portfolio.

Foreign Currency Risk Management

The BSP has numerous regulations related to foreign currency management. The Bank complies with all of these, including

limits on foreign currency exposures, liquidity reserves and types of currencies allowed for trading.

The Bank’s risk measurement system incorporates risk factors for each different foreign currency in which the Bank’s positions

are determined. Foreign exchange positions are generally classified as trading positions and are marked-to-market. Foreign

exchange forwards are classified at inception as either “trading” (outright open positions without an offsetting foreign exchange

contract) or “hedging” (positions with an offsetting foreign exchange contract, generally part of a foreign exchange swap

transaction). Each classification has a separate profit and loss accounting methodology assigned: net present value mark-to-

market for trading positions and straight-line allocation for hedging positions.

In addition, the Bank regularly calculates VaR for each currency position. As of 30 September 2009, the Bank’s unconsolidated

foreign currency VaR was P5.4 million. A system of loss limits and MAT is utilized to control losses. Foreign exchange related

products are also discussed and pricing policies set by the ALCO.

The Bank’s Treasurer has the widest responsibility over the Bank’s foreign exchange risk and can rebalance the allocation of

foreign exchange risks among specific currencies and strategies according to the overall nature of foreign exchange exposures

approved by management.

Operations Risk Management

Operations Risk is the risk arising from the potential that inadequate information systems, operations or transactional problems

(relating to service or product delivery), breaches in internal controls, fraud or unforeseen catastrophes will result in unexpected

loss. Operations risk includes the risk of loss arising from various types of human or technical error, the risk of settlement or

payments failures, the risk of business interruption, administrative and legal risks and the risk arising from systems not

performing adequately.

The Bank maintains departmental operations manuals that are periodically updated. The Bank has also developed a Business

Contingency Plan which is tested at least annually and updated for any major changes in systems procedures. A complaints

log, which is reviewed by management, exists for each business area for logging, monitoring and follow-up on customer

complaints.

Transactions and items of value are subject to a system of dual control whereby the work of one person is verified by a second

person to ensure that the transaction is properly authorized, recorded and settled.

The Bank places emphasis on the security of its computer system and has a comprehensive IT security policy. The Bank

designates a security administrator independent of the front office who is responsible for maintaining strict control over user

access privileges to the Bank’s information systems. The Bank’s ITG has also created a disaster recovery plan to cover the

recovery of critical data and contingency processing requirements in the event of a disaster.

Operational Controls and Procedures in Branches

The Bank employs several operational control measures and procedures to mitigate risks in its branches. These include the

segregation of duties such that no individual has complete authority and responsibility for handling all phases of any

transaction. An Approval Authorities Manual has been issued to identify approving authorities and approval limits of officers in

the bank. The necessary review and scrutiny of a transaction must be performed by an authorized associate of a

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branch/operating unit before proceeding with the processing of transactions. In addition, the use of Bank’s operations system is

limited to authorized employees.

The Bank also has security policies and procedures which are currently being implemented for the purpose of attaining safety

and security of both the Bank and its personnel. These include: (a) personnel security, with the objective of ensuring that

employees of the bank are capable, reliable, trustworthy and loyal, in consonance with the Bank’s hiring policies, and to provide

guidelines with the screening and training of agency personnel to become more effective in their duties; (b) documents and

information security, with the objective of determining the security to be applied to the hardware/software of the Bank

depending on its classification such as critical, confidential, internal use and unclassified; (c) information and system availability

to ensure that a system or process is in place for identifying those assets that would severely affect the operation of the Bank if

they become unavailable; and (d) physical security, which includes structural barriers such as fences, lights, doors, windows,

vault walls and doors. The operations of branches are governed by policy guidelines and detailed procedures that are

formulated to guide the officers and staff in the process of initiating day to day banking transactions.

Operational Controls and Procedures for the RCBC Enterprise Banking Internet Facility and RCBC Payment Gateway

To enroll in the RCBC Enterprise Banking Internet Facility and RCBC Payment Gateway, corporate and commercial clients are

required to sign a service agreement and submit a Board resolution or Secretary’s Certificate. After verification of this

documentation, the designated Bank back office unit will enroll the customer and the customer’s designated security

administrators will receive their password via e-mail. Upon receipt of the e-mail, the designated security administrators can

create profiles for users within the company and set-up the approval workflow. Any amendments to the enrollment parameters,

such as enrolled accounts, should be made by the customer in writing and duly-signed by the customer’s authorized

signatories.

Aside from the basic banking services, corporate and commercial clients can also use other value-added services, such as

check writing and payroll, through the RCBC Enterprise Banking Internet Facility. Corporate and commercial clients are

required to sign separate service agreements for these services. For selected transactions, such as fund transfer or payments

via credit to other bank accounts, BSP-prescribed documents may be required before the transactions are fulfilled.

Operational Controls and Procedures in Treasury

The Bank has implemented pre-trade control policies and procedures, which include ensuring that: (a) dealers are aware of

established dealing conventions, (b) operating systems have been tested and approved for production, (c) the necessary

authorities have approved dealing limits, and (d) counterparties are identified and validated and required documentation is in

place.

The Bank’s front office treasury policies and controls include ensuring that delegated authority is issued to each dealer,

reconciling dealers’ positions against the Bank’s accounting records, monitoring credit exposure and market risk limits, entering

trades and transactions into the system in a timely and accurate manner and checking dealing system information on a spot

basis. Treasury Groups’ Operations Department reviews trade information on the dealing screens and telex logs to ensure that

deals are recorded and input properly. The above-mentioned Operations Department also has the responsibility of investigating

and resolving inconsistencies in the confirmation process.

Positions in securities and related futures and options are to be reported to ALCO on a trade date basis for each issue, issuer,

industry, rating category and country of issuer. These positions are compared to the approved limits. The age of securities

positions is monitored on a first in/first out basis from the trade inception. Because of differing valuation standards, the Bank

places controls on internal transfers of securities from their accounts at inception to other classifications.

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Non-standard transactions, transactions which are not booked routinely in the back office systems, are subject to special

procedures. A business unit head of a unit entering the transaction must verify that all back- office systems required to book,

value and measure exposure of the transaction are in place or can be developed in a timely manner.

Treasury Group’s Operations Department undertakes the settlement of funds and securities and follows procedures and

controls designed to minimize operational risk, including procedures concerning confirmation matching of payments from

counterparties, dealing with confirmation exceptions and reporting settlement exposures and payment failures. Treasury

Group’s Operations Department reports all projected settlement exposures as well as any payment failures to the credit officers

in charge of the counterparty or customer relationship.

In addition, the Bank has implemented operational control policies for accounting and financial control to ensure that

transactions are properly recorded in the balance sheet and income statement. These include reconciliation of treasury

accounts with the general ledger of the Financial Management System. There is an independent regular mark-to-market

process that values portfolio positions at current prices/levels that are provided through live price feed of Reuters or Bloomberg

and from other independent third party sources. These generate the estimated mark-to-market of the investments portfolios or

positions independent of the front and back office.

Internal Audit

The Bank’s internal audit function is performed by its Internal Audit Unit and overseen by its Audit Committee and is conducted

pursuant to an audit plan. The Internal Audit Unit undertakes a comprehensive audit of all business groups and other functions.

The Internal Audit Unit performs a financial audit every quarter and undertakes a risk-based audit of all business and operating

units on a twelve to twenty-four months cycle depending on the unit’s risk score. Various components of IT from applications to

databases, networks and operating systems are covered under the annual audit plan. The Bank’s audit plan is approved by the

Audit Committee and the Board of Directors. Pursuant to BSP regulations, banks in the Philippines are required to constitute an

audit committee comprised of at least two independent directors. The Bank’s Audit Committee provides guidance and oversees

the responsibilities of the internal and external audits of the organization and provides an independent line of reporting for the

internal audit function. As of 30 September 2009, the Bank’s Audit Committee included three independent directors, Teodoro Q.

Peña, Armando Medina, Roberto de Ocampo.

Anti-Money Laundering Controls

The Anti-Money Laundering Act was passed in September 2001 and was amended in March 2003. Under the Anti-Money

Laundering Act, as amended, the Bank is required to submit “Covered Transaction Reports” involving single transactions in

cash or other equivalent monetary instruments in excess of P500,000 within one Banking Day. The Bank is also required to

submit “Suspicious Transaction Reports” to the Anti-Money Laundering Council of the BSP in the event that there are

reasonable grounds to believe that any amounts processed are the proceeds of money-laundering activities. The Bank is

required to establish and record the identities of its clients based on official documents. In addition, all records of transactions

are required to be maintained and stored for five years from the date of the transaction. Records of closed accounts must also

be kept for five years after their closure.

Under BSP Circular No. 279 dated 2 April 2001, within 20 Banking Days after the end of each financial year, the Bank is

required to submit to the BSP a certificate signed by the President and the Chief Compliance Officer stating that they have

monitored compliance and that the Bank is complying with the anti-money laundering rules and regulations.

In an effort to further prevent money laundering activities, the Bank has adopted Know Your Customer policies and guidelines.

Under the guidelines, each business unit is required to validate the true identity of a customer based on official or other reliable

identifying documents or records before an account may be opened. Each business unit is also required to monitor account

activities to determine whether transactions conform to the normal or expected transactions for a customer or an account. For a

high-net worth individual whose source of funds is unclear a more extensive due diligence is required. Decisions to enter into a

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business relationship with a higher risk customer, such as a politically exposed person or a private individual holding a

prominent position, are made exclusively at the senior management level.

The Bank’s procedures for compliance with the Anti-Money Laundering Act are set out in its Anti-Money Laundering Policy

Manual. The Bank’s Compliance Office monitors compliance and conducts compliance- testing of business units.

The Bank’s Anti-Money Laundering Committee evaluates suspicious transaction reports submitted by branches for final

determination if the suspicions are based on reasonable grounds and are therefore reportable to the Anti-Money Laundering

Council. All banking groups are required to submit to the Compliance Office certificates of compliance with the Anti-Money

Laundering Rules & Regulations on a quarterly basis.

Legal Risk Management

Changes in laws and regulations could adversely affect the Bank. In addition, the Bank faces legal risks in enforcing its rights

under its loan agreements, such as foreclosing on collateral. Legal risk is higher in new areas of business where the law

remains untested by the courts. The Bank uses a legal review process as the primary control mechanism for legal risk. Such a

legal review aims to verify and validate the existence, genuineness and due execution of legal documents, and verify the

capacity and authority of counterparties and customers to enter into transactions. In addition, the Bank seeks to minimize its

legal risk by using stringent legal documentation, imposing certain requirements designed to ensure that transactions are

properly authorized and consulting internal and external legal advisors.

Regulatory Risk Management

Regulatory risk refers to the potential for the Bank to suffer financial loss due to changes in the laws or monetary, tax or other

governmental regulations of a country. The Bank’s Compliance Program, the implementation of which is overseen and

coordinated by the Compliance Office, is the primary control process for regulatory risk issues. The Compliance Office is

responsible for communicating and disseminating new rules and regulations to all units, analyzing and addressing compliance

issues, performing periodic compliance testing on branches and Head Office units, and reporting compliance findings to the

Audit Committee and the Board of Directors. On a case by case basis, when the Audit Committee is not immediately available,

the Compliance Officer may initially report urgent matters to the President/Chief Operating Officer or the Chief Executive

Officer, and thereafter to the Audit Committee.

Capital Adequacy

The Philippines adopted capital adequacy requirements based on Basel Capital Accord in July 2001. As of 30 September 30

2009, the Bank’s core capital ratio (the ratio of Tier 1 Capital to risk-weighted assets) was 13.3%, while its risk-weighted capital

ratio (the ratio of total capital to risk-weighted assets) was 19.3%. The BSP’s minimum risk weighted capital ratio is 10.0%.

The following table sets out the capital adequacy ratios of the Bank as of the dates indicated:

As of 31 December As of 30 September

2006 2007 2008 2009

(in percentages)

Core capital ratio (Tier 1)(1) ..................... 13.3 15.1 13.2 13.3

Risk-weighted capital ratio ...................... 20.3 18.7 17.3 19.3

Notes: (1) Total qualifying capital less Tier 2 capital divided by total risk weighted assets

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The following table sets out a breakdown of the Bank’s consolidated capital base by category of capital as of the dates

indicated:

As of 31 December

As of 30 September

2006 2007 2008 2009

Tier 1 Core Capital (in P millions)

Paid-up capital stock................................................................. 7,384.5 16,592.2 16,592.3 16,684.9

Surplus...................................................................................... 7,146.7 3,547.3 5,759.0 6,676.7

Undivided Profits....................................................................... 2,033.0 3,042.3 2,026.4 2,819.2

Eligible hybrid tier 1 capital ....................................................... 2,439.4 3,795.7 3,983.5 4,141.7

Other tier 1 capital items ........................................................... - 223.0 128.2 145.7

Deductions from tier 1:

Unsecured DOSRI .................................................................... (234.9) (138.5) (208.1) (202.1)

Deferred Income tax ................................................................. (2,350.7) (1,602.8) (1,392.6) (1,390.0)

Goodwill .................................................................................... (157.9) (157.9) (335.8) (315.9)

Common shares treasury stock ................................................ - - - (952.7)

Other deductions....................................................................... - (157.4) (537.0) (177.9)

Net tier 1 capital ...................................................................... 16,260.1 25,143.9 26,015.9 27,429.6

Upper Tier 2 .............................................................................. 3,215.0 1,070.0 1,782.7 1,650.9

Lower Tier 2 .............................................................................. 5,427.9 5,158.2 6,865.3 10,922.6

Gross Tier 2 Capital ................................................................ 8,642.9 6,228.1 8,648.0 12,573.5

Deductions ................................................................................ (8.8) (157.4) (537.0) (177.9)

Eligible amount of tier 2 ......................................................... 8,634.1 6,070.7 8,111.0 12,395.6

Total qualifying capital ........................................................... 24,894.2 31,214.6 34,126.9 39,825.2

The following table sets out the breakdown of the Bank’s consolidated risk-weighted assets by category as of the dates

indicated:

As of 31 December

As of 30 September

2006 2007 2008 2009

Risk-weighted on-balance sheet assets (in P millions)

20%......................................................................................... 4,817.1 2,285.7 1,520.0 1,790.8

50%......................................................................................... 4,039.9 6,735.2 14,745.9 14,437.5

75%......................................................................................... 655.6 2,726.9 2,572.3 4,680.8

100%....................................................................................... 98,995.1 102,716.2 132,466.6 141,389.3

125%....................................................................................... 8,034.7 21,175.2 16,940.8 13,327.7

Total risk-weighted on-balance sheet assets..................... 116,542.4 135,639.2 168,245.6 175,626.1

Risk-weighted off-balance sheet exposures ........................... 3,146.2 3,068.8 1,844.2 1,852.1

Total risk-weighted interest rate and exchange rate related contingencies/Others .............................................. 193.5 2,820.1 1,467.5 925.7

Market and Operational risk weighted assets ......................... 2,684.2 25,380.4 25,665.3 28,368.5

Total risk-weighted assets ................................................... 122,566.3 166,908.5 197,222.6 206,772.4

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RELATED PARTY TRANSACTIONS

The Company is a member of the YGC. As of 30 September 2009, the Yuchengco family, primarily through Pan Malayan,

owned approximately 48.1% of the Bank’s issued and outstanding shares whilst other members of YGC owned or controlled an

additional 5.6% of the Bank’s issued and outstanding shares.

The Bank and its subsidiaries, in their ordinary course of business, engage in transactions with the YGC and its subsidiaries.

The Bank’s policy with respect to related-party transactions is to ensure that these transactions are entered into on terms

comparable to those available from unrelated third parties.

Certain of the Bank’s major related-party transactions are described below.

• Angara Abello Concepcion Regala & Cruz Law Office (“ACCRA”) is among the firms engaged by the Bank to provide

various legal services. The Bank’s Director Teodoro Dy-Liaco Regala is a senior partner of ACCRA. During fiscal

year 2006, the Bank paid ACCRA legal fees that the Bank believes to be reasonable for the services provided.

• The Bank is a lessee of RCBC Realty Corporation (“RCBC Realty”) of which it directly owns 25.0% and indirectly

owns 9.8% through its equity holdings in RCBC Land, Inc. (“RCBC Land”). RCBC owns 49.0%, of RCBC Land, which

owns 20.0% of RCBC Realty.

• The Bank entered into a Memorandum of Agreement with House of Investments, Inc. (“HI”), a member of the YGC,

for the procurement of outsourcing services. Under the agreement, HI is the Bank’s sole representative in negotiating

the terms of the contracts with selected suppliers or service providers for the procurement of certain outsourcing

services, primarily IT related services. The agreement stipulated that HI would not charge fees for its service except

for its share in the savings generated from suppliers and service providers. Moreover, HI is obligated to ensure that

the contracts they initiate do not prejudice the Bank in any way and that the Bank does not pay more than the cost of

buying the items without aggregation.

• In December 2006, Bankard and RCBC entered into a services agreement wherein RCBC outsourced the servicing

of the credit card business to Bankard. These services include card acquisition and marketing services, verification

and collection services. Transactions under the agreement are carried out on a “cost plus” basis whereby Bankard

receives a premium above the costs that it expends to conduct its services.

In October 2009, RCBC entered into a joint development agreement with RSB, MICO, Grepalife and Bankard for the

development of the RSB Corporate Center located at Bonifacio Global City. Pursuant to this agreement, the Bank will

obtain ownership and possession of certain floors in the RSB Corporate Centre Building which it will use as office

space for some of its business units.

The Bank’s other transactions with affiliates include leasing office premises to subsidiaries, the availment of computer services

of an affiliate and regular banking transactions (including purchases and sales of trading account securities, securing insurance

coverage on loans and property risks and intercompany advances), all of which are at arms’ length and conducted in the

ordinary course of business.

DOSRI Loans and Deposits

In the ordinary course of business, the Bank provides loans to investees and to certain DOSRI. All such loans are on

commercial, arm’s length terms. The General Banking Law of the Philippines and BSP regulations limit the aggregate amount

of loans to DOSRI to 15.0% of a bank’s total loan portfolio or 100.0% of a bank’s net worth, whichever is lower. In addition,

under existing regulations, the amount of individual loans to DOSRI, of which 70.0% must be secured, may not exceed the

aggregate amount of their deposits with a bank and book value of their investments in such bank. The Bank is required to

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report the level of DOSRI loans to the BSP on a weekly basis. DOSRI loans accounted for approximately 5.9% and 3.3% of the

Bank’s loan portfolio as of 31 December 2008 and 30 September 2009, respectively.

The Board of Directors of the Bank has the sole authority to approve loans to DOSRI.

The following table shows information relating to the DOSRI loans as of the dates indicated:

For the years ended 31 December For the quarters ended 30 September

(in P millions, except percentages)

2006 2007 2008 2008 2009

Total outstanding DOSRI loans 10,144 9,247 9,214 8,868 4,402

Percent of DOSRI loans to total loans 9.6% 7.5% 5.9% 7.2% 3.6%

Percent of unsecured DOSRI loans to total

DOSRI loans

2.9% 1.5% 2.4% 2.5% 2.4%

Subsidiaries and Affiliates

Universal banks in the Philippines, such as the Bank, may invest in the equity of banking related companies or “allied

undertakings”. Financial allied undertakings include leasing companies, banks, investment houses, financing companies, credit

card companies and financial institutions catering to SMEs.

A publicly-listed universal or commercial bank in the Philippines may own 100.0% of the voting stock of only one other

commercial bank. Such universal or commercial bank may only have ownership in additional commercial banks as a minority

shareholder. A universal bank may also own up to 100.0% of the voting stock of thrift banks and rural banks, and generally up

to 100.0% of other financial and non-financial allied undertakings. Prior Monetary Board approval is required for investments in

allied and non-allied undertakings.

The total investments in equities of allied and non-allied enterprises shall not exceed 50.0% of the net worth of the Bank,

subject to the further requirement that the equity investment in one enterprise shall not exceed 25.0% of the net worth of the

Bank.

The Bank’s subsidiaries and investments in allied undertakings are as follows:

Bankard Inc.

Bankard, a 91.7%-owned subsidiary of RCBC and RCBC Capital, was acquired from Equitable PCI Bank in 2000. Until

December 2006, the Bank conducted its credit card operations through Bankard. Bankard continues to provide certain card

services to the Bank. Bankard’s net income for the nine-month period ended 30 September 2009, amounted to P78.4 million.

Bankard’s net income for fiscal year 2008 amounted to P276.05 million which includes a one-time gain from the sale of shares

of Visa Inc., amounting to P192.9 million.

The Bank made an additional P1.0 billion capital contribution to Bankard through a debt for equity swap. As of December 31,

2007, the equity has been credited as deposit for future subscription by Bankard. Bankard has applied to increase its share

capital, which was approved in 2008. Following the receipt of such approval, the Bank received Bankard shares and Bankard

became a direct subsidiary of the Bank.

RCBC Savings Bank, Inc.

RSB, a wholly-owned subsidiary of the Bank, was established in 1996 as the Bank’s consumer banking arm. RSB provides

deposit products, real estate loans, auto loans and personal loans. In fiscal years 2008 and 2007, RSB’s net income was

P776.2 million and P690.6 million. For the nine months ended 30 September 2009, RSB’s net income amounted to P639.0

million compared to P542.4 million for the same period in 2008.

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RCBC Capital Corporation

RCBC Capital, a 99.96% owned subsidiary, was established in 1974. RCBC Capital Corporation is the investment banking

subsidiary of RCBC. It offers a complete range of investment banking and financial consultancy services which include (i) the

underwriting of equity, quasi-equity and debt securities on a firm or best efforts basis for private placement or public distribution;

(ii) the syndication of foreign currency or peso loans; and, (iii) financial advisory services. In fiscal year 2008, RCBC Capital’s

consolidated net loss was P17.7 million. For the nine months ended 30 September 2009, RCBC Capital’s net income amounted

to P 145.5 million compared to P121.4 million net loss for the same period in 2008.

RCBC Forex Brokers Corporation

RCBC Forex Brokers Corporation (“RCBC Forex”), a wholly-owned subsidiary of the Bank, was incorporated in 1998. RCBC

Forex is engaged in dealing and brokering currencies in foreign exchange contracts with local and international clients. For

fiscal year 2008, RCBC Forex’s net income was P59.5 million. For the nine months ended 30 September 2009, RCBC Forex’s

net income amounted to P 56.9 million compare to P56.3 million for the same period in 2008.

RCBC North America, Inc. (formerly RCBC California International, Inc.)

RCBC North America a wholly-owned subsidiary of the Bank, was established in 1991 as the Bank’s foreign exchange

remittance office in California. In fiscal year 2007, RCBC North America’s net income was U.S.$238,700, while for fiscal year

2008, this was a net loss of U.S.$797,000. For the nine months ended 30 September 2009 and 2008, RCBC North America’s

net loss amounted to US$1.0 million and US$ 578,500, respectively.

RCBC TeleMoney Europe S.p.a.

RCBC TeleMoney Europe, a wholly-owned subsidiary of the Bank, was established in 1995 in Rome, Italy to engage in the

remittance business. In fiscal years 2008 and 2007, RCBC TeleMoney Europe registered net income of Euro 349,890 and Euro

77,400, respectively. For the nine months ended 30 September 2009, RCBC TeleMoney Europe’s registered net income

amounted to Euro 94,800 compared to Euro 349,900 for the nine months ended 30 September 2008.

RCBC International Finance Limited

RCBC IFL, a 99.99% owned subsidiary of the Bank, was established in 1979 and is the Bank’s overseas branch in Hong Kong.

RCBC IFL is primarily engaged in the remittance business. In fiscal year 2007, RCBC IFL’s net income was HK$423,420 and

for period ended 31 December 2008, RCBC IFL’s net loss was HK$898,500. For the nine months ended 30 September 2009,

RCBC IFL’s net income amounted to HK$978,500 compared to a net loss of HK$774,900 for the nine months ended 30

September 2008.

RCBC Securities, Inc. (“RCBC Securities”)

RCBC Securities, a wholly-owned subsidiary of RCBC Capital, is engaged in the electronic and traditional trading of listed

securities and in providing corporate and market research.

RCBC Land, Inc.

RCBC Land, a joint venture of the Bank and Pan Malayan, was established in 1997. The Bank currently has a 49.0% stake in

RCBC Land, which is engaged in housing ventures, homebuilding and development, land banking, subdivision development

and joint ventures with home developers. RCBC Land is not a consolidated subsidiary of the Bank. In fiscal year 2007, RCBC

Land had net income of P293.44 million whereas in fiscal year 2008, RCBC Land experienced a P17.8 million net loss. For the

nine months ended 30 September 2009, RCBC Land’s net loss was P6.1 million compared to P12.9 million for the nine months

ended 30 September 2009.

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RCBC Realty Corporation

RCBC Realty, 25% and 20% owned by RCBC and RCBC Land, respectively, is a joint venture between RCBC Land and the

Government of Singapore Investment Corporation. RCBC Realty owns RCBC Plaza where the Bank’s head office is located.

RCBC Realty is primarily engaged in managing and developing real estate infrastructure products, including the Bank’s

corporate headquarters. Net income for 2007 and 2008 was P318.0 million and P335.40 million, respectively. Net income for

the nine months ended 30 September 2009 was P360.9 million, compared to P226.7 million for the period ended 30 September

2008.

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MANAGEMENT, EMPLOYEES AND SHAREHOLDERS

Board of Directors

Secretary Alfonso T. Yuchengco, 86, is the Bank’s Honorary Chairman. He is also Chairman and Chief Executive Officer of the Bank’s major stockholder, Pan Malayan M a n a g e m e n t a n d I n v e s t m e n t C o r p o r a t i o n ( P M M I C ) and the Honorary Chairman of the Board of MICO Equities, Inc. (the holding company of the Malayan Group of Insurance Companies) and other YGC companies. Secretary Yuchengco is presently the Presidential Adviser on Foreign Affairs, and holds a cabinet rank. He has served as Philippine Ambassador to the People’s Republic of China, Ambassador Extraordinary Plenipotentiary of the Philippines to Japan, and Presidential Special Envoy to Greater China, Japan and Korea. He also served as the Philippines’ Permanent Representative to the United Nations with the rank of Ambassador from 2001 to 2002. He was the first recipient of the Order of Lakandula with the rank of Bayani (Grand Cross) presented by President Gloria Macapagal-Arroyo. Ambassador Yuchengco was the first Asian to be elected to the Insurance Hall of Fame by the International Insurance Society, Inc. He graduated from Far Eastern University with a Bachelor of Science degree in Commerce and completed his graduate studies at Columbia University, New York, USA. He holds several Honorary Doctorate Degrees from universities in the Philippines, Japan and the United States.

Ms. Helen Y. Dee, 65, is the Bank’s Chairperson. Ms. Dee is also the Chairperson/President of Hydee Management & Resource Corporation and House of Investments (“HI”), Landev Corporation, Hi-Eisai Pharmaceutical Inc., Mapua Information Technology Center, Inc., and Manila Memorial Park. She is a l s o the Vice Chairperson of PMMIC. Among the top companies where she holds a directorship position are Philippine Long Distance Telephone Company, Petroenergy Resources Corp., Great Life Financial Assurance Corporation (formerly Nippon Life Insurance Co. of the Phils.), Malayan Insurance and MICO Equities, Inc. Ms. Dee is also a Trustee of the Mapua Institute of Technology. She graduated from Assumption College with a Bachelor of Science degree in Commerce and completed her Masters in Business Administration at De La Salle University.

Mr. Lorenzo V. Tan, 48, is the Bank’s President and Chief Executive Officer. He is also the Vice-Chairman of RCBC Savings Bank, a Director of Bankard, Inc., Great Pacific Life Corporation, Smart Communications, Inc. and Morphs Lab, Inc. Before joining the Bank, Mr. Tan was the President and Chief Executive Officer of Sun Life of Canada (Phils.), Inc., President and Chief Executive Officer of Philippine National Bank, President, Chief Operating Officer of United Coconut Planters Bank, and Group Managing Director of Guoco Holdings (Phils.), Inc. He also held various positions in Citibank N.A. from 1987 to 1995. He graduated from De La Salle University with a Bachelor of Science degree in Commerce. He earned his Master of Management degree from the J.L. Kellog Graduate School of Management in Evanston, Illinois, USA. He is a Certified Public Accountant in the United States and the Philippines.

Mr. Cesar E. A. Virata, 78, has been a Director since 1995, Corporate Vice Chairman since June 2000 and Senior Adviser from 2007. He is also the Chairman and President of C. Virata and Associates, Inc., Management Consultants. Mr. Virata’s roster of companies where he is also a Director and/or Chairman include RCBC Savings Bank, RCBC Capital, RCBC Forex, RCBC Realty, RCBC Land, Malayan Insurance, Great Life, Business World Publishing Corporation, Belle Corporation, Coastal Road Corporation, Luisita Industrial Park Corporation, Manila Electric Company, Pacific Fund Inc., Mapua Institute of Technology, Bankard, AY Foundation, Inc., and YGC Corporate Services, Inc. (“YGC Corporate Services”), among others. Mr. Virata has held key positions in the Philippine government, including Prime Minister, Secretary/Minister of Finance, Chairman of the Committee on Finance of the Batasang Pambansa (National Assembly), and member of the Monetary Board. He was also Chairman of the Land Bank of the Philippines. He has served as Governor for the Philippines to the World Bank, the Asian Development Bank, and the International Fund for Agriculture Development. He was Chairman of the Development Committee of the World Bank and International Monetary Fund from 1976 to 1980 and Chairman of the Board of Governors of the Asian Development Bank. Prior to his Government positions, he was a Professor and Dean of the College of Business Administration of the University of the Philippines and Principal, SyCip Gorres Velayo & Company, Management Services Division. Mr. Virata graduated from the University of the Philippines with degrees in Mechanical Engineering and Business Administration (Cum Laude). He earned his Masters in Business Administration from the Wharton Graduate School, University of Pennsylvania.

Mr. Rizalino S. Navarro, 70, has been a Director of the Bank since 1999 and a Senior Adviser from 2007. He was the

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Bank’s Executive Vice Chairman and Chief Executive Officer from 2004 to 2007. Currently, he is Chairman (Non-Executive)

of Clark Development Corp. and a Member of the Subic-Clark Area Development Council. Mr. Navarro is also the Chairman of

EEI Corporation, Seafront Resources Corporation, Petroenergy Corporation (“Petroenergy”), Up l ine Food Corpora t ion ,

and Bankard, and a Director of Grepalife, Mapua Institute of Technology, House of Investments, Malayan Insurance, and

YGC Corporate Services. He has held various positions in the government including that of Secretary of Trade and Industry

and member of the Monetary Board. Mr. Navarro graduated from the University of the East with a Bachelor of Science

degree in Business Administration. He received his Masters in Business Administration from Harvard Business School.

Atty. Wilfrido E. Sanchez, 72, has been a Director of the Bank since 2006. He is a Tax Counsel at Quiason Makalintal Barot Torres & Ibarra Law Offices. He also holds the position of Director in other companies, such as Adventure International Tours, Inc., Amon Trading Corp., Center for Leadership & Change, Inc., Dolphin Ship Management, Inc., EEI Corporation, Grepalife Asset Management Corp., Grepalife Fixed Income Fund Corp., House of Investments, and Universal Robina Corporation, among others. He graduated from Ateneo de Manila University with a Bachelor of Laws degree and completed his Master of Laws at Yale University.

Atty. Teodoro D. Regala, 75, has been a Director of the Bank since 1999 and a Member of the Trust Committee since 2000. He is the Founding & Senior Partner and a member of the Executive Committee of Angara Abello Concepcion Regala & Cruz Law Offices- one of the biggest law offices in the country. He is a Director of Bankard, Malayan Insurance, Datacraft Communications Systems, Inc., Datacraft Opsis Inc., MICO Equities, Safeway Philtech, Inc., and Director and Corporate Secretary of OEP Philippines, Inc and Republic Asahi Realty Corporation. He graduated from the University of the Philippines (Cum Laude) with a Bachelor of Laws degree and took his Masters of Law at Harvard University.

Atty. Ma. Celia H. Fernandez-Estavillo, 37, is the Bank’s Director, Corporate Secretary and Senior Vice President and Head—Legal & Regulatory Affairs Group. She is also a Director and Corporate Secretary in Luisita Industrial Park, Philippine Integrated Advertising Agency, Averon Holdings, Inc., RCBC Capital, Merchant Savings and Loan Association, Inc., Niyog Property Holdings, Inc., and Bankard. She is also a member of the Board of Trustees of Mapua Institute of Technology. Before joining RCBC, she was the Assistant Vice President for Global Business Development at ABS-CBN Broadcasting Corp., and Chief of Staff at the Office of Senator Edgardo J. Angara. She graduated from the University of the Philippines with a Bachelor of Science in Business Economics (Summa Cum Laude). She also graduated from the same university with a Bachelor of Laws degree (Cum Laude). She earned her Master of Laws in Corporate Law (Cum Laude) from New York University School of Law. She received the highest score in the Philippine Bar examinations of 1997.

Mr. Reynaldo B. Vea, 57, is currently the President and Chief Executive Officer of the Mapua Institute of Technology, President of Mapua Information Technology Center, Malayan High School of Science, and Malayan Colleges Laguna. He also holds Directorships position in Wirelesspace, Inc., and Grepalife Fixed Income Fund. Mr. Vea graduated from the University of the Philippines with a Bachelor’s Degree in Mechanical Engineering and earned his Master’s Degree in Naval Architecture and Marine Engineering from the Massachusetts Institute of Technology, and his Doctorate Degree in Engineering from the University of California at Berkeley.

Ms. Yvonne S. Yuchengco, 55, joined RCBC in 1989, establishing the Private Banking Unit and heading the General Services and Purchasing Department while handling public relations for the bank. She was the main proponent behind the Bank’s RCBC Dragon campaign and the award-winning crusade to save the country’s freshwater resources. She was appointed president of Malayan Insurance Company, Inc. and MICO Equities in 1995, positions she still holds at present. In recognition of her involvement in various social causes, she was appointed chair of the National Advisory Board of the Presidential Commission for the Urban Poor by President Fidel Ramos. She currently chairs The First Nationwide Assurance Corporation, and sits as a Director of AY Foundation; Honda Cars Quezon City and Kalookan, Manila Memorial Park, Inc. and Grepalife.

Mr. Armando M. Medina, 60, is an Independent Director of the Bank. He is a member of various board committees of the Bank, including the Executive Committee, Trust Committee, and Risk Management Committee He is also an Independent Director of RCBC Capital, RCBC Savings Bank, First Malayan Leasing & Finance Corporation, RCBC Forex and Great Pacific Life Financial Assurance Corporation. He graduated from De La Salle University with a Bachelor of Arts degree in Commerce and Economics and a Bachelor of Science in Commerce—Major in Accounting.

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Atty. Teodoro Q. Peña, 77, has served as an Independent Director of the Bank since 2002 and Director from 1995 to 2002. He is also t he Chairman of the Bank’s Audit Committee and Personnel and Evaluation Review Committee. He is also an Independent Director of RCBC Securities, Malayan Zurich Insurance Co. Inc, Bankard and RCBC Capital. He is also the Chairman of the Audit Committee of RCBC Savings Bank and EEI Corporation, respectively. He currently holds positions in the Philippine Constitution Association, Palawan State University, Educators Inc., and the Institute of Corporate Directors. He graduated from the University of the Philippines with a Bachelor of Laws degree and received a Master of Laws degree from Yale University.

Mr. Francisco C. Eizmendi, Jr., 73, is an Independent Director of the Bank. Prior to assuming this position, he was a member of the Bank’s Advisory Board. Mr. Eizmendi is also an Independent Director at RCBC Forex and Makati Finance Corporation and Trustee at the Institute of Corporate Directors. He served as President and Chief Operating Officer of San Miguel Corporation from 1987 to 2002. He graduated from the University of Sto. Tomas with a Bachelor of Science degree in Chemical Engineering.

Mr. Roberto F. de Ocampo, 63, has served as an Independent Director of the Bank since 2006. He also holds various Chairmanship and/or Directorship position/s in several companies, including Philam Mutual Funds Group, Seaboard Eastern Insurance, and Universal LRT Corporation, among others. Prior to his current position with the Bank, he was the President of the Asian Institute of Management. He also became an Advisory Board Member of Metropolitan Bank & Trust Co. and a Director of ABS-CBN Broadcasting, Inc. He also held various positions in the Government, including Secretary of Finance, Chairman of the Cabinet Cluster on Macro- Economy, and Chairman of the Committee on Privatization and Fiscal Incentives Review Board. He graduated from Ateneo de Manila University with a Bachelor of Arts degree in Economics. He earned his Masters in Business Administration from the University of Michigan and his Doctorate’s Degree in Developmental Administration from London School of Economics.

Mr. Antonio L. Alindogan, Jr., 71, is currently an Independent Director of the Bank. He also holds directorship position on various companies including House of Investment, C55, Inc., An-Cor Holdings, Inc., Philippines Airlines and PAL Holdings, Inc., among others. Prior to his assumption as director of the Bank, Mr. Alindogan was a member of the Monetary Board of the Bangko Sentral ng Pilipinas. He graduated as Magna Cum Laude from the De La Salle College with a Bachelor of Science degree in Accounting.

Mr. Alfonso T. Yuchengco is the father of Ms. Helen Y. Dee and Yvonne Yuchengco. Other than such relationships, none of

the Bank’s Directors are related to one another or to any of the Bank’s executive officers.

The Directors of the Bank are elected at the annual shareholders’ meeting to hold office until the next succeeding annual

meeting and until their respective successors have been elected and qualified.

Board Committees

The Bank’s Board of Directors has created each of the following committees and appointed Board members thereto. Each member of the respective committees named below has been holding office as of the date of this Offering Circular and will serve until his successor shall have been elected and qualified

Executive Committee

The Executive Committee has the power to act and pass upon such matters as the Board may entrust to it for action in between Board meetings. It may also consider and approve loans and other credit related matters, investments, purchase of stocks, bonds, securities, and other commercial papers for the Bank’s portfolio.

Audit Committee

The Audit Committee provides oversight of the Bank’s financial reporting and control, and internal and external audit

functions. It is responsible for the establishment of the Bank’s internal audit department and for the appointment of the Bank’s

internal auditor and independent external auditors. It is responsible for ensuring that a review of the effectiveness of the

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Bank’s internal controls, including financial, operational, and compliance controls, and risk management, is conducted at least

annually.

Trust Committee

The Trust Committee has the authority to conduct the fiduciary businesses of the Bank, including the power to grant

loans and credit accommodations to clients using trust accounts.

Personnel Evaluation & Review Committee

The Personal Evaluation & Review Committee acts as an independent body in the evaluation and review of cases involving dishonesty, fraud, and negligence, violation of any internal Bank policy, rule or procedure committed by an employee of the Bank The Committee also recommends disciplinary measures and penalties to the Board of Directors in the case of violations. It also ensures that the appropriate preventive, corrective and disciplinary measures are imposed on these cases affirm review, revise, or modify any resolution arrived at or action taken by Management against employees with administrative cases

Corporate Governance Committee

The Corporate Governance Committee assists the Bank’s Board of Directors in fulfilling its corporate governance responsibilities. The Committee reviews and evaluates the qualifications of all persons nominated to the Board as well as those nominated to other positions requiring appointment by the Board. It is responsible for ensuring the Board’s observance of corporate governance principles and guidelines, including those set forth in the Bank’s Manual of Corporate Governance. It also sets compensation for the Board and Executive Officers and makes recommendations to the Board regarding the continuing education of directors, assignments to Board committees, and succession plans for Board members and senior officers.

Executive Officers

The names, ages and positions of the Bank’s executive officers are as follows:

Alfredo S. Del Rosario Jr., 53, Executive Vice President, is the Head of the Asset Management and Remedial Group. He was

the Head of the Overseas Filipino Banking Group from March 2007 to September 2008 and Head of the Commercial Banking

Group from May 2006 to February 2007. Prior to joining the Bank, Mr. Del Rosario worked for AB Capital and Investment

Corporation as Senior Vice President, Trust and Investment Division Head, and Information Technology Division Head (from

January 2000 to May 2006). He also held directorship positions in AB Capital Securities, Inc., Stock Transfer Services, Inc.,

Araullo University, AB Card Corporation and Asianbank Corporation. Furthermore, Mr. Del Rosario previously worked for

Global Business Bank as Senior Vice President and Branch Banking Group Head, Asian Bank as Senior Vice President and

Branch Banking Division and as Senior Vice President, Human Resources and Administration Division, Bank of America as

Vice President, Human Resources, and for Philippine Airlines, FNCB Finance and the Ayala Group of Companies.

Jose Emmanuel U. Hilado, 45, Executive Vice President, is the Bank’s Treasurer and Head of Treasury Group. Prior to joining

RCBC, he was SVP and Head of Trading and Investments of Banco de Oro Unibank from July 2007 to September 2008. He

also served as SVP/Treasurer of BDO Private Bank from September 2003 to June 2007. Prior to this, he held various positions

in Equitable PCIBank, and Far East Bank and Trust Company.

Regino V. Magno, 51, Senior Vice President, is the Bank’s Chief Risk Officer and Head of Corporate Risk Management

Services (CRISMS). Prior to joining RCBC, he was the Chief Risk Officer of Sterling Bank of Asia from August 2007 to

December 2008.. He was a Market Risk Consultant of Chase Cooper, a London-based consulting firm; Chief Risk Officer of

Philippine National Bank for four years; a Consultant of Philippine Deposit Insurance Corporation for a year; and a Senior Risk

Manager at the Bank of the Philippine Islands for four years. He held various positions in CityTrust Banking Corporation.

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Ismael R. Sandig, 55, Executive Vice President, is the Head of RBG. He was a Senior Consultant and Assistant to the

President from 2005 to 2006 at East West Bank Corporation. He also joined Philippine National Bank from 2001 to 2005, where

his last appointment was as Retail Banking Sector Head and concurrent Consumer Finance Sector Head. He held various

positions in Retail Banking in Union Bank of the Philippines, PCI Bank and Insular Bank of Asia and America.

Uy Chun Bing G., 56, Executive Vice President, is the Head of Corporate Banking Group, formerly the Corporate Business

Development Group, a position he has held since 1 January 1997. He is also a Director of the Financial Brokers’ Insurance

Agency. Previously, Mr. Uy was the Head of the Bank’s Binondo Branch and Area Supervisor for Binondo as Senior Vice

President (1989 to 1996), First Vice President (1988 to 1989), Vice President (1987 to 1988) and the Head of the Divisoria

Branch as Vice President (1982 to 1987) and Assistant Vice President (1980 to 1982).

Redentor C. Bancod, 45, Executive Vice President and Head of the IT Shared Services Group. Previously, he was Vice

President & General Manager, Central Systems Asia of Sun Life Financial, Asia and Senior Vice President and Chief

Technology Officer of Sun Life Of Canada (Philippines) Inc. from October 2003 to 2007, Senior Vice President & Chief

Information Officer of Equitable PCI Bank from July 1996 to September 2003, Assistant Vice President and Head of

Applications Development in Far East Bank from October 1993 to June 1996, Assistant Vice President of Regional Operations,

Asia Pacific, of Sequel Concepts, Inc. USA/Ayala Systems Technology Inc. from November 1992 to September 1993, Project

Manager in Union Bank of Switzerland, NA from April 1988 to November 1992 and Chief Designer and Technical Advisor in

Computer Information System Inc. from March 1984 to April 1998.

Zenaida F. Torres, 55, First Vice President, assumed the post of Head, Controllership Group starting October 2009. Ms.

Torres was seconded to Bankard, Inc. as Chief Financial Officer from February 2004 to August 2008 and concurrently acted as

the Corporate Information Officer from November 2006 to August 2008. Prior to this, Ms. Torres also held various positions in

the Bank from 1980 to 2003 and positions at Costraco, Phils., University of the East, and Ford Credit Philippines.

Lope M. Fernandez, Jr., 59, Executive Vice President and current President and CEO of RCBC Savings Bank (RSB). Prior to

his appointment as President, he was the Head of the Consumer Lending Group of RSB. He is a Certified Public Accountant

and holds a Bachelor’s degree in Business Administration majoring in Accounting from the University of the East.

Elbert M. Zosa, 62, Executive Vice President, has been the Head of the Bank’s Corporate Planning Group since April 2006. He

was formerly Head of Strategic Planning of Equitable PCI Bank with responsibility over Corporate Planning and Corporate

Communications. He also served in other capacities such as Head of International Services Group where he spearheaded the

development of its remittance business and coordinated its foreign offices. He also served as Area Head for Marketing and

Operations of some branches. He obtained his Master of Business Administration from the Wharton School, University of

Pennsylvania.

Melissa G. Adalia, 57, Senior Vice President, is the Head of the Human Resources Group. Prior to joining the Bank, Ms.

Adalia was Head of Human Resources for Asia United Bank from March 2001 to April 2006, ABN Amro Bank from 1999 to

2000, Great Pacific Bank in 1999, Bank of America Savings Bank, Dai-Ichi Group of Companies and SM Shoemart.

Manuel G. Ahyong Jr., 48, Senior Vice President, is the current Head of the Wealth Management Segment 2 (Makati) . Prior

to joining the Bank in 2006, he was a Senior Vice President of Pramerica Financial, Director in Societe Generale, Vice

President of Deutsche Bank, AG.; Deputy Manager and Head for Private Banking of Banque Indosuez; and Director for Private

Banking of American Express Bank.

Marcelo E. Ayes, 56, Senior Vice President, is the Head of Treasury’s Financial Institution Management Division (FIMD). Prior

to joining the Bank, Mr. Ayes was First Vice President and Chief Dealer and Head of the Proprietary Trading Division at

Equitable PCI Bank from 2001 to September 2006, and Head of the Treasury Marketing and Product Development Group from

1998 to 2001. Mr. Ayes also held various positions in the Philippine National Bank from 1978 to 1997, including a four-year

term in Singapore and a five-and-a half-year term in Hong Kong.

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John Thomas G. Deveras, 46, First Senior Vice President, is Head of Strategic Initiatives. Prior to joining the Bank in May

2007, he was an Investment Officer at International Finance Corporation. He also worked for PNB Capital and Investment

Corporation as President, and Senior Vice President in PNB Corporate Finance. He holds a degree in Bachelor of Science

degree in Management Engineering from Ateneo de Manila University and earned his Masters Business Administration from

the University of Chicago.

Siony C. Dy Tang, 56, Senior Vice President, is currently the Head of Chinese Banking Division 1 of the CBG. She has been

with the Bank since 1973.

Eli D. Lao, 52, Senior Vice President, is the Head of Chinese Banking Segment under the CBG since 2000. He has been with

the Bank since 1978, holding various positions.

Rommel S. Latinazo, 50, First Senior Vice President, is the Head of the Corporate Banking Segment 1 under the CBG. He

joined the Bank in 2000 as First Vice President. Previously, he held various positions in Solidbank Corporation, Standard

Chartered Bank, CityTrust Banking Corporation, First Pacific Capital Corporation and Philamlife Insurance Company.

Ana Luisa S. Lim, 50, First Senior Vice President, heads the Internal Audit Division of the Bank. She is also a Director and

Corporate Secretary of BEAMExchange, Inc. She joined the Bank in 2000 primarily to implement the risk-based audit approach

under a shared-services set-up in conformity with the Bank’s strategic risk management initiatives. Ms. Lim is a Certified Public

Accountant, Certified Information Systems Auditor and Certified Internal Auditor.

Yasuhiro Matsumoto, 48, Senior Vice President, is the Head of CBG’s Japanese Business Relationship Office since April

2006. Prior to this, he worked for The Bank of Tokyo-Mitsubishi UFJ, Ltd. since 1984, when the bank was named The Sanwa

Bank, Ltd. He has also previously served as a Director of RCBC.

Cynthia P. Santos, 55, Senior Vice President, is the Head of the Overseas Filipino Banking/TeleMoney Group. Prior to this

position, Ms. Santos was the Head of the Corporate Planning Group and its Chief Information Officer. She started with RCBC

as the Bank Economist.

Rolando S. Umali, 58, Senior Vice President, has been cross-posted to RSB as Group Head for Operations since 2001.

Before his current assignment, he was the Group Head for Operations of RCBC since 1999.

Alexander Y. Cham, 59, Senior Vice President and is the current Regional Sales Manager for the Northern Luzon Regional

Office. He joined the Bank as an Assistant Area Supervisor and Branch Manager in 1981. e graduated from the University of

Santo Tomas with a Bachelor of Science degree in Commerce major in Marketing.

Michael O. de Jesus, 50, First Senior Vice President, is the current Segment Head of Corporate Banking 2. He has a Bachelor

of Arts degree in Economics from Union College in Schenectady, New York and a Masters in Business Administration

(Finance) from The Wharton School, University of Pennsylvania.

Lourdes Bernadette M. Ferrer, 51, Senior Vice President, is currently the Head of Trust and Investments. Prior to joining the

Bank on 1 September 2000, she held various related positions in Solidbank Corporation and the International Corporate Bank.

She graduated from the University of the Philippines with a Bachelor of Science degree in Statistics and likewise obtained her

Master’s Degree in Business Administration from the same university.

Reynaldo P. Orsolino, 49, Senior Vice President and Head of the SME Division. Prior to joining the Bank, he served as Senior

Vice President in Philippine National Bank from June 2003 to July 2007, and previously held senior positions at the Planters

Development Bank, Asian Banking Corporation, and the Land Bank of the Philippines. He holds a degree in Bachelor of Arts

degree in Economics from the University of the Philippines.

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Rafael Andres R. Reyes, 47, Senior Vice President, is currently seconded as Chief Operating Officer of Bankard. He holds a

Bachelor of Science degree in Commerce, major in Marketing Management from De La Salle University. Prior to joining the

Bank, he served as First Vice President for Union Bank of the Philippines from September 2000 to July 2007.

Edgar B. Villanueva, 47, is the First Senior Vice President and Head of Global Transaction Services. Prior to his appointment,

he was with global players Bank of America (La Salle Bank N.A.) and ABN Amro Bank N.V., where he held various senior

executive positions. His career record reveals in-depth exposures and involvement in Corporate Banking including Treasury

Management, Global Custody and Institutional Trust in a variety of challenging roles in relationship management, business

development, product management, operations, change management and client services across a broad range of business

environments in cash management, trade services, corporate trust, global custody, and capital markets. He is an MBA graduate

of the Kellogg Graduate School of Management.

Executive officers with the rank of Assistant Vice President and above are appointed annually by the Board of Directors in its

Organizational Board Meeting right after the shareholders meeting which is held annually every last Monday of June. None of

the Bank’s executive officers are related to one another or to any of the Bank’s Directors. There are no binding contracts or

arrangements with regards to the tenure of the Bank’s executive officers. All of the officers identified above are Filipino citizens,

except for Mr. Yasuhiro Matsumoto.

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Employees

As of 31 December 2008, the Bank had 4,365 permanent employees, of which 54.3%, were engaged in a professional

managerial capacity and classified as “officers”. As of 31 December 2008, approximately 49.2% of the Bank’s employees

(excluding its subsidiaries) are employed at the head office and 50.8% are employed at its branches.

The following table presents the number of employees by category as of the dates indicated:

For the years ended 31 December

2006 2007 2008

Staff 1,851 1,752 1.886

Officers 1,955 2,023 2,236

Total 2,806 3,775 4,122

All of the Bank’s non-managerial employees, other than those expressly excluded under the collective bargaining agreement,

are represented by an independent union, the RCBC Employees Association. In November 2006, the Bank (not including

subsidiaries) and RCBC Employees Association agreed on the terms of economic and non-economic collective bargaining

agreements for the period from 1 October 2006 to 30 September 2011.

The Bank has not suffered any strikes in the past five years, and the management of the Bank believes that its relations with its

employees and the union are good.

The Bank continues to invest in its employees through various training programs strategically focused on selling skills,

customer service and product knowledge.

The aggregate compensation paid to employees by the Bank for the year ended 31 December 2008 was P2.5 billion.

PRINCIPAL SHAREHOLDERS

The Yuchengco family, primarily through Pan Malayan, is the Bank’s largest shareholder., as of 30 September 2009, owned,

approximately 48.1% of the Bank’s issued and outstanding Shares. In addition, as of such date, other members of YGC owned

or controlled an additional 5.6% of the Bank’s issued and outstanding Shares. As a result, YGC, which is controlled by the

Yuchengco family, effectively controls the Bank.

As of September 2009, the Bank had 921 shareholders of record worldwide.

The following table shows the five principal shareholders of the Bank, as shown in the Bank’s share register as of 30

September 2009:

Name of Shareholder No of shares % of total shares

Pan Malayan ................................................................................... 431,970,241 48.1

PCD Nominee ................................................................................. 308,195,066 34.3

PCD Nominee (Non-Filipino) .......................................................... 72,614,670 8.1

Grepalife ......................................................................................... 17,150,132 1.9

Malayan Insurance.......................................................................... 15,565,439 1.7

Total ............................................................................................... 845,495,548 94.1

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OFFER PROCEDURE

The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information found elsewhere in this Offering Circular, the Terms and Conditions included herein, and the related Agreements regarding the offer, maintenance, trade and settlement of the LTNCDs. Prospective LTNCD Holders should read this entire Offering Circular, the Terms and Conditions, and the related Agreements fully and carefully. In case of any inconsistency between this summary and the more detailed information in this Offering Circular, then the more detailed portions and/or Terms and Conditions, and/or the Agreements, as the case may be, shall at all times prevail.

OFFERING PROCEDURES

Pursuant to the Placement Agreement, Registry Agreement, and Trust Agreement (the “Agreements”) entered into by the Bank with the relevant counterparties, and subject to the terms and conditions of the Master LTNCD, as well as the applicable provisions of the Manual of Regulations, the LTNCDs are being issued by the Bank with (a) HSBC as Lead Manager and Bookrunner and Selling Agent (b) the Bank, BDO Capital & Investment Corporation, Multinational Investment Bancorporation as Selling Agents, (c) HSBC and Multinational Investment Bancorporation as Market Makers, and (d) Philippine Depository and Trust Corporation as Registrar and Paying Agent.

The following is a summary of the procedures to be adopted among the parties and the prospective LTNCD Holders and is qualified in its entirety by, and should be read in conjunction with, the more detailed information found elsewhere in this Offering Circular and the Agreements.

The Offer Period

During the Offer Period, the Bank, through the Lead Manager and Bookrunner and the Selling Agents, shall solicit subscriptions

to the LTNCDs from LTNCD Holders. Prospective LTNCD Holders may purchase the LTNCDs during the Offer Period by

submitting fully and duly accomplished Applications to Purchase the LTNCDs (the “Applications”), in triplicate together with all

the required attachments and the corresponding payments to the Selling Agents from whom such application was obtained no

later than 5:00 p.m. of the last day of the Offer Period. Applications received after said date or time or without the required

attachments will be rejected. Only Applications that are accompanied by payments in cleared funds or covered by acceptable

payment instructions and covering the entire application money shall be accepted by the Selling Agents. The Selling Agents

shall receive such funds and shall hold it until the end of the Offer Period.

1) For Applicants who are individuals:

a. A clear copy of at least one (1) valid photo-bearing identification document issued by an official authority in accordance

with BSP Circular No. 608 (2008) as may be amended from time to time, and documents as may be required by the

Registrar and/or Selling Agent concerned;

b. Two (2) fully executed signature cards in the form attached to the Application; and

c. For aliens residing in the Philippines or non-residents engaged in trade or business in the Philippines, consularized

proof of tax domicile issued by the relevant tax authority of the Applicant.

2) For corporate and institutional Applicants:

a. SEC-certified or Corporate Secretary-certified true copy of the SEC Certificate of Registration, Articles of Incorporation

and By-Laws or such other relevant and equivalent organizational or charter documents;

b. Original or Corporate Secretary-certified true copy of the duly notarized certificate confirming the resolution of the

Board of Directors and/or committees or bodies authorizing the purchase of the LTNCDs and specifying the authorized

signatories;

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c. Two (2) fully executed signature cards duly authenticated by the Corporate Secretary with respect to corporate and

institutional investors, in the form attached to the Application.

d. If claiming tax-exempt status, the (i) certified true copy of the original tax exemption certificate, ruling or opinion issued

by the Bureau of Internal Revenue on file with the Applicant as certified by its duly authorized officer, (ii) original duly

notarized undertaking, in the prescribed form, declaring and warranting its tax exempt status, undertaking to

immediately notify the Issuer and the Registrar and Paying Agent of any suspension or revocation of its tax exempt

status and agreeing to indemnify and hold the Issuer and the Registrar and Paying Agent free and harmless against

any claims, actions, suits, and liabilities resulting from or incidental to the non-withholding of the required tax; and (iii)

such other documentary requirements as may be required by the Issuer or Selling Agent as proof of the Applicant’s

tax-exempt status; and

e. Such other documentary requirements as may be required by the Registrar as proof of the Applicant’s tax-exempt

status.

The Selling Agents may require the submission of other documents for purposes of confirming matters in conformity with

relevant regulations or policies.

Allocation and Issue of the LTNCDs

Applications to Purchase of the LTNCDs shall be subject to the availability of the LTNCDs and acceptance by the Bank. The

Lead Manager and Bookrunner, in consultation with the Bank, reserves the right to accept, reject, scale down, or reallocate any

Application.

In the event that payment supporting any Application is returned by the drawee bank for any reason whatsoever, the

Application shall be automatically cancelled and any prior acceptance of the Application shall be deemed revoked. If any

Application is rejected or accepted in part only, the application money or the appropriate portion thereof will be returned without

interest by the relevant Selling Agent. On the Issue Date, the Selling Agents, shall, on behalf of the Bank, accept the relevant

Applications to Purchase. The acceptance of the Application to Purchase shall ipso facto convert such Application to Purchase

into a purchase agreement between the Bank and the relevant prospective LTNCD Holder.

Upon confirmation by the Bank of acceptance of the relevant Applications and the respective amount of LTNCDs, the Selling

Agents shall issue copies of the relevant purchase advice (the “Purchase Advice”) to successful prospective LTNCD Holders

confirming the acceptances of their offers to purchase the LTNCDs and consequent ownership thereof and stating the pertinent

details including the amount accepted, with copies furnished to the Registrar.

The Registrar shall rely solely on the Consolidated Sales Report in its preparation of the Registry and the issuance of the

Registry Confirmation for each LTNCD Holder. The Registrar shall distribute the Registry Confirmations directly to the LTNCD

Holders in the mode elected by the LTNCD Holder as indicated in the Application to Purchase in accordance with the terms of

the Registry and Paying Agency Agreement.

Transactions in the Secondary Market

All secondary trading of the LTNCDs shall be coursed through a Market Maker, subject to the payment by the LTNCD Holder of

fees to the Market Maker and to the Registrar, or through other trading participants of PDEx, upon listing of the LTNCDs in

PDEx. Any transfer between investors of different tax status with respect to the Issue shall only be effective on an Interest

Payment Date. No transfers will be effected during the Closed Period. The Market Maker, or the trading participants of the

PDEx, upon listing of the LTNCDs in PDEx, will effect the transfer upon submission of the following documents in form and

substance acceptable to it:

The transferor LTNCD Holder’s original copy of Registry Confirmation;

116

The relevant Registry Confirmation and Purchase Advice of the transferor LTNCD Holder (with the information

provided therein duly set forth in typewritten form);

The Registrar shall register any transfer of the LTNCDs upon presentation to it of the following documents in form and

substance acceptable to it:

Transfer instruction from transferor LTNCD Holder;

Transfer Instruction from Market Maker

The relevant Purchase Advice of the transferee LTNCD Holder (with the information provided therein duly set forth in

typewritten form);

Duly accomplished Investor Registration Form of the transferee LTNCD Holder as prescribed by the Registrar (in

case of a new holder);

Proof of the qualified tax-exempt status of the transferee LTNCD Holder, if applicable, and the covering Affidavit of

Undertaking;

Proof of payment of applicable taxes (if any are due);

The original duly endorsed signature cards of the transferee LTNCD Holder and such other original or certified true

copies of other documents submitted by the transferee LTNCD Holder in support of the transfer or assignment of the

LTNCDs in its favour;

The appropriate secretary’s certificate attesting to the board resolutions authorizing the transfers and acceptances as

well as designating the authorized signatories, together with specimen signature cards duly signed by the parties,

and duly authenticated by each party’s corporate secretary; and

Such other documents that may be required by the Registrar, including those for Non-Trade Transactions

Transfers of the LTNCDs made in violation of the restrictions on transfer under the Terms and Conditions shall be null and void

and shall not be registered by the Registrar.

Payment of interest and principal

The Paying Agent shall, pay or cause to be paid on behalf of the Bank on or before 1:00 p.m via RTGS on each relevant

Payment Date the amounts due in respect of the LTNCDs through a direct credit of the proper amounts, net of taxes and fees

(if any) to the account of the LTNCD Holders as designated in the Application to Purchase and the Purchase Advice.

Crediting of amounts in respect of the LTNCDs is at all times subject to the settlement procedures of RTGS and the internal

clearing policies and procedures of each beneficiary/receiving bank.

Schedule of Registry Fees

The Registrar shall be entitled to charge the LTNCD Holders and/or their counterparties such fees as the Registrar shall prescribe in connection with the services that the Registrar shall perform. The Registry will charge the following fess to the LTNCD Holders:

Fees charged for secondary market transactions

P100 per side per transfer (for trade transactions)

117

P100 per side per transaction (for non-trade transactions such as inheritance, donation, pledge, etc.)

P100 account opening fee for each new transferee investor

Handling fees may also be charged by the Market Maker

Other Fees

Specialized reports without back-up file restoration – P20 per page, plus (+) P100 per request

Specialized reports requiring back-up file restoration – P20 per page, plus (+) P300 per hour

PDTC Certification Holdings – P200 per certification

Request for monthly statements of account – P50 per statement (in addition to the quarterly statement already issued free)

Request for replacement of Transaction Confirmation Advice – P50 per advice

In the event that the Registrar is prohibited by law or regulation to charge the LTNCD Holders and/or their counterparties such

fees in connection with its services, the Bank and the Registrar shall agree on such other arrangements in order for the

Registrar to be fully compensated for the services it performs pursuant to the Registry and Paying Agency Agreement executed

between them.

INDEX TO FINANCIAL STATEMENTS

AUDITED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED 31 DECEMBER 2009 AND 2008...............APPENDIX 1

Report of Independent Auditors

Statements of Financial Position

Statements of Income

Statements of Comprehensive Income

Statements of Changes in Capital Funds

Statements of Cash Flows

Notes to Financial Statements

AUDITED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED 31 DECEMBER 2008 AND 2007...............APPENDIX 2

Report of Independent Auditors

Statements of Condition

Income Statements

Statements of Changes in Capital Funds

Cash Flows Statements

Notes to Financial Statements

THE BANK

Rizal Commercial Banking Corporation 46F Yuchengco Tower

6819 Ayala Avenue Makati City

LEAD MANAGER AND BOOKRUNNER AND SELLING AGENT

The Hongkong and Shanghai Banking Corporation Limited 6/F HSBC Centre, 3058 Fifth Avenue West

Bonifacio Global City, Taguig City 1634

SELLING AGENTS

Rizal Commercial Banking Corporation

46F Yuchenco Tower 6819 Ayala Avenue

Makati City

BDO Capital & Investment Corporation

BDO Corporate Center 7899 Makati Avenue

Makati City

Multinational Investment Bancorporation 41F Rufino Tower

6784 Ayala Avenue Makati City

REGISTRAR AND PAYING AGENT

Philippine Depository and Trust Corporation

37F, Tower I, The Enterprise Center 6766 Ayala Avenue corner Paseo de Roxas

Makati City

LEGAL ADVISER TO THE LEAD MANAGER AND BOOKRUNNER

Romulo Mabanta Buenaventura Sayoc & de los Angeles

CORPORATE BANKING & FINANCE GROUP 30F Citibank Tower

8741 Paseo de Roxas Makati City

Notes 2009 2008 2009 2008

CASH AND OTHER CASH ITEMS 7 6,811,443 P 6,807,939 P 5,408,491 P 5,595,736 P

DUE FROM BANGKO SENTRAL NG PILIPINAS 7 19,321,339 16,390,973 17,914,204 15,656,119

DUE FROM OTHER BANKS 7 3,066,922 4,862,225 1,788,841 3,197,593

INVESTMENT SECURITIES

Financial assets at fair value through profit or loss 8 9,415,889 3,437,138 8,034,236 3,084,380

Held-to-maturity investments 9 19,962,360 20,673,614 17,638,584 17,892,114

Available-for-sale securities - net 10 36,384,430 22,700,044 32,260,486 21,077,161

LOANS AND RECEIVABLES - Net 11 164,892,417 164,402,907 131,733,336 130,292,206

INVESTMENTS IN SUBSIDIARIES AND ASSOCIATES - Net 12 4,021,767 4,294,182 10,700,809 10,311,051

BANK PREMISES, FURNITURE, FIXTURES

AND EQUIPMENT - Net 13 4,754,121 4,029,769 3,382,627 3,037,628

INVESTMENT PROPERTY - Net 14 5,066,543 7,387,613 2,873,265 3,500,460

DEFERRED TAX ASSETS - Net 28 1,408,302 1,391,709 1,389,497 1,389,497

OTHER RESOURCES - Net 15 13,410,044 11,892,093 9,475,346 10,817,548

TOTAL RESOURCES 288,515,577 P 268,270,206 P 242,599,722 P 225,851,493 P

DEPOSIT LIABILITIES 17

Demand 11,034,257 P 11,125,069 P 8,535,205 P 8,392,524 P

Savings 93,571,654 75,738,446 81,165,706 66,269,393

Time 115,671,983 109,363,471 90,852,468 84,267,161

Total Deposit Liabilities 220,277,894 196,226,986 180,553,379 158,929,078

BILLS PAYABLE 18 10,780,964 21,452,609 10,535,173 21,410,087

BONDS PAYABLE 19 5,836,076 6,002,821 5,836,076 6,002,821

ACCRUED TAXES, INTEREST AND OTHER EXPENSES 20 3,249,854 2,787,456 2,326,142 1,976,052

OTHER LIABILITIES 21 6,898,896 7,221,711 5,889,579 5,957,810

SUBORDINATED DEBT 22 10,926,978 6,941,899 10,926,978 6,941,899

Total Liabilities 257,970,662 240,633,482 216,067,327 201,217,747

CAPITAL FUNDS

Attributable to Parent Company Shareholders

Preferred stock 23 207,038 859,335 207,038 859,335

Treasury shares 23 952,709 )( - 952,709 )( -

Common stock 23 9,905,508 9,628,430 9,905,508 9,628,430

Hybrid perpetual securities 24 4,883,139 4,883,139 4,883,139 4,883,139

Capital paid in excess of par 23 6,039,794 5,571,906 6,039,794 5,571,906

Revaluation reserves on available-for-sale securities 407,015 1,568,758 )( 456,007 1,351,022 )(

Revaluation increment in property of an associate 12 58,917 28,243 - -

Accumulated translation adjustment . 97,771 83,889 - -

Reserve for trust business 29 285,724 276,973 278,775 270,024

Other reserves 12 240,889 )( 240,889 )( - -

Share in additional paid-in capital of an associate 12 532,583 532,583 - -

Surplus 23 9,325,311 7,626,144 5,714,843 4,771,934

30,549,202 27,680,995 26,532,395 24,633,746

Non-controlling interest 4,287 )( 44,271 )( - -

Total Capital Funds 30,544,915 27,636,724 26,532,395 24,633,746

TOTAL LIABILITIES AND CAPITAL FUNDS 288,515,577 P 268,270,206 P 242,599,722 P 225,851,493 P

See Notes to Financial Statements.

RIZAL COMMERCIAL BANKING CORPORATION AND SUBSIDIARIES

STATEMENTS OF FINANCIAL POSITION

DECEMBER 31, 2009 AND 2008

LIABILITIES AND CAPITAL FUNDS

RESOURCES

CONSOLIDATED PARENT

(Amounts in Thousand Philippine Pesos)

Notes 2009 2008 2007 2009 2008 2007

INTEREST INCOME ON

Loans and receivables 11 12,109,348 P 10,885,349 P 9,583,739 P 8,347,262 P 7,365,395 P 6,369,342 P

Investment securities 8,9,10 3,959,516 3,991,885 4,917,942 3,448,859 3,735,538 4,614,971

Others 7 701,361 782,398 828,726 642,873 683,548 694,513

16,770,225 15,659,632 15,330,407 12,438,994 11,784,481 11,678,826

INTEREST EXPENSE ON

Deposit liabilities 17 4,716,435 5,128,787 4,192,593 3,347,079 3,772,306 2,952,030

Bills payable and other borrowings 18 1,785,958 2,060,697 2,318,741 1,752,383 2,032,540 2,287,019

6,502,393 7,189,484 6,511,334 5,099,462 5,804,846 5,239,049

NET INTEREST INCOME 10,267,832 8,470,148 8,819,073 7,339,532 5,979,635 6,439,777

IMPAIRMENT LOSSES - Net 11, 16 2,243,192 998,492 942,490 1,683,463 830,597 680,535

NET INTEREST INCOME AFTER

IMPAIRMENT LOSSES 8,024,640 7,471,656 7,876,583 5,656,069 5,149,038 5,759,242

OTHER OPERATING INCOME

Trading and securities gains (losses) - net 8 2,252,821 511,946 )( 1,329,128 1,902,230 612,623 )( 1,007,936

Service fees 1,613,652 1,643,395 1,514,472 902,197 1,045,435 1,032,985

Foreign exchange gains (losses) - net 493,716 851,961 157,107 )( 383,834 715,623 250,627 )(

Equity in net earnings of associates 12 206,857 404,192 351,842 - - -

Trust fees 181,153 206,019 184,849 167,918 186,419 164,212

Commissions and other income 1,138,030 2,003,059 1,157,399 1,236,976 1,814,650 907,704

5,886,229 4,596,680 4,380,583 4,593,155 3,149,504 2,862,210

OTHER OPERATING EXPENSES

Employee benefits 25 2,779,236 2,524,956 2,384,398 1,864,571 1,682,187 1,640,155

Occupancy and equipment-related 26 1,651,224 1,492,784 1,410,766 1,348,043 1,150,968 1,107,099

Taxes and licenses 28 1,219,775 1,143,463 1,068,856 912,063 849,633 768,967

Depreciation and amortization 13 533,797 407,881 315,366 377,126 288,499 224,570

Miscellaneous 27 3,646,715 3,406,723 2,988,471 2,656,267 2,588,221 2,397,935

9,830,747 8,975,807 8,167,857 7,158,070 6,559,508 6,138,726

PROFIT BEFORE TAX 4,080,122 3,092,529 4,089,309 3,091,154 1,739,034 2,482,726

TAX EXPENSE 28 744,420 919,424 845,650 519,030 568,720 543,376

NET PROFIT 3,335,702 2,173,105 3,243,659 2,572,124 1,170,314 1,939,350

NET PROFIT ATTRIBUTABLE

TO NON-CONTROLLING INTEREST 7,320 19,365 36,027 - - -

NET PROFIT ATTRIBUTABLE TO PARENT

COMPANY'S SHAREHOLDERS 3,328,382 P 2,153,740 P 3,207,632 P 2,572,124 P 1,170,314 P 1,939,350 P

Earnings Per Share* 32

Basic 3.13 P 1.72 P 2.93 P 2.30 P 0.70 P 1.53 P

Diluted 3.06 P 1.66 P 2.84 P 2.25 P 0.67 P 1.48 P

* After giving retroactive effect to the 15% stock dividends issued in 2007 (see Note 23).

See Notes to Financial Statements.

RIZAL COMMERCIAL BANKING CORPORATION AND SUBSIDIARIES

STATEMENTS OF INCOME

FOR THE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007

(Amounts in Thousand Philippine Pesos, Except Per Share Data)

CONSOLIDATED PARENT

Notes 2009 2008 2007 2009 2008 2007

ATTRIBUTABLE TO PARENT COMPANY SHAREHOLDERS

PREFERRED STOCK

Balance at beginning of year 859,335 P 859,512 P 1,054,940 P 859,335 P 859,512 P 1,054,940 P

Conversion of preferred stock to common stock 652,297 )( 177 )( 195,428 )( 652,297 )( 177 )( 195,428 )(

Balance at end of year 23 207,038 859,335 859,512 207,038 859,335 859,512

TREASURY SHARES

Purchase of treasury shares during the year 1,594,925 )( - - 1,594,925 )( - -

Reissuance of treasury shares during the year 642,216 - - 642,216 - -

Balance at the end of year 23 952,709 )( - - 952,709 )( - -

COMMON STOCK

Balance at beginning of year 9,628,430 9,628,369 6,329,640 9,628,430 9,628,369 6,329,640

Conversion of preferred stock to common stock 277,078 61 104,598 277,078 61 104,598

Issuance of common stock - - 2,100,000 - - 2,100,000

Stock dividends - - 1,094,131 - - 1,094,131

Balance at end of year 23 9,905,508 9,628,430 9,628,369 9,905,508 9,628,430 9,628,369

CAPITAL PAID IN EXCESS OF PAR

Balance at beginning of year 5,571,906 5,571,793 2,118,688 5,571,906 5,571,793 2,118,688

Conversion of preferred stock to common stock 375,219 113 90,830 375,219 113 90,830

Excess of consideration given over cost of treasury shares reissued 23 92,669 - - 92,669 - -

Issuance of common stock 23 - - 3,362,275 - - 3,362,275

Balance at end of year 6,039,794 5,571,906 5,571,793 6,039,794 5,571,906 5,571,793

HYBRID PERPETUAL SECURITIES 24 4,883,139 4,883,139 4,883,139 4,883,139 4,883,139 4,883,139

REVALUATION RESERVES ON AVAILABLE-FOR-SALE SECURITIES

Balance at beginning of year 1,568,758 )( 1,032,344 2,907,648 1,351,022 )( 977,649 2,747,231

Fair value gains (losses) on available-for-sale securities, net of tax 10 1,975,773 2,601,102 )( 1,875,304 )( 1,807,029 2,328,671 )( 1,769,582 )(

Balance at end of year 407,015 1,568,758 )( 1,032,344 456,007 1,351,022 )( 977,649

REVALUATION INCREMENT IN PROPERTY OF AN ASSOCIATE

Balance at beginning of year 28,243 7,014 7,014 - - -

Increase during the year 30,674 21,229 - - - -

Balance at end of year 12 58,917 28,243 7,014 - - -

ATTRIBUTABLE TO

PARENT COMPANY SHAREHOLDERS (Carried Forward) 20,548,702 P 19,402,295 P 21,982,171 P 20,538,777 P 19,591,788 P 21,920,462 P

CONSOLIDATED PARENT

RIZAL COMMERCIAL BANKING CORPORATION AND SUBSIDIARIESSTATEMENTS OF CHANGES IN CAPITAL FUNDS

FOR THE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007(Amounts in Thousand Philippine Pesos)

Notes 2009 2008 2007 2009 2008 2007

ATTRIBUTABLE TO

PARENT COMPANY SHAREHOLDERS (Brought Forward) 20,548,702 P 19,402,295 P 21,982,171 P 20,538,777 P 19,591,788 P 21,920,462 P

ACCUMULATED TRANSLATION ADJUSTMENTS

Balance at beginning of year 83,889 63,937 144,572 - - -

Translation adjustment during the year 13,882 19,952 80,635 )( - - -

Balance at end of year 97,771 83,889 63,937 - - -

RESERVE FOR TRUST BUSINESS

Balance at beginning of year 276,973 258,348 247,595 270,024 258,348 247,595

Transfer from surplus free 8,751 18,625 10,753 8,751 11,676 10,753

Balance at end of year 29 285,724 276,973 258,348 278,775 270,024 258,348

OTHER RESERVES 12 240,889 )( 240,889 )( - - - -

SHARE IN ADDITIONAL PAID-IN CAPITAL OF AN ASSOCIATE 12 532,583 532,583 532,583 - - -

SURPLUS

Balance at beginning of year 7,626,144 6,495,022 5,448,793 4,771,934 4,617,289 4,839,342

Net profit for the year 3,328,382 2,153,740 3,207,632 2,572,124 1,170,314 1,939,350

Cash dividends 23 785,831 )( 1,003,993 )( 1,056,519 )( 785,831 )( 1,003,993 )( 1,056,519 )(

Amortization of deferred charges 11, 15 834,633 )( - - 834,633 )( - -

Transfer to reserve for trust business 29 8,751 )( 18,625 )( 10,753 )( 8,751 )( 11,676 )( 10,753 )(

Stock dividends 23 - - 1,094,131 )( - - 1,094,131 )(

Balance at end of year 9,325,311 7,626,144 6,495,022 5,714,843 4,771,934 4,617,289

ATTRIBUTABLE TO

PARENT COMPANY SHAREHOLDERS 30,549,202 27,680,995 29,332,061 26,532,395 24,633,746 26,796,099

NON-CONTROLLING INTEREST

Balance at beginning of year 44,271 )( 311,669 )( 282,699 )( - - -

Increase in non-controlling interest due to acquisition of a new subsidiary 32,795 12,585 - - - -

Net profit for the year 7,320 19,365 36,027 - - -

Fair value gains on available-for-sale securities, net of tax 10 131 )( 5,441 )( 64,997 )( - - -

Decrease in share of losses due to dilution 12 - 240,889 - - - -

Balance at end of year 4,287 )( 44,271 )( 311,669 )( - - -

TOTAL CAPITAL FUNDS 30,544,915 P 27,636,724 P 29,020,392 P 26,532,395 P 24,633,746 P 26,796,099 P

See Notes to Financial Statements.

-2-

PARENTCONSOLIDATED

Notes 2009 2008 2007 2009 2008 2007

NET PROFIT FOR THE YEAR 3,335,702 P 2,173,105 P 3,243,659 P 2,572,124 P 1,170,314 P 1,939,350 P

OTHER COMPREHENSIVE INCOME (LOSSES)

Fair value gains (losses) on available-for-sale securities, net of tax 10 1,975,773 2,601,102 )( 1,875,304 )( 1,807,029 2,328,671 )( 1,769,582 )(

Increase in revaluation increment in property of an associate 30,674 21,229 - - - -

Translation adjustment during the year 13,882 19,952 80,635 )( - - -

Increase in other reserves 12 - 240,889 )( - - - -

2,020,329 2,800,810 )( 1,955,939 )( 1,807,029 2,328,671 )( 1,769,582 )(

TOTAL COMPREHENSIVE INCOME (LOSS) FOR THE YEAR 5,356,031 627,705 )( 1,287,720 4,379,153 1,158,357 )( 169,768

TOTAL COMPREHENSIVE INCOME ATTRIBUTABLE TO NON-CONTROLLING INTEREST 131 5,441 64,997 - - -

TOTAL COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE

TO PARENT COMPANY'S SHAREHOLDERS 5,355,900 P 633,146 )( P 1,222,723 P 4,379,153 P 1,158,357 )( P 169,768 P

RIZAL COMMERCIAL BANKING CORPORATION AND SUBSIDIARIESSTATEMENTS OF COMPREHENSIVE INCOME

FOR THE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007

PARENT

(Amounts in Thousand Philippine Pesos)

See Notes to Financial Statements.

CONSOLIDATED

Notes 2009 2008 2007 2009 2008 2007

CASH FLOWS FROM OPERATING ACTIVITIES

Profit before tax 4,080,122 P 3,092,529 P 4,089,309 P 3,091,154 P 1,739,034 P 2,482,726 P

Adjustments for:

Impairment losses 11, 16 2,243,192 998,492 942,490 1,683,463 830,597 680,535

Depreciation and amortization 13 533,797 407,881 315,366 377,126 288,499 224,570

Amortization of deferred charges 15 51,726 42,247 30,410 51,726 42,247 34,067

Equity in net earnings of associates 12 206,857 )( 404,192 )( 351,842 )( - - -

Dividend income - - - 217,904 )( 30,979 )( -

Operating income before working capital changes 6,701,980 4,136,957 5,025,733 4,985,565 2,869,398 3,421,898

Decrease (increase) in financial assets at fair value through profit and loss 5,978,751 )( 5,583,598 1,130,140 4,949,856 )( 5,568,698 1,401,061

Increase in loans and receivables 2,205,572 )( 41,812,593 )( 9,204,264 )( 2,597,463 )( 36,557,885 )( 5,696,413 )(

Decrease (increase) in investment property 447,783 )( 357,354 2,223,422 173,634 387,085 2,191,634

Decrease (increase) in other resources 313,295 4,702 )( 55,581 455,843 337,371 294,402

Increase in deposit liabilities 24,050,908 20,298,111 18,378,706 21,624,301 16,437,910 17,034,785

Increase (decrease) in accrued taxes, interest and other expenses 336,889 244,348 )( 660,633 290,910 509,907 )( 358,163

Decrease in other liabilities 322,815 )( 518,042 )( 2,749,634 )( 68,231 )( 808,945 )( 2,789,654 )(

Cash generated from (used in) operations 22,448,151 12,203,665 )( 15,520,317 19,914,703 12,276,275 )( 16,215,876

Cash paid for taxes 635,504 )( 721,071 )( 1,067,699 )( 459,850 )( 571,258 )( 566,742 )(

Net Cash From (Used in) Operating Activities 21,812,647 12,924,736 )( 14,452,618 19,454,853 12,847,533 )( 15,649,134

CASH FLOWS FROM INVESTING ACTIVITIES

Decrease (increase) in available-for-sale securities 11,602,604 )( 4,254,996 10,057,102 )( 9,270,156 )( 4,297,281 10,019,060 )(

Acquisitions of bank premises, furniture, fixtures and equipment 13 1,340,431 )( 1,035,459 )( 571,515 )( 772,316 )( 649,148 )( 407,980 )(

Increase in held-to-maturity investments 711,254 - - 253,530 - -

Decrease (increase) in investments in subsidiaries and associates 324,837 85,991 1,956,812 )( 1,327 )( 450,612 )( 2,925,562 )(

Cash dividends received 12 217,904 230,718 185,364 217,904 30,979 -

Proceeds from disposals of bank premises, furniture, fixtures and equipment 13 82,282 85,708 139,872 50,191 36,995 104,269

Net Cash From (Used in) Investing Activities 11,606,758 )( 3,621,954 12,260,193 )( 9,522,174 )( 3,265,495 13,248,333 )(

CASH FLOWS FROM FINANCING ACTIVITIES

Proceeds from (payments of) bills payable 18 10,671,645 )( 8,632,109 4,813,495 )( 10,874,914 )( 8,932,177 4,722,936 )(

Net proceeds from issuance of subordinated debt 22 3,985,079 1,937,725 - 3,985,079 1,937,725 -

Purchase of treasury shares 23 1,594,925 )( - - 1,594,925 )( - -

Dividends paid 23 785,831 )( 1,003,993 )( 1,056,519 )( 785,831 )( 1,003,993 )( 1,056,519 )(

Redemption of bonds payable 19 - 433,954 )( - - 433,954 )( -

Issuance of common shares 23 - - 5,462,275 - - 5,462,275

Net Cash From (Used in) Financing Activities 9,067,322 )( 9,131,887 407,739 )( 9,270,591 )( 9,431,955 317,180 )(

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (Carried Forward) 1,138,567 P 170,895 )( 1,784,686 P 662,088 P 150,083 )( 2,083,621 P

RIZAL COMMERCIAL BANKING CORPORATION AND SUBSIDIARIES

(Amounts in Thousand Philippine Pesos)

FOR THE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007

STATEMENTS OF CASH FLOWS

CONSOLIDATED PARENT

P P

Notes 2009 2008 2007 2009 2008 2007

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (Brought Forward) 1,138,567 P 170,895 )( 1,784,686 P 662,088 P 150,083 )( 2,083,621 P

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR

Cash and other cash items 7 6,807,939 5,875,727 5,005,742 5,595,736 4,827,540 4,181,906

Due from Bangko Sentral ng Pilipinas 7 16,390,973 17,611,380 13,787,927 15,656,119 16,750,323 12,844,278

Due from other banks 7 4,862,225 4,744,925 7,653,677 3,197,593 3,021,668 5,489,726

28,061,137 28,232,032 26,447,346 24,449,448 24,599,531 22,515,910

CASH AND CASH EQUIVALENTS AT END OF YEAR

Cash and other cash items 7 6,811,443 6,807,939 5,875,727 5,408,491 5,595,736 4,827,540

Due from Bangko Sentral ng Pilipinas 7 19,321,339 16,390,973 17,611,380 17,914,204 15,656,119 16,750,323

Due from other banks 7 3,066,922 4,862,225 4,744,925 1,788,841 3,197,593 3,021,668

29,199,704 P 28,061,137 P 28,232,032 P 25,111,536 P 24,449,448 P 24,599,531 P

Supplemental Information on Noncash Investing Activities

In 2009, the Group and the Parent Company reclassified its investment in special purpose companies (SPCs), previously presented as investment property, with total carrying amount of P3,092,154 and P388,431, respectively, to investments in subsidiaries.

Accordingly, the net assets of the SPCs were consolidated to the Group's 2009 financial statements (see Note 14).

In 2009, the Parent Company exchanged its common shares previously purchased as treasury shares amounting to P642,216 for a 5.64% equity stake in MICO Equities, Inc. (see Note 23).

In 2008, the Group and the Parent Company made the following reclassifications of investment securities (see Notes 8, 9, 10 and 11):

- Financial assets at fair value through profit or loss (FVTPL) with a total carrying value of P411,228 were reclassified to held-to-maturity (HTM) investments both in the Group and Parent Company's financial statements.

- Available-for-sale (AFS) securities with a total carrying value of P5,960,822 were reclassified to loans and receivables in the Group and Parent Company's financial statements.

- Financial derivative instruments with a negative carrying value of P307,836 were reclassified to loans and receivables in the Group and Parent Company's financial statements .

- AFS securities with a total carrying value of P20,373,408 and P17,588,835 were reclassified from AFS securities to HTM investments in the Group and Parent Company's financial statements, respectively.

- Financial assets at FVTPL with carrying value of P527,223 were reclassified to AFS securities in the Group's financial statements.

See Notes to Financial Statements.

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CONSOLIDATED PARENT

PP

RIZAL COMMERCIAL BANKING CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2009, 2008 AND 2007 (Amounts in Thousands of Philippine Pesos, Except Per Share Data or as Indicated)

1. CORPORATE INFORMATION

Rizal Commercial Banking Corporation (the “Parent Company”) holds interest in the following subsidiaries and associates:

Effective Percentage Country of Explanatory of Ownership Subsidiaries/Associates Incorporation Notes 2009 2008 Subsidiaries: RCBC Savings Bank, Inc. (RSB) Philippines 100.00 100.00 RCBC Forex Brokers Corporation (RCBC Forex) Philippines 100.00 100.00 RCBC Telemoney Europe Italy 100.00 100.00 RCBC North America, Inc. (RCBC North America) California, USA (a) 100.00 100.00 RCBC International Finance Limited (RCBC IFL) Hongkong 99.99 99.99 RCBC Investment Ltd. Hongkong (b) 100.00 100.00 RCBC Capital Corporation (RCBC Capital) Philippines 99.96 99.96 RCBC Securities, Inc. (RSI) Philippines (c) 100.00 100.00 Pres. Jose P. Laurel Rural Bank, Inc. (JPL) Philippines (d) 99.00 - Bankard, Inc. (Bankard) Philippines (e) 91.69 91.69 Merchants Savings and Loan Association, Inc. (Merchants Bank) Philippines (f) 96.38 96.38 Special Purpose Companies (SPCs): Under Parent Company: Niyog Property Holdings, Inc. (NPHI) Philippines (g) 100.00 - Under RSB: (h) Goldpath Properties Development Corporation (GPDC) Philippines 100.00 - Manchesterland Properties, Inc. Philippines (i) 100.00 - Hexagonland Corporation Philippines (i) 100.00 - Best Value Property and Development Corporation Philippines 100.00 - Crescent Park Property and Development Corporation Philippines 100.00 - Crestview Properties Development Corporation Philippines 100.00 - Eight Hills Property and Development Corporation Philippines 100.00 - Fairplace Property and Development Corporation Philippines 100.00 - Gold Place Properties Development Corporation Philippines 100.00 - Greatwings Properties Development Corporation Philippines 100.00 - Happyville Property and Development Corporation Philippines 100.00 - Landview Property and Development Corporation Philippines 100.00 - Lifeway Property and Development Corporation Philippines 100.00 - Niceview Property and Development Corporation Philippines 100.00 - Princeway Properties Development Corporation Philippines 100.00 -

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Effective Percentage Country of Explanatory of Ownership Subsidiaries/Associates Incorporation Notes 2009 2008 Under RSB: (h) Stockton Realty Development Corporation Philippines 100.00 - Top Place Properties Development Corporation Philippines 100.00 - Associates: RCBC Land, Inc. (RLI) Philippines 49.00 49.00 YGC Corporate Services, Inc. (YCS) Philippines 40.00 40.00 Luisita Industrial Park Co. (LIPC) Philippines 35.00 35.00 Subic Power Corporation (SPC) Philippines 26.50 26.50 RCBC Realty Corporation (RRC) Philippines 34.80 34.80 Honda Cars Phils., Inc. (HCPI) Philippines 12.88 12.88 Roxas Holdings, Inc. (RHI) Philippines 4.71 4.71 Great Life Financial Assurance Corporation (GLFAC) Philippines (j) - 20.00

Explanatory Notes:

(a) Includes 25.29% and 31% ownership of RCBC IFL in 2009 and 2008, respectively.

(b) A wholly owned subsidiary of RCBC IFL. (c) A wholly owned subsidiary of RCBC Capital. (d) In 2009, the Parent Company made a total capital infusion to JPL amounting to

P175 million which resulted in its full and irrevocable voting and economic rights for 99% of JPL’s outstanding shares (see Note 12).

(e) Owned 59.07% by RCBC Capital in 2007. In 2008, the Parent Company’s P1 billion capital infusion by way of conversion of debt to equity was effected (see Note 12). As of December 31, 2009 and 2008, the Parent Company has 66.58% direct ownership and 25.11% indirect ownership through RCBC Capital.

(f) In 2008, the Parent Company acquired 96.38% ownership in Merchants Bank from Finman Capital Corporation.

(g) In 2009, the Parent Company and RSB reclassified their 58% and 42%, respectively, investment in NPHI from Investment Property account to Investments in Subsidiaries and Associates account (see Notes 12 and 14).

(h) In 2009, RSB reclassified its investment with SPCs from Investment Property account to Investments in Subsidiaries and Associates account which resulted into its consolidation with the Parent Company (see Note 14).

(i) A wholly owned subsidiary of GPDC. (j) Sold in 2009 to Grepalife Financial, Inc. (Grepalife), formerly Great Pacific Life

Assurance Corporation (see Note 12). The Parent Company is a universal bank engaged in all aspects of banking. It provides products and services related to traditional loans and deposits, trade finance, domestic and foreign fund transfers or remittance, cash management, treasury, and trust and custodianship services. The Parent Company also enters into forward currency contracts as an accommodation to its clients and as a means of managing its foreign exchange exposures. The Parent Company and its subsidiaries are engaged in all aspects of traditional banking, investment banking, retail financing (credit cards, auto loans and mortgage/ housing loans), leasing and stock brokering. At the end of December 31, 2009, the Parent Company has 367 automated teller machines, 219 branches, 19 E-biz centers, 3 extension offices and 3 foreign exchange booths within and outside of the Philippines.

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The Parent Company’s common shares are listed in the Philippine Stock Exchange (PSE) and is a 48.10% owned subsidiary of Pan Malayan Management and Investment Corporation (PMMIC), a company incorporated and domiciled in the Philippines. PMMIC is the holding company of the flagship institutions of the Yuchengco Group of Companies.

The registered address of the Parent Company is located at Yuchengco Tower, RCBC Plaza, 6819 Ayala Avenue, Makati City. The accompanying financial statements for the year ended December 31, 2009 (including the comparatives for the years ended December 31, 2008 and 2007) were approved and authorized for issue by the Board of Directors (BOD) on March 29, 2010.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The significant accounting policies that have been used in the preparation of these financial statements are summarized in the succeeding pages. The policies have been consistently applied to all years presented, unless otherwise stated.

2.1 Basis of Preparation of Financial Statements

(a) Statement of Compliance with Financial Reporting Standards in the Philippines for Banks and

Philippine Financial Reporting Standards The 2009 and 2008 consolidated financial statements of Rizal Commercial Banking Corporation and its subsidiaries (together hereinafter referred to as the “Group”) and the separate 2009 and 2008 financial statements of Rizal Commercial Banking Corporation have been prepared in accordance with the Financial Reporting Standards in the Philippines for Banks (FRSPB); and the 2007 comparative financial statements of the Group and of the Parent Company have been prepared in accordance with Philippine Financial Reporting Standards (PFRS), except for the following matters: the staggered recognition of required additional allowance for impairment and losses, and the derecognition of certain non-performing assets (NPAs) transferred, as discussed fully in Note 11. PFRS are adopted by the Financial Reporting Standards Council (FRSC) from the pronouncements issued by the International Accounting Standards Board (IASB). FRSPB are similar to PFRS, except for the following reclassifications of certain financial instruments which are not allowed under PFRS, but allowed under FRSPB starting October 2008 as permitted by the Bangko Sentral ng Pilipinas (BSP) for prudential regulation, and by the Securities and Exchange Commission (SEC) for financial reporting purposes: (i) the reclassification of the embedded derivatives in credit-linked notes (CLNs) and other similar instruments that are linked to Republic of the Philippines (ROP) bonds from the fair value through profit or loss (FVTPL) classification to loans and receivables and available-for-sale (AFS) classifications; and (ii) the reclassification of certain financial assets previously classified under AFS category due to the tainting of held-to-maturity (HTM) portfolio back to HTM category. The effects of the reclassification to certain statement of financial position items as of December 31, 2009 and 2008 and net profit for the years then ended under FRSPB are discussed fully in Notes 8, 9, 10, and 11.

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These financial statements have been prepared using the measurement bases specified by FRSPB and PFRS for each type of resource, liability, income and expense. These financial statements have been prepared on the historical basis, except for the revaluation of certain financial assets. The measurement bases are more fully described in the accounting policies that follow.

(b) Presentation of Financial Statements The financial statements are presented in accordance with Philippine Accounting Standards (PAS) 1 (Revised 2007), Presentation of Financial Statements. The Group presents all items of income and expense in two statements: a Statement of Income and a Statement of Comprehensive Income. Two comparative periods are presented for the statement of financial position when the Group applies an accounting policy retrospectively, makes a retrospective restatement of items in its financial statements, or reclassifies items in the financial statements.

(c) Functional and Presentation Currency

These financial statements are presented in Philippine pesos, the Group’s functional and presentation currency, and all values represent absolute amounts except for per share data or when otherwise indicated (see also Note 2.17). Items included in the financial statements of the Group are measured using the currency of the primary economic environment in which the Group operates (the functional currency).

2.2 Adoption of New Interpretations, Revisions and Amendments to PFRS (a) Effective in 2009 that are Relevant to the Group

In 2009, the Group adopted the following new revisions and amendments to PFRS

that are relevant to the Group and effective for financial statements for the annual period beginning on or after January 1, 2009:

PAS 1 (Revised 2007) : Presentation of Financial Statements PAS 23 (Revised 2007) : Borrowing Costs PAS 32 and PAS 1

(Amendments) : Financial Instruments: Presentation and Presentation of Financial

Statements – Puttable Financial Instruments and Obligations

Arising on Liquidation PFRS 7 (Amendment) : Financial Instruments: Disclosures PFRS 8 : Operating Segments Philippine Interpretation

IFRIC 13 : Customer Loyalty Programmes Various Standards : 2008 Annual Improvements to PFRS

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Discussed below are the effects on the financial statements of the new accounting interpretation and amended standards: (i) PAS 1 (Revised 2007), Presentation of Financial Statements, requires an entity to

present all items of income and expense recognized in the period in a single statement of comprehensive income or in two statements: a separate statement of income and a statement of comprehensive income. Income and expense recognized in profit or loss is presented in the statement of income in the same way as the previous version of PAS 1. The statement of comprehensive income includes the profit or loss for the period and each component of income and expense recognized outside of profit or loss or the “non-owner changes in equity,” which are no longer allowed to be presented in the statements of changes in equity, classified by nature (e.g., gains or losses on available-for-sale assets or translation differences related to foreign operations). A statement showing an entity’s financial position at the beginning of the previous period is also required when the entity retrospectively applies an accounting policy or makes a retrospective restatement, or when it reclassifies items in its financial statements.

The Group’s adoption of PAS 1 (Revised 2007) did not result in any material adjustments in its financial statements as the change in accounting policy only affects presentation aspects. The Group has elected to present all income and expense in two statements: a statement of income and statement of comprehensive income (see Note 2.1).

(ii) PAS 23 (Revised 2007), Borrowing Costs. Under the revised PAS 23, all borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset shall be capitalized as part of the cost of that asset. The option of immediately expensing borrowing costs that qualify for asset recognition has been removed. The Group’s adoption of this new standard does not have any significant effect on the 2009 financial statements, as well as for prior periods, as the Group’s existing accounting policy is to capitalize all interest directly to qualifying assets.

(iii) PAS 32 (Amendment), Financial Instruments: Presentation and PAS 1 (Amendment), Presentation of Financial Statements – Puttable Financial Instruments and Obligations Arising on Liquidation. The amendments require certain financial instruments that represent a residual interest in the net assets of an entity, which would otherwise be classified as financial liabilities, to be classified as equity, if both the financial instrument and the capital structure of the issuing entity meet certain conditions. The Group’s adoption of this standard does not have material effect on its financial statements.

(iv) PFRS 7 (Amendment), Financial Instruments: Disclosures. The amendment

requires additional disclosures for financial instruments that are measured at fair value in the statement of financial position. These fair value measurements are categorized into a three-level fair value hierarchy, which reflects the extent to which they are based on observable market data. A separate quantitative maturity analysis must be presented for derivative financial liabilities that shows the remaining contractual maturities, where these are essential for an understanding of the timing of cash flows. The change in accounting policy only results in additional disclosures (see Note 4.5).

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(v) PFRS 8, Operating Segments. Under this new standard, a reportable operating segment is identified based on the information about the components of the entity that management uses to make decisions about operating matters. In addition, segment resources, liabilities and performance, as well as certain disclosures, are to be measured and presented based on the internal reports prepared for and reviewed by the chief decision makers. The Group identifies operating segments and reports on segment resources, liabilities and performance based on internal management reports, hence, adoption of this new standard does not have a material impact on the Group’s financial statements.

(vi) Philippine Interpretation IFRIC 13, Customer Loyalty Programmes. This new

Philippine Interpretation clarifies that when goods or services are sold together with a customer loyalty incentive (for example loyalty points or free products), the arrangement is a multiple-element arrangement and the consideration receivable from the customer is allocated between the components of the arrangement using fair values. This new interpretation has no impact on the Group’s financial statements.

(vii) 2008 Annual Improvements to PFRS. The FRSC has adopted the Improvements

to International Financial Reporting Standards 2008. These amendments became effective in the Philippines in annual periods beginning on or after January 1, 2009. The Group determined the amendments to the following standards to be relevant to the Group’s accounting policies:

• PAS 1 (Amendment), Presentation of Financial Statements. The amendment

clarifies that financial instruments classified as held for trading in accordance with PAS 39 are not necessarily required to be presented as current assets or current liabilities. Instead, normal classification principles under PAS 1 should be applied. Since the presentation of assets and liabilities in the Group’s financial statements are unclassified, this new standard has no impact on the Group’s financial statements.

• PAS 19 (Amendment), Employee Benefits. The amendment includes the

following:

- Clarification that a curtailment is considered to have occurred to the extent that benefit promises are affected by future salary increases and a reduction in the present value of the defined benefit obligation results in negative past service cost.

- Change in the definition of return of plan assets to require the

deduction of plan administration costs in the calculation of plan assets return only to the extent that such costs have been excluded from measurement of the defined benefit obligation.

- Distinction between short-term and long-term employee benefits will

be based on whether benefits are due to be settled within or after 12 months of employee service being rendered.

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- Removal of the reference to recognition in relation to contingent liabilities in order to be consistent with PAS 37, Provisions, Contingent Liabilities and Contingent Assets, which requires contingent liabilities to be disclosed and not recognized.

This amendment to PAS 19 has no impact on the Group’s 2009 financial statements.

• PAS 23 (Amendment), Borrowing Costs. The amendment clarifies the

definition of borrowing costs to include interest expense determined using the effective interest method under PAS 39. This amendment had no significant effect on the Group’s financial statements.

• PAS 28 (Amendment), Investments in Associates. Where an investment in

associate is accounted for in accordance with PAS 39, only certain rather than all disclosure requirements in PAS 28 need to be made in addition to disclosures required by PFRS 7. The Group’s adoption of this new standard does not have any significant effect on the 2009 financial statements, as all investment in associates of the Group are in accordance with PAS 28.

• PAS 36 (Amendment), Impairment of Assets. Where fair value less cost to sell

is calculated on the basis of discounted cash flows, disclosures equivalent to those for value-in-use calculation should be made. The Group’s adoption of this amendment has no material effect on its 2009 financial statements.

• PAS 38 (Amendment), Intangible Assets. The amendment clarifies when to

recognize a prepayment asset, including advertising or promotional expenditures. In the case of supply of goods, the entity recognizes such expenditure as an expense when it has a right to access the goods. For services, an expense is recognized on receiving the service. Also, prepayment may only be recognized in the event that payment has been made in advance of obtaining right of access to goods or receipt of services. The Group’s adoption of this amendment had no material effect on its 2009 financial statements.

• PAS 39 (Amendment), Financial Instruments: Recognition and Measurement. The

definition of financial asset or financial liability at fair value through profit or loss as it relates to items that are held for trading was changed. A financial asset or liability that is part of a portfolio of financial instruments managed together with evidence of an actual recent pattern of short-term profit taking is included in such a portfolio on initial recognition. The Group’s adoption of this amendment has no material effect on its 2009 financial statements.

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• PAS 40 (Amendment), Investment Property. PAS 40 is amended to include property under construction or development for future use as investment property in its definition of investment property. This results in such property being within the scope of PAS 40; previously, it was within the scope of PAS 16. Also, if an entity’s policy is to measure investment property at fair value, but during construction or development of an investment property the entity is unable to reliably measure its fair value, then the entity would be permitted to measure the investment property at cost until construction or development is complete. At such time, the entity would be able to measure the investment property at fair value. The Group’s adoption of this new standard has no material effect on its financial statements.

• PFRS 5 (Amendment), Non-current Assets Held-for-Sale and Discontinued

Operations. The amendment clarifies that all the assets and liabilities of a subsidiary should be classified as held for sale if the entity is committed to a sale plan involving loss of control of the subsidiary, regardless of whether the entity will retain a non-controlling interest after the sale. Relevant disclosures should be made for this subsidiary if the definition of a discontinued operation is met. The Group’s adoption of this amendment did not result to significant impact on its financial statements.

(b) Effective in 2009 but not Relevant to the Group

The following amendments and interpretations to published standards are mandatory

for accounting periods beginning on or after January 1, 2009 but are not relevant to the Group’s financial statements:

PFRS 1 and PAS 27 (Amendments) : PFRS 1 – First Time Adoption of PFRS and PAS 27 – Consolidated and

Separate Financial Statements PFRS 2 (Amendment) : Share-based Payment Philippine Interpretations IFRIC 16 : Hedges of a Net Investment in a

Foreign Operation

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(c) Effective Subsequent to 2009

There are new PFRS, revisions, amendments, annual improvements and interpretations to existing standards that are effective for periods subsequent to 2009. Among those, management has initially determined the following, which the Group will apply in accordance with their transitional provisions, to be relevant to its financial statements:

(i) PAS 27 (Revised 2008), Consolidated and Separate Financial Statements

(effective from July 1, 2009). The amendment requires that dividends received out of the investee's pre-acquisition profits be no longer deducted from cost in the parent or investor's separate financial statements, instead, dividends receivable will be recorded as income (but may also give rise to impairment of the investment). Moreover, the amendment introduces new guidance on accounting when a parent reorganizes the structure of its group by establishing a new entity as its parent and the interests of shareholders are not affected. The Group does not expect any impact on its consolidated financial statements when it applies the standard subsequently.

(ii) PFRS 3 (Revised), Business Combinations (effective from July 1, 2009). The

revised standard continues to apply the acquisition method to business combinations, with some significant changes. For example, all payments to purchase a business are to be recorded at fair value at the acquisition date, with contingent payments classified as debt subsequently re-measured through the income statement. There is a choice on an acquisition-by-acquisition basis to measure the non-controlling interest in the acquiree either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s net assets. All acquisition-related costs should be expensed. The Group will apply PFRS 3 (Revised) prospectively to all business combinations from January 1, 2010.

(iii) PFRS 9, Financial Instruments (effective from January 1, 2013). PFRS 9 is the first part of Phase 1 of the project to replace PAS 39, Financial Instruments: Recognition and Measurement, in its entirety by the end of 2010. The main phases are (with a separate project dealing with derecognition):

o Phase 1 : Classification and Measurement o Phase 2 : Impairment Methodology o Phase 3 : Hedge Accounting

PFRS 9 introduces major simplifications of the classification and measurement provisions under PAS 39. These include reduction from four measurement categories into two categories, i.e. fair value and amortized cost, and from several impairment methods into one method. Management is yet to assess the impact that this amendment is likely to have on the financial statements. However, it does not expect to implement the amendments until 2013 when all phases of the PAS 39 replacement have been published at which time the Group expects it can comprehensively assess the impact of the revised standard.

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(iv) Philippine Interpretation IFRIC 14, Prepayments of a Minimum Funding Requirement – Amendment to IFRIC 14 (effective on or before January 1, 2011). This interpretation addresses unintended consequences that can arise from the previous requirements when an entity prepays future contributions into a defined benefit pension plan. It sets out guidance on when an entity recognizes an asset in relation to a PAS 19 surplus for defined benefit plans that are subject to a minimum funding requirement. Management does not expect that its future adoption of the amendment will have a material effect on its financial statements because it does not usually make substantial advance contribution to its retirement fund.

(v) Philippine Interpretation IFRIC 18, Transfers of Assets from Customers

(effective from July 1, 2009). This interpretation provides guidance on how to account for items of property, plant and equipment received from customers; or cash that is received and used to acquire or construct specific assets. It is only applicable to agreements in which an entity receives from a customer such assets that the entity must either use to connect the customer to a network or to provide ongoing access to a supply of goods or services or both. Management does not anticipate the adoption of the interpretation to have material impact on its financial statements.

(vi) Philippine Interpretation IFRIC 19, Extinguishing Financial Liabilities with Equity

Instruments (effective on or after July 1, 2010). It addresses accounting by an entity when the terms of a financial liability are renegotiated and result in the entity issuing equity instruments to a creditor to extinguish all or part of the financial liability. These transactions are sometimes referred to as “debt for equity” exchanges or swaps, and have happened with increased regularity during the financial crisis. The interpretation requires the debtor to account for a financial liability which is extinguished by equity instruments as follows:

• the issue of equity instruments to a creditor to extinguish all (or part) of a

financial liability is considered as payment in accordance with PAS 39;

• the entity measures the equity instruments issued at fair value, unless this cannot be reliably measured;

• if the fair value of the equity instruments cannot be reliably measured, then

the fair value of the financial liability extinguished is used; and, • the difference between the carrying amount of the financial liability

extinguished and the consideration paid is recognized in profit or loss.

Management has determined that the adoption of the interpretation will not have a material effect on it financial statements as it does not normally extinguish financial liabilities through equity swap.

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(vii) 2009 Annual Improvements to PFRS. The FRSC has adopted the Improvements to Philippine Financial Reporting Standards 2009. Most of these amendments became effective for annual periods beginning on or after July 1, 2009, or January 1, 2010. Among those improvements, only the following amendments were identified to be relevant to the Group’s financial statements:

• PAS 1 (Amendment), Presentation of Financial Statements (effective from

January 1, 2010). The amendment clarifies the current and non-current classification of a liability that can, at the option of the counterparty, be settled by the issue of the entity’s equity instruments. The Group will apply the amendment in its 2010 financial statements but expects to have no material impact in the Group’s financial statements.

• PAS 7 (Amendment), Statement of Cash Flows (effective from

January 1, 2010). The amendment clarifies that only an expenditure that results in a recognized asset can be classified as a cash flow from investing activities. The amendment will not have a material impact on the financial statements since only recognized assets are classified by the Group as cash flow from investing activities.

• PAS 17 (Amendment), Leases (effective from January 1, 2010). The amendment clarifies that when a lease includes both land and building elements, an entity assesses the classification of each element as finance or an operating lease separately in accordance with the general guidance on lease classification set out in PAS 17. Management has initially determined that this will not have material impact on the Group’s financial statements.

• PAS 18 (Amendment), Revenue (effective from January 1, 2010). The

amendment provides guidance on determining whether an entity is acting as a principal or as an agent. Management will apply this amendment prospectively in its 2010 financial statements.

2.3 Basis of Consolidation and Accounting for Investments in Subsidiaries and

Associates in Separate Financial Statements

The Group obtains and exercises control through voting rights. The Group’s consolidated financial statements comprise the accounts of the Parent Company and its subsidiaries as enumerated in Note 1, after the elimination of material intercompany transactions. All intercompany balances and transactions with subsidiaries, including income, expenses and dividends, are eliminated in full. Unrealized profits and losses from intercompany transactions that are recognized in assets are also eliminated in full. Intercompany losses that indicate an impairment are recognized in the consolidated financial statements. The financial statements of subsidiaries are prepared for the same reporting period as the Parent Company, using consistent accounting policies.

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The Group accounts for its investments in subsidiaries and associates, and non-controlling interest as follows: (a) Investments in Subsidiaries

Subsidiaries are all entities over which the Group has the power to control the financial and operating policies. The Parent Company obtains and exercises control through voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered from the date in which the Parent Company controls another entity. Subsidiaries are fully consolidated from the date when the Parent Company obtains control. They are de-consolidated from the date the control ceases. Acquired subsidiaries are subject to application of the purchase method for acquisitions. This involves the revaluation at fair value of all identifiable assets and liabilities, including contingent liabilities of the subsidiary, at the acquisition date, regardless of whether or not they were recorded in the financial statements of the subsidiary prior to acquisition. On initial recognition, the assets and liabilities of the subsidiary are included in the consolidated statement of financial position at their revalued amounts, which are also used as the bases for subsequent measurement in accordance with the Group accounting policies. Goodwill (positive) represents the excess of acquisition cost over the fair value of the Group’s share of the identifiable net assets of the acquired subsidiary at the date of acquisition. Negative goodwill represents the excess of the Group’s share in the fair value of identifiable net assets of the subsidiary at date of acquisition over acquisition cost. All intercompany balances and transactions with subsidiaries, including the unrealized profits arising from intra-group transactions, have been eliminated in full. Unrealized losses are eliminated unless costs cannot be recovered.

(b) Transactions with Non-controlling Interests

Non-controlling interests represent the portion of the net assets and profit or loss not attributable to the Group. The Group applies a policy of treating transactions with non-controlling interests as transactions with parties external to the Group. Disposals to non-controlling interests result in gains and losses for the Group that are recorded in the statement of income. Purchases of equity shares from non-controlling interests may result in goodwill, being the difference between any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary. In the consolidated financial statements, the non-controlling interest component is shown as part of statements of changes in capital funds.

(c) Investments in Associates

Associates are those entities over which the Group is able to exert significant influence but which are neither subsidiaries nor interest in a joint venture. In the consolidated financial statements, Investments in Associates are initially recognized at cost and subsequently accounted for using the equity method. Under the equity method, the Group recognizes in its statement of income its share in the earnings or losses of the associates. The cost of the investment is increased or decreased by the Group’s equity in net earnings or losses of the associates since the date of acquisition.

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Dividends received are recorded as reduction in the carrying values of the investments.

Acquired investments in associates are also subject to purchase accounting. However, any goodwill or fair value adjustment attributable to the share in the associate is included in the amount recognized as investment in associates. All subsequent changes to the share of interest in the equity of the associate are recognized in the Group’s carrying amount of the investment. Changes resulting from the profit or loss generated by the associate are charged against Equity in Net Earnings of Associates in the Group’s statement of income and therefore affect net results of the Group. These changes include subsequent depreciation, amortization or impairment of the fair value adjustments of assets and liabilities. Items that have been directly recognized in the associate’s equity, for example, resulting from the associate’s accounting for available-for-sale financial assets, are recognized in consolidated Capital Funds of the Group. Any non-financial income related equity movements of the associate that arise, for example, from the distribution of dividends or other transactions with the associate’s shareholders, are charged against the proceeds received or granted. No effect on the Group’s net result or capital funds is recognized in the course of these transactions. However, 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.

Unrealized gains on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the associates. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the assets transferred. Accounting policies of associates have been changed where necessary to ensure consistency with the policies adopted by the Group.

In the Parent Company financial statements, the Parent Company’s Investments in Subsidiaries and Associates are accounted for at cost, less any impairment loss. Investment costs are inclusive of unamortized positive goodwill, if any. If there is an objective evidence that the investments in subsidiaries and associates will not be recovered, an impairment loss is provided. Impairment loss is measured as the difference between the carrying amount of the investment and the present value of the estimated cash flows discounted at the current market rate of return for similar financial assets. The amount of the impairment loss is recognized in profit or loss.

2.4 Segment Reporting

A business segment is a group of assets and operations engaged in providing products or services that are subject to risks and returns that are different from those of other business segments. A geographical segment is a segment engaged in providing products or services within a particular economic environment that is subject to risks and returns that are different from those of segments operating in other economic environments. The Group’s operations are structured according to the nature of the services provided (primary segment) and different markets served (secondary segment). Financial information on business segments is presented in Note 6.

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2.5 Financial Assets

Financial assets, which are recognized when the Group becomes a party to the contractual terms of the financial instrument, include cash and other financial instruments. Financial assets, other than hedging instruments, are classified into the following categories: financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments and available-for-sale securities. Financial assets are assigned to the different categories by management on initial recognition, depending on the purpose for which the investments were acquired. The designation of financial assets is re-evaluated at every reporting period at which date a choice of classification or accounting treatment is available, subject to compliance with specific provisions of applicable accounting standards.

Regular purchases and sales of financial assets are recognized on their trade date. All financial assets that are not classified as at fair value through profit or loss are initially recognized at fair value plus any directly attributable transaction costs. Financial assets carried at fair value through profit or loss are initially recorded at fair value and transaction costs related to it are recognized as expense in the statement of income. The foregoing categories and detailed description of the categories of financial instruments are more fully discussed below and in the succeeding pages.

(a) Financial Assets at Fair Value through Profit or Loss

This category includes derivative financial instruments and financial assets that are either classified as held for trading or are designated by the entity to be carried at fair value through profit or loss upon initial recognition. A financial asset is classified in this category 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. Financial assets at fair value through profit or loss are measured at fair value, and changes therein are recognized in profit or loss. Financial assets may be reclassified out of fair value through profit or loss category if they are no longer held for the purpose of being sold or repurchased in the near term. Derivatives and financial assets originally designated as financial assets at fair value through profit or loss may not be subsequently reclassified, except for derivatives embedded in CLNs linked to ROP bonds as allowed by BSP for prudential reporting and SEC for financial reporting purposes.

(b) Loans and Receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the Group provides money, goods or services directly to the debtor with no intention of trading the receivables. Included in this category are those arising from direct loans to customers, interbank loans and receivables, sales contracts receivable, all receivables from customers and cash and cash equivalents. Cash and cash equivalents comprise balances with less than three months maturity from the date of acquisition, including cash and non-restricted balances with the BSP and amounts due from other banks.

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Loans and receivables are subsequently measured at amortized cost using the effective interest method, less impairment losses. Any change in their value is recognized in profit or loss, except for changes in fair values of reclassified financial assets under PAS 39 and PFRS 7 (Amendments). Increases in estimates of future cash receipts from such financial assets shall be recognized as an adjustment to the effective interest rate from the date of the change in estimate rather than as an adjustment to the carrying amount of the financial asset at the date of the change in estimate. Impairment losses is the estimated amount of losses in the Group’s loan portfolio, based on the evaluation of the estimated future cash flows discounted at the loan’s original effective interest rate or the last repricing rate for loans issued at variable rates (see Note 2.6). It is established through an allowance account which is charged to expense. Loans and receivables are written off against the allowance for impairment losses when management believes that the collectibility of the principal is unlikely, subject to BSP regulations.

(c) Held-to-maturity Investments This includes non-derivative financial assets with fixed or determinable payments and a fixed date of maturity. Investments are classified as held-to maturity if the Group has the positive intention and ability to hold them until maturity. Investments intended to be held for an undefined period are not included in this classification. Held-to-maturity investments consist of government and private debt securities. Should the Group sell other than an insignificant amount of held-to-maturity assets, the entire category would be tainted and reclassified as available-for-sale securities. The tainting provision will not apply if the sales or reclassifications of held-to-maturity investments are so close to maturity or the financial asset’s call date that changes in the market rate of interest would not have a significant effect on the financial asset’s fair value; occur after the Group has collected substantially all of the financial asset’s original principal through scheduled payments or prepayments; or are attributable to an isolated event that is beyond the control of the Group, is nonrecurring and could not have been reasonably anticipated by the Group. Financial assets that are booked under the available-for-sale category because of the tainting provision may be reclassified to held-to-maturity investments or loans and receivables using the fair value carrying amount of the financial assets as of the date of reclassification in accordance with BSP Circular No. 628.

Held-to-maturity investments are subsequently measured at amortized cost using the effective interest method. In addition, if there is objective evidence that the investment has been impaired, the financial asset is measured at the present value of estimated cash flows (see Note 2.6). Any changes to the carrying amount of the investment due to impairment are recognized in profit or loss.

(d) Available-for-sale Securities

This includes non-derivative financial assets that are either designated to this category or do not qualify for inclusion in any of the other categories of financial assets.

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Non-derivative financial asset classified as available-for-sale may be reclassified to loans and receivables category that would have met the definition of loans and receivables (effective in July 1, 2008) if there is an intention and ability to hold that financial asset for the foreseeable future or until maturity. Any previous gain or loss on the asset that has been recognized in the capital funds shall be amortized to profit or loss over the remaining life of the held-to-maturity investment, in case of financial asset with a fixed maturity, using the effective interest method. Any difference between the new amortized cost and maturity amount shall also be amortized over the remaining life of the financial asset using the effective interest method.

All financial assets within this category are subsequently measured at fair value, unless otherwise disclosed, with changes in value recognized in other comprehensive income, net of any effects arising from income taxes. When the asset is disposed of or is determined to be impaired the cumulative gain or loss recognized in other comprehensive income is reclassified from revaluation reserve to profit or loss and presented as a reclassification adjustment within other comprehensive income. Reversal of impairment loss is recognized in other comprehensive income, except for financial assets that are debt securities which are recognized in profit or loss only if the reversal can be objectively related to an event occurring after the impairment loss is recognized.

Impairment losses recognized on financial assets are presented as part of Impairment Losses account in the statement of income. The fair values of quoted investments in active markets are based on current bid prices. If the market for a financial asset is not active (and for unlisted securities), the Group establishes the fair value by using valuation techniques, which include the use of recent arm’s length transactions, discounted cash flow analysis, option pricing models and other valuation techniques commonly used by market participants. Gains and losses arising from changes in the fair value of the financial assets at fair value through profit or loss category are included in Trading and Securities Gains (Losses) - Net account in the statement of income in the period in which they arise. Gains and losses arising from changes in the fair value of available-for-sale securities are recognized as other comprehensive income, until the financial asset is derecognized or impaired at which time the cumulative gain or loss previously recognized in capital funds shall be recognized in profit or loss. However, interest calculated using the effective interest method is recognized in the statement of income. Dividends on available-for-sale equity instruments are recognized in the statement of income when the entity’s right to receive payment is established. Non-compounding interest and other cash flows resulting from holding impaired financial assets are recognized in profit or loss when received, regardless of how the related carrying amount of financial assets is measured. Derecognition of financial assets occurs when the right to receive cash flows from the financial instruments expire or are transferred and substantially all of the risks and rewards of ownership have been transferred.

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2.6 Impairment of Financial Assets The Group assesses at the end of each reporting period whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses 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 (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. Objective evidence that a financial asset or group of assets is impaired includes observable data that comes to the attention of the Group about the following loss events: i. significant financial difficulty of the issuer or obligor; ii. a breach of contract, such as a default or delinquency in interest or principal

payments; iii. the Group granting to the borrower, for economic or legal reasons relating to the

borrower’s financial difficulty, a concession that the lender would not otherwise consider;

iv. it becoming probable that the borrower will enter bankruptcy or other financial

reorganization; v. the disappearance of an active market for that financial asset because of financial

difficulties; or, vi. observable data indicating that there is a measurable decrease in the estimated

future cash flows from a group of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in the group, including: adverse changes in the payment status of borrowers in the group, or national or local economic conditions that correlate with defaults on the assets in the group.

(a) Assets Carried at Amortized Cost

The Group first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant and individually or collectively for financial assets that are not individually significant. If the Group determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. 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 of impairment.

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If there is objective evidence that an impairment loss on loans and receivable or held-to-maturity investments 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 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 the use of an allowance account and the amount of the loss is recognized in the statement of income. If a loan or held-to-maturity investment has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. As a practical expedient, the Group may measure impairment on the basis of an instrument’s fair value using an observable market price.

The calculation of the present value of the estimated future cash flows of a collateralized financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable.

For the purpose of a collective evaluation of impairment, financial assets are grouped on the basis of 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). 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.

Future cash flows in a group of financial assets that are collectively evaluated for impairment are estimated on the basis of the contractual cash flows of the assets in the group and historical loss experience for assets with credit risk characteristics similar to those in the group. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the period on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currently.

Estimates of changes in future cash flows for groups of assets should reflect and be directionally consistent with changes in related observable data from period to period (for example, changes in unemployment rates, property prices, payment status, or other factors indicative of changes in the probability of losses in the group and their magnitude). The methodology and assumptions used for estimating future cash flows are reviewed regularly by the Group to reduce any differences between loss estimates and actual loss experience.

When a loan/receivable is determined to be uncollectible, it is written off against the related allowance for impairment. Such loan/receivable is written off after all the prescribed procedures have been completed and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off decrease the amount of impairment losses in the statement 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. The amount of the reversal is recognized in the statement of income.

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(b) Assets Carried at Fair Value In the case of equity investments classified as available-for-sale, a significant or prolonged decline in the fair value of the security below its cost is considered in determining whether the assets are impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognized in profit or loss – is removed from Capital Funds and recognized in the profit or loss. Impairment losses recognized in the statement of income on equity instruments are not reversed through the statement of income. If, in a subsequent period, the fair value of a debt instrument classified as available for sale 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 statement of income.

(c) Assets Carried at Cost

If there is objective evidence of impairment for any of the unquoted equity securities and derivative assets linked to and required to be settled in such unquoted equity instruments, which are carried at cost, the amount of impairment loss is recognized. The impairment loss is the difference between the carrying amount of the equity security and the present value of the estimated future cash flows discounted at the current market rate of return of a similar asset. Impairment losses on assets carried at cost cannot be reversed.

2.7 Derivative Financial Instruments and Hedge Accounting The Parent Company is a party to various foreign currency forward contracts, cross currency swaps, futures, and interest rate swaps. These contracts are entered into as a service to customers and as a means of reducing or managing the Parent Company’s foreign exchange and interest rate exposures as well as for trading purposes. Amounts contracted are recorded as contingent accounts that are not included in the statement of financial position. Derivatives are initially recognized as Financial Assets at Fair Value Through Profit or Loss at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at their fair value. Fair values are obtained from quoted market prices in active markets and valuation techniques, including discounted cash flow models and options pricing models, as appropriate. The change in fair value of derivative financial instruments is recognized in profit or loss, except when their effects qualify as a hedging instrument. All derivatives are carried as assets when fair value is positive and as liabilities when fair value is negative. The best evidence of the fair value of a derivative at initial recognition is the transaction price (i.e., the fair value of the consideration given or received) unless the fair value of that instrument is evidenced by comparison with other observable current market transactions in the same instrument (i.e., without modification or repackaging) or based on a valuation technique whose variables include only data from observable markets. When such evidence exists, the Parent Company and certain subsidiaries recognize the profits at initial recognition.

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Certain derivatives embedded in other financial instruments, such as credit default swaps in a credit linked note, 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 changes in fair value recognized in the profit or loss except for the embedded derivatives in CLNs linked to ROP bonds which were not bifurcated from the host contracts and were reclassified to loans and receivables as permitted by the BSP for prudential regulation and SEC for financial reporting purposes. Except for derivatives that qualify as a hedging instrument, changes in fair value of derivatives are recognized in profit and loss. For a derivative that is designated as a hedging instrument, the method of recognizing the resulting fair value gain or loss depends on the type of hedging relationship. The Parent Company designates certain derivatives as either: (a) hedges of the fair value of recognized assets or liabilities or firm commitments (fair value hedges); or (b) hedges of highly probable future cash flows attributable to a recognized asset or liability, or a forecasted transaction (cash flow hedge). Hedge accounting is used for derivatives designated in this way provided certain criteria are met. 2.8 Offsetting Financial Instruments Financial assets and liabilities are offset and the net amounts are reported in the statement of financial position when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or realize the asset and settle the liability simultaneously. 2.9 Bank Premises, Furniture, Fixtures and Equipment

Land is stated at cost. As no finite useful life for land can be determined, related carrying amount are not depreciated. All other bank premises, furniture, fixtures and equipment are stated at cost less accumulated depreciation, amortization and any impairment in value. The cost of an asset comprises its purchase price and directly attributable costs of bringing the asset to working condition for its intended use. Expenditures for additions, major improvements and renewals are capitalized; expenditures for repairs and maintenance are charged to expense as incurred. When assets are sold, retired or otherwise disposed of, their cost and related accumulated depreciation, amortization and impairment losses, if any, are removed from the accounts and any resulting gain or loss is reflected in income for the period. Depreciation is computed on the straight-line method over the estimated useful lives of the depreciable assets as follows:

Buildings 20-25 years Furniture, fixtures and equipment 3-15 years

Leasehold rights and improvements are amortized over the term of the lease or the estimated useful lives of the improvements, whichever is shorter. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount (see Note 2.18).

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The residual values and estimated useful lives of bank premises, furniture, fixtures and equipment are reviewed, and adjusted if appropriate, at each statement of financial position date. An item of bank premises, furniture, fixtures and equipment is derecognized upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the item) is included in the statement of income in the year the item is derecognized.

2.10 Investment Property Investment property pertains to land, buildings or condominium units acquired by the Group, in settlement of loans from defaulting borrowers through foreclosure or dacion in payment, and not held for sale in the next 12 months.

Investment property is initially recognized at cost, which includes acquisition price plus directly attributable cost incurred such as legal fees, transfer taxes and other transaction costs. Subsequent to initial recognition, investment property is stated at cost less accumulated depreciation and any impairment losses (see Note 2.18).

The Group adopted the cost model in measuring its investment property, hence, it is carried at cost less accumulated depreciation and any impairment in value. Depreciation and impairment loss are recognized in the same manner as in Bank Premises, Furniture, Fixtures and Equipment.

Investment property is derecognized upon disposal or when permanently withdrawn from use and no future economic benefit is expected from its disposal. Any gain or loss on the retirement or disposal of an investment property is recognized in the statement of income in the year of retirement or disposal.

2.11 Assets Held-for-Sale

Assets held-for-sale (presented as part of Other Resources) include real and other properties acquired through repossession or foreclosure or purchase that certain subsidiaries intend to sell within one year from the date of classification as held-for-sale. Assets classified as held-for-sale are measured at the lower of their carrying amounts, immediately prior to their classification as held-for-sale and their fair value less costs to sell. Assets classified as held-for-sale are not subject to depreciation or amortization. The profit or loss arising from the sale or revaluation of held-for-sale assets is included in the Other Operating Income (Expenses) account in the statement of income. 2.12 Intangible Assets

Intangible assets include goodwill, branch licenses, and computer software licenses. Goodwill represents the excess of the cost of acquisition over the fair value of the net assets acquired and branch licenses at the date of acquisition. Branch licenses, on the other hand, represent the rights given to the Parent Company to establish certain number of branches in the restricted areas in the country as incentive in acquiring a certain rural bank.

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Goodwill is classified as intangible asset with indefinite useful life and, thus, not subject to amortization but would require an annual test for impairment. Goodwill is subsequently carried at cost less accumulated impairment losses. Goodwill is allocated to cash generating units for the purpose of impairment testing. Each of those cash generating units is represented by each primary reporting segment. Branch licenses are amortized over five years, its estimated useful life, starting from the year the branch is opened. Computer software licenses are capitalized on the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortized on the basis of the expected useful lives (three to five years). Costs associated with developing or maintaining computer software programs are recognized as an expense as incurred. Costs that are directly associated with the production of identifiable and unique software products controlled by the Group, and that will probably generate economic benefits exceeding costs beyond one year, are recognized as intangible assets. Direct costs include software development employee costs and an appropriate portion of relevant overheads. Computer software development costs recognized as assets are amortized using the straight-line method over their useful lives (not exceeding five years). 2.13 Financial Liabilities

Financial liabilities include deposit liabilities, bills payable, bonds payable, subordinated debt, accrued interest and other expenses, and other liabilities. Financial liabilities are recognized when the Group becomes a party to the contractual agreements of the instrument. All interest-related charges are recognized as an expense in the statement of income. Financial liabilities are generally at their fair value at initial recognition and subsequently measured at amortized cost less settlement payments. Deposit liabilities are stated at amounts in which they are to be paid. Interest is accrued periodically and recognized in a separate liability account before recognizing as part of deposit liabilities. Bills payable, bonds payable and subordinated debt are recognized initially at fair value, which is the issue proceeds (fair value of consideration received) net of direct issue costs. Bills payable, bonds payable and subordinated debt are subsequently stated at amortized cost; any difference between the proceeds net of transaction costs and the redemption value is recognized in the statement of income over the period of the borrowings using the effective interest method. Preferred shares that carry mandatory coupons or are redeemable on a specific date or at the option of the shareholder, are classified as financial liabilities and are presented as part of Other Liabilities in the statement of financial position. The dividends on these preference shares are recognized in the statement of income as interest expense on an amortized cost basis using the effective interest method.

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Derivative financial liabilities represent the cumulative changes in net fair value losses arising from the Group’s foreign currency forward transactions and interest rate swaps. Dividend distributions to shareholders are recognized as financial liabilities when the dividends are approved by the BSP. Financial liabilities are derecognized from the statement of financial position only when the obligations are extinguished either through discharge, cancellation or expiration. 2.14 Provisions

Provisions are recognized when present obligations will probably lead to an outflow of economic resources and they can be estimated reliably even if the timing or amount of the outflow may still be uncertain. A present obligation arises from the presence of a legal or constructive commitment that has resulted from past events. Provisions are measured at the estimated expenditure required to settle the present obligation, based on the most reliable evidence available at the end of the reporting period, including the risks and uncertainties associated with the present obligation. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. When time value of money is material, long-term provisions are discounted to their present values using a pretax rate that reflects market assessments and the risks specific to the obligation. Provisions are reviewed at the end of each reporting period and adjusted to reflect the current best estimate. In those cases where the possible outflow of economic resource as a result of present obligations is considered improbable or remote, or the amount to be provided for cannot be measured reliably, no liability is recognized in the financial statements. Similarly, possible inflows of economic benefits to the Group that do not yet meet the recognition criteria of an asset are considered contingent assets, hence, are not recognized in the financial statements. On the other hand, any reimbursement that the Group can be virtually certain to collect from a third party with respect to the obligation is recognized as a separate asset not exceeding the amount of the related provision. Prior to 2007, Bankard, under a rewards program, offers monetized rewards to active cardholders. Provisions for rewards are recognized at a certain rate of cardholders’ credit card availments, determined by management based on redeemable amounts. The program was assumed by the Parent Company when Bankard sold certain assets, including credit card receivables, to the Parent Company.

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2.15 Revenue and Cost Recognition

Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognized:

(a) Interest Income and Expenses are recognized in the statement of income for all

instruments measured at amortized cost using the effective interest method. 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. Once a financial asset or a group of similar financial assets has been written down as a result of an impairment loss, interest income is recognized using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss.

(b) Trading and Securities Gains (Losses) recognized when the ownership of the securities is transferred to the buyer (at an amount equal to the excess or deficiency of the selling price over the carrying amount of securities) and as a result of the mark-to-market valuation of certain securities at year-end.

(c) Commission and Other Income includes the following accounts:

(i) Finance charges are recognized on credit card revolving accounts, other than

those accounts classified as installment, as income as long as those outstanding account balances are not 90 days and over past due. Finance charges on installment accounts, first year and renewal membership fees are recognized as income when billed to cardholders. Purchases by cardholders which are collected on installment are recorded at the cost of items purchased.

(ii) Late payment fees are billed on delinquent credit card receivable balances until

179 days past due. These late payment fees are recognized as income upon collection.

(iii) Loan syndication fees are recognized upon completion of all syndication activities

and where there are no further obligations to perform under the syndication agreement. Service charges and penalties are recognized only upon collection or accrued where there is a reasonable degree of certainty as to its collectibility.

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(iv) Discounts earned, net of interchange costs, are recognized as income upon presentation by member establishments of charges arising from Bankard and non-Bankard (associated with MasterCard, JCB and VISA labels) credit card availments passing through the Point of Sale (POS) terminals of Bankard. These discounts are computed based on agreed rates and are deducted from amounts remitted to member establishments. Interchange costs pertain to the other credit card companies’ share in Bankard’s merchant discounts whenever their issued credit cards transact in a Bankard POS terminal.

(v) Profit from assets sold or exchanged is recognized when the title to the acquired

assets is transferred to the buyer, or when the collectibility of the entire sales price is reasonably assured.

Cost and expenses are recognized in the statement of income upon utilization of the assets or services or at the date they are incurred. 2.16 Leases

The Group accounts for its leases as follows:

(a) Group as Lessee

Leases which transfer to the Group substantially all risks and benefits incidental to ownership of the leased item are classified as finance leases and are recognized as resources and liabilities in the statement of financial position at amounts equal at the inception of the lease to the fair value of the leased property or, if lower, at the present value of minimum lease payments. Lease payments are apportioned between the finance costs and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance costs are directly charged against income. Capitalized leased assets are depreciated over the shorter of the estimated useful life of the asset or the lease term. Leases which do not transfer to the Group substantially all the risks and benefits of ownership of the asset are classified as operating leases. Operating lease payments are recognized as expense in the statement of income on a straight-line basis over the lease term. Associated costs, such as maintenance and insurance, are expensed as incurred.

(b) Group as Lessor

Leases, wherein the Group substantially transfers to the lessee all risks and benefits incidental to ownership of the leased item, are classified as finance leases and are presented as receivable at an amount equal to the Group’s net investment in the lease. Finance income is recognized based on the pattern reflecting a constant periodic rate of return on the Group’s net investment outstanding in respect of the finance lease. Leases which do not transfer to the lessee substantially all the risks and benefits of ownership of the asset are classified as operating leases. Operating lease collections are recognized as income in the statement of income on a straight-line basis over the lease term.

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The Group determines whether an arrangement is, or contains a lease based on the substance of the arrangement. It makes an assessment of whether the fulfillment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset.

2.17 Foreign Currency Transactions and Translations

(a) Transaction and Balances Except for the foreign subsidiaries and accounts from the Group’s foreign currency denominated unit (FCDU), the accounting records of the Group are maintained in

Philippine pesos. Foreign currency transactions during the period are translated into the functional currency at exchange rates which approximate those prevailing at transaction dates. Resources and liabilities denominated in foreign currencies are translated to Philippine pesos at prevailing Philippine Dealing System closing rates (PDSCR) at the statement of financial position date.

For financial reporting purposes, the accounts of the FCDU are translated into their

equivalents in Philippine pesos based on PDSCR prevailing at the end of the period (for resources and liabilities) and at the average PDSCR for the period (for income and expenses).

Foreign exchange gains and losses resulting from the settlement of such transactions

and from the translation at year-end exchange rates of monetary resources and liabilities denominated in foreign currencies are recognized in the statement of income, except when deferred in capital funds as qualifying cash flow hedges and qualifying net investment hedges. Translation differences on non-monetary items, such as equities held at fair value through profit or loss, are reported as part of the fair value gain or loss. Translation differences on non-monetary items, such as equities classified as available-for-sale securities, are recognized as part of the Revaluation Reserves on AFS Securities account presented in capital funds.

(b) Translation of Financial Statements of Foreign Subsidiaries

The results and financial position of all the foreign subsidiaries (none of which has the currency dependency of a hyperinflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows: • Resources and liabilities for each statement of financial position presented are

translated at the closing rate at the date of that statement of financial position;

• Income and expenses for each statement of income are translated at average exchange rates during the year (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transactions’ dates, in which case income and expenses are translated at the dates of the transactions); and

• All resulting exchange differences are recognized as a separate component of capital funds.

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On consolidation, exchange differences arising from the translation of the net investment in foreign entities are taken to Capital Funds. When a foreign operation is sold, such exchange differences are recognized in the statement of income as part of the gain or loss on sale. The translation on the financial statements into Philippine peso should not be construed as a representation that the amounts stated in currencies other than the Philippine peso could be converted in Philippine peso amounts at the translation rates or at any other rates of exchange.

2.18 Impairment of Non-financial Assets The Group’s investments in associates, bank premises, furniture, fixtures and equipment, investment property and other resources (including intangible assets) are subject to impairment testing. Intangible assets with an indefinite useful life or those not yet available for use are tested for impairment at least annually. All other individual assets or cash-generating units are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. For purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). As a result, some assets are tested individually for impairment and some are tested at cash-generating unit level. An impairment loss is recognized for the amount by which the asset or cash-generating unit’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of fair value, reflecting market conditions less costs to sell and value in use, based on an internal discounted cash flow evaluation. Impairment loss is charged pro rata to the other assets in the cash generating unit. All assets are subsequently reassessed for indications that an impairment loss previously recognized may no longer exist and the carrying amount of the asset is adjusted to the recoverable amount resulting in the reversal of the impairment loss. 2.19 Employee Benefits (a) Post-employment Benefits

Post-employment benefits are provided to employees through a defined benefit plan,

as well as defined contribution plans. A defined benefit plan is a post-employment plan that defines an amount of post-employment benefit that an employee will receive on retirement, usually

dependent on one or more factors such as age, years of service and salary. The legal obligation for any benefits from this kind of post-employment plan remains with the Group, even if plan assets for funding the defined benefit plan have been acquired. Plan assets may include assets specifically designated to a long-term benefit fund, as well as qualifying insurance policies. The Group’s post-employment defined benefit pension plan covers all regular full-time employees. The pension plan is tax-qualified, noncontributory and administered by a trustee.

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The asset recognized in the statement of financial position for post-employment defined benefit pension plans is the present value of the defined benefit obligation (DBO) at the end of the reporting period less the fair value of plan assets, together with adjustments for unrecognized actuarial gains or losses and past service costs. The DBO is calculated by independent actuaries using the projected unit credit method. The present value of the DBO is determined by discounting the estimated future cash outflows using interest rates of high quality corporate bonds that are denominated in the currency in which the benefits will be paid and that have terms to maturity approximating the terms of the related pension liability.

Actuarial gains and losses are not recognized as an expense unless the total unrecognized gain or loss exceeds 10% of the greater of the obligation and related plan assets. The amount exceeding this 10% corridor is charged or credited to profit or loss over the employees’ expected average remaining working lives. Actuarial gains and losses within the 10% corridor are disclosed separately. Past-service costs are recognized immediately in the statement of income, unless the changes to the pension plan are conditional on the employees remaining in service for a specified period of time (the vesting period). In this case, the past service costs are amortized on a straight-line basis over the vesting period.

A defined contribution plan is a pension plan under which the Group pays fixed

contributions into an independent entity such as the Social Security System. The Group has no legal or constructive obligations to pay further contributions after payment of the fixed contribution. The contributions recognized in respect of defined contribution plans are expensed as they fall due. Liabilities and assets may be recognized if underpayment or prepayment has occurred and are included in current liabilities or current assets as they are normally of a short term nature.

(b) Termination Benefits

Termination benefits are payable when employment is terminated by the Group before the normal retirement date, or whenever an employee accepts voluntary redundancy in exchange for these benefits. The Group recognizes termination benefits when it is demonstrably committed to either: (i) terminating the employment of current employees according to a detailed formal plan without possibility of withdrawal; or (ii) providing termination benefits as a result of an offer made to encourage voluntary redundancy. Benefits falling due more than 12 months after the end of each reporting period are discounted to present value.

(c) Profit-sharing and Bonus Plans

The Group recognizes a liability and an expense for bonuses, based on a formula that is fixed regardless of the Group’s income after certain adjustments and does not take into consideration the profit attributable to the Group’s shareholders. The Group recognizes a provision where it is contractually obliged to pay the benefits, or where there is a past practice that has created a constructive obligation.

(d) Compensated Absences

Compensated absences are recognized for the number of paid leave days

(including holiday entitlement) remaining at the end of the reporting period. They are included in the Accrued Taxes, Interest and Other Expenses account at the undiscounted amount that the Group expects to pay as a result of the unused entitlement.

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2.20 Income Taxes

Tax expense recognized in profit or loss comprises the sum of deferred tax and current tax not recognized in other comprehensive income or directly in capital funds, if any. Current tax assets or liabilities comprise those claims from, or obligations to, tax authorities relating to the current or prior reporting period, that are unpaid at the reporting period. They are calculated according to the tax rates and tax laws applicable to the periods to which they relate, based on the taxable profit for the year. All changes to current tax assets or liabilities are recognized as a component of Tax Expense in the statement of income. Deferred tax is provided, using the liability method on temporary differences at the end of the reporting period between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Under the liability method, with certain exceptions, deferred tax liabilities are recognized for all taxable temporary differences and deferred tax assets are recognized for all deductible temporary differences and the carryforward of unused tax losses and unused tax credits to the extent that it is probable that taxable profit will be available against which the deferred tax assets can be utilized. The carrying amount of deferred tax assets is reviewed at each statement of each reporting period and reduced to the extent that it is probable that sufficient taxable profit will be available to allow all or part of the deferred tax assets to be utilized. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled provided such tax rates have been enacted or substantively enacted at the end of the reporting period. Most changes in deferred tax assets or liabilities are recognized as a component of tax expense in profit or loss. Only changes in deferred tax assets or liabilities that relate to items recognized in other comprehensive income or directly in capital funds are recognized in other comprehensive income or directly in capital funds. 2.21 Related Parties

Parties are considered related when one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control or common significant influence. Related parties may be individuals or corporate entities. 2.22 Capital Funds

Preferred and common stocks represent the nominal value of shares that have been issued. Treasury shares are stated at the cost of reacquiring such shares. Hybrid perpetual securities reflect the net proceeds from the issuance of non-cumulative step-up callable perpetual securities.

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Capital paid in excess of par includes any premiums received on the issuance of capital stocks. Any transaction costs associated with the issuance of shares are deducted from additional paid-in capital, net of any related income tax benefits. Revaluation reserves on available-for-sale securities pertain to changes in the fair values of available-for-sale securities resulting in net gains and losses as a result of the revaluation of available-for-sale financial assets. Revaluation increment in property of an associate consists of gains arising from the revaluation of land. Accumulated translation adjustment represents the cumulative gain from the translation of the financial statements of foreign subsidiaries whose functional currency is different to that of the Group. Reserve for trust business represents the accumulated amount set aside under existing regulations requiring the Parent Company and a subsidiary to carry to surplus 10% of its net profits accruing from trust business until the surplus shall amount to 20% of authorized capital stock. The reserve shall not be paid out in dividends, but losses accruing in the course of the trust business may be charged against this account. Other reserves refers to the amount attributable to the Parent Company arising from the change in the ownership of the non-controlling interest in the Parent Company’s subsidiary. Share in additional paid-in capital of an associate represents the share of the Parent Company in the additional paid-in capital of an associate accounted for under the equity method in the consolidated financial statements. Surplus includes all current and prior period results as disclosed in the statement of income. Non-controlling interests represent the portion of the net assets and profit or loss not attributable to the Group and are presented separately in the Group statement of income and statement of comprehensive income and within capital funds in the Group statements of financial position and changes in capital funds. 2.23 Earnings Per Share

Basic earnings per share is determined by dividing the net profit for the year attributable to common shareholders by the weighted average number of common shares outstanding during the year, after giving retroactive effect to any stock dividends declared in the current year.

Diluted earnings per common share is also computed by dividing net profit by the weighted average number of common shares subscribed and issued during the period. However, net profit attributable to common shares and the weighted average number of common shares outstanding are adjusted to reflect the effects of potentially dilutive convertible preferred shares. Convertible preferred shares are deemed to have been converted into common shares at the issuance of preferred shares.

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2.24 Trust Activities The Group commonly acts as trustee and in other fiduciary capacities that result in the holding or placing of assets on behalf of individuals, trusts, retirement benefit plans and other institutions. These assets and income arising thereon are excluded from these financial statements, as they are not assets of the Group. 2.25 Subsequent Events

Any post-year-end event that provides additional information about the Group’s position at the statement of financial position date (adjusting event) is reflected in the financial statements. Post-year-end events that are not adjusting events, if any, are disclosed when material to the financial statements.

3. SIGNIFICANT ACCOUNTING JUDGMENTS AND ESTIMATES

The Group’s financial statements prepared in accordance with FRSPB and PFRS require management to make judgments and estimates that affect amounts reported in the financial statements and related notes. Judgments and estimates are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Actual results may ultimately vary from these estimates. 3.1 Critical Management Judgments in Applying Accounting Policies

In the process of applying the Group’s and the Parent Company’s accounting policies, management has made the following judgments, apart from those involving estimation, which have the most significant effect on the amounts recognized in the financial statements.

(a) Held-to-maturity Investments

The Group follows the guidance of PAS 39, Financial Instruments: Recognition and Measurement, in classifying non-derivative financial assets with fixed or determinable payments and fixed maturity as held-to-maturity. This classification 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 at maturity other than for the allowed specific circumstances – for example, selling a not insignificant amount close to maturity – it will be required to reclassify the entire class to available-for-sale securities. However, the tainting provision will not apply if the sales or reclassifications of held-to-maturity investments are so close to maturity or the financial asset’s call date that changes in the market rate of interest would not have a significant effect on the financial asset’s fair value; or occurs after the Group has collected substantially all of the financial asset’s original principal through scheduled payments or prepayments; or are attributable to an isolated event that is beyond the control of the Group, is nonrecurring and could not have been reasonably anticipated by the Group. The investments would therefore be measured at fair value and not at amortized cost. In October 2008, the Group was permitted by the BSP and SEC to reclassify certain financial assets previously classified under AFS category due to the tainting of HTM portfolio back to HTM category (see Note 9).

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(b) Impairment of Available-for-sale Securities

The Group also follows the guidance of PAS 39 on determining when an investment is other-than-temporarily impaired. This determination requires significant judgment. In making this judgment, the Group evaluates, among other factors, the duration and extent to which the fair value of an investment is less than its cost; and the financial health of and near-term business outlook for the investee, including factors such as industry and sector performance, changes in technology and operational and financing cash flow. For investments issued by counterparty under bankcruptcy, the Group determines permanent impairment based on the price of the most recent transaction and on latest indications obtained from reputable counterparties (which regularly quotes prices for distressed securities) since current bid prices are no longer available. The Group recognized allowance for impairment on its available-for-sale securities amounting to P1,336,264 and P1,276,157 in 2009 in the consolidated and Parent Company financial statements, respectively, and P811,207 in 2008 both in the consolidated and Parent Company’s financial statements (see Note 10).

(c) Distinction Between Investment Property and Owner-occupied Properties

The Group determines whether a property qualifies as investment property. In making its judgment, the Group considers whether the property generated cash flows largely independently of the other assets held by an entity. Owner-occupied properties generate cash flows that are attributable not only to property but also to other assets used in the production or supply process. Some properties comprise a portion that is held to earn rental or for capital appreciation and another portion that is held for use in the production and supply of goods and services or for administrative purposes. If these portion can be sold separately (or leased out separately under finance lease), the Group accounts for the portions separately. If the portion cannot be sold separately, the property is accounted for as investment property only if an insignificant portion is held for use in operations or for administrative purposes. Judgment is applied in determining whether ancillary services are so significant that a property does not qualify as investment property. The Group considers each property separately in making its judgment.

(d) Operating and Finance Leases

The Group has entered into various lease agreements as either a lessor or lessee. Critical judgment was exercised by management to distinguish each lease agreement as either an operating or finance lease by looking at the transfer or retention of significant risk and rewards of ownership of the properties covered by the agreements. Failure to make the right judgment will result in either overstatement or understatement of assets and liabilities.

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(e) Classification of Acquired Properties and Fair Value Determination of Assets Held- for-Sale and Investment Property

The Group classifies its acquired properties as Bank Premises, Furniture, Fixtures and Equipment if used in operations, as Assets Held-for-sale if the Group expects that the properties will be recovered through sale rather than use, as Investment Property if the Group intends to hold the properties for capital appreciation or as Financial Assets in accordance with PAS 39. At initial recognition, the Group determines the fair value of acquired properties through internally and externally generated appraisal. The appraised value is determined based on the current economic and market conditions, as well as the physical condition of the property.

(f) Provisions and Contingencies

Judgment is exercised by management to distinguish between provisions and contingencies. Policies on recognition and disclosure of provision and disclosure of contingencies are discussed in Note 2.14 and relevant disclosures are presented in Note 31.

3.2 Key Sources of Estimation Uncertainty

The following are the key assumptions concerning the future, and other key sources of estimation uncertainty at the statement of financial position date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year.

(a) Impairment Losses on Financial Assets (Loans and Receivables and Held-to-maturity

Investments)

The Group reviews its loans and receivables and held-to-maturity investments portfolios to assess impairment at least on an annual basis. In determining whether an impairment loss should be recorded in the statement of income, the Group makes judgments as to whether there is any observable data indicating that there is a measurable decrease in the estimated future cash flows from the portfolio before the decrease can be identified with an individual item in that portfolio. This evidence may include observable data indicating that there has been an adverse change in the payment status of borrowers or issuers in a group, or national or local economic conditions that correlate with defaults on assets in the group. Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the portfolio when scheduling its future cash flows. The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience.

Impairment losses on loans and receivables, net of recoveries, amounted to P1,661,931 in 2009, P873,545 in 2008 and P942,490 in 2007 in the consolidated financial statements; and P1,156,333 in 2009, P830,597 in 2008 and P680,535 in 2007 in the Parent Company financial statements (see Note 11).

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(b) Valuation of Financial Assets Other than Loans and Receivables

The Group carries certain financial assets at fair value, which requires the extensive use of accounting estimates and judgment. In cases when active market quotes are not available, fair value is determined by reference to the current market value of another instrument which is substantially the same or is calculated based on the expected cash flows of the underlying net base of the instrument. The amount of changes in fair value would differ if the Group utilized different valuation methods and assumptions. Any change in fair value of these financial assets and liabilities would affect profit or loss and other comprehensive income.

The Group recognized the change in value of financial assets at fair value through

profit or loss resulting to an increase of P39,227 in 2009, P1,557,064 decrease in 2008, and P86,769 increase in 2007; and P10,376 increase in 2009, P1,316,222 decrease in 2008, and P80,504 increase in 2007; in the consolidated and Parent Company financial statements, respectively. The changes in fair values from available-for-sale securities that were reported in the statement of comprehensive income amounted to fair value gains of P1,975,773 in 2009, fair value losses of P2,601,102 in 2008 and P1,875,304 in 2007 in the consolidated financial statements; and fair value gains of P1,807,029 in 2009 and fair value losses of P2,328,671 in 2008 and P1,769,582 in 2007 in the Parent Company financial statements. The carrying values of the assets are disclosed in Notes 8 and 10, respectively.

(c) Useful Lives of Bank Premises, Furniture, Fixtures and Equipment and Investment Property

The Group estimates the useful lives of bank premises, furniture, fixtures and equipment and investment property based on the period over which the assets are expected to be available for use. The estimated useful lives of bank premises, furniture, fixtures and equipment and investment property are reviewed periodically and are updated if expectations differ from previous estimates due to physical wear and tear, technical or commercial obsolescence and legal or other limits on the use of the assets. The carrying amount of bank premises, furniture, fixtures and equipment and investment property are analyzed in Notes 13 and 14, respectively. Based on management’s assessment as at December 31, 2009, there are no changes in the useful lives of bank premises, furniture, fixtures and equipment and investment property during the period. Actual results, however, may vary due to changes in estimates brought about by changes in factors mentioned above.

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(d) Fair Values of Financial Assets and Liabilities

The following table summarizes the carrying amounts and fair values of those significant financial assets and liabilities not presented on the statement of financial position at their fair value.

Consolidated

2009 2008 Carrying Carrying Amount Fair Value Amount Fair Value

Due from BSP P 19,321,339 P 19,321,339 P 16,390,973 P 16,390,973 Due from other banks 3,066,922 3,066,922 4,862,225 4,862,225 Held-to-maturity investments 19,962,360 20,973,194 20,673,614 19,483,613 Loans and receivables 164,892,417 164,948,621 164,402,907 164,306,650 Deposit liabilities:

Demand 11,034,257 11,034,257 11,125,069 11,125,069 Savings 93,571,654 93,571,654 75,738,446 75,738,446 Time 115,671,983 115,671,983 109,363,471 109,363,471

Bills payable 10,780,964 10,780,964 21,452,609 21,452,609 Bonds payable 5,836,076 5,870,927 6,002,821 6,168,088 Subordinated debt 10,926,978 11,176,735 6,941,899 6,923,354

Parent

2009 2008 Carrying Carrying Amount Fair Value Amount Fair Value

Due from BSP P 17,914,204 P 17,914,204 P 15,656,119 P 15,656,119 Due from other banks 1,788,841 1,788,841 3,197,593 3,197,593 Held-to-maturity investments 17,638,584 18,649,418 17,892,114 16,764,396 Loans and receivables 131,733,336 131,472,666 130,292,206 130,195,949 Deposit liabilities

Demand 8,535,205 8,535,205 8,392,524 8,392,524 Savings 81,165,706 81,165,706 66,269,393 66,269,393 Time 90,852,468 90,852,468 84,267,161 84,267,161

Bills payable 10,535,173 10,535,173 21,410,087 21,410,087 Bonds payable 5,836,076 5,870,927 6,002,821 6,168,088 Subordinated debt 10,926,978 11,176,735 6,941,899 6,923,354 See Notes 2.5 and 2.13 for a description of the accounting policies for each category of financial instrument. A description of the Group’s risk management objectives and policies for financial instruments is provided in Note 4.

(e) Fair Value of Derivatives

The fair value of derivative financial instruments that are not quoted in an active market are determined through valuation techniques using the net present value computation.

Valuation techniques are used to determine fair values which are validated and periodically reviewed. To the extent practicable, models use observable data, however, areas such as credit risk (both own and counterparty), volatilities and correlations require management to make estimates. Changes in assumptions could affect reported fair value of financial instruments. The Group uses judgment to select a variety of methods and make assumptions that are mainly based on market conditions existing at the end of each reporting period.

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(f) Realizable Amount of Deferred Tax Assets

The Group reviews its deferred tax assets at the end of each reporting period and reduces the carrying amount to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilized. The carrying value of deferred tax assets as of December 31, 2009 and 2008 is disclosed in Note 28.

(g) Impairment of Non-financial Assets

Except for intangible assets with indefinite useful lives, PFRS requires that an impairment review be performed when certain impairment indicators are present. The Group’s policy on estimating the impairment of non-financial assets is discussed in detail in Note 2.18. Though management believes that the assumptions used in the estimation of fair values reflected in the financial statements are appropriate and reasonable, significant changes in these assumptions may materially affect the assessment of recoverable values and any resulting impairment loss could have a material adverse effect on the results of operations.

(h) Retirement Benefits The determination of the Group’s obligation and cost of pension and other retirement benefits is dependent on the selection of certain assumptions used by actuaries in calculating such amounts. Those assumptions are described in Note 25 and include, among others, discount rates, expected return on plan assets and salary increase rate. In accordance with PFRS, actual results that differ from the assumptions are accumulated and amortized over future periods and therefore, generally affect the recognized expense and recorded obligation in such future periods. The retirement benefit asset and net unrecognized actuarial losses amounted to P71,103 and P267,511, respectively, in the 2009 consolidated financial statements, and P75,583 and P168,676, respectively, in the 2008 consolidated financial statements. The retirement benefit asset and net unrecognized actuarial losses amounted to P40,434 and P295,427, respectively, in the 2009 Parent Company financial statements, and P36,225 and P257,339, respectively, in the 2008 Parent Company financial statements. Fair value of plan assets amounted to P1,761,844 and P1,167,540 in the 2009 and 2008 consolidated financial statements, respectively, and P1,323,988 and P772,209 in the 2009 and 2008 Parent Company financial statements, respectively (see Note 25).

4. RISK MANAGEMENT POLICIES AND OBJECTIVES

The Group is exposed to a variety of risks that are particular to its operating, investing, and financing activities, and the business environment in which it operates. As such, the Group’s risk management is closely coordinated with those charged with governance and focuses on identifying, measuring, monitoring, and controlling the various risks that arise from its business activities and ensuring the Group’s strict adherence to the policies, procedures, and control systems which are established to address these risks.

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4.1 Parent Company’s and RSB’s Strategy in Using Financial Instruments Majority of the Group’s operating, investing and financing activities are undertaken by the Parent Company and RSB, its subsidiary savings bank. It is the Parent Company’s and RSB’s intent to generate returns mainly from their traditional financial intermediation and service-provision activities, rather than from any substantial positions based on views of the financial markets. The main source of risk, therefore, remains to be that arising from credit risk exposures. Nevertheless, within BSP regulatory constraints, and subject to limits and parameters established by the BOD, the Parent Company and RSB are exposed to liquidity risk and interest rate risk inherent in the statement of financial position, and other market risks, which include foreign exchange risk. In the course of performing financial intermediation function, the Parent Company and RSB accept deposits from customers at fixed and floating rates, for various periods, and seek to earn above-average interest margins by investing these funds in high-quality assets. Given a normal upward-sloping yield curve, a conventional strategy to enhance margin is the investment of short-term funds in longer-term assets, including fixed-income securities. While, in doing so, the Parent Company and RSB maintain liquidity at prudent levels to meet all claims that fall due, the Parent Company and RSB fully recognize the consequent interest rate risk exposure. Foreign exchange risk arises from the Parent Company’s and RSB’s net foreign exchange positions. The investment portfolio is composed mainly of marketable, sovereign-risk fixed-income securities. It also includes a small portfolio of equity securities and a modest exposure to credit derivatives, in most of which the underlying is Republic of the Philippines sovereign debt. Other than aforementioned derivatives, short-term foreign currency forward contracts are used mostly in the context of swap transactions where an offsetting spot position is taken at the same time. There are outstanding long-term, cross-currency swaps where the Parent Company is committed to pay fixed-rate interest and principal in US dollars and is entitled to receive fixed-rate interest and principal in pesos. But these closely match, in terms of interest rate characteristics, tenor and amount, the local currency Subordinated Debt issued in 2003 which was redeemed in 2008 on one hand, and certain foreign currency denominated assets on the other. A committee system is a fundamental part of the Parent Company’s and RSB’s process of managing risk. Three committees of the BOD are relevant in this context: • The Executive Committee, which meets weekly, approves credit policies and

decides on large counter-party credit facilities and limits.

• The Risk Management Committee (RMC), which meets monthly, carries out the BOD’s oversight responsibility for risk management, covering credit, market and operational risk. Market risk limits are reviewed and approved by the RMC.

• The Audit Committee, which meets monthly, reviews results of Internal Audit examinations and recommends remedial actions to the BOD as appropriate.

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Two senior management committees also provide a regular forum, at a lower-level, to take up risk issues:

• The Credit and Collection Committee, chaired by the Chief Executive Officer and composed of the heads of credit risk-taking business units and the head of credit risk management, meets weekly to review and approve credit exposures within its authority. It also reviews plans and progress on the resolution of problem loan accounts.

• The Asset/Liability Committee (ALCO), chaired by the Treasurer of the Parent Company but with the Chief Executive Officer and key business and support unit heads including the President of RSB participating, meets weekly to appraise market trends, and economic and political developments. It provides direction in the management of interest rate risk, liquidity risk, foreign currency risk, and trading and investment portfolio decisions. It sets prices/rates for various asset and liability and trading products, in light of funding costs and competitive and other market conditions. It receives confirmation that market risk limits (as described in Note 4.3 are not breached; or if breached, provides guidance on the handling of the relevant risk exposure.

The Parent Company established a Corporate Risk Management Services (CRISMS) group, headed by a chief risk officer, to ensure that the objectives of risk identification, measurement and/or assessment, mitigation, and monitoring are pursued via practices commensurate with the risk profile. CRISMS is independent of all risk-taking business segments and reports directly to the BOD’s RMC. It participates in the Credit and Collection Committee (through the head of credit risk management) and in ALCO. In addition to the risk management systems and controls, the Parent Company and RSB hold capital commensurate with the levels of risk they undertake (see Note 5.1) in accordance with minimum regulatory capital requirements. 4.2 Liquidity Risk

Liquidity risk is the potential insufficiency of funds available to meet the credit demands of the Parent Company’s and RSB’s customers and repay maturing liabilities. The Parent Company and RSB manage liquidity risk by limiting the maturity mismatch between assets and liabilities, and by holding sufficient liquid assets of appropriate quality and marketability. The Parent Company and RSB recognize the liquidity risk inherent in their activities, and identify, measure, monitor and control the liquidity risk inherent as financial intermediaries. The Parent Company’s and RSB’s liquidity policy is to manage its operations to ensure that funds available are more than adequate to meet credit demands of its customers and to enable deposits to be repaid on maturity. The Parent Company’s and RSB’s liquidity policies and procedures are set out in its funding and liquidity plan which contains certain funding requirement based on assumptions and uses asset and liability maturity gap analysis.

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The gap analyses (before elimination of intercompany accounts/transactions) as of December 31, 2009 and 2008 in accordance with account classification of the BSP are presented below (amounts in millions). Parent and RSB 2009 One to Three One to More Three Months to Five Than Five Months One Year Years Years Non-maturity Total Resources: Cash P 427 P - P - P - P 6,365 P 6,792 Cash equivalents 5,077 371 - - 17,504 22,952 Loans and receivables 32,025 15,548 18,551 8,087 91,193 165,404 Investments 35,223 139 5,963 17,725 18,383 77,433 Other resources 132 67 258 18 20,078 20,553 Total resources 72,884 16,125 24,772 25,830 153,523 293,134 Liabilities: Deposits liabilities 16,611 666 728 - 203,648 221,653 Bills payable and due to other banks 7,201 2,573 12 749 - 10,535 Bonds payable 5,836 - - - - 5,836 Subordinated debt - - 10,927 - - 10,927 Other liabilities 3,158 10 - - 8,818 11,986 Total liabilities 32,806 3,249 11,667 749 212,466 260,937 Capital funds - - - - 33,335 33,335

Total liabilities and capital

funds 32,806 3,249 11,667 749 245,801 294,272

On-book gap 40,078 12,876 13,105 25,081 ( 92,278 ) ( 1,138 ) Cumulative on-book gap 40,078 52,954 66,059 91,140 ( 1,138 ) -

Contingent resources 70,378 25,499 334 - - 96,211 Contingent liabilities 80,422 25,716 329 - 3,656 110,123 Total gap ( 10,044 ) ( 217 ) 5 - ( 3,656 ) ( 13,912 ) Cumulative off-book gap ( 10,044 ) ( 10,261 ) ( 10,256 ) ( 10,256 ) ( 13,912 ) -

Cumulative total gap P 30,034 P 42,693 P 55,803 P 80,884 ( P 15,050 ) P -

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Parent and RSB 2008 One to Three One to More Three Months to Five Than Five Months One Year Years Years Non-maturity Total Resources: Cash P 1,202 P - P - P - P 5,588 P 6,790 Cash equivalents 5,645 - - - 15,723 21,368 Loans and receivables 38,683 11,028 22,661 17,443 86,203 176,018 Investments 17,110 2,342 11,089 16,075 9,020 55,636 Other resources 298 53 179 114 23,591 24,235 Total resources 62,938 13,423 33,929 33,632 140,125 284,047 Liabilities: Deposits liabilities 44,142 13,766 3,771 - 136,292 197,971 Bills payable and due to other banks 11,451 5,902 3,321 771 1 21,446 Bonds payable - - - 6,003 - 6,003 Subordinated debt - 6,942 - - - 6,942 Other liabilities 3,988 10 - - 5,445 9,443 Total liabilities 59,581 26,620 7,092 6,774 141,738 241,805 Capital funds - - - - 30,674 30,674

Total liabilities and capital

funds 59,581 26,620 7,092 6,774 172,412 272,479

On-book gap 3,357 ( 13,197 ) 26,837 26,858 ( 32,287 ) 11,568 Cumulative on-book gap 3,357 ( 9,840 ) 16,997 43,855 11,568 -

Contingent resources 44,951 3,760 549 - - 49,260 Contingent liabilities 25,487 3,702 2,447 - 3,021 34,657 Total gap 19,464 58 ( 1,898 ) - ( 3,021 ) 14,603 Cumulative off-book gap 19,464 19,522 17,624 17,624 14,603 -

Cumulative total gap P 22,821 P 9,682 P 34,621 P 61,479 P 26,171 P -

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Parent Only 2009 One to Three One to More Three Months to Five Than Five Months One Year Years Years Non-maturity Total Resources : Cash P 414 P - P - P - P 4,994 P 5,408 Cash equivalents 1,828 371 - - 17,504 19,703 Loans and receivables 27,624 8,291 75 6,018 89,725 131,733 Investments 31,161 139 5,585 16,339 15,410 68,634 Other resources - - - - 17,122 17,122 Total resources 61,027 8,801 5,660 22,357 144,755 242,600 Liabilities: Deposits liabilities 15,857 603 679 - 163,414 180,553 Bills payable and due to other banks 7,201 2,573 12 749 - 10,535 Bonds payable 5,836 - - - - 5,836 Subordinated debt - - 10,927 - - 10,927 Other liabilities 2,128 10 - - 6,079 8,217 Total liabilities 31,022 3,186 11,618 749 169,493 216,068 Capital funds - - - - 26,532 26,532

Total liabilities and capital

funds 31,022 3,186 11,618 749 196,025 242,600

On-book gap 30,005 5,615 ( 5,958 ) 21,608 ( 51,270 ) - Cumulative on-book gap 30,005 35,620 29,662 51,270 - -

Contingent resources 70,378 25,499 334 - - 96,211 Contingent liabilities 75,238 25,716 329 - 3,656 104,939 Total gap ( 4,860 ) ( 217 ) 5 - ( 3,656 ) ( 8,728 ) Cumulative off-book gap ( 4,860 ) ( 5,077 ) ( 5,072 ) ( 5,072 ) ( 8,728 ) -

Cumulative total gap P 25,145 P 30,543 P 24,590 P 46,198 ( P 8,728 ) P -

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Parent Only 2008 One to Three One to More Three Months to Five Than Five Months One Year Years Years Non-maturity Total Resources : Cash P 8 P - P - P - P 5,588 P 5,596 Cash equivalents 3,553 - - - 15,301 18,854 Loans and receivables 35,334 2,810 2,197 5,539 84,412 130,292 Investments 16,980 1,948 9,977 14,388 9,072 52,365 Other resources - - - - 18,744 18,744 Total resources 55,875 4,758 12,174 19,927 133,117 225,851 Liabilities: Deposits liabilities 23,415 12,142 30 - 123,342 158,929 Bills payable and due to other banks 11,416 5,902 3,321 771 1 21,411 Bonds payable - - - 6,003 - 6,003 Subordinated debt - 6,942 - - - 6,942 Other liabilities 3,604 10 - - 4,318 7,932 Total liabilities 38,435 24,996 3,351 6,774 127,661 201,217 Capital funds - - - - 24,634 24,634

Total liabilities and capital

funds 38,435 24,996 3,351 6,774 152,295 225,851

On-book gap 17,440 ( 20,238 ) 8,823 13,153 ( 19,178 ) - Cumulative on-book gap 17,440 ( 2,798 ) 6,025 19,178 - -

Contingent resources 44,951 3,760 549 - - 49,260 Contingent liabilities 25,485 3,702 2,447 - 1,235 32,869 Total gap 19,466 58 ( 1,898 ) - ( 1,235 ) 16,391 Cumulative off-book gap 19,466 19,524 17,626 17,626 16,391 -

Cumulative total gap P 36,906 P 16,726 P 23,651 P 36,804 P 16,391 P - Pursuant to applicable BSP regulations, the Parent Company and RSB are required to maintain liquidity reserve and statutory legal reserve which are based on a certain percentages of deposits. A portion of the required reserve must be deposited with BSP. The remaining portion of the required reserve may be held by the Parent Company and RSB in the form of cash in vault and or government securities. Under a current BSP circular, the liquidity reserve is required to be in the form of reserve deposits with the BSP. The BSP also requires the Parent Company and RSB to maintain asset cover of 100% for foreign currency liabilities of their FCDU, of which 30% must be in liquid assets.

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4.2.1 Foreign Currency Liquidity Management The liquidity risk management policies and objectives described also apply to the management of any foreign currency to which the Parent Company and RSB maintain significant exposure. Specifically, the Parent Company and RSB ensure that their measurement, monitoring, and control systems account for these exposures as well. The Parent Company and RSB set and regularly review limits on the size of their cash flow mismatches for each significant individual currency and in aggregate over appropriate time horizons. The Parent Company and RSB also assess their access to foreign exchange markets when setting up their risk limits.

4.3 Market Risk The Parent Company’s and RSB’s exposure to market risk, as mentioned earlier, is the potential diminution of accrual earnings arising from the movement of market interest rates as well as the potential loss of market value, primarily of its holdings of debt securities and derivatives, due to price fluctuation. The market risks of the Parent Company and RSB are (a) foreign exchange risk, (b) interest rate risk, and (c) equity price risk. The Parent Company and RSB manage this risk via a process of identifying, analyzing, measuring and controlling relevant market risk factors, and establishing appropriate limits for the various exposures. The market risk metrics in use, each of which has a corresponding limit, include the following: • Nominal Position – an open risk position that is held as of any point in time

expressed in terms of the nominal amount of the exposure. • Value-at-Risk (VaR) – an estimate of the amount of loss that a given risk exposure

is unlikely to exceed during a given time period, at a given level of statistical confidence. Analytically, VaR is the product of: (a) the sensitivity of the market value of the position to movement of the relevant market risk factors, and (b) the volatility of the market risk factor for the given time horizon at a specified level of statistical confidence. Typically, the Parent Company and RSB use a 99% confidence level for this measurement. VaR is used as a risk measure for trading positions, which are marked-to-market (as opposed to exposures resulting from banking, or accrual, book assets and liabilities). Foreign Exchange position VaR uses a 1-day holding period, while Fixed Income VaR uses a defeasance period assessed periodically as appropriate to allow an orderly unwinding of the position. VaR models are back-tested to ensure results remain consistent with the expectations based on the chosen statistical confidence level. While the Parent Company and RSB use VaR as an important tool for measuring market risk, they are cognizant of its limitations, notably the following:

− The use of historical data as a basis for determining the possible range of future

outcomes may not always cover all possible scenarios, especially those of an exceptional nature.

− VaR is based on historical volatility. Future volatility may be different due to either random, one-time events or structural changes (including changes in correlation). VaR may be unable to capture volatility due to either of these.

− The holding period assumption may not be valid in all cases, such as during periods of extremely stressed market liquidity.

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− VaR is, by definition, an estimate at a specified level of confidence. Losses may occur beyond VaR. A 99% VaR implies that losses can exceed VaR 1% of the time.

− In cases where a parametric distribution is assumed to calculate VaR, the

assumed distribution may not fit the actual distribution well.

− VaR assumes a static position over the holding period. In reality, trading positions change, even during the trading day.

• Earnings-at-Risk (EaR) – more specifically, in its current implementation, this

refers to the impact on Net Interest Income for a 12-month horizon of adverse movements in interest rates. For this purpose the Parent Company and RSB employs a gap analysis to measure the interest rate sensitivity of their statements of financial position (local and foreign currencies). As of a given reporting period, the gap analysis (see Note 4.3.2) measures mismatches between the amounts of interest-earning assets and interest-bearing liabilities re-pricing within “time buckets” going forward from the statement of financial position date. A positive gap means net asset sensitivity, which implies that an increase in the interest rates would have a positive effect on the Parent Company’s and RSB’s net interest income. Conversely, a negative gap means net liability sensitivity, implying that an increase in the interest rates would have a negative effect on the Parent Company’s and RSB’s net interest income. The rate movements assumed for measuring EaR are consistent with a 99% confidence level with respect to historical rate volatility, assuming a 1-year holding period.

In addition to the limits corresponding to the above measurements, the following are also in place:

• Loss Limit - represents a ceiling on accumulated month-to-date losses. For trading

positions, a Management Action Trigger (MAT) is also usually defined to be at 50% of the Loss Limit. When MAT is breached, the risk-taking unit must consult with ALCO for approval of a course of action moving forward.

• Product Limit – the nominal position exposure for certain specific financial

instruments is established. Stress Testing, which uses more severe rate/price volatility and/or holding period assumptions, (relative to those used for VaR) is applied to marked-to-market positions to arrive at “worst case” loss estimates. This supplements the VaR measure, in recognition of its limitations already mentioned earlier.

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A summary of the VaR position of the trading portfolios at December 31 is as follows: Parent and RSB 2009 At December 31 Average Maximum Minimum Foreign currency risk P 7,312 P 6,407 P 18,631 P 978 Interest rate risk 120,294 111,934 307,422 8,379 Overall P 127,606 P 118,341 P 326,053 P 9,357 2008 At December 31 Average Maximum Minimum Foreign currency risk P 4,618 P 6,865 P 18,973 P 816 Interest rate risk 14,860 53,711 171,771 5,097 Overall P 19,478 P 60,576 P 190,744 P 5,913 Parent Only 2009 At December 31 Average Maximum Minimum Foreign currency risk P 5,658 P 5,012 P 16,411 P 304 Interest rate risk 110,304 98,757 273,448 8,378 Overall P 115,962 P 103,769 P 289,859 P 8,682 2008 At December 31 Average Maximum Minimum Foreign currency risk P 3,442 P 6,095 P 17,693 P 581 Interest rate risk 12,811 43,214 152,175 3,048 Overall P 16,253 P 49,309 P 169,868 P 3,629 4.3.1 Foreign Currency Risk Foreign currency risk is the risk to earnings or capital arising from changes in foreign exchange rates. The net foreign currency exposure, or the difference between foreign currency assets and foreign currency liabilities, is capped by current BSP regulations. Compliance with this ceiling by the Parent Company and RSB and the respective foreign currency positions of its subsidiaries are reported to the BSP on a daily basis as required. Beyond this constraint, the Parent Company and RSB manage their foreign exchange exposure by limiting it to within conservative levels justifiable from a return/risk perspective. In addition, the Parent Company and RSB regularly calculate VaR for each currency position, which is incorporated in market risk management discussion in Note 4.3.

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The breakdown of the financial resources and liabilities as to foreign and peso-denominated balances (before elimination of intercompany accounts/transactions) as of December 31 is as follows: Parent and RSB 2009 Foreign Currency Peso Total

Resources: Due from BSP P - P 19,119,211 P 19,119,211 Due from other banks 3,281,679 551,448 3,833,127 Financial assets at fair value through profit or loss 2,954,638 6,009,668 8,964,306 Available-for-sale securities 19,674,201 15,641,284 35,315,485 Held-to-maturity investments 17,211,665 2,535,924 19,747,589 Loans and receivables 42,345,946 121,645,552 163,991,498 Other resources 1,700,330 7,905,453 9,605,783

Liabilities: Deposit liabilities 55,545,468 166,107,823 221,653,291 Bills payable 8,746,430 1,788,743 10,535,173 Derivative liabilities 77,685 625,919 703,604 Bonds payable 5,836,076 - 5,836,076 Other liabilities 695,869 6,614,481 7,310,350 Subordinated debt - 10,926,978 10,926,978 2008 Foreign Currency Peso Total

Resources: Due from BSP P - P 16,360,396 P 16,360,396 Due from other banks 4,620,947 386,560 5,007,507 Financial assets at fair value through profit or loss 2,578,987 505,393 3,084,380 Available-for-sale securities 8,382,477 13,416,268 21,798,745 Held-to-maturity investments 18,143,421 2,350,997 20,494,418 Loans and receivables 43,626,103 120,605,063 164,231,166 Other resources 2,935,430 8,585,520 11,520,950 Liabilities: Deposit liabilities 52,767,476 145,203,807 197,971,283 Bills payable 13,675,252 7,770,269 21,445,521 Derivative liabilities 248,075 81,430 329,505 Bonds payable 6,002,821 - 6,002,821 Other liabilities 2,389,465 4,440,478 6,829,943 Subordinated debt - 6,941,899 6,941,899

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Parent Only 2009 Foreign Currency Peso Total Resources: Due from BSP P - P 17,914,204 P 17,914,204 Due from other banks 1,404,960 383,881 1,788,841 Financial assets at fair value through profit or loss 2,954,638 5,079,598 8,034,236 Available-for-sale securities 19,344,712 12,915,774 32,260,486 Held-to-maturity investments 15,102,660 2,535,924 17,638,584 Loans and receivables 42,152,177 89,581,159 131,733,336 Other resources 1,569,893 7,905,453 9,475,346

Liabilities: Deposit liabilities 51,026,925 129,526,454 180,553,379 Bills payable 8,746,430 1,788,743 10,535,173 Derivative liabilities 77,685 625,919 703,604 Bonds payable 5,836,076 - 5,836,076 Other liabilities 695,869 5,193,710 5,889,579 Subordinated debt - 10,926,978 10,926,978 2008 Foreign Currency Peso Total Resources: Due from BSP P - P 15,656,119 P 15,656,119 Due from other banks 2,943,916 253,677 3,197,593 Financial assets at fair value through profit or loss 2,578,987 505,393 3,084,380 Available-for-sale securities 8,382,477 12,694,684 21,077,161 Held-to-maturity investments 15,541,116 2,350,998 17,892,114 Loans and receivables 42,923,236 87,368,970 130,292,206 Other resources 2,728,038 8,089,510 10,817,548 Liabilities: Deposit liabilities 47,961,695 110,967,383 158,929,078 Bills payable 13,675,252 7,734,835 21,410,087 Derivative liabilities 248,075 81,430 329,505 Bonds payable 6,002,821 - 6,002,821 Other liabilities 2,251,078 3,706,732 5,957,810 Subordinated debt - 6,941,899 6,941,899 4.3.2 Interest Rate Risk The interest risk inherent in the Parent Company’s and RSB’s statement of financial position arises from re-pricing mismatches between resources and liabilities. The Parent Company and RSB follow a policy on managing its assets and liabilities so as to ensure that exposure to fluctuations in interest rates is kept within acceptable limits. ALCO meets at least weekly to set rates for various financial assets and liabilities and trading products. ALCO employs interest rate gap analysis to measure interest rate sensitivity of its assets and liabilities.

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The interest rate gap analyses of resources and liabilities as of December 31 based on re-pricing maturities appear below and on the succeeding pages. It should be noted that this interest rate gap analysis is based on certain assumptions, the key ones being: • Loans and time deposits are subject to re-pricing on their contractual maturity

dates. Non-performing loans (NPLs), however, do not re-price.

• Held-for-trading securities are treated as if they are assets subject to re-pricing within the first month maturity bucket; available-for-sale securities re-price on contractual maturity.

• Non-rate sensitive deposits such as Demand Accounts and Savings Accounts have

a certain volatile portion that is responsive to interest rate changes. The size of this portion as well as its rate sensitivity was determined from historical analysis.

Parent and RSB 2009 One to Three One to More Three Months to Five Than Five Non-rate Months One Year Years Years Sensitive Total Resources : Cash and cash equivalents P 5,734,000 P - P - P - P 6,779,491 P 12,513,491 Loans and advances to banks 1,537,496 371,106 - - 17,794,443 19,703,045 Loans and advances to customers 106,153,782 15,457,227 24,525,205 13,107,364 8,312,758 167,556,336 Investment securities 16,452,229 325,753 14,587,072 32,442,687 14,709,374 78,517,115 Total resources P 129,877,507 P 16,154,086 P 39,112,277 P 45,550,051 P 47,596,066 P 278,289,987

Liabilities: Deposits from banks P 7,200,818 P 2,573,259 P 11,923 P 749,173 P - P 10,535,173 Deposits from customers 102,295,868 7,218,961 7,589,640 1,000 104,547,910 221,653,379 Debt securities issued 5,836,076 - - - - 5,836,076 Subordinated liabilities - - 10,926,978 - - 10,926,978 Total liabilities P 115,332,762 P 9,792,220 P 18,528,541 P 750,173 P 104,547,910 P 248,951,606 Gap 1 P 14,544,745 P 6,361,866 P 20,583,736 P 44,799,878 ( P 56,951,844 ) P 29,338,381 Cumulative gap P 14,544,745 P 20,906,611 P 41,490,347 P 86,290,225 P 29,338,381

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Parent and RSB 2008 One to Three One to More Three Months to Five Than Five Non-rate Months One Year Years Years Sensitive Total Resources : Cash and cash equivalents P 8,143 P - P - P - P 24,442,499 P 24,450,642 Loans and advances to banks 22,113,666 381,709 - 381,709 - 22,877,084 Loans and advances to customers 12,463,680 2,396,373 1,469,394 5,952,017 85,184,862 107,466,326 Investment securities 17,702,663 2,058,149 5,591,439 10,455,496 6,249,179 42,056,926 Total resources P 52,288,152 P 4,836,231 P 7,060,833 P 16,789,222 P 115,876,540 P 196,850,978

Liabilities: Deposits from banks P 7,460,783 P 9,859,434 P 3,320,562 P 770,759 P - P 21,411,538 Deposits from customers 18,950,677 16,628,757 33,571 - 123,355,115 158,968,120 Debt securities issued - - 6,002,821 - - 6,002,821 Subordinated liabilities - - 6,941,899 - - 6,941,899 Total liabilities P 26,411,460 P 26,488,191 P 16,298,853 P 770,759 P 123,355,115 P 193,324,378 Gap 1 P 25,876,692 ( P 21,651,960 ) ( P 9,238,020 ) P 16,018,463 ( P 7,478,575 ) P 3,526,600 Cumulative gap P 25,876,692 P 4,224,732 ( P 5,013,288 ) P 11,005,175 P 3,526,600 Parent Only 2009 One to Three One to More Three Months to Five Than Five Non-rate Months One Year Years Years Sensitive Total Resources: Cash and cash equivalents P - P - P - P - P 5,408,491 P 5,408,491 Loans and advances to banks 1,537,496 371,106 - - 17,794,443 19,703,045 Loans and advances to customers 101,890,782 7,632,227 4,604,205 10,876,364 6,729,758 131,733,336 Investment securities 8,520,229 325,753 14,209,072 31,056,687 14,522,374 68,634,115 Total

resources (Carried

forward) P 111,948,507 P 8,329,086 P 18,813,277 P 41,933,051 P 44,455,066 P 225,478,987

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2009 One to Three One to More

Three Months to Five Than Five Non-rate Months One Year Years Years Sensitive Total

Total

resources (Brought

forward) P 111,948,507 P 8,329,086 P 18,813,277 P 41,933,051 P 44,455,066 P 225,478,987 Liabilities: Deposits from banks P 7,200,818 P 2,573,259 P 11,923 P 749,173 P - P 10,535,173 Deposits from customers 80,807,868 4,524,961 5,519,640 - 89,700,910 180,553,379 Debt securities issued 5,836,076 - - - - 5,836,076 Subordinated liabilities - - 10,926,978 - - 10,926,978 Total liabilities P 93,844,762 P 7,098,220 P 16,458,541 P 749,173 P 89,700,910 P 207,851,606 Gap 1 P 18,103,745 P 1,230,866 P 2,354,736 P 41,183,878 ( P 45,245,844 ) P 17,627,381 Cumulative gap P 18,103,745 P 19,334,611 P 21,689,347 P 62,873,225 P 17,627,381 Parent Only 2008 One to Three One to More Three Months to Five Than Five Non-rate Months One Year Years Years Sensitive Total Resources: Cash and cash equivalents P 8,119 P - P - P - P 24,441,329 P 24,449,448 Loans and advances to banks 22,112,203 381,709 - 381,709 - 22,875,621 Loans and advances to customers 12,461,783 2,388,112 1,448,759 5,940,000 85,177,931 107,416,585 Investment securities 17,702,533 2,057,755 5,590,327 10,453,809 6,249,231 42,053,655 Total

resources P 52,284,638 P 4,827,576 P 7,039,086 P 16,775,518 P 115,868,491 P 196,795,309

Liabilities: Deposits from banks P 7,460,783 P 9,859,434 P 3,320,562 P 770,759 P - P 21,411,538 Deposits from customers 18,929,955 16,627,133 29,830 - 123,342,160 158,929,078 Debt securities issued - - 6,002,821 - - 6,002,821 Subordinated liabilities - - 6,941,899 - - 6,941,899 Total liabilities P 26,390,738 P 26,486,567 P 16,295,112 P 770,759 P 123,342,160 P 193,285,336 Gap 1 P 25,893,900 ( P 21,658,991 ) ( P 9,256,026 ) P 16,004,759 ( P 7,473,669 ) P 3,509,973 Cumulative gap P 25,893,900 P 4,234,909 ( P 5,021,117 ) P 10,983,642 P 3,509,973

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4.3.3 Equity Price Risk The Parent Company and RSB have minimal exposures to equity securities price risk on their investments held and classified on the statement of financial position as available-for-sale. The Group is not exposed to commodity price risk. To manage price risk, the Parent Company and RSB diversify their portfolio. Diversification of the portfolio is done in accordance with the limits set by the Parent Company and RSB. 4.4 Credit Risk Credit risk is the risk that the counterparty in a transaction may default, and arises from lending, trade finance, treasury, derivatives and other activities undertaken by the Parent Company and RSB. The Group manages credit risk through a system of policies and authorities that govern the processes and practices of all credit-originating and borrowing relationship management units. Credit Risk Division of CRISMS assists senior management : (a) to develop credit policy; (b) to establish risk concentration limits accepted at the level of the single borrower, related-borrower group, industry segments, and sovereign jurisdiction; and, (c) to continuously monitor the actual credit risk portfolio from the perspective of those limits and other risk management objectives. In performing this function, the Credit Risk Division works hand-in-hand with the business units and with the Corporate Planning Group. At the individual borrower level, exposure to credit risk is managed via adherence to a set of policies, the most notable features of which, in this context, are: (a) credit approving authority is not exercised by a single individual but rather, through a hierarchy of limits, is effectively exercised collectively; (b) branch managers have limited approval authority only for credit exposure related to deposit-taking operations in the form of bills purchased, acceptance of second endorsed checks, and 1:1 loan accommodations; (c) an independent credit risk assessment by the Credit Risk Division of large corporate and middle-market borrowers, summarized into a borrower risk rating, is provided as input to the credit decision-making process; and, (d) borrower credit analysis is performed at origination and at least annually thereafter. Impairment provisions are recognized for losses that have been incurred at the statement of financial position date. Significant changes in the economy, or in particular industry segments that represent a concentration in the Parent Company’s and RSB’s portfolio, could result in losses that are different from those provided for at the end of the reporting period. Management therefore carefully monitors the changes and adjusts its exposure to such credit risk, as necessary.

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4.4.1 Exposure to Credit Risk The carrying amount of financial resources recorded in the consolidated financial statements, grossed up for any allowances for losses, which represents the maximum exposure to credit risk, without taking into account of the value of any collateral obtained, as of December 31 follows: Parent and RSB 2009 Loans and Investment Receivables Securities Carrying Amount P 163,991,498 P 62,285,284 Individually Impaired Grade 1 to 5: Unclassified 372,000 - Grade 6 to 7: Impaired 564,189 - Grade 8: Impaired 816,269 - Grade 9: Impaired 1,667,533 - Grade 10: Impaired 533,880 - Gross amount 3,953,871 3,393,319 Allowance for impairment ( 1,710,715 ) ( 1,276,157 ) Carrying amount 2,243,156 2,117,162 Collectively Impaired Grade 1 to 5: Unclassified 107,030,198 - Grade 6 to 7: Impaired 16,896,119 - Grade 8: Impaired 3,917,908 - Grade 9: Impaired 9,500 - Grade 10: Impaired 678,000 - Gross amount 128,531,725 - Allowance for impairment ( 3,019,846 ) - Carrying amount 125,511,879 - Unquoted debt securities classified as loans 5,689,068 - Allowance for impairment ( 462,000 ) - Carrying amount 5,227,068 - Neither Past Due Nor Impaired 31,009,395 60,168,122 Total Carrying Amount P 163,991,498 P 62,285,284

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Parent and RSB 2008 Loans and Investment Receivables Securities Carrying Amount P 164,231,166 P 44,459,397 Individually Impaired Grade 1 to 5: Unclassified 629,000 - Grade 6 to 7: Impaired 477,319 - Grade 8: Impaired 1,699,807 - Grade 9: Impaired 999,817 - Grade 10: Impaired 874,873 - Gross amount 4,680,816 2,466,280 Allowance for impairment ( 1,571,731 ) ( 811,207 ) Carrying amount 3,109,085 1,655,073 Collectively Impaired Grade 1 to 5: Unclassified 111,883,119 - Grade 6 to 7: Impaired 9,691,743 - Grade 8: Impaired 1,438,809 - Grade 9: Impaired 29,840 - Grade 10: Impaired 548,000 - Gross amount 123,591,511 - Allowance for impairment ( 4,745,066 ) - Carrying amount 118,846,445 - Unquoted debt securities classified as loans 6,621,885 - Allowance for impairment ( 1,082,467 ) - Carrying amount 5,539,418 - Neither Past Due Nor Impaired 36,736,218 42,804,324 Total Carrying Amount P 164,231,166 P 44,459,397

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Parent Only 2009

Loans and Investment Receivables Securities Carrying Amount P 131,733,336 P 56,191,210 Individually Impaired Grade 6: Impaired 550,439 - Grade 7: Impaired 13,750 - Grade 8: Impaired 816,269 - Grade 9: Impaired 1,667,533 - Grade 10: Impaired 533,880 - Gross amount 3,581,871 3,393,319 Allowance for impairment ( 1,710,715 ) ( 1,276,157 ) Carrying amount 1,871,156 2,117,162 Collectively Impaired Grade 1 to 5: Unclassified 89,535,198 - Grade 6: Watchlist 5,777,787 - Grade 7: Special Mention 3,128,332 - Grade 8: Sub-standard 3,287,908 - Grade 9: Doubtful 9,500 - Grade 10: Loss - - Gross amount 101,738,725 - Allowance for impairment ( 2,070,846 ) - Carrying amount 99,667,879 - Unquoted debt securities classified as loans 5,689,068 - Allowance for impairment ( 462,000 ) - Carrying amount 5,227,068 - Neither Past Due Nor Impaired 24,967,233 54,074,048 Total Carrying Amount P 131,733,336 P 56,191,210

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Parent Only 2008

Loans and Investment Receivables Securities Carrying Amount P 130,292,206 P 41,135,509 Individually Impaired Grade 6: Impaired 383,219 - Grade 7: Impaired 94,100 - Grade 8: Impaired 1,699,807 - Grade 9: Impaired 999,817 - Grade 10: Impaired 874,873 - Gross amount 4,051,816 2,466,280 Allowance for impairment ( 1,571,731 ) ( 811,207 ) Carrying amount 2,480,085 1,655,073 Collectively Impaired Grade 1 to 5: Unclassified 94,300,118 - Grade 6: Watchlist 2,797,107 - Grade 7: Special Mention 303,637 - Grade 8: Sub-standard 711,809 - Grade 9: Doubtful 29,840 - Grade 10: Loss - - Gross amount 98,142,511 - Allowance for impairment ( 1,526,066 ) - Carrying amount 96,616,445 - Unquoted debt securities classified as loans 6,621,885 - Allowance for impairment ( 1,082,467 ) - Carrying amount 5,539,418 - Neither Past Due Nor Impaired 25,656,258 39,480,436 Total Carrying Amount P 130,292,206 P 41,135,509

The credit risk for cash and cash equivalents such as Due from BSP and Due from Other Banks is considered negligible, since the counterparties are reputable banks with high quality external credit ratings. 4.4.2 Collateral Held as Security and Other Credit Enhancements The Parent Company and RSB hold collateral against loans and advances to customers in the form of mortgage interests over property, other registered securities over assets, and guarantees. Estimates of fair value are based on the value of collateral assessed at the time of borrowing and are generally updated annually. Collateral, generally, is not held over loans and advances to banks, except when securities are held as part of reverse repurchase and securities borrowing activity. Collateral usually is not held against investment securities, and no such collateral was held at December 31, 2009 and 2008.

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The Parent Company and RSB hold collateral against Loans and Other Receivables in the form of hold-out on deposits, real estate mortgage, standby letters of credit or bank guaranty, government guaranty, chattel mortgage, assignment of receivables, pledge of shares, personal and corporate guaranty and other forms of security. An estimate of the fair value of collateral and other security enhancements held against loans and receivables as of December 31, 2009 and 2008 are shown below. Parent and RSB

2009 2008 Against individually impaired Real property P 2,287,915 P 4,648,242 Chattels 254,544 392,084 Equities - 461,000 Others - 236,980 Against past due but not impaired Real property 24,720,064 18,700,355 Chattels 14,441,811 12,751,047 Equities 1,191,823 710,190 Debt securities - - Others 1,970,065 1,422,824 Against neither past due nor impaired Real property 38,596,440 42,111,183 Chattels 516,000 486,000 Others 15,107,528 14,645,252 Total P 99,086,190 P 96,565,157 Parent Only

2009 2008

Against individually impaired Real property P 1,915,915 P 4,020,242 Chattels 254,544 392,084 Equities - 461,000 Other 167,881 236,980 Against past due but not impaired Real property 8,505,064 5,983,355 Chattels 2,183,811 837,047 Equities 1,191,823 710,190 Debt securities - - Other 1,344,065 814,824 Against neither past due nor impaired Real property 36,130,440 34,407,183 Chattels - - Other 15,107,528 14,645,252 Total P 66,801,071 P 62,508,157

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4.4.3 Concentrations of Credit Risk The Parent Company and RSB monitor concentrations of credit risk by sector. An analysis of concentrations of credit risk at the reporting date is shown in Note 11. 4.5 Fair Value Hierarchy The Parent Company and RSB adopted the amendments to PFRS 7, Improving Disclosures about Financial Instruments, effective January 1, 2009. These amendments require the Parent Company and RSB to present certain information about financial instruments measured at fair value in the statement of financial position. In the first year of application, comparative information need not be presented for the disclosures required by the amendment. Accordingly, the disclosure for the fair value hierarchy is only presented for December 31, 2009. In accordance with this amendment, financial assets and liabilities measured at fair value in the statement of financial position are categorized in accordance with the fair value hierarchy. This hierarchy groups financial assets and liabilities into three levels based on the significance of inputs used in measuring the fair value of the financial assets and liabilities. The fair value hierarchy has the following levels: • Level 1: quoted prices (unadjusted) in active markets for identical assets or

liabilities; • Level 2: inputs other than quoted prices included within Level 1 that are observable

for the resource or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and

• Level 3: inputs for the asset or liability that are not based on observable market data

(unobservable inputs). The level within which the financial asset or liability is classified is determined based on the lowest level of significant input to the fair value measurement. The table in the next page presents the breakdown of the Parent Company’s and RSB’s financial assets and liabilities measured at fair value in the statement of financial position as of December 31, 2009.

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Parent Company and RSB 2009 Level 1 Level 2 Level 3 Total

Financial assets at fair

value through profit and loss: Government bonds P 6,198,850 P 342,319 P - P 6,541,169

Other debt securities 1,610,277 - - 1,610,277 Derivative assets 54,163 758,697 - 812,860

7,863,290 1,101,016 - 8,964,306

Available-for-sale securities: Government bonds 16,114,700 4,558,429 - 20,673,129 Other debt securities 14,236,515 - - 14,236,515 Equity securities 1,742,095 - - 1,742,095 32,093,310 4,558,429 - 36,651,739 Allowance for impairment ( 1,336,254 ) - - ( 1,336,254 ) 30,757,056 4,558,429 - 35,315,485 Total Resources at Fair Value P 38,620,346 P 5,659,445 P - P 44,279,791

Derivative liability P - P 703,604 P - P 703,604

Parent Company 2009 Level 1 Level 2 Level 3 Total Financial assets at fair value through profit and loss: Government bonds P 5,268,780 P 342,319 P - P 5,611,099 Other debt securities 1,610,277 - - 1,610,277 Derivative assets 54,163 758,697 - 812,860 6,933,220 1,101,016 - 8,034,236

Available-for-sale securities:

Government bonds 12,999,604 4,558,429 - 17,558,033 Other debt securities 14,236,515 - - 14,236,515

Equity securities 1,742,095 - - 1,742,095 28,978,214 4,558,429 - 33,536,643 Allowance for impairment ( 1,276,157 ) - - ( 1,276,157 ) 27,702,057 4,558,429 - 32,260,486 Total Resources at Fair Value P 34,635,277 P 5,659,445 P - P 40,294,722

Derivative liability P - P 703,604 P - P 703,604

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4.6 Operations Risk and Reputation Risk Operations risk is the risk arising from the potential that inadequate information systems, operations or transactional problems (relating to service or product delivery), breaches in internal controls and fraud or unforeseen catastrophes will result in unexpected loss. Operations risk includes the risk of loss arising from various types of human or technical error, the risk of settlement or payments failures, the risk of business interruption, administrative and legal risks and the risk arising from systems not performing adequately. Reputation risk is the risk to earnings or capital arising from negative public opinion. This affects the Parent Company’s and RSB’s ability to establish new relationships or services, or to continue servicing existing relationships. This risk can expose the Parent Company and RSB to litigation, financial loss, or damage to their reputation. Reputation risk arises whenever technology-based banking products, services, delivery channels, or processes may generate adverse public opinion such that it seriously affects the Parent Company’s and RSB’s earnings or impairs capital. This risk is present in activities such as asset management and regulatory compliance. The Parent Company and RSB maintain departmental operations manuals that are periodically updated. The Parent Company and RSB have also developed a Business Contingency Plan which is tested at least annually and updated for any major changes in systems procedures. Transactions and items of value are subject to a system of dual control whereby the work of one person is verified by a second person to ensure that the transaction is properly authorized, recorded and settled. The Parent Company and RSB place emphasis on the security of their computer systems and have a comprehensive information technology (IT) security policy. The Parent Company and RSB designate a security administrator independent of the front office who is responsible for maintaining strict control over user access privileges to the Parent Company and RSB’s information systems. The Parent Company’s and RSB’s IT Groups have also created a disaster recovery plan to cover the recovery of critical data and contingency processing requirements in the event of a disaster. 4.7 Legal Risk and Regulatory Risk Management Changes in laws and regulations could adversely affect the Parent Company and RSB. In addition, the Parent Company and RSB face legal risks in enforcing its rights under its loan agreements, such as foreclosing on collateral. Legal risk is higher in new areas of business where the law remains untested by the courts. The Parent Company and RSB use a legal review process as the primary control mechanism for legal risk. Such a legal review aims to verify and validate the existence, genuineness and due execution of legal documents, and verify the capacity and authority of counterparties and customers to enter into transactions. In addition, the Parent Company and RSB seek to minimize its legal risk by using stringent legal documentation, imposing certain requirements designed to ensure that transactions are properly authorized and consulting internal and external legal advisors.

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Regulatory risk refers to the potential for the Parent Company and RSB to suffer financial loss due to changes in the laws or monetary, tax or other governmental regulations of a country. The Parent Company’s and RSB’s Compliance Program, the implementation of which is overseen and coordinated by the Compliance Office, is the primary control process for regulatory risk issues. The Compliance Office is responsible for communicating and disseminating new rules and regulations to all units, analyzing and addressing compliance issues, performing periodic compliance testing on branches and Head Office units, and reporting compliance findings to the Audit Committee and the BOD. 4.8 Anti-Money Laundering Controls The Anti-Money Laundering Act was passed in September 2001 and was amended in March 2003. Under the Anti-Money Laundering Act, as amended, the Parent Company and RSB are required to submit “Covered Transaction Reports” involving single transactions in cash or other equivalent monetary instruments in excess of P500,000 within one banking day. The Parent Company and RSB are also required to submit “Suspicious Transaction Reports” to the Anti-Money Laundering Council of the BSP in the event that there are reasonable grounds to believe that any amounts processed are the proceeds of money-laundering activities. The Parent Company and RSB are required to establish and record the identities of its clients based on official documents. In addition, all records of transactions are required to be maintained and stored for five years from the date of the transaction. Records of closed accounts must also be kept for five years after their closure. Under BSP Circular No. 279 dated April 2, 2001, within 20 banking days after the end of each financial year, the Parent Company and RSB are required to submit to the BSP a certificate signed by the President and the Chief Compliance Officer stating that they have monitored compliance and that the Parent Company and RSB are complying with the anti-money laundering rules and regulations. In an effort to further prevent money laundering activities, the Parent Company and RSB have adopted Know Your Customer policies and guidelines. Under the guidelines, each business unit is required to validate the true identity of a customer based on official or other reliable identifying documents or records before an account may be opened. Each business unit is also required to monitor account activities to determine whether transactions conform to the normal or expected transactions for a customer or an account. For a high-net worth individual whose source of funds is unclear, a more extensive due diligence is required. Decisions to enter into a business relationship with a higher risk customer, such as a politically exposed person or a private individual holding a prominent position, are made exclusively at the senior management level. The Parent Company’s and RSB’s procedures for compliance with the Anti-Money Laundering Act are set out in its Anti-Money Laundering Policy Manual. The Parent Company’s and RSB’s Compliance Offices monitor compliance and conduct compliance testing of business units.

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The Parent Company’s and RSB’s Anti-Money Laundering Committee evaluates suspicious transaction reports submitted by branches for final determination if the suspicions are based on reasonable grounds and are therefore reportable to the Anti-Money Laundering Council. All banking groups are required to submit to the Compliance Office certificates of compliance with the Anti-Money Laundering Rules & Regulations on a quarterly basis. 4.9 Other Subsidiaries’ Policies and Objectives

The other subsidiaries have essentially the same risk management policies and objectives as that of the Parent Company and RSB. The other subsidiaries’ risk management is coordinated with the Parent Company, in close cooperation with their respective BOD.

5. CAPITAL MANAGEMENT

5.1 Regulatory Capital The BSP, Group’s lead regulator, sets and monitors capital requirements of the Parent Company, RSB and RCBC Capital and the Group as a whole. In implementing current capital requirements, BSP requires the Parent Company and the Group to maintain a minimum capital amount and a prescribed ratio of qualifying capital to risk-weighted assets or the capital adequacy ratio (CAR). Risk-weighted assets is the sum of credit risk, market risks, and operational risks, computed based on BSP-prescribed formula provided under its circulars. Under the relevant provisions of the current BSP regulations, the minimum capitalization of the Parent Company, RSB and RCBC Capital is P4.95 billion, P325 million and P300 million, respectively. In computing CAR, the regulatory qualifying capital is analyzed into two tiers which are: (i) Tier 1 Capital, and (ii) Tier 2 Capital; less deductions from the Total Tier 1 and Tier 2 for the following: (a) Investments in equity of unconsolidated subsidiary banks and other financial allied

undertakings, but excluding insurance companies; (b) Investments in debt capital instruments of unconsolidated subsidiary banks; (c) Investments in equity of subsidiary insurance companies and non-financial allied

undertakings; (d) Reciprocal investments in equity of other banks/enterprises; and, (e) Reciprocal investments in unsecured subordinated term debt instruments of other

banks/quasi-banks qualifying as Hybrid Tier 1, Upper Tier 2 and Lower Tier 2, in excess of the lower of (i) an aggregate ceiling of 5% of total Tier 1 capital of the bank excluding Hybrid Tier 1; or (ii) 10% of the total outstanding unsecured subordinated term debt issuance of the other bank/quasi-banks. Provided, that any asset deducted from the qualifying capital in computing the numerator of the risk-based capital ratio shall not be included in the risk-weighted assets in computing the denominator of the ratio.

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Tier 1 Capital and Tier 2 Capital are defined as follows:

(a) Tier 1 Capital includes the following: i. paid-up common stock; ii. paid-up perpetual and non-cumulative preferred stock; iii. common and perpetual, non-cumulative preferred stock dividends distributable; iv. surplus; v. surplus reserves; vi. undivided profits (for domestic banks only); vii. unsecured subordinated debt (with prior BSP approval); and, viii. non-controlling interest in the equity of subsidiary financial allied undertakings;

Subject to following deductions:

i. treasury shares; ii. unrealized losses on underwritten listed equity securities purchased; iii. unbooked valuation reserves, and other capital adjustments based on the latest report of examination; iv. outstanding unsecured credit accommodations, both direct and indirect, to directors, officers, stockholders and their related interests (DOSRI); v. goodwill; and, vi. deferred income tax.

(b) Tier 2 Capital includes:

i. perpetual and cumulative preferred stock; ii. limited life redeemable preferred stock with or without the replacement requirement subject to BSP conditions; iii. dividends distributable of i and ii above; iv. appraisal increment reserve – bank premises, as authorized by the Monetary

Board(MB); v. net unrealized gains on underwritten listed equity securities purchased; vi general loan loss provision; vii. unsecured subordinated debt with a minimum original maturity of at least ten years (with prior BSP approval); viii. unsecured subordinated debt with a minimum original maturity of at least five years (with prior BSP approval); and, ix. deposit for stock subscription on:

- common stock, - perpetual and non-cumulative preferred stock, - perpetual and cumulative preferred stock subscription, and, - limited life redeemable preferred stock subscription with the replacement

requirement upon redemption;

Subject to following deductions:

i. Perpetual and cumulative preferred stock treasury shares; ii. Limited life redeemable preferred stock treasury shares with the replacement requirement upon redemption; iii. Sinking fund for redemption of limited life redeemable preferred stock with the replacement requirement upon redemption; iv. Limited life redeemable preferred stock treasury shares without the replacement requirement upon redemption; and,

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v. Sinking fund for redemption of limited life redeemable preferred stock without the replacement requirement upon redemption.

The Group’s regulatory capital position as of December 31 is presented as follows:

2009 2008

Tier 1 Capital P 27,128,731 P 26,015,850 Tier 2 Capital 12,733,761 8,111,092

Total Qualifying Capital, after deductions P 39,862,491 P 34,126,942

Total Risk Weighted Assets P 215,825,856 P 197,222,586 Capital ratios:

Total regulatory capital expressed as percentage of total risk weighted assets 18.47% 17.30%

Total Tier 1 expressed as percentage of total risk weighted assets 12.57% 13.19%

The Parent Company’s regulatory capital position as of December 31 is presented as follows:

2009 2008

Tier 1 Capital P 22,091,302 P 21,369,107 Tier 2 Capital 7,350,514 3,235,534

Total Qualifying Capital, after deductions P 29,441,816 P 24,604,641

Total Risk Weighted Assets P 170,922,058 P 151,148,326

Capital ratios:

Total regulatory capital expressed as percentage of total risk weighted assets 17.23% 16.28% Total Tier 1 expressed as percentage of total risk weighted assets 12.92% 14.14%

The preceding capital ratios comply with the related BSP prescribed ratio of at least 10%.

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6. SEGMENT INFORMATION

The Group’s operating businesses are recognized and managed separately according to the nature of services provided (primary segments) and the different markets served (secondary segments) with a segment representing a strategic business unit. The Group’s business segments follow: a. Retail Banking – principally handles the business centers offering a wide range of

financial products and services to the commercial “middle market” customers. Products offered include individual customer’s deposits, term loans, revolving credit lines, overdraft facilities, trade finance, payment remittances, and foreign exchange transactions.

b. Corporate Banking – principally handles loans and other credit facilities and deposit and current accounts for corporate and institutional customers.

c. Treasury – principally provides money market, trading and treasury services, as well as

the management of the Group’s funding operations by use of treasury bills, government securities and placements and acceptances with other banks, through treasury and wholesale banking.

d. Others – consists of the Parent Company’s various support groups and consolidated

subsidiaries.

These segments are the basis on which the Group reports its primary segment information. Other operations of the Group comprise the operations and financial control groups. Transactions between segments are conducted at estimated market rates on an arm’s length basis. Segment revenues and expenses that are directly attributable to a primary business segment and the relevant portions of the Group’s revenues and expenses that can be allocated to that business segment are accordingly reflected as revenues and expenses of that business segment. For secondary segment, revenues and expenses are attributed to geographic areas based on the location of the resources producing the revenues, and in which location the expenses are incurred.

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Primary segment information (by business segment) on a consolidated basis as of and for the years ended December 31, 2009 and 2008 (in millions of Philippine Pesos) follows: 2009 Retail Corporate Banking Banking Treasury Group Group Group Others Total

Results of operations Net interest income P 4,006 P 1,859 P 1,080 P 3,323 P 10,268 Non-interest income 1,808 938 2,388 752 5,886 Total revenue 5,814 2,797 3,468 4,075 16,154 Non-interest expense 4,084 827 399 6,764 12,074 Profit (loss) before tax 1,730 1,970 3,069 ( 2,689 ) 4,080 Tax expense - - - 745 745 Non-controlling interest in net profit - - - ( 7 ) ( 7 ) Net profit (loss) P 1,730 P 1,970 P 3,069 (P 3,441 ) P 3,328 Statement of financial position Total Resources P 184,765 P 96,875 P 75,578 (P 68,702 ) P 288,516 Total Liabilities P 184,765 P 96,875 P 75,578 (P 99,247 ) P 257,971 Other segment information Capital expenditures P 150 P 13 P 4 P 1,173 P 1,340 Depreciation and amortization P 103 P 10 P 5 P 416 P 534 2008 Retail Corporate Banking Banking Treasury Group Group Group Others Total

Results of operations Net interest income P 3,123 P 930 P 311 P 4,106 P 8,470 Non-interest income 1,177 548 1,014 1,858 4,597 Total revenue 4,300 1,478 1,325 5,964 13,067 Non-interest expense 2,349 411 227 6,988 9,975 Profit (loss) before tax 1,951 1,067 1,098 ( 1,024 ) 3,092 Tax expense - - - 919 919 Non-controlling interest in net profit - - - ( 19 ) ( 19 ) Net profit (loss) P 1,951 P 1,067 P 1,098 (P 1,962 ) 2,154 Statement of financial position Total Resources P 144,720 P 63,248 P 69,421 (P 9,119 ) P 268,270 Total Liabilities P 144,720 P 63,248 P 69,421 (P 36,756 ) P 240,633

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2008 Retail Corporate Banking Banking Treasury Group Group Group Others Total Other segment information Capital expenditures P 225 P 38 P 7 P 765 P 1,035 Depreciation and amortization P 131 P 9 P 11 P 257 P 408 Secondary information (by geographical location) as of and for the years ended December 31, 2009 and 2008 (in millions of Philippine pesos) follows: 2009 Asia and Philippines United States Europe Total Results of operations Total revenues P 22,462 P 75 P 119 P 22,656 Total expenses 19,068 144 116 19,328 Net profit (loss) P 3,394 ( P 69 ) P 3 P 3,328 Statement of financial position Total resources P 287,950 P 147 P 419 P 288,516 Total liabilities P 257,640 P 133 P 198 P 257,971 Other segment information Capital expenditures P 1,333 P 3 P 4 P 1,340 Depreciation and amortization P 528 P 5 P 1 P 534 2008 Asia and Philippines United States Europe Total Results of operations Total revenues P 20,045 P 97 P 114 P 20,256 Total expenses 17,873 132 97 18,102 Net profit (loss) P 2,172 ( P 35 ) P 17 P 2,154 Statement of financial position Total resources P 267,490 P 246 P 534 P 268,270 Total liabilities P 240,138 P 207 P 288 P 240,633 Other segment information Capital expenditures P 1,008 P 23 P 4 P 1,035 Depreciation and amortization P 405 P 2 P 1 P 408

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7. CASH AND CASH EQUIVALENTS

The components of Cash and Cash Equivalents are as follows: Consolidated Parent 2009 2008 2009 2008 Cash and other cash items P 6,811,443 P 6,807,939 P 5,408,491 P 5,595,736 Due from BSP 19,321,339 16,390,973 17,914,204 15,656,119 Due from other banks 3,066,922 4,862,225 1,788,841 3,197,593 P 29,199,704 P 28,061,137 P 25,111,536 P 24,449,448

Cash consists primarily of funds in the form of Philippine currency notes and coins in the bank’s vault and those in the possession of tellers, including automated teller machines. Other Cash Items include cash items (other than currency and coins on hand), such as checks drawn on other banks or other branches after the bank’s clearing cut-off time until the close of the regular banking hours. Due from BSP represents the aggregate balance of deposit accounts maintained with the BSP primarily to meet reserve requirements, to serve as clearing account for interbank claims and to comply with existing trust regulations.

The balance of Due from Other Banks account represents regular deposits with the following:

Consolidated Parent 2009 2008 2009 2008 Foreign banks P 1,972,975 P 3,120,283 P 1,089,096 P 1,872,693 Local banks 1,093,947 1,741,942 699,745 1,324,900 P 3,066,922 P 4,862,225 P 1,788,841 P 3,197,593 The breakdown of Due from Other Banks by currency is shown below. Consolidated Parent 2009 2008 2009 2008 Foreign currencies P 2,549,536 P 4,116,106 P 1,404,960 P 2,943,916 Philippine pesos 517,386 746,119 383,881 253,677 P 3,066,922 P 4,862,225 P 1,788,841 P 3,197,593 Interest rates on these deposits range from 0.50% to 5.25% in 2009, 0.50% to 7.00% in

2008 and 1% to 4.5% in 2007.

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8. FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS

This account is composed of the following: Consolidated Parent 2009 2008 2009 2008 Government bonds P 6,825,653 P 1,940,272 P 5,611,099 P 1,619,470 Other debt securities 1,727,831 1,059,205 1,610,277 1,059,205 Derivative financial assets 812,860 405,705 812,860 405,705 Equity securities Quoted 49,529 31,431 - - Unquoted 16 525 - - P 9,415,889 P 3,437,138 P 8,034,236 P 3,084,380

The carrying amounts of the above financial assets are classified as follows:

Consolidated Parent 2009 2008 2009 2008 Held-for-trading P 8,350,243 P 1,762,624 P 7,221,376 P 1,619,470 Designated as fair value through profit or loss on initial recognition 1,065,646 1,674,514 812,860 1,464,910 P 9,415,889 P 3,437,138 P 8,034,236 P 3,084,380

Treasury bills and other debt securities issued by the government and other private corporations earn annual interest as follows:

2009 2008 2007 Peso denominated 4.016% - 11.875% 5.50% - 18.75 % 5.50% - 16.50% Foreign currency denominated 3.75 % - 11.375% 6.25% - 10.625% 6.38% - 10.63%

Fair values of government bonds were determined by reference to published closing prices available from electronic financial data service providers which had been based on price quoted or actually dealt in an active market.

Fair values of certain derivative financial assets were determined through valuation techniques using net present value computation. Derivatives instruments used by the Parent Company include foreign currency short term forwards and cross currency swaps. Foreign currency forwards represent commitments to purchase/sell on a future date at a specific exchange rate. Foreign currency short term swaps are simultaneous foreign currency spot and forward deals with tenor of one year. The aggregate contractual or notional amount of derivatives financial instruments and the aggregative fair values of derivative financial assets and liabilities as of December 31 both in the consolidated and Parent Company financial statements are set out in the succeeding page.

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2009 Notional Fair Values Amount Assets Liabilities

Currency swaps P 1,762,750 P 722,561 P 597,165 Interest rate swaps 1,700,000 11,579 4,998 Futures 260,200 110 - Currency forwards/futures 169,243 24,471 101,441 Debt warrants - 54,139 - P 3,892,193 P 812,860 P 703,604

2008 Notional Fair Values Amount Assets Liabilities

Currency swaps ( P 1,911,200) P 192,752 P 247,108 Currency forwards/futures ( 4,447,600) 176,751 82,397 Debt warrants - 36,202 - ( P 6,358,800) P 405,705 P 329,505

The derivative liabilities of P703,604 and P329,505 as of December 31, 2009 and 2008, respectively, are shown as part of Other Liabilities (see Note 21). The Group recognized the change in value of financial assets at fair value through profit or loss resulting to an increase of P39,227 in 2009, P1,557,064 decrease in 2008, and P86,769 increase in 2007; and P10,376 increase in 2009, P1,316,222 decrease in 2008, and P80,504 increase in 2007 in the consolidated and Parent Company financial statements, respectively, which were included as part of Trading and Securities Gains (Losses) - net account in the statements of income. In 2008, the Group reclassified certain debt securities and embedded derivatives of CLNs from financial assets at fair value through profit or loss to held-to-maturity investments, available-for-sale securities and loans and receivables categories (see Notes 9, 10 and 11).

9. HELD-TO-MATURITY INVESTMENTS

The balance of this account as of December 31 is composed of the following:

Consolidated Parent 2009 2008 2009 2008

Government bonds P 19,476,766 P 20,621,861 P 17,172,858 P 17,840,361 Other debt securities 485,594 51,753 465,726 51,753 P 19,962,360 P 20,673,614 P 17,638,584 P 17,892,114

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As to currency, held-to-maturity investments comprise of the following:

Consolidated Parent 2009 2008 2009 2008

Foreign currency P 17,231,532 P 18,143,420 P 15,102,660 P 15,541,116 Philippine pesos 2,730,828 2,530,194 2,535,924 2,350,998 P 19,962,360 P 20,673,614 P 17,638,584 P 17,892,114 Changes in the held-to-maturity investments account in December 31, 2009 and 2008

are summarized below. Consolidated Parent 2009 2008 2009 2008

Balance at beginning of year P 20,673,614 P - P 17,892,114 P - Additions 398,290 - 378,397 - Amortization of premium – net ( 285,389) ( 111,022 ) ( 261,027) ( 107,949) Maturities ( 453,255) - - - Revaluation of foreign currency ( 370,900) - ( 370,900) -

Reclassification from FVTPL - 411,228 - 411,228 Reclassification from AFS - 20,373,408 - 17,588,835

Balance at end of year P 19,962,360 P 20,673,614 P 17,638,584 P 17,892,114

In accordance with BSP Circular No. 670, the Parent Company entered into a bond exchange transaction with Power Sector Assets and Liabilities Management Corporation (PSALM) on December 2, 2009 to convert its guaranteed notes and bonds originally issued by National Power Corporation with total face value of

US$100.0 million to PSALM’s newly issued guaranteed global bonds amounting to US$105.0 million which will mature on 2024. The carrying amount of the investment in PSALM classified as held-to-maturity investment amounted to P4,847,997 as of December 31, 2009.

9.1 Reclassification to HTM Investments The Monetary Board of the BSP, through BSP Circular No. 628, approved the prudential reporting guidelines for banks governing the reclassification of investments in debt and equity securities between categories in accordance with the provisions of the amendments to the PAS 39 and PFRS, and provided additional guidelines which include, among others, the reclassification of certain financial assets previously classified under available-for-sale securities due to tainting of held-to-maturity portfolio back to held-to-maturity investments category. On February 2, 2009, the SEC approved the adoption of such BSP Circular No. 628 as being compliant with generally accepted accounting principles for banks.

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Pursuant to these amendments and guidelines, the Group and the Parent Company reclassified certain financial assets classified under AFS Securities due to the previous tainting of HTM portfolio and certain financial assets at fair value through profit or loss to HTM Investments category with an aggregate carrying value of P20,784,636 and P18,000,063, respectively, at reclassification date. The carrying amount and the corresponding fair values of the reclassified AFS securities and financial assets at fair value through profit or loss as of December 31 are presented below. Consolidated

2009 2008 Carrying Fair Carrying Fair Amount Value Amount Value From AFS to HTM P 14,508,235 P 15,438,869 P 20,264,434 P 19,059,065 From FVTPL to HTM 404,453 431,129 409,180 424,548 P 14,912,688 P 15,869,998 P 20,673,614 P 19,483,613

Parent

2009 2008 Carrying Fair Carrying Fair Amount Value Amount Value From AFS to HTM P 12,204,352 P 13,014,557 P 17,482,934 P 16,339,848 From FVTPL to HTM 404,453 431,129 409,180 424,548 P 12,608,805 P 13,445,686 P 17,892,114 P 16,764,396

The effective interest rates of FVTPL denominated in foreign currency and peso which were reclassified to HTM range from 7.75% to 10.63% and 8.43% to 8.85%, respectively, both in the consolidated and Parent Company financial statements. Had no reclassification been made, the net trading gain on FVTPL that would have been recognized for the years ended December 31, 2009 and 2008 both in the consolidated and Parent Company financial statements would have amounted to P85,060 and P13,320, respectively. The net unrealized fair value gains on AFS that would have been recognized in the capital funds as of December 31, 2009 would have amounted to P453,146 and P332,718 for the Group and Parent Company, respectively, and the unrealized fair value losses would have amounted to P1,311,269 and P1,248,987 as of December 31, 2008 for the Group and Parent Company, respectively, if the reclassification had not been made. The amortization of the amount of net unrealized fair value losses at the date of reclassification of the reclassified AFS recognized in the profit or loss for the years ended December 31, 2009 and 2008 amounted to P15,574 and P29,651, respectively, in the consolidated statements of income; and P7,660 and P36,598, respectively, in the Parent Company statements of income.

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10. AVAILABLE-FOR-SALE SECURITIES

The Group’s available-for-sale securities consist of the following:

Consolidated Parent Note 2009 2008 2009 2008

Government bonds P 21,000,855 P 17,424,645 P 17,558,033 P 16,338,845 Other debt securities 14,266,181 4,632,718 14,236,515 4,631,377 Equity securities 2,453,658 1,453,888 1,742,095 918,146 37,720,694 23,511,251 33,536,643 21,888,368 Allowance for impairment 16 ( 1,336,264) ( 811,207) ( 1,276,157) ( 811,207 ) P 36,384,430 P 22,700,044 P 32,260,486 P 21,077,161

Government bonds and other debt securities earn annual interest as follows:

2009 2008 2007 Group 2.50% - 17.50% 5.00% - 17.50% 4.00% - 13.00% Parent 2.50% - 17.50% 5.23% - 17.50% 4.00% - 10.62%

Changes in available-for-sale securities are as follows: Consolidated Parent 2009 2008 2009 2008

Balance at beginning of year P 22,700,044 P 54,625,359 P 21,077,161 P 50,512,612

Additions 40,474,698 45,142,502 37,920,438 44,793,212 Fair value gains (losses) 1,975,773 ( 2,601,102 ) 1,807,029 ( 2,328,671) Sale/disposal ( 27,631,449) ( 50,132,293 ) ( 27,357,821) ( 49,794,322) Provision for impairment losses ( 433,258) ( 31,903 ) ( 464,950) ( 31,903) Amortization / accretion of discount or premium ( 271,027) ( 2,492,453 ) ( 472,665) ( 2,521,051)

Revaluation of foreign currency investments ( 430,351) 3,996,941 ( 248,706) 3,996,941

Reclassification from FVTPL - 527,223 - - Reclassification to

held-to-maturity investments - ( 20,373,408 ) - ( 17,588,835) Reclassification to loans and receivables - ( 5,960,822 ) - ( 5,960,822)

P 36,384,430 P 22,700,044 P 32,260,486 P 21,077,161

The changes in fair values of available-for-sale securities which were recognized under other comprehensive income and directly to capital funds amounted to fair value gains of P1,975,773 in 2009, and fair value losses of P2,601,102 in 2008 and P1,875,304 in 2007 in the consolidated financial statements; and fair value gains of P1,807,029 in 2009 and fair value losses of P2,328,671 in 2008 and P1,769,582 in 2007 in the Parent Company financial statements.

Certain government securities are deposited with BSP as security for the Group’s faithful compliance with its fiduciary obligations in connection with its trust operations (see Note 29).

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In 2008, the Group reclassified financial assets at FVTPL to AFS in accordance with PFRS. The carrying value and fair value of the securities at the date of reclassification amounted to P527,223. Had no reclassification been made, the Group would have earned additional fair value gain of P197,156 for the year ended December 31, 2009 and incurred additional loss of P232,726 for the year ended December 31, 2008. The carrying amount of the securities as of December 31, 2009 and 2008 amounted to P660,391 and P294,497, respectively, in the consolidated financial statements.

Also in 2008, the Group reclassified private and government debt securities with

carrying value at the date of reclassification of P20,373,408 to held-to-maturity investments in accordance with FRSPB (see Note 9). In addition, the Parent Company reclassified CDOs and CLNs that are linked to ROP bonds, with an aggregate carrying value of P5,960,822 to loans and receivables (see Note 11).

11. LOANS AND RECEIVABLES This account consists of the following:

Consolidated Parent 2009 2008 2009 2008

Loans and discounts P 118,502,226 P 113,607,267 P 85,264,805 P 78,727,671 Customers’ liabilities on acceptances, import bills and trust receipts 11,643,552 15,883,708 11,643,552 15,883,708 Bills purchased 2,211,973 2,106,007 2,187,432 2,085,789 Securities purchased under reverse repurchase agreements 646,000 488,000 - - 133,003,751 132,084,982 99,095,789 96,697,168 Interbank loans receivables 24,358,198 23,598,507 22,958,198 22,875,621 Credit card receivables 8,187,585 8,256,256 5,523,286 5,497,159 Unquoted debt securities classified as loans 5,689,068 6,621,885 5,689,068 6,621,885 Accrued interest receivable 2,249,005 2,205,587 1,938,864 1,955,747 Accounts receivable 1,315,520 1,921,735 876,248 1,247,660 Sales contract receivables 1,216,938 1,196,328 701,523 767,117 Miscellaneous 11,212 52,721 - 30,979 176,031,277 175,938,001 136,782,976 135,693,336 Allowance for impairment (see Note 16) ( 7,465,624) ( 7,943,278) ( 4,433,774) ( 4,943,286) Unearned discount ( 2,096,986) ( 2,149,136 ) ( 173,171) ( 155,933) Prompt payment discount ( 368,137) ( 363,597) - - Reserves for credit card ( 1,208,113) ( 1,079,083) ( 442,695) ( 301,911 )

P 164,892,417 P 164,402,907 P 131,733,336 P 130,292,206

Loans and receivables bear average interest rates of 2% to 11% per annum in 2009, 3.4% to 9.7% in 2008 and 3.4% to 10.5% in 2007 in the consolidated and Parent Company financial statements.

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Included in these accounts in the consolidated financial statements are NPLs amounting to P6,137,804 (net of allowance of P1,687,007) as of the end of 2009 and P3,930,841 (net of allowance of P1,799,778) as of the end of 2008, and in the Parent Company financial statements amounting to P4,764,124 (net of allowance of P1,520,843) as of the end of 2009 and P3,141,378 (net of allowance of P1,352,750) as of the end of 2008. Loans and receivables amounting to P2,354,515 and P10,729,055 as of December 31, 2009 and 2008, respectively, both in the consolidated and Parent Company financial statements are assigned as collateral to BSP as security for rediscounting availments (see Note 18). The concentration of credit as to industry follows:

Consolidated Parent 2009 2008 2009 2008

Other community, social and personal activities P 43,847,227 P 46,179,659 P 13,959,662 P 13,923,573 Manufacturing (various industries) 27,761,730 30,281,180 27,686,254 30,261,981 Real estate, renting and other related activities 17,077,568 14,293,382 16,286,233 13,733,296 Electricity, gas and water 10,699,371 9,294,329 10,370,757 9,097,739 Wholesale and retail trade 10,604,224 10,165,040 9,125,960 9,002,426 Transportation and communication 9,608,088 7,503,127 9,606,957 7,503,127 Financial intermediaries 3,597,550 7,481,284 2,944,300 7,456,284 Hotels and restaurants 1,539,718 1,176,779 1,539,241 1,176,779 Agriculture, fishing and forestry 1,069,909 663,740 659,821 299,469 Others 7,198,366 5,046,462 6,916,604 4,242,494

P 133,003,751 P 132,084,982 P 99,095,789 P 96,697,168 The BSP considers that loan concentration exists when the total loan exposure to a particular industry exceeds 30% of the total loan portfolio above plus the outstanding credit card receivables and interbank loans receivables. The breakdown of total loans as to secured and unsecured follows:

Consolidated Parent 2009 2008 2009 2008 Secured: Real estate mortgage P 47,178,874 P 47,739,934 P 27,930,851 P 26,646,468 Deposit hold-out 6,489,238 11,731,613 5,862,811 11,123,949 Chattel mortgage 12,898,454 12,549,276 123,215 148,981 Other securities 12,523,486 6,207,297 11,948,486 5,744,296 79,090,052 78,228,120 45,865,363 43,663,694 Unsecured 53,913,699 53,856,862 53,230,426 53,033,474 P 133,003,751 P 132,084,982 P 99,095,789 P 96,697,168

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A reconciliation of the allowance for impairment at the beginning and end of 2009 and 2008 is shown below.

Consolidated Parent 2009 2008 2009 2008 Balance at beginning of year P 7,943,278 P 9,935,036 P 4,943,286 P 5,812,828 Provisions during the year 1,748,355 1,928,086 1,156,333 1,830,597 Recovery of impairment losses ( 86,424 ) ( 1,054,541 ) - ( 1,000,000 ) Accounts written off/others ( 2,139,585 ) ( 2,865,303 ) ( 1,665,845 ) ( 1,700,139 ) Balance at end of year P 7,465,624 P 7,943,278 P 4,433,774 P 4,943,286

The maturity profile of loans follows:

Consolidated Parent 2009 2008 2009 2008 Due within one year P 43,608,195 P 52,497,992 P 42,076,816 P 49,816,491 Due beyond one year 89,395,556 79,586,990 57,018,973 46,880,677 P 133,003,751 P 132,084,982 P 99,095,789 P 96,697,168

11.1 Reclassification to Loans and Receivables In 2008, the Parent Company reclassified CLNs that are linked to ROP bonds and certain collateralized debt obligations (CDOs) previously recognized as Available-for-sale securities to Loans and Receivables with aggregate carrying amount of P5,960,822, and embedded derivatives with negative fair value amounting to P307,836, at reclassification date (see Notes 8 and 10). As of December 31, 2009 and 2008, the carrying amounts and the corresponding fair values of the reclassified CLNs linked to ROP bonds (including embedded derivatives) and the CDOs are presented below:

2009 2008 Carrying Fair Carrying Fair Amount Value Amount Value CLNs: From AFS – host contract P 5,227,068 P 4,814,729 P 6,028,297 P 6,295,730 From FVTPL – embedded derivative - 468,600 - ( 952,361) CDOs – from AFS 462,000 - 593,588 99,792 5,689,068 5,283,329 6,621,885 5,443,161 Less allowance for impairment ( 462,000 ) - ( 1,082,467 ) - P 5,227,068 P 5,283,329 P 5,539,418 P 5,443,161

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The effective interest at reclassification date ranges from 4.9% to 10.5% and 5.0% to 8.8% for CLNs and CDOs, respectively. The unrealized fair value losses that should have been recognized in the Group’s capital funds had the CLNs and CDOs not been reclassified to Loans and Receivables amounted to P729,270 and nil, respectively, as of December 31, 2009, and P134,962 and P375,408, respectively, as of December 31, 2008. Had the embedded derivatives not been reclassified by the Parent Company, interest income on loans and receivables would have decreased by P20,721 in 2009 and P7,477 in 2008 and the additional trading gains to be recognized in profit or loss amounted to P1,420,959 for the year ended December 31, 2009, and additional trading losses amounted to P644,524 from the date of reclassification to December 31, 2008. 11.2 Special Purpose Vehicle (SPV) Transactions In accordance with the provisions of Republic Act (RA) No. 9182 (the SPV Act) and BSP Resolution No. 135, the Parent Company entered into either “sale and purchase” or “asset sale” agreements with SPVs, namely: • New Pacific Resources Management (SPV-AMC), Inc. (NPRMI) on May 14, 2008

and February 26, 2007, • Philippine Investments One, Inc. (PIOI) on August 25, 2004 and April 12, 2005, • Star Two (SPV-AMC), Inc. (Star Two) on November 15, 2006,

• Global Ispat Holdings and Global Steelworks International (collectively referred

herein as the Global SPVs) on October 15, 2004, and

• Asian Pacific Recoveries (SPV-AMC) Corporation (Asian Pacific Recoveries) on February 21, 2005.

The agreements cover the transfer of specific NPAs, consisting of NPLs and real and other properties acquired (ROPA; presented as Investment Property), amounting to P50,728 in 2008 and P1,698,558 in 2007 to NPRMI; P3,770,948 and P1,433,228 in 2004 and 2005, respectively to PIOI; P3,878,781 in 2006 to Star Two; P685,561 to Global SPVs in 2004; and P2,070,064 to Asian Pacific Recoveries in 2005. The agreement with the Global SPVs was made in conjunction with other participating banks. The agreement with Star Two also covers the sale of NPAs not eligible under the SPV Act amounting to P486,142. The Certificates of Eligibility, obtained for purposes of availing of the tax exemptions and privileges on the NPLs transferred and ROPAs sold, were completely issued by the BSP to the Parent Company on various dates in 2004, 2005, 2007 and 2008. The significant terms and conditions of the “asset sale” agreement with NPRMI and the “sale and purchase” agreements with PIOI, among others, follow: • The SPVs shall issue 10-year subordinated/SPV notes in exchange for the NPLs

transferred. The issuance of the subordinated/SPV notes constitutes full settlement for the NPLs transferred.

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• The subordinated/SPV notes are subordinated in priority of payment to the senior notes and any other working capital notes of the SPVs.

• The amount and schedule of payment of the subordinated/SPV notes shall be

contingent and dependent on the amount and timing of collections to be made by the SPVs on the NPLs transferred, subject to the rights and privileges of the SPVs’ other creditors.

In addition, the SPV note issued by PIOI to the Parent Company relative to the April 12, 2005 “sale and purchase” agreement shall have a maturity of 10 years. Interest shall accrue on the amount of the aggregate allocated loan asset amount and shall be payable for each quarter in arrears in reckoning date at an interest rate equal to the 91-day rate for Philippine treasury bills per annum. The total consideration for the sale of NPAs (for eligible and not eligible under the SPV Act) to Star Two amounted to P1,190,410. Based on the terms and conditions of the “asset sale and purchase” agreement with Star Two, the risk and rewards of the ownership of the sold NPAs was transferred completely to Star Two. The asset sale and purchase agreement also requires Star Two to pay an earnest money deposit equivalent to 20% of the total purchase price within five days after the bid award date. The 20% earnest money deposit amounting to P238,082 was received by the Parent Company in November 2006. The remaining outstanding balance of the purchase price amounting to P952,328 was subsequently collected on February 9, 2007. The significant terms and conditions of the Parent Company’s “sale and purchase” agreement with the Global SPVs, among others, follow: • The SPVs shall pay cash up front and issue 8-year zero-coupon subordinated notes

to the Parent Company and other participating banks in exchange for the NPLs transferred. The issuance of the subordinated notes and the upfront cash payment to the Parent Company constitute full settlement for the NPLs transferred.

• The subordinated notes shall be issued to the Parent Company and other

participating banks in two tranches, namely, Tranche A and Tranche B. The subordinated notes shall be secured by a first-ranking mortgage and security interest over the plant assets of the Global SPVs and standby letters of credit to be delivered by the Global SPVs from time to time in accordance with the agreement subject to the rights and privileges of the SPVs’ other creditors.

• The amount and schedule of payment of the subordinated notes to the Parent

Company and other participating banks shall be based on the repayment schedule set forth in the “sale and purchase” agreement.

The significant terms and conditions of the Parent Company’s “sale and purchase” agreement with Asian Pacific Recoveries, among others, follow: • The SPV shall pay P20,000 as bid deposit. • On closing date, the SPV shall pay the Parent Company the purchase price balance

by wire transfer in full settlement of the NPLs transferred.

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• The SPV acknowledges and agrees that if there is occurrence of a default by any obligor under any loan document, SPV will remain bound by all terms and conditions to purchase all the loans in the transaction without any adjustment or alteration in the purchase price unless the Parent Company removes loans from the transaction prior to closing.

In relation to such transactions, the BSP has informed the Parent Company that the allowance for impairment amounting to P23,280 and P289,994 on the NPAs transferred to NPRMI in 2008 and 2007, respectively; P1,474,440 on the NPAs transferred to Star Two in 2006, P2,225,558 and P163,814 to PIOI and the Global SPVs, respectively, in 2004; and P1,211,332 to PIOI and P245,477 to Asian Pacific Recoveries in 2005, shall be “freed” and used only for general loan loss provision and/or for specific provision of loan accounts that may be classified in the future. In 2008, the Parent Company reversed portion of the freed allowance amounting to P1,000,000 by charging it to the current operations, instead of to Surplus. Portion of the freed allowance was charged against amortization for deferred charges (as discussed below) totaling P536,684 in 2008 and P1,077,401 in 2007 and prior years. In 2006, the Parent Company charged portion of the freed allowance for the write-off of certain impaired credit card receivables amounting to P2,593,440. FRSPB, however, requires the derecognition of the related allowance for impairment of the NPAs transferred that qualified for derecognition at the time of sale. The face value of the subordinated/SPV notes issued by NPRMI in 2008 amounted to P48,192 and P1,688,902 in 2007; subordinated/SPV notes issued by PIOI in 2005 amounted to P1,418,896 and P3,770,948 in 2004; the SPV note issued by Global SPVs amounted to P548,930 in 2004. In addition to the subordinated notes, the Global SPV also paid cash to the Parent Company amounting to P27,439 in 2004; PIOI and Asian Pacific Recoveries paid cash amounting to P14,332 and 427,564, respectively, for the 2005 transfer; and NPRMI paid cash amounting to P2,536 in 2008 and P9,656 in 2007. In recording the transfers of the NPAs, the Parent Company derecognized the NPAs from its financial records and recorded the subordinated/SPV notes as part of Available-for-sale Securities (unquoted debt securities) at their fair values as of the dates of issuance. However, one of the significant conditions stated in the terms of the subordinated/SPV notes from NPRMI and PIOI is that the amount and timing of payment of the subordinated/SPV notes are dependent on the collections to be made by NPRMI and PIOI on the NPAs transferred. Under FRSPB, this is indicative of an incomplete transfer of the risks and rewards of ownership of the NPAs from the Parent Company to NPRMI and PIOI. FRSPB requires that: (a) the entity retaining majority of the residual risks and rewards of ownership of certain assets of SPV should reflect in its financial statements its proportionate interest in such SPV; and (b) an entity should substantially transfer all the risks and rewards of ownership of an asset before such asset could be derecognized.

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As permitted under BSP Resolution No. 135, the Parent Company has deferred over 10 years the recognition of the required additional allowance for impairment as determined from the NPAs transferred to PIOI, and the losses determined from the NPAs transferred to Star Two, Global SPVs and Asian Pacific Recoveries, totaling to P1,335,149 in 2006, P1,604,587 in 2005 and P1,955,768 in 2004. The schedule of amortization of the required additional allowance for impairment and losses as prescribed under BSP Resolution No. 135 shall be 5% for the first three years, 10% for the next four years, and 15% for the remaining three years. In accordance with BSP Resolution No. 135, total amortization recognized by the Parent Company amounted to P834,633 (charged to Surplus) for the year ended December 31, 2009 and P745,342 (P536,684 of which was charged against the “freed” allowance for impairment while the remaining balance of P208,658 was charged to profit or loss) for the year ended December 31, 2008. FRSPB, however, requires the full recognition of the required additional allowance for impairment and the losses against current operations in the period such impairment and losses were determined instead of capitalizing it as deferred charges and amortizing it over future periods. Had the Parent Company (i) reflected in its financial statements its interest in NPRMI and PIOI and not derecognized the NPAs transferred; (ii) derecognized the allowance for impairment related to the NPAs transferred that qualified for derecognition at the time of sale; and, (iii) not deferred the recognition of the required additional allowance for impairment and the losses determined from the NPAs transferred in accordance with FRSPB, the gross balance of the Group’s and Parent Company’s Loans and Receivables - Net account would have decreased by P188,088 in 2009 and 2008; Available-for-sale Securities would have decreased by P1,423,820 in 2009 and 2008; Investment Property would have increased by P1,436,012 in 2009 and 2008; Deferred Charges (part of Other Resources account in Note 15) would have decreased by P7,047,308 and P7,844,385 in 2009 and 2008, respectively; Other Liabilities would have increased by P12,192 and P26,524 in 2009 and 2008, respectively, Surplus would have decreased by P7,047,308 in 2009 and P8,264,501 in 2008, and net income would have decreased by P791,342 in 2008.

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12. INVESTMENTS IN SUBSIDIARIES AND ASSOCIATES

The components of the carrying values of investments in subsidiaries and associates are as follows:

Consolidated Effective Percentage of Ownership 2009 2008 Acquisition costs of associates: RRC 34.80 P 1,947,320 P 1,999,934 RLI 49.00 921,076 921,076 SPC 26.50 120,095 120,095 RHI 4.71 101,665 101,665 HCPI 12.88 91,050 91,050 LIPC 35.00 52,500 52,500 YCS 40.00 5,070 5,070 GLFAC 20.00 - 200,000 3,238,776 3,491,390

Equity in net earnings (losses): Balance at beginning of year 294,466 120,992 Equity in net earnings for the year 206,857 404,192 Equity earnings in associate sold ( 39,428) - Dividends ( 217,904) ( 230,718 ) Balance at end of year 243,991 294,466 3,482,767 3,785,856 Share in additional paid-in capital of an associate 532,583 532,583 Revaluation increment in property of an associate 58,917 28,243 4,074,267 4,346,682 Allowance for impairment (see Note 16) ( 52,500) ( 52,500 ) P 4,021,767 P 4,294,182

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Parent Effective Percentage of Ownership 2009 2008 Subsidiaries: RSB 100.00 P 3,190,000 P 3,190,000 RCBC Capital 99.96 2,230,673 2,230,673 Bankard 66.58 1,000,000 1,000,000 Merchants Bank 96.38 492,389 493,039 NPHI 100.00 388,431 - RCBC Forex 100.00 150,000 150,000 RCBC Telemoney Europe 100.00 71,796 16,055 RCBC North America* 100.00 59,896 36,046 RCBC IFL 99.99 58,013 58,013 7,641,198 7,173,826

Associates:

RRC 25.00 1,947,320 1,999,934 RLI 49.00 921,076 921,076 SPC 26.50 120,095 120,095 HCPI 12.88 91,050 91,050 LIPC 35.00 52,500 52,500 YCS 40.00 5,070 5,070 GLFAC 20.00 - 200,000 3,137,111 3,389,725 10,778,309 10,563,551 Allowance for impairment (see Note 16) ( 252,500) ( 252,500 ) Deposit for future stock subscription 175,000 - P 10,700,809 P 10,311,051

*Includes the 25.29% and 31% ownership of RCBC IFL in RCBC North America in 2009 and 2008, respectively.

The following table presents the audited financial information (except for HCPI and GLFAC for which 2009 and 2008 information were based on unaudited financial statements) on the significant associates as of and for the years ended December 31, 2009 and 2008: Income Assets Liabilities Revenues (Loss) 2009: RRC P 8,806,554 P 2,626,142 P 1,283,114 P 459,236 RLI 847,630 199,964 1,252 ( 6,363 ) HCPI 3,754,622 1,522,563 13,148,182 30,925 2008: RRC P 9,060,000 P 2,608,410 P 1,154,322 P 335,398 RLI 1,027,227 175,198 38,747 ( 17,750) GLFAC 3,210,333 2,148,668 617,376 26,981

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The Parent Company, under a shareholders agreement, agreed with another stockholder of HCPI, to commit and undertake to vote as a unit the shares of stock thereof, which they proportionately own and hold, and to regulate the conduct of the voting and the relationship between them with respect to their exercise of their voting rights. As a result of this agreement, the Parent Company is able to exercise significant influence over the operating and financial policies of HCPI. Thus, HCPI has been accounted for using the equity method. RCBC Capital entered into an agreement with another stockholder of RHI to commit and undertake to vote as a unit the shares of stock of RHI, representing 54.68% of the outstanding capital stock thereof, which they own and hold, to regulate the conduct of the voting and the relationship between them with respect to the exercise of the voting rights. Thus, notwithstanding the RCBC Capital’s ownership of only 4.71% in RHI, its investment is carried under the equity method of accounting. On November 27, 2006, as part of its corporate restructuring strategy, the Parent Company’s BOD approved the capital infusion of P1 billion each into Bankard and RCBC Capital. The Parent Company, in its letter to the BSP dated January 9, 2007, requested for the approval of such capital infusion by way of conversion of Bankard’s and RCBC Capital’s debt to the Parent Company into equity which was approved by BSP on February 23, 2007. Thereafter, on January 4, 2008, the application for increase in Bankard’s authorized capital to cover the Parent Company’s capital infusion was approved by the SEC. Starting 2008, with the capital infusion (previously classified as Deposit for Stock Subscription) applied against subscription to Bankard’s capital stock, the Parent Company now holds direct percentage interest of 66.58%. Prior to 2008 and the additional capital infusion made by the Parent Company to Bankard, the Parent Company owns 59% indirectly of Bankard’s net assets through RCBC Capital. As a result of the capital infusion, the Parent Company’s interest in Bankard’s net assets increased to 91.69% (representing 66.58% direct ownership and 25.11% indirect ownership through RCBC Capital). This change in ownership with Bankard did not result on gaining or losing control. In accordance with the relevant accounting standards, Parent Company and Non-controlling Interest (other than RCBC Capital) share in Bankard’s net assets were adjusted to reflect the changes in their relative interest. The difference between the amount of additional investment made by the Parent Company and the adjustment in the Non-controlling Interest share in Bankard’s net assets amounting to P240,889, was recognized directly in equity and presented as Other Reserves in the statements of changes in capital funds for the years ended December 31, 2009 and 2008. After a series of earlier consultations and discussions among the parties and BSP, the Parent Company entered into a formal Reorganization Agreement and Deed of Assignment of Rights with PMMIC and RLI on December 26, 2007 to transfer RLI’s ownership with RRC to the Parent Company and PMMIC by 25% and 15%, respectively, in exchange of partial and full settlement of RLI’s obligations with the Parent Company and PMMIC, respectively. The Parent Company recorded its equity investment with RRC by the carrying amount of loan paid and the interest income accrued which amounted to P2,071,777. This was earlier approved by the BSP on September 27, 2007 through MB Resolution No. 1097. RRC redeemed a certain percentage of its preferred shares which resulted to the decrease in the Parent Company’s cost of investment by P52,614 and P71,843 in 2009 and 2008, respectively.

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On October 30, 2007, the Parent Company’s BOD approved the acquisition of 96.38% interest in Merchants Bank for P493,039, inclusive of capital gains tax, property claims and buyer’s tax claims which was temporarily held in escrow upon determination of the final amount of tax claims that will be paid by Merchants Bank through the Parent Company. This investment cost was reduced to P492,389 in 2009 as a result of the tax claims amounting to P650 which was returned to the Parent Company in 2009. On May 25, 2009, the BOD of the Parent Company approved the reclassification of its investment in NPHI with carrying amount of P388,431 from Investment Property account to Investments in Subsidiaries and Associates account in accordance with BSP Circular No. 520 (see Note 14). On February 12 and 13, 2009, an agreement was executed between the Parent Company and JPL whereby the Parent Company infused an initial amount of P125,000 in JPL as stock subscription which resulted in the Parent Company’s 33% ownership and full management control of JPL . The Parent Company was also granted the option to own the remaining 66% of the outstanding shares of the JPL by way of future equity infusion into JPL of P125,000 on February 2010 and another P125,000 on February 2011 bringing the total equity investment of the Parent Company to P375,000 or 99% by 2011. In March 2009, the Parent Company made an additional investment amounting to P50,000. On December 29, 2009, BSP approved JPL’s proposed amendments on its articles of incorporation which includes, among others, the reduction of the par value of JPL’s common stock from P100 per share to P1.00 per share. These amendments were subsequently approved by the SEC on March 4, 2010. On March 16, 2009, JPL’s BOD approved the increase in its authorized capital stock. As of December 31, 2009, such proposed increase is pending approval by the SEC. As of December 31, 2009, the Parent Company has full management control of JPL and, accordingly, recognized its full stock subscription to JPL (net of subscription payable amounting to P200,000) and presented as Deposit for future Stock Subscription (presented under Investments in Subsidiaries and Associates account) pending approval by the SEC of the proposed increase in authorized capital stock of JPL. On October 12, 2009, the Parent Company sold its 20% shareholdings with GLFAC for the amount of P211,488 to Grepalife in accordance with the sale and purchase agreement entered into between the two parties.

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13. BANK PREMISES, FURNITURE, FIXTURES AND EQUIPMENT

The gross carrying amounts and accumulated depreciation, amortization and impairment at the beginning and end of 2009 and 2008 are shown below. Consolidated

Furniture, Leasehold Fixtures and Rights and Land Buildings Equipment Improvements Total December 31, 2009 Cost P 1,438,279 P 1,736,213 P 3,466,248 P 991,279 P 7,632,019 Accumulated depreciation, amortization and impairment - ( 698,569 ) ( 2,108,646 ) ( 70,683 ) ( 2,877,898 ) Net carrying amount P 1,438,279 P 1,037,644 P 1,357,602 P 920,596 P 4,754,121 December 31, 2008 Cost P 1,102,951 P 1,579,867 P 2,941,206 P 956,548 P 6,580,572 Accumulated depreciation, amortization and impairment ( 10,831 ) ( 616,060 ) ( 1,878,153 ) ( 45,759 ) ( 2,550,803 ) Net carrying amount P 1,092,120 P 963,807 P 1,063,053 P 910,789 P 4,029,769 January 1, 2008 Cost P 1,074,222 P 1,494,050 P 2,420,036 P 799,484 P 5,787,792 Accumulated depreciation, amortization, and impairment - ( 533,786 ) ( 1,735,538 ) ( 14,652 ) ( 2,283,976 ) Net carrying amount P 1,074,222 P 960,264 P 684,498 P 784,832 P 3,503,816

Parent

Furniture, Leasehold Fixtures and Rights and Land Buildings Equipment Improvements Total December 31, 2009 Cost P 693,259 P 1,382,220 P 2,645,002 P 817,905 P 5,538,386 Accumulated depreciation and amortization - ( 539,819 ) ( 1,615,940 ) - ( 2,155,759 ) Net carrying amount P 693,259 P 842,401 P 1,029,062 P 817,905 P 3,382,627 December 31, 2008 Cost P 668,740 P 1,288,176 P 2,195,692 P 821,491 P 4,974,099 Accumulated depreciation and amortization - ( 484,029 ) ( 1,452,442 ) - ( 1,936,471 ) Net carrying amount P 668,740 P 804,147 P 743,250 P 821,491 P 3,037,628 January 1, 2008 Cost P 678,438 P 1,269,650 P 1,821,953 P 731,406 P 4,501,447 Accumulated depreciation and amortization - ( 431,924 ) ( 1,355,549 ) - ( 1,787,473 ) Net carrying amount P 678,438 P 837,726 P 466,404 P 731,406 P 2,713,974

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A reconciliation of the carrying amounts at the beginning and end of 2009 and 2008, of bank premises, furniture, fixtures and equipment is shown below.

Consolidated

Furniture, Leasehold Fixtures and Rights and Land Buildings Equipment Improvements Total Balance at January 1, 2009, net of accumulated depreciation, amortization, and impairment P 1,092,120 P 963,807 P 1,063,053 P 910,789 P 4,029,769 Additions 365,735 160,123 677,523 137,050 1,340,431 Disposals ( 19,576 ) ( 5,649 ) ( 57,033 ) ( 24 ) ( 82,282 ) Depreciation and amortization charge for the year - ( 80,637 ) ( 325,941 ) ( 127,219 ) ( 533,797 ) Balance at December 31, 2009, net of accumulated depreciation, amortization, and impairment P 1,438,279 P 1,037,644 P 1,357,602 P 920,596 P 4,754,121 Balance at January 1, 2008, net of accumulated depreciation, amortization, and impairment P 1,074,222 P 960,264 P 684,498 P 784,832 P 3,503,816 Additions 69,358 96,851 650,963 218,287 1,035,459 Disposals ( 40,629 ) ( 15,988 ) ( 29,091 ) - ( 85,708 ) Depreciation and amortization charge for the year - ( 72,234 ) ( 243,317 ) ( 92,330 ) ( 407,881 ) Impairment loss (see Note 16) ( 10,831 ) ( 5,086 ) - - ( 15,917 ) Balance at December 31, 2008, net of accumulated depreciation, amortization, and impairment P 1,092,120 P 963,807 P 1,063,053 P 910,789 P 4,029,769 Parent Furniture, Leasehold Fixtures and Rights and Land Buildings Equipment Improvements Total Balance at January 1, 2009, net of accumulated depreciation and amortization P 668,740 P 804,147 P 743,250 P 821,491 P 3,037,628 Additions 24,519 94,044 550,782 102,971 772,316 Disposals - - ( 50,167 ) ( 24 ) ( 50,191 ) Depreciation and amortization charge for the year - ( 55,790 ) ( 214,803 ) ( 106,533 ) ( 377,126 ) Balance at December 31, 2009, net of accumulated depreciation and amortization P 693,259 P 842,401 P 1,029,062 P 817,905 P 3,382,627

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Parent Furniture, Leasehold Fixtures and Rights and Land Buildings Equipment Improvements Total Balance at January 1, 2008, net of accumulated depreciation and amortization P 678,438 P 837,726 P 466,404 P 731,406 P 2,713,974 Additions 650 25,093 455,382 168,023 649,148 Disposals ( 10,348 ) ( 4,455 ) ( 22,192 ) - ( 36,995 ) Depreciation and amortization charge for the year - ( 54,217 ) ( 156,344 ) ( 77,938 ) ( 288,499 ) Balance at December 31, 2008, net of accumulated depreciation and amortization P 668,740 P 804,147 P 743,250 P 821,491 P 3,037,628

In October 2009, the Parent Company, RSB and Bankard entered into an agreement with Grepalife and Malayan Insurance Company, Inc., all related parties, to form a consortium for the pooling of their resources and establishment of an unincorporated joint venture for the construction and development of high rise, mixed use commercial/office building. The initial cash contribution of the Parent Company and Bankard to the joint venture amounted to P40,499 and P24,290 as of December 31, 2009, respectively, and the land costing P315,000 were recorded as part of Buildings and Land accounts (see Note 30). Under BSP rules, investments in bank premises, furniture, fixtures and equipment should not exceed 50% of the respective unimpaired capital of the Parent Company and RSB. As of December 31, 2009 and 2008, the Parent Company and RSB have satisfactorily complied with this BSP requirement.

14. INVESTMENT PROPERTY

Investment property consists of various land and building acquired through foreclosure or dacion as payment of outstanding loans by the borrowers. A reconciliation of the carrying amounts at the beginning and end of 2009 and 2008, and the gross carrying amounts and the accumulated depreciation and impairment of investment property are as follows:

Consolidated Parent 2009 2008 2009 2008 Balance at January 1, net of accumulated depreciation and impairment P 7,387,613 P 7,761,435 P 3,500,460 P 3,887,545 Additions 1,825,943 1,338,653 222,812 563,040 Disposal ( 777,449) ( 1,338,863 ) ( 327,503) ( 886,704 ) Reclassification to investment in subsidiaries ( 3,092,154) - ( 388,431) - Write-off ( 25,895) ( 244,779) ( 25,365) - Depreciation and impairment charges for the year ( 251,515) ( 128,833 ) ( 108,708) ( 63,421 ) Balance at December 31, net of accumulated depreciation and impairment P 5,066,543 P 7,387,613 P 2,873,265 P 3,500,460

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Consolidated Parent 2009 2008 2009 2008

December 31

Cost P 6,546,189 P 9,013,278 P 3,661,410 P 4,354,687 Accumulated depreciation and impairment (see Note 16) ( 1,479,646) ( 1,625,665) ( 788,145) ( 854,227 ) Net carrying amount P 5,066,543 P 7,387,613 P 2,873,265 P 3,500,460

The fair value of investment property as of December 31, 2009 and 2008, based on the available appraisal values, amounted to P8,978,128 and P11,025,506, respectively, for the Group; and P5,484,871 and P5,670,707, respectively, for the Parent Company. On May 25, 2009, the BOD of the Parent Company approved the reclassification of its investment in NPHI with carrying amount of P388,431 from Investment Property account to Investments in Subsidiaries and Associates account (see Note12) in accordance with BSP Circular No. 520. This resulted into the consolidation of NPHI’s assets, liabilities and net income in the Group’s financial statements as of and for year ended December 31, 2009. In November 2003, RSB entered into a memorandum of Agreement (MOA) with certain borrowers for the settlement of their indebtedness with RSB amounting to P4.1 billion through dacion of certain real properties. Under the MOA, the transfer of the properties may be effected through the creation of special purpose companies (SPCs). On June 17, 2004, RSB entered into another MOA setting the guidelines in creating the SPC as well as the ultimate assignment to RSB of the shares of stock of the SPCs. On various dates in 2005 and 2004, certain SPCs were incorporated and created, covering certain real properties with carrying values of P2,472,830 and P1,938,234 in 2005 and 2004, respectively, being assigned to the SPCs. Moreover, the shares of stock of certain SPCs were transferred to RSB in 2005 and 2004. In 2008, the remaining properties covered by the MOA have been transferred to specific SPCs, and the ultimate assignment of the corresponding shares of stock of these specific SPCs to RSB has been effected. There were no new SPCs that were incorporated nor shares of stock that were transferred to RSB in 2006 to 2009. Prior to 2009, the real properties, although assigned to the incorporated SPCs or will be incorporated SPCs, are recognized by RSB as part of Investment Property on the basis that the SPCs are merely transitory holders of the assets while RSB is looking for ways to eventually dispose of such assets. This treatment is consistent with the letter of the BSP to RSB in 2005 which emphasized that the dacioned properties be recorded as ROPA-Real Properties, and which were subsequently reclassified as Investment Property when RSB transitioned to PFRS. However, in 2009, in accordance with another letter received by RSB from the BSP dated March 26, 2009, RSB reclassified these investment property to equity investments, subject to the following conditions: (i) RSB should immediately dissolve the SPCs once the underlying dacioned real property assets are sold or disposed; and, (ii) the equity investments in the SPCs shall be disposed of within a reasonable period not beyond October 5, 2012. The reclassification resulted into consolidation of the SPCs in the Group’s financial statements. Accordingly, the assets, liabilities, income and expenses of the SPCs were consolidated in the Group’s financial statements as of and for the year ended December 31, 2009.

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In its meeting on February 19, 2007, the BOD of RSB approved the sale of certain NPAs to Innovative Property Solutions, Inc. (IPSI), a corporation duly organized and existing under Philippine laws. An Asset Sale Agreement was executed by both parties on February 26, 2007 to formalize the sale of the NPAs. Subsequently, in a separate Accession Agreement dated July 16, 2007, IPSI assigned all its rights and obligations as the purchaser in the aforementioned Asset Sale Agreement to NPRMI, an SPV entity. The BSP approved and issued on August 28, 2007 the certificate of eligibility of the NPAs under the SPV Act of 2002 and transfer/sale of the assets to NPRMI. In November 2008, RSB completed the obligations as stated under the Asset Sale Agreement and Accession Agreement to fully consummate the transaction and in accordance with the provisions of RA No. 9182 (the SPV Act) and BSP Resolution No. 135, recognized the aforementioned sale. The significant terms and conditions of the “asset sale” agreement follow:

• The SPVs shall issue 10-year subordinated/SPV notes in exchange for the NPLs

transferred. The issuance of the subordinated/SPV notes constitutes full settlement for the NPLs transferred.

• The subordinated/SPV notes are subordinated in priority of payment to the senior

notes and any other working capital notes of the SPV. • The amount and schedule of payment of the subordinated/SPV notes shall be

contingent and dependent on the amount and timing of collections to be made by the SPVs on the NPLs transferred, subject to the rights and privileges of the SPV’s other creditors.

In consideration of the sale, RSB received cash amounting to P347 and subordinated note with a face value of P60,097. One of the significant conditions stated in the terms of the subordinated/SPV notes from NPRMI is that the amount and timing of payment of the subordinated/SPV notes are dependent on the collections to be made by NPRMI on the NPAs transferred. RSB initially recognized the subordinated note as AFS securities amounting to P60,097 but subsequently provided an allowance for impairment for the entire amount.

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15. OTHER RESOURCES Other resources consist of the following:

Consolidated Parent 2009 2008 2009 2008 Deferred charges - net (see Note 11.2) P 7,359,991 P 8,094,653 P 7,359,991 P 8,094,653 Real estate properties for sale 2,698,942 - - - Foreign currency notes and coins on hand 1,148,555 1,701,866 1,018,118 1,494,082 Goodwill - net 425,985 426,635 - - Branch licenses 264,429 - - - Prepaid expenses 247,770 510,866 201,018 457,683 Returned checks and other cash items 154,843 168,469 154,776 168,465 Assets held-for-sale 141,195 - - - Inter-office float items 100,457 59,721 228,399 187,909 Unused stationery and supplies 91,459 154,954 90,503 153,843 Miscellaneous checks and other cash items 12,877 20,492 12,854 20,487 Miscellaneous (see Note 25) 928,935 919,987 543,869 372,429 13,575,438 12,057,643 9,609,528 10,949,551 Accumulated depreciation ( 11,419) ( 15,270 ) ( 11,419 ) ( 15,270) Allowance for impairment (see Note 16) ( 153,975) ( 150,280 ) ( 122,763 ) ( 116,733) P 13,410,044 P 11,892,093 P 9,475,346 P 10,817,548

Deferred charges mainly represent the unamortized balance of the required additional allowance for impairment and losses as determined from the asset exchanges of the Parent Company’s NPAs to certain SPVs; these are amortized over a period of 10 years in accordance with BSP Resolution No. 135 (see Note 11.2). In addition, this account also includes the cost of software, net of accumulated amortization. The following shows the movement in the Group’s Deferred Charges account.

Consolidated Parent 2009 2008 2009 2008 Balance at beginning of year P 8,094,653 P 9,167,132 P 8,094,653 P 9,167,132 Additions 187,057 167,089 187,057 167,089 Amortization/disposals ( 921,719 ) ( 1,239,568 ) ( 921,719 ) ( 1,239,568 ) Balance at end of year P 7,359,991 P 8,094,653 P 7,359,991 P 8,094,653

The total amortization pertaining to SPVs amounted to P834,633 and P745,342 for the years ended December 31, 2009 and 2008, respectively. The Parent Company charged the amortization for the year ended December 31, 2009 against Surplus. On the other hand, out of the total amortization of P745,342 for the year ended December 31, 2008, P536,684 was charged against the “freed” allowance for impairment while P208,658 was charged to profit or loss (see Note 11). The total amortization pertaining to the computer software amounted to P51,726, P42,247 and P34,067 for the years ended December 31, 2009, 2008 and 2007, respectively, both for the Group and Parent Company’s financial statements, respectively.

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Real estate properties for sale represent those properties held by SPCs that were consolidated to the Group’s statement of financial position as of December 31, 2009 (see Note 14). On May 14, 2009, BSP approved the Parent Company’s acquisition of JPL under the terms and conditions specified under the Term Sheet dated February 12, 2009 and Addendum to Term Sheet dated February 13, 2009, executed by the Parent Company and JPL subject to certain conditions (see Note 12). As a result of this approval to acquire JPL through capital infusion over three years, the Parent Company recognized the excess of the total cost of investment over the allocated net assets of JPL amounting to P264,429 as Branch Licenses in its financial statements.

16. ALLOWANCE FOR IMPAIRMENT Changes in the allowance for impairment are summarized as follows: Consolidated Parent Notes 2009 2008 2009 2008 Balance at beginning of year Loans and receivables 11 P 7,943,278 P 9,935,036 P 4,943,286 P 5,812,828 Available-for-sale securities 10 811,207 779,304 811,207 779,304 Investment in subsidiaries and associates 12 52,500 52,500 252,500 252,500 Bank premises 13 18,911 - - -

Investment property 14 963,466 1,244,281 429,183 491,015 Other resources 15 150,280 369,225 116,733 174,553 9,939,642 12,380,346 6,552,909 7,510,200

Provisions during the year 2,329,616 2,053,033 1,683,463 1,830,597 Recovery of impairment losses ( 86,424 ) ( 1,054,541 ) - ( 1,000,000) Charge-offs during the year ( 2,319,269 ) ( 3,439,196 ) ( 1,725,610) ( 1,787,888) Balance at end of year

Loans and receivables 11 7,465,624 7,943,278 4,433,774 4,943,286 Available-for-sale securities 10 1,336,264 811,207 1,276,157 811,207 Investment in subsidiaries and associates 12 52,500 52,500 252,500 252,500 Bank premises 13 - 18,911 - -

Investment property 14 855,202 963,466 425,568 429,183 Other resources 15 153,975 150,280 122,763 116,733 P 9,863,565 P 9,939,642 P 6,510,762 P 6,552,909

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17. DEPOSIT LIABILITIES

The following is the breakdown of deposit liabilities: Consolidated Parent 2009 2008 2009 2008 Demand P 11,034,257 P 11,125,069 P 8,535,205 P 8,392,524 Savings 93,571,654 75,738,446 81,165,706 66,269,393 Time 115,671,983 109,363,471 90,852,468 84,267,161 P 220,277,894 P 196,226,986 P 180,553,379 P 158,929,078 The maturity profile of the deposit liabilities follow: Consolidated Parent 2009 2008 2009 2008 Within one year P 212,118,663 P 191,875,263 P 176,370,989 P 158,739,468 Beyond one year, within five years 8,158,163 4,351,723 4,182,390 189,610 Beyond five years 1,068 - - - P 220,277,894 P 196,226,986 P 180,553,379 P 158,929,078

Deposit liabilities are in the form of savings, demand and time deposit accounts with annual interest rates of 0.5% to 4.5% in 2009, 0.5% to 5% in 2008 and 0.5% to 4.25% in 2007. Deposit liabilities are stated at amounts they are to be paid which approximate the market value.

Under existing BSP regulations, non-FCDU deposit liabilities of the Group are subject to liquidity reserves and statutory reserves equivalent to 11% and 8%, respectively, as of December 31, 2009 and 2008. As of December 31, 2009 and 2008, the Group is in compliance with such regulations. Available reserves as of December 31, 2009 and 2008 follow:

Consolidated Parent 2009 2008 2009 2008 Cash and other cash items P 7,748,975 P 6,409,809 P 6,355,743 P 5,215,356 Due from BSP 5,272,834 4,240,275 4,056,075 3,535,622 Reserve deposit account (BSP) 13,513,000 11,797,000 13,513,000 11,797,000 Available-for-sale securities 550,462 553,498 550,462 110,361 Securities purchased under reverse repurchase agreement 71,000 25,000 - - P 27,156,271 P 23,025,582 P 24,475,280 P 20,658,339

On September 30, 2009, the Parent Company issued US$85 million worth of US$-denominated Negotiable Certificates of Time Deposits (“September NCTD”). On October 19, 2009, the Parent Company issued a second offering worth US$13.2 million of US$-denominated NCTD (“October NCTD”). The September NCTD and the October NCTD carry a fixed annual interest rate of 3.75% per annum, payable quarterly until September 30, 2012. The NCTDs are presented as part of the Time Deposit Liabilities account in both the Group and Parent Company financial statements.

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18. BILLS PAYABLE

This account consists of borrowings from:

Consolidated Parent 2009 2008 2009 2008 Foreign banks P 8,003,907 P 12,842,101 P 8,003,907 P 12,842,101 BSP 2,130,456 7,925,719 2,130,456 7,925,719 Local banks 539,560 - 293,769 523,142 Others 107,041 684,789 107,041 119,125 P 10,780,964 P 21,452,609 P 10,535,173 P 21,410,087

The maturity profile of bills payable follows:

Consolidated Parent 2009 2008 2009 2008 Within one year P 8,972,993 P 21,388,718 P 8,727,202 P 21,381,630 Beyond one year, within five years 1,807,971 63,891 1,807,971 28,457 P 10,780,964 P 21,452,609 P 10,535,173 P 21,410,087

Borrowings with foreign and local banks are mainly short-term in nature. In the consolidated financial statements, peso borrowings are subject to annual fixed interest rates ranging from 4.75% to 5.5% in 2009 and 5% to 12% in 2008 and 2007, while foreign currency-denominated borrowings are subject to annual fixed interest rates ranging from 0.10% to 3.18% in 2009, 0.25% to 5% in 2008 and 2% to 8.41% in 2007. In the Parent Company financial statements, peso borrowings are subject to annual fixed interest rates ranging from 3.50% to 4.75% in 2009, 5% to 6.7% in 2008 and 5% to 12% in 2007, while foreign currency-denominated borrowings are subject to annual fixed interest rates ranging from 0.10% to 3.18% in 2009, 0.25% to 5% in 2008 and 2% to 8.41% in 2007. The interest rates on bills payable maturing beyond one year are repriced semi-annually at effective market interest rates. Bills payable include rediscounting availments from the BSP amounting to P2,130,456 and P7,925,719 as of December 31, 2009 and 2008, respectively, both in the consolidated and Parent Company financial statements. Such borrowings are collateralized by the assignment of certain loans amounting to P2,354,515 and P10,729,055 as of December 31, 2009 and 2008, respectively, both in the consolidated and Parent Company financial statements (see Note 11).

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19. BONDS PAYABLE On February 23, 2005, the Parent Company issued to local and foreign entities (excluding those in the United States of America) unsecured bonds (Global Notes) with a principal amount of US$150,000 at an issue price of 99.67% and bearing an interest of 6.875% per annum. The Global Notes, unless previously redeemed or cancelled, will be redeemed on February 24, 2010. The Parent Company, at the option of the holder of the Global Notes, redeemed portion of the Global Notes with principal amount of US$10,678 on February 23, 2008. Interest is payable semi-annually in arrears on February 23 and August 23 of each year commencing on August 23, 2005, except that the last payment of the interest will be on February 24, 2010. As of December 31, 2009 and 2008, the peso equivalent of the outstanding bond issue amounted to P5,836,076 and P6,002,821, respectively. In February 2010, the outstanding principal balance of US$139,322 was fully redeemed. Also, in February 2010, the Parent Company issued US$ denominated Senior Notes with principal amount of US$250,000 bearing an interest of 6.25% per annum, payable semi-annually in arrears on February 9 and August 9 of each year, commencing on August 9, 2010. The Senior Notes, unless redeemed, will mature on February 9, 2015.

20. ACCRUED TAXES, INTEREST AND OTHER EXPENSES The composition of this account follows:

Consolidated Parent 2009 2008 2009 2008 Accrued expenses P 1,364,718 P 1,056,690 P 916,753 P 722,290 Accrued interest payable 869,539 1,055,671 801,318 929,048 Taxes payable 179,686 69,172 77,585 17,843 Others 835,911 605,923 530,486 306,871 P 3,249,854 P 2,787,456 P 2,326,142 P 1,976,052

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21. OTHER LIABILITIES

Other liabilities consist of the following:

Consolidated Parent 2009 2008 2009 2008 Accounts payable P 2,260,356 P 2,788,020 P 1,660,398 P 2,024,610 Bills purchased - contra 1,790,172 1,675,239 1,790,172 1,675,239 Manager’s checks 703,662 643,652 485,163 433,551 Derivatives with negative fair values (see Note 8) 703,604 329,505 703,604 329,505 Unearned income 399,336 518,400 399,282 518,400 Outstanding acceptances payable 250,421 318,908 250,421 318,908 Other credits 161,555 154,426 137,330 125,268 Payment orders payable 120,115 196,071 89,101 151,212 Withholding taxes payable 114,918 125,103 89,671 96,634 Guaranty deposits 91,674 60,369 91,674 60,369 Sundry credits 39,793 23,741 39,777 23,651 Due to BSP 24,179 107,923 24,179 93,365 Due to other banks 21,042 1,452 21,042 1,452 Miscellaneous 218,069 278,902 107,765 105,646 P 6,898,896 P 7,221,711 P 5,889,579 P 5,957,810 22. SUBORDINATED DEBT

On November 26, 2007, the Parent Company’s BOD approved the issuance of P7 billion unsecured subordinated notes (the “P7 billion Notes”) with the following significant terms and conditions: a. The P7 billion Notes shall mature on February 22, 2018, provided that they are not

previously redeemed. b. Subject to satisfaction of certain regulatory approval requirements, the Parent

Company may, on February 22, 2013, redeem all of the outstanding notes at redemption price equal to 100% of the face value of the P7 billion Notes together with accrued and unpaid interest thereon.

c. The P7 billion Notes bear interest at the rate of 7% per annum from

February 22, 2008 and shall be payable quarterly in arrears at the end of each interest period on May 22, August 22, November 22 and February 22 each year.

d. Unless the P7 billion Notes are previously redeemed, the interest rate from 2013 to 2018 will be reset at the equivalent of the five-year Fixed Rate Treasury Note benchmark bid yield as of February 22, 2013 multiplied by 80% plus 3.53% per annum. Such stepped-up interest shall be payable quarterly commencing 2013.

The P7 billion Notes were issued on February 22, 2008 and were fully subscribed. The

carrying amount of the P7 billion Notes amounted to P6,954,332 and P6,941,899 as of December 31, 2009 and 2008, respectively.

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On January 26, 2009, the Parent Company’s BOD approved another issuance of P4 billion unsecured subordinated notes (the “P4 billion Notes”) with the following significant terms and conditions: a. The P4 billion Notes shall mature on May 15, 2019, provided that they are not

previously redeemed. b. Subject to satisfaction of certain regulatory approval requirements, the Parent

Company may, on May 15, 2014, redeem all of the outstanding notes at redemption price equal to 100% of the face value of the P4 billion Notes together with accrued and unpaid interest thereon.

c. The P4 billion Notes bear interest at the rate of 7.75% per annum from

May 15, 2009 and shall be payable quarterly in arrears at the end of each interest period on August 15, November 15, February 15 and May 15 each year.

d. Unless the P4 billion Notes are previously redeemed, the interest rate from

May 15, 2014 to May 15, 2019 will be increased to the rate equivalent to 80% of benchmark rate as of the first day of the 21st interest period plus the step-up spread. Such stepped up interest shall be payable quarterly in arrears.

The P4 billion Notes were issued on May 15, 2009 and were fully subscribed. The carrying amount of the P4 billion Notes amounted to P3,972,646 as of December 31, 2009.

The subordinated debt is measured at amortized cost at each statement of financial position date.

23. CAPITAL FUNDS

23.1 Capital Stock

Capital stock consists of (amounts and shares in thousands, except per par value): Shares 2009 2008 2007 Preferred stock – voting, non-cumulative non-redeemable, participating, convertible into common shares – P10 par value Authorized – 200 million shares Issued and outstanding 20,704 85,934 85,951 Common stock – P10 par value Authorized – 1,100 million shares Issued and outstanding 990,551 962,843 962,837

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Amount 2009 2008 2007 Preferred stock – voting, non-cumulative non-redeemable, participating, convertible into common shares – P10 par value Authorized – 200 million shares Issued and outstanding P 207,038 P 859,335 P 859,512 Common stock – P10 par value Authorized – 1,100 million shares Issued and outstanding P 9,905,508 P 9,628,430 P 9,628,369

On January 22, 2007, the Parent Company stockholders, owning or representing more than 2/3 of the outstanding capital stock, unanimously confirmed and ratified the approval by the majority of the BOD held on December 4, 2006, the increase of the Parent Company’s authorized capital stock from P9,000,000 to P13,000,000, by amending its Articles of Incorporation. The increase in authorized capital stock of the Parent Company was approved by the BSP and SEC on February 12, 2007 and March 8, 2007, respectively. The authorized capital stock of the Parent Company of P13 billion is divided into the following classes of shares:

a. One billion one hundred million (1,100 million) common shares of stock with

par value of ten pesos (P10.00) per share; and,

b. Two hundred million (200 million) preferred shares of stock with par value of ten pesos (P10.00) per share.

On March 29, 2007 and April 13, 2007, the Parent Company issued additional shares from its unissued common shares with total par value amounting to P1,826,087 and P273,913, respectively. The corresponding additional paid-in capital on the additional issuances of shares amounted to P3,362,275. On May 29, 2006, the Parent Company’s stockholders approved the issuance of up to 200,000 thousand convertible preferred shares with a par value of P10 per share, subject to the approval, among others of the PSE. The issuance of the convertible preferred shares was also approved by the Parent Company’s stockholders on May 29, 2006. The purpose of the issuance of the preferred shares is to raise the Tier 1 capital pursuant to BSP regulations, thereby strengthening the capital base of the Parent Company and allowing it to expand its operations. On February 13, 2007, the PSE approved the listing application of the underlying common shares for the 105,494 thousand convertible preferred shares, subject to the compliance of certain conditions of the PSE. Preferred shares have the following features: a. Entitled to dividends at floating rate equivalent to the applicable base rate plus a

spread of 2% per annum, calculated quarterly;

b. Convertible to common stocks at any time after the issue date at a conversion price using the adjusted net book value per share of the Parent Company based on the latest available financial statements prepared in accordance with PFRS adjusted by local regulations;

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c. Non-redeemable; and,

d. Participating as to dividends on a pro rata basis with the common stockholders in the Surplus of the Parent Company after quarterly dividends payments had been made to the preferred shares.

In 2009, P652 million or 65 thousand preferred shares were converted to 27.7 thousand common shares. In 2008, P0.20 million or 17.7 thousand preferred shares were converted to 6 thousand common shares. Common shares may be transferred to Philippine and foreign nationals and shall, at all times, not be less than 60% and not more than 40% of the voting stock, be beneficially owned by Philippine nationals and by foreign nationals, respectively. 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) required and reported to the BSP, determined on the basis of regulatory accounting policies, which differ from PFRS in some aspects. Specifically, under existing banking regulations, the combined capital accounts of the Parent Company should not be less than an amount equal to 10% of its risk assets. A portion of the Group’s surplus corresponding to the undistributed income of subsidiaries and equity in net earnings of certain associates totaling P1,813,912, P1,450,528, and P1,216,532 as of December 31, 2009, 2008 and 2007, respectively, is not currently available for distribution as dividends. 23.2 Declaration of Stock Dividends The shareholders confirmed and ratified the approval by the majority of the BOD during the December 4, 2006 meeting, of a 15% stock dividend corresponding to 109,413 thousand shares, to support the foregoing increase of authorized capital stock, payable to holders of common and preferred class shares of record as of March 14, 2007. The 15% stock dividend was approved by the BSP on January 26, 2007 and by the SEC on March 8, 2007, and was issued on March 19, 2007. Documentary stamp tax (DST) on the stock dividends amounting to P15,325 was deducted from capital paid in excess of par.

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23.3 Purchase of Treasury Shares On March 16, 2009, the BOD of the Parent Company approved the acquisition of 92,421,320 common shares and 18,082,311 convertible preferred shares at P15.20 per share and P10.00 per share, respectively. Total cost of purchasing the treasury shares including the buying charges and documentary stamp taxes incurred amounted to P1,594,925. On September 1, 2009, majority of the stockholders approved the reissuance of the 41,993,389 common treasury shares amounting to P642,216 in exchange for 5.64% ownership or 169,059 shares of stock in MICO Equities, Inc. (MICO) amounting to P734,884. The excess of the carrying amount of the investment in MICO over the cost of treasury stock re-issued amounting to P92,669 was recognized as part of Capital Paid in Excess of Par in the consolidated and Parent Company’s financial statements as of December 31, 2009. The remaining balance of the total cost of purchasing the treasury shares amounting to P952,709 was presented as Treasury Stock in the consolidated and Parent Company’s financial statements as of December 31, 2009. 23.4 Cash Dividend Declaration The details of the cash dividend declarations and distributions in 2009, 2008 and 2007 follow: Date Dividend Stockholders of Date Approved by Date Declared Per Share Total Amount Record as of BOD BSP Paid/Payable October 30, 2007 P 0.1829 P 15,054 December 21, 2007 October 30, 2007 January 4, 2008 January 10, 2008 January 28, 2008 P 0.1740 P 14,945 March 21, 2008 January 28, 2008 April 4, 2008 April 17, 2008 July 30, 2007 * P 207,572 * July 30, 2007 April 4, 2008 April 25, 2008 March 31, 2008 P 0.1177 P 10,671 June 21, 2008 March 31, 2008 June 19, 2008 July 3, 2008 March 31, 2008 P 0.4800 P 462,165 June 29, 2008 March 31, 2008 June 19, 2008 June 30, 2008 March 31, 2008 P 0.4800 P 41,248 June 29, 2008 March 31, 2008 June 19, 2008 June 30, 2008 June 30, 2008 P 0.1227 P 10,445 September 21, 2008 June 30, 2008 September 3, 2008 September 30, 2008 July 30, 2007 P * P 241,893 * July 30, 2007 September 3, 2008 October 24, 2008 September 29, 2008 P 0.1331 P 11,317 December 21, 2008 September 29, 2008 February 10, 2009 February 23, 2009 September 29, 2008 * P 239,123 * September 29, 2008 April 16, 2009 April 24, 2009 September 29, 2008 * P 232,038 * September 29, 2008 September 1, 2009 October 27, 2009 January 26, 2009 P 0.0881 P 5,978 December 31, 2008 January 26, 2009 April 16, 2009 May 8, 2009 March 30, 2009 P 0.0824 P 5,589 February 28, 2009 March 30, 2009 June 10, 2009 July 3, 2009 March 30, 2009 P 0.3060 P 20,762 March 11, 2009 March 30, 2009 June 10, 2009 July 13, 2009 March 30, 2009 P 0.3060 P 266,349 March 11, 2009 March 30, 2009 June 10, 2009 July 13, 2009 June 29, 2009 P 0.0667 P 4,526 May 31, 2009 June 29, 2009 September 1, 2009 September 10, 2009 September 28, 2009 P 0.0579 P 146 December 21, 2009 September 28, 2009 December 7, 2009 January 5, 2010 September 28, 2009 * P 228,113 * September 28, 2009 Pending Pending * Cash dividends on Hybrid perpetual securities

24. HYBRID PERPETUAL SECURITIES On October 30, 2006, the Parent Company received the proceeds from the issuance of Non-Cumulative Step-Up Callable Perpetual Securities (“Perpetual Securities”) amounting to US$98.045 million, net of fees and other charges. Net proceeds were used to strengthen the CAR of the Parent Company, repay certain indebtedness and, thereby, enhance its financial stability and for general corporate purposes. The issuance of the Perpetual Securities was approved by the Parent Company’s BOD on June 7, 2006.

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The Perpetual Securities represent US$100 million, 9.875%, non-cumulative step-up callable perpetual securities issued pursuant to a trust deed dated October 27, 2006 between the Parent Company and Bank of New York - London Branch each with a liquidation preference of US$1 thousand per US$1 thousand in principal amount of the Perpetual Securities. The actual listing and quotation of the Perpetual Securities in a minimum board lot size of US$1 hundred with the Singapore Exchange Securities Trading Limited (“SGX-ST”) was on November 1, 2006. The Perpetual Securities were issued pursuant to BSP Circular 503 dated December 22, 2005 allowing the issuance of perpetual, non-cumulative securities up to US$125 million which are eligible to qualify as Hybrid Tier 1 Capital. The significant terms and conditions of the issuance of the Perpetual Securities, among others, follow: • Interest will be paid from and including October 27, 2006 (the “issue date”) to

(but excluding) October 27, 2016 (the “First Optional Redemption Date”) at a rate of 9.875% per annum payable semi-annually in arrears from April 27, 2007 and, thereafter at a rate preset and payable quarterly in arrears, of 7.02% per annum (which incorporates a step-up in margin equal to 1% above the initial credit spread after adjusting for the applicable swap spread) above the then prevailing London interbank offered rate (“LIBOR”) for three-month US dollar deposits;

• Except as described below, interest will be payable on April 27 and October 27 in each year, commencing on April 27, 2007 and ending on the First Optional Redemption Date, and thereafter (subject to adjustment for days which are not business days) on January 27, April 27, July 27, October 27 in each year commencing on January 27, 2016;

• The Parent Company may, in its absolute discretion, elect not to make any interest payment in whole or in part if the Parent Company has not paid or declared a dividend on its common shares in the preceding financial year; or determines that no dividend is to be paid on such shares in the current financial year;

• The rights and claims of the holders will be subordinated to the claims of all senior creditors (as defined in the conditions) and the holders of any priority preference shares (as defined in the conditions), in that payments in respect of the securities are conditional upon the Parent Company being solvent at the time of payment and in that no payments shall be due except to the extent the Parent Company could make such payments and still be solvent immediately thereafter;

• The Perpetual Securities are not deposits of the Parent Company and are not guaranteed or insured by the Parent Company or any party related to the Parent Company or the Philippine Deposit Insurance Corporation and they may not be used as collateral for any loan made by the Parent Company or any of its subsidiaries or affiliates;

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• The Parent Company undertakes that, if on any Interest Payment Date payment of all Interest Payments scheduled to be made on such date is not made in full it shall not declare or pay any distribution or dividend or make any other payment on, and will procure that no distribution or dividend or other payment is made on, any junior share capital or any parity security, and it shall not redeem, repurchase, cancel, reduce or otherwise acquire any junior share capital or any parity securities, other than in the case of any partial interest payment, pro rata payments on, or redemptions of, parity securities the dividend and capital stopper shall remain in force so as to prevent the Parent Company from undertaking any such declaration, payment or other activity as aforesaid unless and until a payment is made to the holders in an amount equal to the unpaid amount (if any) of interest payments in respect of interest periods in the twelve months including and immediately preceding the date such interest payment was due and the BSP does not otherwise object; and,

• The Perpetual Securities will have fixed or final redemption date although the Parent Company may, having given not less than 30 nor more than 60 days’ notice to the Trustee, the Registrar, the Principal Paying Agent and the Holders, redeem all (but not some only) of the securities (i) on the first optional redemption date; and (ii) on each interest payment date thereafter, at an amount equal to the liquidation preference plus accrued interest.

25. EMPLOYEE BENEFITS

Expenses recognized for employee benefits are analyzed below.

Consolidated 2009 2008 2007 Salaries and wages P 1,730,326 P 1,580,233 P 1,436,465 Bonuses 505,734 442,669 416,427 Retirement - defined benefit plan 142,050 145,566 151,015 Compensated absences 92,265 83,847 78,250 Social security costs 74,345 68,739 65,477 Other short-term benefits 234,516 203,902 236,764 P 2,779,236 P 2,524,956 P 2,384,398 Parent 2009 2008 2007 Salaries and wages P 1,067,277 P 970,772 P 905,528 Bonuses 369,027 338,112 315,513 Retirement - defined benefit plan 125,882 115,610 107,394 Compensated absences 90,264 82,628 76,475 Social security costs 49,333 45,975 44,671 Other short-term benefits 162,788 129,090 190,574 P 1,864,571 P 1,682,187 P 1,640,155

The Parent Company and its subsidiaries maintain a tax-qualified, noncontributory

retirement plan that is being administered by a trustee covering all of their respective regular full-time employees.

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The amounts of retirement benefit asset (presented as part of Other Resources - Miscellaneous) recognized in the financial statements (see Note 15) are determined as follows:

Consolidated Parent 2009 2008 2009 2008 Fair value of plan assets P 1,761,844 P 1,167,540 P 1,323,988 P 772,209 Present value of the obligation 1,958,428 1,257,968 1,578,981 993,323 Excess of obligation ( 196,584) ( 90,428) ( 254,993 ) ( 221,114 ) Addition (reduction) due to ceiling 176 ( 2,665 ) - - Unrecognized actuarial losses 267,511 168,676 295,427 257,339 Retirement benefit asset P 71,103 P 75,583 P 40,434 P 36,225

The movements in the present value of the retirement benefit obligation recognized in the books are as follows:

Consolidated Parent 2009 2008 2009 2008 Balance at the beginning of year P 1,257,968 P 1,826,186 P 993,323 P 1,516,414 Current service cost and interest cost 222,910 234,271 167,649 175,221 Actuarial losses (gains) 615,388 ( 596,644 ) 553,367 ( 501,823) Benefits paid by the plan ( 137,838) ( 205,845 ) ( 135,358 ) ( 196,489) Balance at end of the year P 1,958,428 P 1,257,968 P 1,578,981 P 993,323

The movements in the fair value of plan assets are presented below.

Consolidated Parent 2009 2008 2009 2008 Balance at the beginning of year P 1,167,540 P 1,670,105 P 772,209 P 1,352,252 Actuarial gains (losses) 515,045 ( 624,621 ) 508,409 ( 612,591 ) Expected return on plan assets 80,897 110,963 48,637 83,841 Contributions paid into the plan 136,200 216,938 130,091 145,196 Benefits paid by the plan ( 137,838) ( 205,845 ) ( 135,358 ) ( 196,489 ) Balance at end of the year P 1,761,844 P 1,167,540 P 1,323,988 P 772,209

The plan assets consist of the following:

Consolidated Parent 2009 2008 2009 2008 Assets Equity securities P 1,393,654 P 918,136 P 1,296,503 P 906,877 Government securities 571,444 461,955 353,680 276,047 Deposit with banks 127,047 181,944 48,670 26,349 Loans and receivables 78,213 47,456 75,811 27,848 Unit investment trust fund 53,242 30,000 53,242 30,000 ROPA 19,046 35,906 19,046 35,905 Long-term equity investments - 44,220 - 44,220 Other investments 62,183 23,496 20,000 - 2,304,829 1,743,113 1,866,952 1,347,246 Liabilities 542,985 575,573 542,964 575,037 P 1,761,844 P 1,167,540 P 1,323,988 P 772,209

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Actual return on plan assets were P596 million and P557 million in 2009, while actual loss on plan assets were P513 million and P529 million in 2008, for the Group and the Parent Company, respectively.

The amounts of retirement benefit expense recognized as part of Employee Benefits account in the statements of income are as follows:

Consolidated 2009 2008 2007 Current service costs P 83,254 P 83,301 P 122,242 Interest costs 140,674 151,536 113,002 Expected return on plan assets ( 80,897) ( 110,963) ( 108,191) Net transition obligation recognized - 24,232 24,232 Retirement expense (income) due to ceiling ( 2,489) 1,048 1,161 Net actuarial losses (gains) recognized during the year 1,508 ( 3,588) ( 1,431) Retirement benefits P 142,050 P 145,566 P 151,015 Parent 2009 2008 2007 Current service costs P 56,198 P 49,205 P 82,315 Interest costs 111,451 126,014 91,286 Expected return on plan assets ( 48,637) ( 83,841) ( 84,782) Net transition obligation recognized - 24,232 24,232 Net actuarial gains recognized during the year 6,870 - ( 5,657) Retirement benefits P 125,882 P 115,610 P 107,394

For determination of the pension liability, the following actuarial assumptions were used: Consolidated 2009 2008 2007 Discount rates 9.2% 11.2% 8.3% Expected rate of return on plan assets 6% 6.3% 6.3% Expected rate of salary increases 5% 2.5% 5% Parent 2009 2008 2007 Discount rates 9.2% 11.2% 8.3% Expected rate of return on plan assets 6% 6.3% 6.3% Expected rate of salary increases 5% 2.5% 5%

26. LEASE CONTRACTS

The Parent Company and certain subsidiaries lease some of the premises occupied by their respective branches/business centers. The Group’s rental expense (included in Occupancy and Equipment-related account in the statements of income) based on the lease contracts amounted to P541,825 in 2009, P477,383 in 2008 and P440,943 in 2007, of which P430,385 in 2009, P374,226 in 2008 and P363,779 in 2007 and pertains to the Parent Company. The lease periods are from 1 to 25 years. Most of the lease contracts contain renewal options, which give the Parent Company and its subsidiaries the right to extend the lease on terms mutually agreed upon by the parties.

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As of December 31, 2009, future minimum rentals payable under non-cancelable operating leases follow:

Consolidated Parent Within one year P 570,369 P 498,757 After one year but not more than five years 745,110 562,639 More than five years 242,181 220,446 P 1,557,660 P 1,281,842 27. MISCELLANEOUS EXPENSES

Miscellaneous expenses consist of the following:

Consolidated 2009 2008 2007 Insurance P 511,587 P 469,135 P 409,200 Management and other professional fees 460,755 433,967 340,055 Litigation/Assets acquired expense 420,765 479,199 323,089 Transportation and travel 328,538 354,705 236,527 Communication and information services 301,824 247,341 235,461 Other credit card related expenses 265,385 234,880 200,015 Advertising and publicity 260,436 263,808 396,475 Other outside services 165,943 135,859 117,071 Stationery and office supplies 116,761 112,095 146,576 Banking fees 101,028 85,715 78,741 Depreciation – investment property 89,448 111,085 79,018 Service charges 59,102 48,201 32,156 Others 565,143 430,733 394,087 P 3,646,715 P 3,406,723 P 2,988,471 Parent 2009 2008 2007 Management and other professional fees P 411,912 P 394,737 P 333,475 Insurance 375,438 347,205 306,053 Litigation/Assets acquired expense 315,458 401,435 234,940 Other credit card related expenses 265,385 234,880 200,015 Communication and information services 207,096 156,203 151,421 Advertising and publicity 188,554 190,171 365,956 Transportation and travel 165,976 167,019 164,856 Banking fees 92,341 85,715 78,741 Stationery and office supplies 81,017 79,099 75,238 Other outside services 67,042 69,746 49,507 Service charges 59,102 48,201 32,156 Depreciation – investment property 43,579 63,421 65,518 Others 383,367 350,389 340,059 P 2,656,267 P 2,588,221 P 2,397,935

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28. INCOME AND OTHER TAXES

Under Philippine tax laws, the Parent Company and its domestic subsidiaries are subject to percentage and other taxes (presented as Taxes and Licenses in the statement of income), as well as income taxes. Percentage and other taxes paid consist principally of the gross receipts tax (GRT) and DST. In 2003, the Parent Company and its financial intermediary subsidiaries were subjected to the value-added tax (VAT) instead of GRT. However, effective January 1, 2004 as prescribed under RA No. 9238, the Parent Company and certain subsidiaries were again subjected to GRT instead of VAT. RA No. 9238, which was enacted on February 10, 2004, provides for the reimposition of GRT on banks and non-bank financial intermediaries performing quasi-banking functions and other non-bank financial intermediaries beginning January 1, 2004. The liability of the Parent Company and certain subsidiaries for GRT is based on the related regulations issued by the authorities. Income taxes include the corporate income tax discussed below, and final tax paid at the rate of 20%, which represents the final withholding tax on gross interest income from government securities and other deposit substitutes. Under the tax regulations, the regular corporate income tax rate (RCIT) applicable is 32% up to October 31, 2005 and 35% up to December 31, 2008. Effective January 1, 2009, in accordance with RA No. 9337, RCIT was reduced from 35% to 30% and nonallowable deductions for interest expense from 42% to 33% of interest income subjected to final tax. Effective July 2008, RA No. 9504 was approved giving corporate taxpayers an option to claim itemized deduction or optional standard deduction equivalent to 40% of gross sales. Once the option is made, it shall be irrevocable for the taxable year for which the option was made. In 2009 and 2008, the Group opted to continue claiming itemized deductions.

Interest allowed as a deductible expense is reduced by an amount equivalent to certain percentage of interest income subjected to final tax. Minimum corporate income tax (MCIT) of 2% on modified gross income is computed and compared with the RCIT. Any excess of the MCIT over the RCIT is deferred and can be used as a tax credit against future income tax liability for the next three years. In addition, the Group net operating loss carry over (NOLCO) is allowed as a deduction from taxable income in the next three years. In accordance with the Revenue Regulation (RR) No. 09-05 relative to the tax exemptions and privileges granted under the SPV Act, the losses incurred by the Group as a result of transferring its NPA to an SPV within the period of 2 years from April 12, 2003 shall be carried over as a deduction from its taxable gross income for a period of 5 consecutive taxable years. On December 29, 2009, the Parent Company received a certification from BIR that the exchange of shares between the Parent Company (41,993,389 common treasury shares) and PMMIC (169,059 shares of stock in MICO) is a tax-free exchange in accordance with Revenue Regulations No. 18-2001 (see Note 23).

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Effective May 2004, RA No. 9294 restored the tax exemption of FCDUs and offshore banking units (OBUs). Under such law, the income derived by the FCDU from foreign currency transactions with nonresidents, 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% gross income tax. Interest income on deposits with other FCDUs and offshore banking units is subject to 7.5% final tax. The Parent Company’s foreign subsidiaries are subject to income and other taxes based on the enacted tax laws of the countries where they operate. The components of tax expense as reported in statements of income consist of:

Consolidated 2009 2008 2007 Current Final withholding tax P 450,566 P 480,272 P 473,421 RCIT 196,647 95,833 102,667 MCIT 97,702 88,619 87,754 Deferred tax expense (income) ( 495 ) 254,700 181,808 Tax expense reported in the statements of income P 744,420 P 919,424 P 845,650 Parent 2009 2008 2007 Current Final withholding tax P 367,207 P 444,858 P 455,622 RCIT 53,837 43,870 - MCIT 97,986 79,992 87,754 Tax expense reported in the statements of income P 519,030 P 568,720 P 543,376

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A reconciliation of tax on pretax income computed at the applicable statutory rates to tax expense reported in the statements of income is as follows:

Consolidated 2009 2008 2007 Statutory income tax at 30% in 2009 and 35% in 2008 and 2007 P 1,224,036 P 1,082,385 P 1,431,258 Adjustments for income subjected to lower income tax rates ( 91,273) ( 33,873 ) 6,596 Tax effects of: Unrecognized temporary differences 321,449 ( 117,428 ) 221,193 Non-deductible expenses 231,533 349,017 229,489 Non-taxable income ( 1,097,760) ( 247,305 ) ( 828,917) Application of unrecognized MCIT ( 991) - - Application of unrecognized NOLCO ( 986) - - Decrease in deferred tax assets due to reduction in RCIT rate - 276 - Others 158,412 ( 113,648) ( 213,969) Tax expense reported in the statements of income P 744,420 P 919,424 P 845,650 Parent 2009 2008 2007 Statutory income tax at 30% in 2009 and 35% in 2008 and 2007 P 927,346 P 608,661 P 868,954 Adjustments for income subjected to lower income tax rates ( 46,856) ( 42,856) ( 2,382 ) Tax effects of: Unrecognized temporary differences 335,107 ( 62,429) 251,312 Non-deductible expenses 148,577 245,463 215,293 Non-taxable income ( 845,144) ( 180,119) ( 602,385) Application of unrecognized NOLCO - - ( 187,416) Tax expense reported in the statements of income P 519,030 P 568,720 P 543,376

The components of deferred tax assets - net as of December 31 follow: Consolidated Parent 2009 2008 2009 2008 Allowance for impairment P 1,407,407 P 1,391,302 P 1,389,497 P 1,389,497 Unamortized past services costs 599 1,100 - - Retirement benefits 539 - - - Unrealized foreign exchange losses 132 - - - Accrued rent 68 99 - - Gain on rediscounting ( 443) ( 799) - - Accounts receivable - 7 - - P 1,408,302 P 1,391,709 P 1,389,497 P 1,389,497

The Group did not set up deferred tax liabilities on accumulated translation adjustment, particularly those relating to its foreign subsidiaries, since their reversal can be controlled, and it is probable that the temporary difference will not reverse in the foreseeable future.

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In light of the provision of PAS 12 Income Taxes, the Parent Company and certain subsidiaries have taken a conservative position by not recognizing deferred tax assets (liabilities) on certain temporary differences. Accordingly, the Group did not set up the net deferred tax assets on the following temporary differences:

Consolidated Parent 2009 2008 2009 2008 NOLCO P 4,587,890 P 10,319,892 P 4,471,011 P 10,217,785 Allowance for impairment 4,924,425 6,375,047 1,657,150 1,538,670 MCIT 274,075 269,546 265,732 208,540 Unamortized past service cost 271,802 299,604 268,129 290,457 Loss on revaluation 2,709 421 - - Retirement liability 423 38,964 - - Accrued rent 8 31 - - Unrealized foreign exchange gains ( 1,496) ( 4,973) - - P 10,059,836 P 17,298,532 P 6,662,022 P 12,255,452

The breakdown of the Group’s NOLCO, which can be claimed as deduction from future taxable income within three years from the year the taxable loss was incurred and within five years from the year SPV losses were incurred, is shown below. Inception Used/ Expiry Year Amount Expired Balance Year 2005 P 3,629,720 P 568,324 P 3,061,396* 2010 2006 6,484,406 6,484,406 - 2009 2007 21,089 - 21,089 2010 2008 753,001 - 753,001 2011 2009 752,404 - 752,404 2012 P 11,640,620 P 7,052,730 P 4,587,890

*Refers to losses incurred from SPV transactions in 2005. The breakdown of the Parent Company’s NOLCO, which can be claimed as deduction from future taxable income within three years from the year the taxable loss was incurred and within five years from the year SPV losses were incurred, is shown below. Inception Expiry Year Amount Expired Balance Year 2005 P 3,629,720 P 568,324 P 3,061,396* 2010 2006 6,484,406 6,484,406 - 2009 2008 671,983 - 671,983 2011 2009 737,632 - 737,632 2012 P 11,523,741 P 7,052,730 P 4,471,011

*Refers to losses incurred from SPV transactions in 2005.

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As of December 31, 2009, the Group has MCIT of P274,705 that can be applied against RCIT for the next three consecutive years after the MCIT was incurred. The breakdown of MCIT with the corresponding validity periods follow: Inception Used/ Expiry Year Amount Expired Balance Year 2006 P 93,173 P 93,173 P - 2007 87,754 - 87,754 2010 2008 88,619 - 88,619 2011 2009 97,702 - 97,702 2012 P 367,248 P 93,173 P 274,075 The breakdown of the Parent Company’s MCIT with the corresponding validity periods follow: Inception Expiry Year Amount Expired Balance Year

2006 P 40,794 P 40,794 P - 2007 87,754 - 87,754 2010 2008 79,992 - 79,992 2011 2009 97,986 - 97,986 2012 P 306,526 P 40,794 P 265,732

29. TRUST OPERATIONS

Securities and properties (other than deposits) held by the Parent Company and RSB in fiduciary or agency capacities for their respective customers are not included in the accompanying financial statements, since these are not resources of the Parent Company and RSB. The Group’s total trust resources amounted to P52,448,850 and P46,945,928 as of December 31, 2009 and 2008, respectively. The Parent Company’s total trust resources amounted to P47,306,436 and P45,193,199 as of December 31, 2009 and 2008, respectively. In connection with the trust operations of the Parent Company and RSB, time deposit placements and government securities with a total face value of P 670,967 (Group) and P605,967 (Parent Company); and P860,667 (Group) and P769,715 (Parent Company) as of December 31, 2009 and 2008, respectively, are deposited with the BSP in compliance with existing trust regulations (see Notes 7 and 10). In compliance with existing BSP regulations, 10% of the Parent Company’s and RSB’s profit from trust business is appropriated to surplus reserve. This yearly appropriation is required until the surplus reserve for trust business equals 20% of the Parent Company’s and RSB’s regulatory capital. The surplus reserve is shown as Reserve for Trust Business in the statements of changes in capital funds.

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30. RELATED PARTY TRANSACTIONS 30.1 DOSRI In the ordinary course of business, the Group has loan transactions with each other, their other affiliates, and with certain DOSRIs. Under existing policies of the Group, these loans are made substantially on the same terms as loans to other individuals and business of comparable risks. Under current BSP regulations, the amount of individual loans to a DOSRI, 70% of which must be secured, should not exceed the amount of his deposit and book value of his investment in the Parent Company and/or any of its lending and nonbanking financial subsidiaries. In the aggregate, loans to DOSRIs, generally, should not exceed the total capital funds or 15% of the total loan portfolio of the Parent Company and/or any of its lending and nonbanking financial subsidiaries, whichever is lower. BSP Circular No. 423 dated March 15, 2004 amended the definition of DOSRI accounts. The following table shows information relating to the loans, other credit accommodations and guarantees classified as DOSRI accounts under regulations existing prior to said circular and new DOSRI loans, other credit accommodations and guarantees granted under said circular as of December 31, 2009 and 2008:

Consolidated Parent 2009 2008 2009 2008 Total outstanding DOSRI loans P 4,562,445 P 9,213,808 P 4,371,850 P 9,142,497 Percent of DOSRI accounts to total loans 2.76% 5.94% 4.18% 7.65% Percent of unsecured DOSRI accounts to total DOSRI accounts 5.03% 2.35% 4.92% 2.29% Percent of past due DOSRI accounts to total loans 0.32% - 0.50% - Percent of nonaccruing DOSRI accounts to total loans 0.32% - 0.50% -

30.2 Joint Development Agreement

On October 1, 2009, the Parent Company entered into a Joint Development Agreement (Agreement) with RSB, Bankard, Grepalife, MICO, and Hexagonland (all related parties, collectively referred to as the Consortium) and with the conformity of Goldpath, the parent company of Hexagonland, whereby the Consortium agreed to pool their resources and enter into an unincorporated joint venture arrangement for the construction and development of a high rise, mixed use commercial/office building which shall be referred to by the Consortium as the RCBC Savings Bank Building Project (the Project). The estimated cost for the Project is at P2,200,000.

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The Consortium shall share in the Project cost as follows: Type of Party Contribution % RSB Cash 36.59% Parent Company Cash 23.16% Hexagonland Land 17.42% Bankard Cash 13.89% MICO Cash 4.47% Grepalife Cash 4.47% 100%

Furthermore, within six months from the execution of the Agreement, RSB shall undertake to liquidate Goldpath and Hexagonland to acquire ownership of the land, thereby increasing the RSB’s share in the Project cost to 54.01%. As of December 31, 2009, RSB is still in the process of completing the requirements for the liquidation of Goldpath and Hexagonland.

The Group and the Parent Company’s initial cash contribution to the joint venture amounted to P64,791 and P40,499 as of December 31, 2009, respectively, and the land costing P315,000. The Group and Parent Company’s contributions are presented as part of the Bank Premises, Furniture, Fixtures and Equipment account in the Group and Parent Company’s statement of financial position (see Note 13). 30.3 Key Management Personnel Compensation The breakdown of key management personnel compensation follow:

Consolidated 2009 2008 2007 Short-term benefits P 154,414 P 186,231 P 159,410 Post-employment benefits 41,054 38,022 38,428 Termination benefits - 48 254 Other long-term benefits - 404 634 P 195,468 P 224,705 P 198,726

Parent 2009 2008 2007 Short-term benefits P 52,529 P 59,789 P 53,040 Post-employment benefits 41,054 37,421 37,946 P 93,583 P 97,210 P 90,986

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30.4 Lease Contract with RRC The Parent Company and certain subsidiaries occupy several floors of RCBC Plaza as leaseholders of RRC. Related rental expense reported in the consolidated and Parent Company financial statements amounted to P167,639 and P159,067 in 2009 and P163,027 and P156,063 in 2008, respectively, and is included as part of Occupancy and Equipment-related account in the statements of income. While advance rentals included as part of Deferred Charges under Other Resources in the statements of financial position amounted to P42,049 as of December 31, 2008 and nil as of December 31, 2009, both in the consolidated and Parent Company financial statements. The Parent Company’s lease contract with RRC is until December 31, 2010. 30.5 Deposits As of December 31, 2009 and 2008, certain related parties have deposits with the Parent Company.

31. COMMITMENTS AND CONTINGENCIES

In the normal course of operations of the Group, there are various outstanding commitments and contingent liabilities such as guarantees, commitments to extend credit, tax assessments, etc., which are not reflected in the accompanying financial statements. As at December 31, 2009, management does not anticipate losses from these transactions that will adversely affect the Group’s operations. Several suits and claims remain unsettled. In the opinion of management, the suits and claims, if decided adversely, will not involve sums with a material effect on the Parent Company and its subsidiaries’ financial position or operating results. The following is a summary of contingencies and commitments arising from off-statement of financial position items at their equivalent peso contractual amounts as of December 31, 2009 and 2008:

Consolidated Parent 2009 2008 2009 2008 Derivatives P 92,918,002 P 24,776,281 P 92,918,002 P 24,776,281 Trust department accounts (see Note 29) 52,448,850 46,945,928 47,306,436 45,193,199 Unused commercial letters of credit 4,484,766 5,646,927 4,484,766 5,646,927 Inward bills for collection 4,127,816 1,261,327 4,127,816 1,259,476 Spot exchange sold 3,138,383 3,310,091 3,138,383 3,310,091 Spot exchange bought 2,823,634 3,520,890 2,823,634 3,520,890 Outward bills for collection 454,530 412,444 454,283 412,444 Outstanding guarantees issued 870,655 - 870,655 - Late deposits/payments received 634,677 260,874 592,893 227,892 Minimum lease rentals under non-cancellable operating lease 215,625 222,291 - - Items held for safekeeping/collateral 1,414 3,587 1,387 3,561 Traveller’s check unsold 1,225 21,577 1,225 21,577

- 112 -

Derivatives include the Parent Company’s outstanding long-term cross currency swap contracts wherein it is committed to sell US dollars and buy Philippine pesos in the future at a precontracted rate from a counterparty bank, with an aggregate notional amount of P1,911,200 or $40 million as of December 31, 2008. The Parent Company then invested the proceeds from the cross currency swap contracts in interbank placements with various foreign banks. The US dollar placements outstanding as of December 31, 2007 have a “credit link” to underlying securities that would be received by the Parent Company in lieu of the US dollar funds it originally invested in case of a credit default event as defined in the agreement between the Parent Company and its counterparties. RCBC Capital has filed an arbitration claim with the International Chamber of Commerce against a local bank relating to RCBC Capital’s acquisition of Bankard. RCBC Capital is seeking a rescission of the sale or compensation for damages. In September 2007, the arbitral tribunal upheld the claim of RCBC Capital and stated that RCBC Capital is entitled to damages for the breach, the amount of which would be determined by the tribunal with the assistance of an expert appointed by it. The hearings concerning the amount of damages due to RCBC Capital were concluded in October 2009, and RCBC’s Capital’s Memorandum and Reply Memorandum were submitted on December 1, 2009 and December 15, 2009, respectively. On January 15, 2010, final evidence on RCBC Capital’s arbitration costs was submitted by its external counsel and the case was submitted for resolution. A final decision is expected to be published in April or May 2010.

32. EARNINGS PER SHARE

The following reflects the income and per share data used in the basic and diluted earnings per share (EPS) computations (figures in thousands, except EPS data):

Consolidated 2009 2008 2007

Basic Earnings Per Share

a. Net profit attributable to parent company’s shareholders P 3,328,382 P 2,153,740 P 3,207,632 Less allocated for preferred and Hybrid Tier 1 dividends ( 487,401 ) ( 496,844) ( 544,691) 2,840,981 1,656,896 2,662,941 b. Weighted average number of outstanding common shares 907,994 962,841 909,325 c. Basic EPS (a/b) P 3.13 P 1.72 P 2.93

Diluted Earnings Per Share

a. Net profit attributable to parent company’s shareholders P 2,840,981 P 1,656,896 P 2,662,941 b. Weighted average number of outstanding common shares 928,454 999,344 939,168 c. Diluted EPS (a/b) P 3.06 P 1.66 P 2.84

- 113 -

Parent 2009 2008 2007

Basic Earnings Per Share

a. Net profit attributable to parent company’s shareholders P 2,572,124 P 1,170,314 P 1,939,350 Less allocated for preferred and Hybrid Tier 1 dividends ( 487,401 ) ( 496,844) ( 544,691 ) 2,084,723 673,470 1,394,659 b. Weighted average number of outstanding common shares 907,994 962,841 909,325 c. Basic EPS (a/b) P 2.30 P 0.70 P 1.53

Diluted Earnings Per Share a. Net profit attributable to parent company’s shareholders P 2,084,723 P 673,470 P 1,394,659 b. Weighted average number of outstanding common shares 928,454 999,344 939,168 c. Diluted EPS (a/b) P 2.25 P 0.67 P 1.48

The above computation does not take into consideration the effects of certain accounting treatment allowed by BSP but not allowed under FRSPB and PFRS as discussed in Note 11.

33. SELECTED FINANCIAL PERFORMANCE INDICATORS

The following basic ratios measure the financial performance of the Group and the Parent Company:

Consolidated 2009 2008 2007 Return on average capital funds 11.95% 7.40% 12.43% Return on average assets 1.24% 0.87% 1.42% Net interest margin 4.62% 4.25% 5.00% Capital adequacy ratio 18.47% 17.30% 18.70% Parent 2009 2008 2007 Return on average capital funds 10.46% 3.56% 7.26% Return on average assets 1.14% 0.56% 1.04% Net interest margin 4.00% 3.57% 4.47% Capital adequacy ratio 17.23% 16.28% 18.21%

The above computation does not take into consideration the effects of certain accounting treatment allowed by BSP but not allowed under FRSPB and PFRS as discussed in Note 11.

Notes 2008 2007 2008 2007

CASH AND OTHER CASH ITEMS 7 6,807,939 P 5,875,727 P 5,595,736 P 4,827,540 P

DUE FROM BANGKO SENTRAL NG PILIPINAS 7 16,390,973 17,611,380 15,656,119 16,750,323

DUE FROM OTHER BANKS 7 4,862,225 4,744,925 3,197,593 3,021,668

INVESTMENT SECURITIESFinancial Assets at Fair Value Through Profit or Loss 8 3,437,138 9,959,187 3,084,380 9,064,306 Held-to-maturity Investments 9 20,673,614 - 17,892,114 - Available-for-sale Securities 10 22,700,044 54,625,359 21,077,161 50,512,612

LOANS AND RECEIVABLES - Net 11 164,402,907 117,195,202 130,292,206 88,056,623

INVESTMENTS IN SUBSIDIARIES AND ASSOCIATES - Net 12 4,294,182 4,172,885 10,311,051 9,891,418

BANK PREMISES, FURNITURE, FIXTURESAND EQUIPMENT - Net 13 4,029,769 3,503,816 3,037,628 2,713,974

INVESTMENT PROPERTY - Net 14 7,387,613 7,761,435 3,500,460 3,887,545

DEFERRED TAX ASSETS 28 1,391,709 1,645,768 1,389,497 1,389,497

OTHER RESOURCES - Net 15 11,892,093 12,002,250 10,817,548 11,405,827

TOTAL RESOURCES 268,270,206 P 239,097,934 P 225,851,493 P 201,521,333 P

DEPOSIT LIABILITIES 17Demand 11,125,069 P 10,765,240 P 8,392,524 P 7,581,932 P Savings 75,738,446 66,769,816 66,269,393 57,690,027 Time 109,363,471 98,393,819 84,267,161 77,219,209

Total Deposit Liabilities 196,226,986 175,928,875 158,929,078 142,491,168

BILLS PAYABLE 18 21,452,609 12,820,500 21,410,087 12,477,910

BONDS PAYABLE 19 6,002,821 5,650,670 6,002,821 5,650,670

OUTSTANDING ACCEPTANCES PAYABLE 318,908 234,717 318,908 234,717

ACCRUED TAXES, INTEREST AND OTHER EXPENSES 20 2,787,456 3,087,510 1,976,052 2,488,497

OTHER LIABILITIES 21 6,902,803 7,197,200 5,638,902 6,224,202

SUBORDINATED DEBT 22 6,941,899 5,158,070 6,941,899 5,158,070

Total Liabilities 240,633,482 210,077,542 201,217,747 174,725,234

CAPITAL FUNDSAttributable to Parent Company Shareholders

Preferred Stock 24 859,335 859,512 859,335 859,512 Common Stock 24 9,628,430 9,628,369 9,628,430 9,628,369 Hybrid Perpetual Securities 25 4,883,139 4,883,139 4,883,139 4,883,139 Capital Paid in Excess of Par 5,571,906 5,571,793 5,571,906 5,571,793 Revaluation Reserves on Available-for-sale Securities 10 1,568,758 )( 1,032,344 1,351,022 )( 977,649 Revaluation Increment in Property of an Associate 12 28,243 7,014 - - Accumulated Translation Adjustment 83,889 63,937 - - Reserve for Trust Business 29 276,973 258,348 270,024 258,348 Other reserves 12 240,889 )( - - - Share in Additional Paid-in Capital of an Associate 12 532,583 532,583 - - Surplus 24 7,626,144 6,495,022 4,771,934 4,617,289

27,680,995 29,332,061 24,633,746 26,796,099 Minority Interest 44,271 )( 311,669 )( - -

Total Capital Funds 27,636,724 29,020,392 24,633,746 26,796,099

TOTAL LIABILITIES AND CAPITAL FUNDS 268,270,206 P 239,097,934 P 225,851,493 P 201,521,333 P

See Notes to Financial Statements.

CONSOLIDATED PARENT

RIZAL COMMERCIAL BANKING CORPORATION AND SUBSIDIARIESSTATEMENTS OF CONDITION

DECEMBER 31, 2008 AND 2007

LIABILITIES AND CAPITAL FUNDS

RESOURCES

(Amounts in Thousand Philippine Pesos)

Notes 2008 2007 2006 2008 2007 2006

INTEREST INCOME ONLoans and receivables 11 10,885,349 P 9,583,739 P 9,844,055 P 7,365,395 P 6,369,342 P 5,509,836 P Investment securities 8, 9,10 3,991,885 4,917,942 5,074,813 3,735,538 4,614,971 4,664,314 Others 782,398 828,726 409,073 683,548 694,513 295,400

15,659,632 15,330,407 15,327,941 11,784,481 11,678,826 10,469,550

INTEREST EXPENSE ONDeposit liabilities 17 5,128,787 4,192,593 5,026,315 3,772,306 2,952,030 3,514,922 Bills payable and other borrowings 18 2,060,697 2,318,741 3,043,189 2,032,540 2,287,019 2,393,353

7,189,484 6,511,334 8,069,504 5,804,846 5,239,049 5,908,275

NET INTEREST INCOME 8,470,148 8,819,073 7,258,437 5,979,635 6,439,777 4,561,275

IMPAIRMENT LOSSES - Net 11, 16 998,492 942,490 1,749,368 830,597 680,535 462,528

NET INTEREST INCOME AFTER IMPAIRMENT LOSSES 7,471,656 7,876,583 5,509,069 5,149,038 5,759,242 4,098,747

OTHER OPERATING INCOMEService fees 1,643,395 1,514,472 1,078,656 1,045,435 1,032,985 587,310 Foreign exchange gains (losses) - net 851,961 157,107 )( 260,826 )( 715,623 250,627 )( 359,399 )( Equity in net earnings of associates 12 404,192 351,842 231,350 - - - Trust fees 206,019 184,849 246,540 186,419 164,212 238,202 Trading and securities gains (losses) - net 8 511,946 )( 1,329,128 2,377,588 612,623 )( 1,007,936 1,974,418 Commissions and other income 2,003,059 1,157,399 1,380,661 1,814,650 907,704 816,737

4,596,680 4,380,583 5,053,969 3,149,504 2,862,210 3,257,268

OTHER OPERATING EXPENSESEmployee benefits 26 2,524,956 2,384,398 2,184,417 1,682,187 1,640,155 1,498,326 Occupancy and equipment-related 27 1,492,784 1,410,766 1,435,073 1,150,968 1,107,099 1,025,030 Taxes and licenses 28 1,143,463 1,068,856 1,369,297 849,633 768,967 966,214 Depreciation and amortization 13 407,881 315,366 327,785 288,499 224,570 204,211 Miscellaneous 11 3,406,723 2,988,471 2,730,198 2,588,221 2,397,935 1,688,559

8,975,807 8,167,857 8,046,770 6,559,508 6,138,726 5,382,340

INCOME BEFORE TAX 3,092,529 4,089,309 2,516,268 1,739,034 2,482,726 1,973,675

TAX EXPENSE 28 919,424 845,650 626,883 568,720 543,376 473,180

NET INCOME 2,173,105 3,243,659 1,889,385 1,170,314 1,939,350 1,500,495

NET INCOME (LOSS) ATTRIBUTABLE TO MINORITY INTEREST 19,365 36,027 163,253 )( - - -

NET INCOME ATTRIBUTABLE TO PARENT

COMPANY'S SHAREHOLDERS 2,153,740 P 3,207,632 P 2,052,638 P 1,170,314 P 1,939,350 P 1,500,495 P

Earnings Per Share* 32

Basic 1.72 P 2.93 P 2.82 P 0.70 P 1.53 P 2.06 P Diluted 1.66 P 2.84 P 2.81 P 0.67 P 1.48 P 2.06 P

* After giving retroactive effect to the 15% stock dividends issued in 2007 (see Note 24).

CONSOLIDATED PARENT

RIZAL COMMERCIAL BANKING CORPORATION AND SUBSIDIARIESINCOME STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006(Amounts in Thousand Philippine Pesos, Except Per Share Data)

P P

Notes 2008 2007 2006 2008 2007 2006

ATTRIBUTABLE TO PARENT COMPANY SHAREHOLDERS

PREFERRED STOCKBalance at beginning of year 859,512 P 1,054,940 P - 859,512 P 1,054,940 P - Issuance (conversion) of preferred stock 177 )( 195,428 )( 1,054,940 177 )( 195,428 )( 1,054,940

Balance at end of year 24 859,335 859,512 1,054,940 859,335 859,512 1,054,940

COMMON STOCKBalance at beginning of year 9,628,369 6,329,640 6,329,640 9,628,369 6,329,640 6,329,640 Conversion of preferred stock to common stock 61 104,598 - 61 104,598 - Issuance of common stock - 2,100,000 - - 2,100,000 - Stock dividends - 1,094,131 - - 1,094,131 -

Balance at end of year 24 9,628,430 9,628,369 6,329,640 9,628,430 9,628,369 6,329,640

HYBRID PERPETUAL SECURITIES

Issuance of hybrid perpetual securities 25 4,883,139 4,883,139 4,883,139 4,883,139 4,883,139 4,883,139

CAPITAL PAID IN EXCESS OF PARBalance at beginning of year 5,571,793 2,118,688 2,118,688 5,571,793 2,118,688 2,118,688 Conversion of preferred stock to common stock 113 90,830 - 113 90,830 - Issuance of common stock - 3,362,275 - - 3,362,275 -

Balance at end of year 24 5,571,906 5,571,793 2,118,688 5,571,906 5,571,793 2,118,688

REVALUATION RESERVES ON AVAILABLE-FOR-SALE SECURITIESBalance at beginning of year 1,032,344 2,907,648 39,246 977,649 2,747,231 24,184 Fair value gains (losses) on available-for-sale securities, net of tax 10 2,601,102 )( 1,875,304 )( 2,868,402 2,328,671 )( 1,769,582 )( 2,723,047

Balance at end of year 1,568,758 )( 1,032,344 2,907,648 1,351,022 )( 977,649 2,747,231

REVALUATION INCREMENT IN PROPERTY OF AN ASSOCIATEBalance at beginning of year 7,014 7,014 324 - - - Increase during the year 12 21,229 - 6,690 - - -

Balance at end of year 28,243 7,014 7,014 - - -

ACCUMULATED TRANSLATION ADJUSTMENTSBalance at beginning of year 63,937 144,572 163,360 - - - Translation adjustment during the year 19,952 80,635 )( 18,788 )( - - -

Balance at end of year 83,889 63,937 144,572 - - -

RESERVE FOR TRUST BUSINESSBalance at beginning of year 258,348 247,595 223,774 258,348 247,595 223,774 Transfer from surplus free 18,625 10,753 23,821 11,676 10,753 23,821

Balance at end of year 29 276,973 258,348 247,595 270,024 258,348 247,595

OTHER RESERVES 12 240,889 )( - - - - -

SHARE IN ADDITIONAL PAID-IN CAPITAL OF AN ASSOCIATE 12 532,583 532,583 532,583 - - -

SURPLUS FREEBalance at beginning of year 6,495,022 5,448,793 3,419,976 4,617,289 4,839,342 3,362,668 Net income 2,153,740 3,207,632 2,052,638 1,170,314 1,939,350 1,500,495 Cash dividends 24 1,003,993 )( 1,056,519 )( - 1,003,993 )( 1,056,519 )( - Transfer to reserve for trust business 29 18,625 )( 10,753 )( 23,821 )( 11,676 )( 10,753 )( 23,821 )( Stock dividends 24 - 1,094,131 )( - - 1,094,131 )( -

Balance at end of year 7,626,144 6,495,022 5,448,793 4,771,934 4,617,289 4,839,342

ATTRIBUTABLE TO PARENT COMPANY SHAREHOLDERS (Carried Forward) 27,680,995 P 29,332,061 P 23,674,612 P 24,633,746 P 26,796,099 P 22,220,575 P

RIZAL COMMERCIAL BANKING CORPORATION AND SUBSIDIARIESSTATEMENTS OF CHANGES IN CAPITAL FUNDS

FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006(Amounts in Thousand Philippine Pesos)

CONSOLIDATED PARENT

PPP P PP

Notes 2008 2007 2006 2008 2007 2006

ATTRIBUTABLE TO PARENT COMPANY SHAREHOLDERS (Brought Forward) 27,680,995 P 29,332,061 P 23,674,612 P 24,633,746 P 26,796,099 P 22,220,575 P

MINORITY INTERESTBalance at beginning of year 311,669 )( 282,699 )( 116,726 )( - - - Fair value losses on available-for-sale securities, net of tax 10 5,441 )( 64,997 )( 2,720 )( - - - Decrease in share of losses due to dilution 12 240,889 - - - - - Increase in minority interest due to acquisition of a new subsidiary 12,585 - - - - - Net income (loss) for the year 19,365 36,027 163,253 )( - - -

Balance at end of year 44,271 )( 311,669 )( 282,699 )( - - -

TOTAL CAPITAL FUNDS 27,636,724 P 29,020,392 P 23,391,913 P 24,633,746 P 26,796,099 P 22,220,575 P

Net Gains (Losses) Directly Recognized in Capital Funds 2,565,362 )( P 2,020,936 )( P 2,853,584 P 2,328,671 )( P 1,769,582 )( P 2,723,047 P

See Notes to Financial Statements.

-2-

CONSOLIDATED PARENT

Notes 2008 2007 2006 2008 2007 2006

CASH FLOWS FROM OPERATING ACTIVITIESIncome before tax 3,092,529 P 4,089,309 P 2,516,268 P 1,739,034 P 2,482,726 P 1,973,675 P Adjustments for:

Impairment losses 11, 16 998,492 942,490 1,749,368 830,597 680,535 462,528 Depreciation and amortization 13 407,881 315,366 327,785 288,499 224,570 204,211 Amortization of deferred charges 15 42,247 30,410 59,275 42,247 34,067 59,275 Equity in net earnings of associates 12 404,192 )( 351,842 )( 231,350 )( - - - Dividend income - - - 30,979 )( - -

Operating income before working capital changes 4,136,957 5,025,733 4,421,346 2,869,398 3,421,898 2,699,689 Decrease (increase) in financial assets at fair value through profit and loss 5,583,598 1,130,140 3,740,824 )( 5,568,698 1,401,061 3,791,328 )( Increase in loans and receivables 41,812,593 )( 9,204,264 )( 10,431,040 )( 36,557,885 )( 5,696,413 )( 7,331,813 )( Decrease in investment property 357,354 2,223,422 1,548,208 387,085 2,191,634 1,558,119 Decrease (increase) in other resources 4,702 )( 55,581 1,425,454 )( 337,371 294,402 1,956,502 )( Increase in deposit liabilities 20,298,111 18,378,706 24,269,934 16,437,910 17,034,785 20,581,020 Increase (decrease) in outstanding acceptances payable 84,191 720 41,350 )( 84,191 720 41,350 )( Increase (decrease) in accrued taxes, interest and other expenses 244,348 )( 660,633 359,799 509,907 )( 358,163 832,195 Increase (decrease) in other liabilities 602,233 )( 2,750,354 )( 2,038,655 893,136 )( 2,790,374 )( 3,366,668

Cash generated from (used in) operations 12,203,665 )( 15,520,317 16,999,274 12,276,275 )( 16,215,876 15,916,698 Cash paid for taxes 721,071 )( 1,067,699 )( 628,688 )( 571,258 )( 566,742 )( 490,570 )(

Net Cash From (Used in) Operating Activities 12,924,736 )( 14,452,618 16,370,586 12,847,533 )( 15,649,134 15,426,128

CASH FLOWS FROM INVESTING ACTIVITIESDecrease (increase) in available-for-sale securities 4,254,996 10,057,102 )( 8,779,456 )( 4,297,281 10,019,060 )( 5,365,880 )( Acquisitions of bank premises, furniture, fixtures and equipment 13 1,035,459 )( 571,515 )( 361,339 )( 649,148 )( 407,980 )( 474,465 )( Cash dividends received 12 230,718 185,364 251,327 - - - Decrease (increase) in investments in subsidiaries and associates 85,991 1,956,812 )( 4,043 419,633 )( 2,925,562 )( 400,956 )( Proceeds from disposals of bank premises, furniture, fixtures and equipment 13 85,708 139,872 151,947 36,995 104,269 37,136 Increase in held-to-maturity investments - - 1,554,499 )( - - 4,987,380 )(

Net Cash From (Used in) Investing Activities 3,621,954 12,260,193 )( 10,287,977 )( 3,265,495 13,248,333 )( 11,191,545 )(

CASH FLOWS FROM FINANCING ACTIVITIESProceed from (payments of) bills payable 18 8,632,109 4,813,495 )( 2,778,665 8,932,177 4,722,936 )( 2,752,567 Net proceeds from issuance of subordinated debt 22 1,937,725 - - 1,937,725 - - Dividends paid 24 1,003,993 )( 1,056,519 )( - 1,003,993 )( 1,056,519 )( - Redemption of bonds payable 19 433,954 )( - - 433,954 )( - - Issuance of common shares 24 - 5,462,275 - - 5,462,275 - Issuance of hybrid perpetual securities - - 4,883,139 - - 4,883,139 Issuance of preferred shares - - 1,054,940 - - 1,054,940

Net Cash From (Used in) Financing Activities 9,131,887 407,739 )( 8,716,744 9,431,955 317,180 )( 8,690,646

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (Carried Forward) 170,895 )( 1,784,686 14,799,353 150,083 )( 2,083,621 12,925,229

PARENTCONSOLIDATED

RIZAL COMMERCIAL BANKING CORPORATION AND SUBSIDIARIES

(Amounts in Thousand Philippine Pesos)FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006

CASH FLOWS STATEMENTS

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (Brought Forward) 170,895 )( 1,784,686 14,799,353 150,083 )( 2,083,621 12,925,229

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEARCash and other cash items 7 5,875,727 5,005,742 5,389,129 4,827,540 4,181,906 4,043,856 Due from Bangko Sentral ng Pilipinas 7 17,611,380 13,787,927 3,032,805 16,750,323 12,844,278 2,514,365 Due from other banks 7 4,744,925 7,653,677 3,226,059 3,021,668 5,489,726 3,032,460

28,232,032 26,447,346 11,647,993 24,599,531 22,515,910 9,590,681

CASH AND CASH EQUIVALENTS AT END OF YEARCash and other cash items 7 6,807,939 5,875,727 5,005,742 5,595,736 4,827,540 4,181,906 Due from Bangko Sentral ng Pilipinas 7 16,390,973 17,611,380 13,787,927 15,656,119 16,750,323 12,844,278 Due from other banks 7 4,862,225 4,744,925 7,653,677 3,197,593 3,021,668 5,489,726

28,061,137 P 28,232,032 P 26,447,346 P 24,449,448 P 24,599,531 P 22,515,910 P

Supplemental Information on Noncash Investing Activities

In 2008, the Group and the Parent Company made the following reclassifications of investment securities (see Notes 8, 9, 10 and 11):

- Financial assets at fair value through profit or loss (FVTPL) with a total carrying value of P411,228 was reclassified to held-to-maturity (HTM) investments both in the Group and Parent Company's financial statements.

- Available-for-sale (AFS) securities with a total carrying value of P5,960,822 were reclassified to loans and receivables in the Group and Parent Company's financial statements.

- Financial derivative instruments with a negative carrying value of P307,836 were reclassified to loans and receivables in the Group and Parent Company's financial statements .

- AFS securities with a total carrying value of P20,373,408 and P17,588,835 were reclassified from AFS securities to HTM investments in the Group and Parent Company's financial statements, respectively.

- Financial assets at FVTPL with carrying value of P527,223 was reclassified to AFS securities in the Group's financial statements.

See Notes to Financial Statements.

RIZAL COMMERCIAL BANKING CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2008, 2007 AND 2006 (Amounts in Thousands of Philippine Pesos, Except Per Share Data or as Indicated)

1. CORPORATE INFORMATION

Rizal Commercial Banking Corporation (the Parent Company) holds interest in the following subsidiaries and associates:

Effective Percentage Country of Explanatory of Ownership Subsidiaries/Associates Incorporation Notes 2008 2007 Subsidiaries: RCBC Savings Bank, Inc. (RSB) Philippines (a) 100.00 100.00 RCBC Forex Brokers Corporation (RCBC Forex) Philippines 100.00 100.00 RCBC Telemoney Europe Italy 100.00 100.00 RCBC North America, Inc. (RCBC North America) California, USA (b) 100.00 100.00 RCBC International Finance Limited (RCBC IFL) Hongkong 99.99 99.99 RCBC Investment Ltd. Hongkong (c) 100.00 100.00 RCBC Capital Corporation (RCBC Capital) Philippines (d) 99.96 99.96 RCBC Securities, Inc. (RSI) Philippines (e) 100.00 100.00 Bankard, Inc. (Bankard) Philippines (f) 91.69 59.07 Merchants Savings and Loan Association, Inc. (Merchants Bank) Philippines (g) 96.38 - Associates: RCBC Land, Inc. (RLI) Philippines 49.00 49.00 YGC Corporate Services, Inc. (YCS) Philippines 40.00 40.00 Luisita Industrial Park Co. (LIPC) Philippines 35.00 35.00 Subic Power Corporation (SPC) Philippines 26.50 26.50 RCBC Realty Corporation (RRC) Philippines 25.00 25.00 Great Life Financial Assurance Corporation (GLFAC) Philippines 20.00 20.00 Honda Cars Phils., Inc. (HCPI) Philippines 12.88 12.88 Roxas Holdings, Inc. (RHI) Philippines 4.71 4.71 New Pacific Resources Management (SPV-AMC), Inc. (NPRMI) Philippines - 5.00

(a) The Parent Company made an additional investment amounting to P1 billion in 2007.

(b) Includes 31% ownership of RCBC IFL (c) A wholly owned subsidiary of RCBC IFL (d) The Parent Company made an additional investment amounting to

P872.7 million in 2007. (e) A wholly owned subsidiary of RCBC Capital (f) Owned 59.07% by RCBC Capital in 2007. In 2008, the Parent Company’s

P1 billion capital infusion by way of conversion of debt to equity was effected (see Note 12). As of December 31, 2008, the Parent Company has 66.58% direct ownership and 25.11% indirect ownership through RCBC Capital.

(g) In 2008, the Parent Company acquired 96.38% ownership in Merchants Bank from Finman Capital Corporation

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The Parent Company is a universal bank engaged in all aspects of banking. It provides products and services related to traditional loans and deposits, trade finance, domestic and foreign fund transfers or remittance, cash management, treasury, and trust and custodianship services. The Parent Company also enters into forward currency contracts as an accommodation to its clients and as a means of managing its foreign exchange exposures. The Parent Company and its subsidiaries are engaged in all aspects of traditional banking, investment banking, retail financing (credit cards, auto loans and mortgage/ housing loans), leasing and stock brokering. As of end of 2008, the Parent Company has 290 automated teller machines, 206 branches, 3 extension offices and 2 foreign exchange booths within and outside of the Philippines. The Parent Company’s common shares are listed in the Philippine Stock Exchange (PSE) and is a 41.99% owned subsidiary of Pan Malayan Management and Investment Corporation (PMMIC), a company incorporated and domiciled in the Philippines. PMMIC is the holding company of the flagship institutions of the Yuchengco Group of Companies.

The registered address of the Parent Company is located at Yuchengco Tower, RCBC Plaza, 6819 Ayala Avenue, Makati City. The accompanying financial statements for the year ended December 31, 2008 (including the comparatives for the years ended December 31, 2007 and 2006) were approved and authorized for issue by the Board of Directors (BOD) on March 30, 2009.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The significant accounting policies that have been used in the preparation of these financial statements are summarized below. The policies have been consistently applied to all years presented, unless otherwise stated.

2.1 Basis of Preparation of Financial Statements

The 2008 consolidated financial statements of Rizal Commercial Banking Corporation and its subsidiaries (together hereinafter referred to as the Group) and the separate financial statements of Rizal Commercial Banking Corporation have been prepared in accordance with the Financial Reporting Standards in the Philippines for Banks (FRSPB). The comparative financial statements for 2007 and 2006 have been prepared in accordance with Philippine Financial Reporting Standards (PFRS), except for the following matters: the staggered recognition of required additional allowance for impairment and losses; not writing-off of impaired credit card receivables against operations; the derecognition of certain non-performing assets (NPAs) transferred, as discussed fully in Note 11; and, the recording by the Parent Company of certain transactions pending approval by the BSP, as discussed in Note 12. PFRS are adopted by the Financial Reporting Standards Council (FRSC) from the pronouncements issued by the International Accounting Standards Board (IASB). FRSPB are similar to PFRS, except for the following reclassifications of certain financial instruments which are not allowed under PFRS in 2007 and prior years, but allowed under FRSPB starting 2008 as permitted by the Bangko Sentral ng Pilipinas (BSP) for prudential regulation, and by the Securities and Exchange Commission (SEC) for financial reporting purposes: the reclassification of the embedded derivatives in credit-linked notes (CLNs) and other similar instruments that are linked to Republic of the Philippines (ROP) bonds from the fair value through profit or loss (FVTPL) classification to

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loans and receivables and available-for-sale (AFS) classifications; and the reclassification of certain financial assets previously classified under AFS category due to the tainting of held-to-maturity (HTM) portfolio back to HTM category.

These financial statements have been prepared using the measurement bases specified by PFRS and FRSPB for each type of resource, liability, income and expense. These financial statements have been prepared on the historical basis, except for the revaluation of certain financial assets. The measurement bases are more fully described in the accounting policies in the succeeding pages.

The following tables show the reconciliation of the capital funds and certain statement of condition items as of December 31, 2008 and net income for the year then ended determined under PFRS to FRSPB amounts as presented in the 2008 financial statements, considering the reclassifications of certain financial instruments as permitted by BSP and SEC for FRSPB starting in 2008. (i) The reconciliation of the capital funds under PFRS to capital funds reported

under FRSPB as of December 31, 2008 is shown below: Notes Consolidated Parent Capital Funds under PFRS P 25,925,988 P 22,985,292 Net unrealized losses on AFS reclassified to HTM 9 1,074,102 1,011,820 Mark-to-market loss on embedded derivatives on CLNs reclassified to loans and receivables 11 644,524 644,524 Trading gains of FVTPL reclassified to HTM 9 ( 13,319 ) ( 13,319 ) Interest income – effect of reclassification of CLNs and FVTPL 9, 11 5,429 5,429 1,710,736 1,648,454 Capital Funds under FRSPB P 27,636,724 P 24,633,746

(ii) Differences in the measurement of statement of condition items as of December 31, 2008 are summarized below:

Consolidated PFRS Difference FRSPB

Changes in resources: Investment securities: FVTPL P 3,861,686 ( P 424,548 ) P 3,437,138 HTM Investments - 20,673,614 20,673,614 AFS Securities 41,890,376 ( 19,190,332 ) 22,700,044 Loans and receivables 164,703,266 ( 300,359 ) 164,402,907 210,455,328 758,375 211,213,703 Changes on other liabilities 7,855,164 ( 952,361 ) 6,902,803 P 202,600,164 P 204,310,900 Total adjustments to capital funds P 1,710,736

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Parent PFRS Difference FRSPB Changes in resources: Investment securities: FVTPL P 3,508,928 ( P 424,548 ) P 3,084,380 HTM Investments - 17,892,114 17,892,114 AFS Securities 37,548,274 ( 16,471,113 ) 21,077,161 Loans and receivables 130,592,565 ( 300,359 ) 130,292,206 171,649,767 696,094 172,345,861 Changes on other liabilities 6,591,262 ( 952,360 ) 5,638,902 P 165,058,505 P 166,706,959 Total adjustments to capital funds P 1,648,454

(iii) The reconciliation of the net income under PFRS to net income reported under FRSPB for the year ended December 31, 2008 is as follows:

Notes Consolidated Parent Net income under PFRS P 1,517,106 P 533,680 Mark-to-market loss on embedded derivatives on CLNs reclassified to loans and receivables 11 644,524 644,524 Trading gains of FVTPL reclassified to HTM 9 ( 13,319 ) ( 13,319 ) Interest income – effect of reclassification of CLNs and FVTPL 9, 11 5,429 5,429 636,634 636,634 Net income under FRSPB P 2,153,740 P 1,170,314

These financial statements are presented in Philippine pesos, the Group’s functional currency, and all values represent amounts in thousands except for per share data or when otherwise indicated (see also Note 2.17).

2.2 Impact of New Amendments and Interpretations to Existing Standards (a) Effective in 2008 that are Relevant to the Group

In 2008, the Group adopted for the first time the following new and amended standards which are mandatory for accounting periods beginning on or after January 1, 2008.

Philippine Interpretation International Financial Reporting and Interpretations Committee (IFRIC) 14 : Philippine Accounting Standard (PAS) 19 – The Limit on a Defined

Benefit Asset, Minimum Funding Requirements and their Interaction

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PAS 39 and PFRS 7 (Amendments) : PAS 39, Financial Instruments: Recognition and Measurements

and PFRS 7, Financial Instruments: Disclosures

Discussed below are the effects on the financial statements of the new accounting interpretation and amended standards. (i) Philippine Interpretation IFRIC 14, PAS 19 – The Limit on a Defined

Benefit Asset, Minimum Funding Requirements and their Interaction (effective from January 1, 2008). This Philippine Interpretation provides general guidance on how to assess the limit in PAS 19, Employee Benefits, on the amount of the surplus that can be recognized as an asset. It standardizes practice and ensures that entities recognize an asset in relation to a surplus on a consistent basis. As any excess of the asset over the obligation is fully refundable to the Group based on the set-up of the pension trust fund, the Group has determined that the adoption of this Philippine Interpretation did not materially affect its financial statements.

(ii) PAS 39 (Amendment), Financial Instruments: Recognition and Measurement and PFRS 7 (Amendment), Financial Instruments: Disclosures (effective from July 1, 2008). The amendments permit an entity to: • reclassify non-derivative financial assets (other than those designated at fair

value through profit or loss by the entity upon initial recognition) out of fair value through profit or loss category in particular circumstances; and

• transfer from the available-for-sale category to the loans and receivable

category those financial assets that would have met the definition of loans and receivables, provided that the entity has the intention and the ability to hold those financial assets for the foreseeable future.

The amendments are applicable in a partially retrospective manner up to July 1, 2008 provided that the reclassification was made on or before November 15, 2008, the cut-off date set by the FRSC. After the cut-off date, all reclassifications will only take effect prospectively. Related to this, the Monetary Board of the BSP approved the prudential reporting guidelines for banks governing the reclassification of investments in debt and equity securities between categories in accordance with the provisions of the foregoing amendments to PAS 39 and PFRS 7, and provided additional guidelines (under BSP Circular No. 628) which include, among others: • The reclassification of CLNs and other similar instruments that are linked

to ROP bonds out of the Held-for-trading (included under FVTPL category) into AFS, HTM, Unquoted debt securities classified as loans (UDSCL); or from AFS to UDSCL or HTM, without bifurcating the embedded derivatives from the host instruments.

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• Financial assets that are booked under the AFS category because of the tainting of the HTM portfolio may be reclassified to HTM or UDSCL using the fair value carrying amount of the financial assets as of the effective date of reclassification.

Provided that these shall only apply for financial assets that are outstanding as of the effective date of reclassification, which shall not be on or later than November 15, 2008.

On February 2, 2009, the SEC approved the adoption of BSP Circular No. 628 as being compliant with generally accepted accounting principles for banks.

Pursuant to these amendments and guidelines, the Group reclassified certain financial assets out of FVTPL and AFS categories to HTM, AFS and loans and receivables categories (see Notes 8, 9, 10 and 11).

The first time application of these interpretation and amendments has not resulted in any prior period adjustments of statement of condition, net income or cash flows line items.

(b) Effective in 2008 but not Relevant to the Group

The following interpretations to published standards are mandatory for accounting periods beginning on or after January 1, 2008 but are not relevant to the Group’s operations:

Philippine Interpretation

IFRIC 11 : Group and Treasury Share Transactions Philippine Interpretation

IFRIC 12 : Service Concession Arrangements

(c) Effective Subsequent to 2008

There are new and amended standards and Philippine Interpretation that are effective for periods subsequent to 2008. The following amended standards and interpretation are relevant to the Group which the Group will apply in accordance with their transitional provisions.

PAS 1 (Revised 2007) : Presentation of Financial Statements PAS 23 (Revised 2007) : Borrowing Costs PAS 27 (Revised 2008) : Consolidated and Separate Financial Statements PAS 32 and PAS 1

(Amendments) : Financial Instruments: Presentation and Presentation of Financial

Statements – Puttable Financial Instruments and Obligations

Arising on Liquidation PFRS 3 (Revised 2008) : Business Combinations PFRS 8 : Operating Segments Philippine Interpretation

IFRIC 13 : Customer Loyalty Programmes Various Standards : 2008 Annual Improvements to PFRS

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Below is a discussion of the possible impact of these accounting standards.

(i) PAS 1 (Revised 2007), Presentation of Financial Statements (effective from January 1, 2009). The amendment requires an entity to present all items of income and expense recognized in the period in a single statement of comprehensive income or in two statements: a separate income statement and a statement of comprehensive income. The income statement shall disclose income and expense recognized in profit and loss in the same way as the current version of PAS 1. The statement of comprehensive income shall disclose profit or loss for the period, plus each component of income and expense recognized outside of profit and loss classified by nature (e.g., gains or losses on available-for-sale assets or translation differences related to foreign operations). Changes in equity arising from transactions with owners are excluded from the statement of comprehensive income (e.g., dividends and capital increase). An entity would also be required to include in its set of financial statements a statement showing its financial position (or statement of condition) at the beginning of the previous period when the entity retrospectively applies an accounting policy or makes a retrospective restatement. The Group will apply PAS 1 (Revised 2007) in its 2009 financial statements.

(ii) PAS 23 (Revised 2007), Borrowing Costs (effective from January 1, 2009). Under the revised PAS 23, all borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset shall be capitalized as part of the cost of that asset. The option of immediately expensing borrowing costs that qualify for asset recognition has been removed. The Group has initially determined that adoption of this new standard will not have significant effects on the financial statements for 2009, as well as for prior and future periods, as the Group’s current accounting policy is to capitalize all interest directly related to qualifying assets.

(iii) PAS 27 (Revised 2008), Consolidated and Separate Financial Statements (effective from July 1, 2009). The amendment requires that dividends received out of the investee's pre-acquisition profits be no longer deducted from cost in the parent or investor's separate financial statements, instead, dividends receivable will be recorded as income (but may also give rise to impairment of the investment). Moreover, the amendment introduces new guidance on accounting when a parent reorganizes the structure of its group by establishing a new entity as its parent and the interests of shareholders are not affected. The Group will apply PAS 27 (Revised 2008) in its 2009 consolidated and separate financial statements.

(iv) PAS 32 (Amendment), Financial Instruments: Presentation and PAS 1 (Amendment), Presentation of Financial Statements – Puttable Financial Instruments and Obligations Arising on Liquidation (effective from January 1, 2009). The amendments require certain financial instruments that represent a residual interest in the net assets of an entity, which would otherwise be classified as financial liabilities, to be classified as equity, if both the financial instrument and the capital structure of the issuing entity meet certain conditions. The Group does not expect any impact on its financial statements when it applies the amendments in 2009.

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(v) PFRS 3 (Revised), Business Combinations (effective from July 1, 2009). The revised standard continues to apply the acquisition method to business combinations, with some significant changes. For example, all payments to purchase a business are to be recorded at fair value at the acquisition date, with contingent payments classified as debt subsequently re-measured through the income statement. There is a choice on an acquisition-by-acquisition basis to measure the non-controlling interest in the acquiree either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s net assets. All acquisition-related costs should be expensed. The Group will apply PFRS 3 (Revised) prospectively to all business combinations from January 1, 2010.

(vi) PFRS 8, Operating Segments (effective for annual periods beginning on or after

January 1, 2009). Under this new standard, a reportable operating segment is identified based on the information about the components of the entity that management uses to make decisions about operating matters. In addition, segment resources, liabilities and performance, as well as certain disclosures, are to be measured and presented based on the internal reports prepared for and reviewed by the chief decision makers. The Group identifies operating segments and reports on segment resources, liabilities and performance based on internal management reports, adoption of this new standard will not have a material impact on the Group’s financial statements.

(vii)Philippine Interpretation IFRIC 13, Customer Loyalty Programmes, (effective from

July 1, 2008). This new Philippine Interpretation clarifies that when goods or services are sold together with a customer loyalty incentive (for example loyalty points or free products), the arrangement is a multiple-element arrangement and the consideration receivable from the customer is allocated between the components of the arrangement using fair values. The Group’s current accounting policy is to recognize the consideration in full and to provide for the estimated cost of the future awards. Consequently, the adoption of this interpretation will change the Group’s accounting policy. However, the Group initially determined that adoption of this standard will not have material effect on its financial statements.

(viii)2008 Annual Improvements to PFRS. The FRSC has adopted the Improvements

to International Financial Reporting Standards 2008. These amendments will become effective in the Philippines in annual periods beginning on or after January 1, 2009. The Group expects the amendments to the following standards to be relevant to the Group’s accounting policies:

• PAS 23 (Amendment), Borrowing Costs. The amendment clarifies the

definition of borrowing costs to include interest expense determined using the effective interest method under PAS 39. This amendment will be applied by the Group in 2009; however, management expects its effect to be insignificant.

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• PAS 1 (Amendment), Presentation of Financial Statements. The amendment clarifies that financial instruments classified as held for trading in accordance with PAS 39 are not necessarily required to be presented as current assets or current liabilities. Instead, normal classification principles under PAS 1 should be applied. The Group determined that this amendment will have no impact in the Group’s 2009 financial statements.

• PAS 19 (Amendment), Employee Benefits. The amendment includes the

following:

- Clarification that a curtailment is considered to have occurred to the extent that benefit promises are affected by future salary increases and a reduction in the present value of the defined benefit obligation results in negative past service cost.

- Change in the definition of return of plan assets to require the

deduction of plan administration costs in the calculation of plan assets return only to the extent that such costs have been excluded from measurement of the defined benefit obligation.

- Distinction between short-term and long-term employee benefits will

be based on whether benefits are due to be settled within or after 12 months of employee service being rendered.

- Removal of the reference to recognition in relation to contingent

liabilities in order to be consistent with PAS 37, Provisions, Contingent Liabilities and Contingent Assets, which requires contingent liabilities to be disclosed and not recognized.

The Group’s management assessed that this amendment to PAS 19 will have no impact on its 2009 financial statements.

• PAS 36 (Amendment), Impairment of Assets. Where fair value less cost to sell

is calculated on the basis of discounted cash flows, disclosures equivalent to those for value-in-use calculation should be made. The Group will apply this amendment in its 2009 financial statements.

• PAS 38 (Amendment), Intangible Assets. The amendment clarifies when to

recognize a prepayment asset, including advertising or promotional expenditures. In the case of supply of goods, the entity recognizes such expenditure as an expense when it has a right to access the goods. For services, an expense is recognized on receiving the service. Also, prepayment may only be recognized in the event that payment has been made in advance of obtaining right of access to goods or receipt of services. The Group initially determined that adoption of this amendment will not have a material effect on its 2009 financial statements.

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• PAS 39 (Amendment), Financial Instruments: Recognition and Measurement. The definition of financial asset or financial liability at fair value through profit or loss as it relates to items that are held for trading was changed. A financial asset or liability that is part of a portfolio of financial instruments managed together with evidence of an actual recent pattern of short-term profit taking is included in such a portfolio on initial recognition. The Group initially determined that adoption of this amendment will not have a material effect on its 2009 financial statements.

• PAS 40 (Amendment), Investment Property. PAS 40 is amended to include

property under construction or development for future use as investment property in its definition of investment property. This results in such property being within the scope of PAS 40; previously, it was within the scope of PAS 16. Also, if an entity’s policy is to measure investment property at fair value, but during construction or development of an investment property the entity is unable to reliably measure its fair value, then the entity would be permitted to measure the investment property at cost until construction or development is complete. At such time, the entity would be able to measure the investment property at fair value.

• PFRS 5 (Amendment), Non-current Assets Held-for-Sale and Discontinued

Operations. The amendment clarifies that all the assets and liabilities of a subsidiary should be classified as held for sale if the entity is committed to a sale plan involving loss of control of the subsidiary, regardless of whether the entity will retain a non-controlling interest after the sale. Relevant disclosures should be made for this subsidiary if the definition of a discontinued operation is met. The Group will apply this amendment prospectively to all partial disposals of subsidiaries from January 1, 2009.

Minor amendments are made to several other standards; however, those amendments are not expected to have a material impact on the Group’s financial statements.

2.3 Basis of Consolidation and Accounting for Investments in Subsidiaries and

Associates in Separate Financial Statements

The Group obtains and exercises control through voting rights. The Group’s consolidated financial statements comprise the accounts of the Parent Company and its subsidiaries as enumerated in Note 1, after the elimination of material intercompany transactions. All intercompany balances and transactions with subsidiaries, including income, expenses and dividends, are eliminated in full. Unrealized profits and losses from intercompany transactions that are recognized in assets are also eliminated in full. Intercompany losses that indicate an impairment are recognized in the consolidated financial statements. The financial statements of subsidiaries are prepared for the same reporting period as the Parent Company, using consistent accounting policies.

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The Group accounts for its investments in subsidiaries and associates, and minority interest as follows: (a) Investments in Subsidiaries

Subsidiaries are all entities over which the Group has the power to control the financial and operating policies. The Parent Company obtains and exercises control through voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered from the date in which the Parent Company controls another entity. Subsidiaries are fully consolidated from the date when the Parent Company obtains control. They are de-consolidated from the date the control ceases. Acquired subsidiaries are subject to application of the purchase method for acquisitions. This involves the revaluation at fair value of all identifiable assets and liabilities, including contingent liabilities of the subsidiary, at the acquisition date, regardless of whether or not they were recorded in the financial statements of the subsidiary prior to acquisition. On initial recognition, the assets and liabilities of the subsidiary are included in the consolidated statement of condition at their revalued amounts, which are also used as the bases for subsequent measurement in accordance with the Group accounting policies. Goodwill (positive) represents the excess of acquisition cost over the fair value of the Group’s share of the identifiable net assets of the acquired subsidiary at the date of acquisition. Negative goodwill represents the excess of the Group’s share in the fair value of identifiable net assets of the subsidiary at date of acquisition over acquisition cost. All intercompany balances and transactions with subsidiaries, including the unrealized profits arising from intra-group transactions, have been eliminated in full. Unrealized losses are eliminated unless costs cannot be recovered.

(b) Transactions with Minority Interests

The Group applies a policy of treating transactions with minority interests as transactions with parties external to the Group. Disposals to minority interests result in gains and losses for the Group that are recorded in the income statement. Purchases of equity shares from minority interests may result in goodwill, being the difference between any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary. In the consolidated financial statements, minority interest component is shown as part of statements of changes in capital funds.

(c) Investments in Associates

Associates are those entities over which the Group is able to exert significant influence but which are neither subsidiaries nor interest in a joint venture. In the consolidated financial statements, Investments in Associates are initially recognized at cost and subsequently accounted for using the equity method. Under the equity method, the Group recognizes in its income statement its share in the earnings or losses of the associates. The cost of the investment is increased or decreased by the Group’s equity in net earnings or losses of the associates since the date of acquisition. Dividends received are recorded as reduction in the carrying values of the investments.

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Acquired investments in associates are also subject to purchase accounting. However, any goodwill or fair value adjustment attributable to the share in the associate is included in the amount recognized as investment in associates. All subsequent changes to the share of interest in the equity of the associate are recognized in the Group’s carrying amount of the investment. Changes resulting from the profit or loss generated by the associate are charged against Equity in Net Earnings of Associates in the Group’s income statement and therefore affect net results of the Group. These changes include subsequent depreciation, amortization or impairment of the fair value adjustments of assets and liabilities. Items that have been directly recognized in the associate’s equity, for example, resulting from the associate’s accounting for available-for-sale financial assets, are recognized in consolidated Capital Funds of the Group. Any non-financial income related equity movements of the associate that arise, for example, from the distribution of dividends or other transactions with the associate’s shareholders, are charged against the proceeds received or granted. No effect on the Group’s net result or capital funds is recognized in the course of these transactions. However, 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.

Unrealized gains on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the associates. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the assets transferred. Accounting policies of associates have been changed where necessary to ensure consistency with the policies adopted by the Group.

In the Parent Company financial statements, the Parent Company’s Investments in Subsidiaries and Associates are accounted for at cost, less any impairment loss. Investment costs are inclusive of unamortized positive goodwill, if any. If there is an objective evidence that the investments in subsidiaries and associates will not be recovered, an impairment loss is provided. Impairment loss is measured as the difference between the carrying amount of the investment and the present value of the estimated cash flows discounted at the current market rate of return for similar financial assets. The amount of the impairment loss is recognized in the profit or loss.

2.4 Segment Reporting

A business segment is a group of assets and operations engaged in providing products or services that are subject to risks and returns that are different from those of other business segments. A geographical segment is a segment engaged in providing products or services within a particular economic environment that is subject to risks and returns that are different from those of segments operating in other economic environments.

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2.5 Financial Assets

Financial assets include cash and other financial instruments. The Group classifies its financial assets, other than hedging instruments, into the following categories: financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments and available-for-sale securities. Financial assets are assigned to the different categories by management on initial recognition, depending on the purpose for which the investments were acquired. The designation of financial assets is re-evaluated at every reporting date at which date a choice of classification or accounting treatment is available, subject to compliance with specific provisions of applicable accounting standards. Cash and Cash Equivalents comprise balances with less than three months maturity from the date of acquisition, including cash and non-restricted balances with the BSP and amounts due from other banks. Cash and cash equivalents are initially and subsequently measured at fair value. Regular purchases and sales of financial assets are recognized on their trade date. All financial assets that are not classified as at fair value through profit or loss are initially recognized at fair value, plus transaction costs. Financial assets carried at fair value through profit or loss are initially recognized at fair value and transaction costs are expensed in the income statement. The foregoing categories of financial instruments are more fully described below.

(a) Financial Assets at Fair Value Through Profit or Loss

This category includes derivative financial instruments and financial assets that are either classified as held for trading or are designated by the entity to be carried at fair value through profit or loss upon initial recognition. A financial asset is classified in this category 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. Subsequent to initial recognition, the financial assets included in this category are measured at fair value with changes in fair value recognized in profit or loss. Financial assets may be reclassified out of fair value through profit or loss category if they are no longer held for the purpose of being sold or repurchased in the near term. Derivatives and financial assets originally designated as financial assets at fair value through profit or loss may not be subsequently reclassified, except for derivatives embedded in CLNs linked to ROP bonds as allowed by BSP for prudential reporting and SEC for financial reporting purposes.

(b) Loans and Receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the Group provides money, goods or services directly to the debtor with no intention of trading the receivables. Included in this category are those arising from direct loans to customers, interbank loans and receivables, sales contracts receivable and all receivables from customers and other banks.

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Loans and receivables are subsequently measured at amortized cost using the effective interest method, less impairment losses. Any change in their value is recognized in profit or loss, except for changes in fair values of reclassified financial assets under PAS 39 and PFRS 7 (Amendments). Increases in estimates of future cash receipts from such financial assets shall be recognized as an adjustment to the effective interest rate from the date of the change in estimate rather than as an adjustment to the carrying amount of the financial asset at the date of the change in estimate. Impairment losses is the estimated amount of losses in the Group’s loan portfolio, based on the evaluation of the estimated future cash flows discounted at the loan’s original effective interest rate or the last repricing rate for loans issued at variable rates (see Note 2.6). It is established through an allowance account which is charged to expense. Loans and receivables are written off against the allowance for impairment losses when management believes that the collectibility of the principal is unlikely, subject to BSP regulations.

(c) Held-to-maturity Investments

This includes non-derivative financial assets with fixed or determinable payments and a fixed date of maturity. Investments are classified as held-to maturity if the Group has the positive intention and ability to hold them until maturity. Investments intended to be held for an undefined period are not included in this classification. Held-to-maturity investments consist of government and private debt securities. Should the Group sell other than an insignificant amount of held-to-maturity assets, the entire category would be tainted and reclassified as available-for-sale securities. The tainting provision will not apply if the sales or reclassifications of held-to-maturity investments are so close to maturity or the financial asset’s call date that changes in the market rate of interest would not have a significant effect on the financial asset’s fair value; occur after the Group has collected substantially all of the financial asset’s original principal through scheduled payments or prepayments; or are attributable to an isolated event that is beyond the control of the Group, is nonrecurring and could not have been reasonably anticipated by the Group. Financial assets that are booked under the available-for-sale category because of the tainting provision may be reclassified to held-to-maturity investments or loans and receivables using the fair value carrying amount of the financial assets as of the date of reclassification in accordance with BSP Circular No. 628.

Held-to-maturity investments are subsequently measured at amortized cost using the effective interest method. In addition, if there is objective evidence that the investment has been impaired, the financial asset is measured at the present value of estimated cash flows (see Note 2.6). Any changes to the carrying amount of the investment due to impairment are recognized in profit or loss.

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(d) Available-for-sale Securities

This includes non-derivative financial assets that are either designated to this category or do not qualify for inclusion in any of the other categories of financial assets. Non-derivative financial asset classified as available-for-sale may be reclassified to loans and receivables category that would have met the definition of loans and receivables (effective in July 1, 2008) if there is an intention and ability to hold that financial asset for the foreseeable future or until maturity. Any previous gain or loss on the asset that has been recognized in the capital funds shall be amortized to profit or loss over the remaining life of the held-to-maturity investment, in case of financial asset with a fixed maturity, using the effective interest method. Any difference between the new amortized cost and maturity amount shall also be amortized over the remaining life of the financial asset using the effective interest method.

All financial assets within this category are subsequently measured at fair value, unless otherwise disclosed, with changes in value recognized in capital funds, net of any effects arising from income taxes. Gains and losses arising from securities classified as available-for-sale are recognized in the income statement when these are sold or when the investment is impaired.

In the case of impairment, the cumulative loss previously recognized directly in capital funds is transferred to the income statement (see Note 2.6). If circumstances change, impairment losses on available-for-sale equity instruments are not reversed through the income statement. On the other hand, if in subsequent period, the fair value of a debt classified as available-for-sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognized in income statement, the impairment loss is reversed through the income statement.

Impairment losses recognized on financial assets are presented as part of Impairment Losses account in the income statement. The fair values of quoted investments in active markets are based on current bid prices. If the market for a financial asset is not active (and for unlisted securities), the Group establishes the fair value by using valuation techniques, which include the use of recent arm’s length transactions, discounted cash flow analysis, option pricing models and other valuation techniques commonly used by market participants. Gains and losses arising from changes in the fair value of the financial assets at fair value through profit or loss category are included in Trading and Securities Gains (Losses) - Net account in the income statement in the period in which they arise. Gains and losses arising from changes in the fair value of available-for-sale securities are recognized directly in capital funds, until the financial asset is derecognized or impaired at which time the cumulative gain or loss previously recognized in capital funds shall be recognized in profit or loss. However, interest calculated using the effective interest method is recognized in the income statement. Dividends on available-for-sale equity instruments are recognized in the income statement when the entity’s right to receive payment is established. Non-compounding interest and other cash flows resulting from holding impaired financial assets are recognized in profit or loss when received, regardless of how the related carrying amount of financial assets is measured.

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Derecognition of financial assets occurs when the right to receive cash flows from the financial instruments expire or are transferred and substantially all of the risks and rewards of ownership have been transferred. 2.6 Impairment of Financial Assets The Group assesses at each statement of condition date whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses 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 (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. Objective evidence that a financial asset or group of assets is impaired includes observable data that comes to the attention of the Group about the following loss events: a. significant financial difficulty of the issuer or obligor; b. a breach of contract, such as a default or delinquency in interest or principal

payments; c. the Group granting to the borrower, for economic or legal reasons relating to the

borrower’s financial difficulty, a concession that the lender would not otherwise consider;

d. it becoming probable that the borrower will enter bankruptcy or other financial

reorganization; e. the disappearance of an active market for that financial asset because of financial

difficulties; or, f. observable data indicating that there is a measurable decrease in the estimated

future cash flows from a group of financial assets since the initial recognition of those assets, although the decrease cannot yet be identified with the individual financial assets in the group, including: adverse changes in the payment status of borrowers in the group, or national or local economic conditions that correlate with defaults on the assets in the group.

(a) Assets Carried at Amortized Cost

The Group first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant and individually or collectively for financial assets that are not individually significant. If the Group determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment. 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 of impairment.

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If there is objective evidence that an impairment loss on loans and receivable or held-to-maturity investments 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 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 the use of an allowance account and the amount of the loss is recognized in the income statement. If a loan or held-to-maturity investment has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract. As a practical expedient, the Group may measure impairment on the basis of an instrument’s fair value using an observable market price.

The calculation of the present value of the estimated future cash flows of a collateralized financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable.

For the purpose of a collective evaluation of impairment, financial assets are grouped on the basis of 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). 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.

Future cash flows in a group of financial assets that are collectively evaluated for impairment are estimated on the basis of the contractual cash flows of the assets in the group and historical loss experience for assets with credit risk characteristics similar to those in the group. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the period on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currently.

Estimates of changes in future cash flows for groups of assets should reflect and be directionally consistent with changes in related observable data from period to period (for example, changes in unemployment rates, property prices, payment status, or other factors indicative of changes in the probability of losses in the group and their magnitude). The methodology and assumptions used for estimating future cash flows are reviewed regularly by the Group to reduce any differences between loss estimates and actual loss experience.

When a loan/receivable is determined to be uncollectible, it is written off against the related allowance for impairment. Such loan/receivable is written off after all the prescribed procedures have been completed and the amount of the loss has been determined. Subsequent recoveries of amounts previously written off decrease the amount of impairment losses in the income statement. 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. The amount of the reversal is recognized in the income statement.

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(b) Assets Carried at Fair Value

In the case of equity investments classified as available-for-sale, a significant or prolonged decline in the fair value of the security below its cost is considered in determining whether the assets are impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognized in profit or loss – is removed from Capital Funds and recognized in the income statement. Impairment losses recognized in the income statement on equity instruments are not reversed through the income statement. If, in a subsequent period, the fair value of a debt instrument classified as available for sale 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 income statement.

(c) Assets Carried at Cost

If there is objective evidence of impairment for any of the unquoted equity securities and derivative assets linked to and required to be settled in such unquoted equity instruments, which are carried at cost, the amount of impairment loss is recognized. The impairment loss is the difference between the carrying amount of the equity security and the present value of the estimated future cash flows discounted at the current market rate of return of a similar asset. Impairment losses on assets carried at cost cannot be reversed.

2.7 Derivative Financial Instruments and Hedge Accounting The Parent Company is a party to various foreign currency forward contracts and cross-currency swaps. These contracts are entered into as a service to customers and as a means of reducing or managing the Parent Company’s foreign exchange and interest rate exposures as well as for trading purposes. Amounts contracted are recorded as contingent accounts that are not included in the statement of condition. Derivatives are initially recognized as Financial Assets at Fair Value Through Profit or Loss at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at their fair value. Fair values are obtained from quoted market prices in active markets and valuation techniques, including discounted cash flow models and options pricing models, as appropriate. The change in fair value of derivative financial instruments is recognized in profit or loss, except when their effects qualify as a hedging instrument. All derivatives are carried as assets when fair value is positive and as liabilities when fair value is negative. The best evidence of the fair value of a derivative at initial recognition is the transaction price (i.e., the fair value of the consideration given or received) unless the fair value of that instrument is evidenced by comparison with other observable current market transactions in the same instrument (i.e., without modification or repackaging) or based on a valuation technique whose variables include only data from observable markets. When such evidence exists, the Parent Company and certain subsidiaries recognize the profits at initial recognition.

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Certain derivatives embedded in other financial instruments, such as credit default swaps in a credit linked note, 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 changes in fair value recognized in the income statement except for the embedded derivatives in CLNs linked to ROP bonds which were not bifurcated from the host contracts and were reclassified to loans and receivables as permitted for prudential reporting. Except for derivatives that qualify as a hedging instrument, changes in fair value of derivatives are recognized in profit and loss. For a derivative that is designated as a hedging instrument, the method of recognizing the resulting fair value gain or loss depends on the type of hedging relationship. The Parent Company designates certain derivatives as either: (a) hedges of the fair value of recognized assets or liabilities or firm commitments (fair value hedges); or (b) hedges of highly probable future cash flows attributable to a recognized asset or liability, or a forecasted transaction (cash flow hedge). Hedge accounting is used for derivatives designated in this way provided certain criteria are met. 2.8 Offsetting Financial Instruments Financial assets and liabilities are offset and the net amounts are reported in the statement of condition when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or realize the asset and settle the liability simultaneously. 2.9 Bank Premises, Furniture, Fixtures and Equipment

Bank premises, furniture, fixtures and equipment are stated at cost less accumulated depreciation, amortization and any impairment in value. The cost of an asset comprises its purchase price and directly attributable costs of bringing the asset to working condition for its intended use. Expenditures for additions, improvements and renewals are capitalized; expenditures for repairs and maintenance are charged to expense as incurred. When assets are sold, retired or otherwise disposed of, their cost and related accumulated depreciation, amortization and impairment losses, if any, are removed from the accounts and any resulting gain or loss is reflected in income for the period. Depreciation is computed on the straight-line method over the estimated useful lives of the depreciable assets as follows:

Buildings 20-25 years Furniture, fixtures and equipment 3-15 years

Leasehold rights and improvements are amortized over the term of the lease or the estimated useful lives of the improvements, whichever is shorter. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount. The residual values and estimated useful lives of bank premises, furniture, fixtures and equipment are reviewed, and adjusted if appropriate, at each statement of condition date.

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An item of bank premises, furniture, fixtures and equipment is derecognized upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the item) is included in the income statement in the year the item is derecognized.

2.10 Investment Property Investment property pertains to land, buildings or condominium units foreclosed or acquired by the Group as payment from defaulting borrowers not held for sale in the next twelve months. Investment property is initially recognized at cost, which includes acquisition price plus directly attributable cost incurred such as legal fees, transfer taxes and other transaction costs. Subsequent to initial recognition, investment property is stated at cost less accumulated depreciation and any impairment losses. The Group adopted the cost model in measuring its investment property, hence, it is carried at cost less accumulated depreciation and any impairment in value. Depreciation and impairment loss are recognized in the same manner as in Bank Premises, Furniture, Fixtures and Equipment. Investment property is derecognized upon disposal or when permanently withdrawn from use or no future economic benefit is expected from its disposal. Any gain or loss on the retirement or disposal of an investment property is recognized in the income statement in the year of retirement or disposal.

2.11 Assets Held-for-Sale

Assets held-for-sale (presented as part of Other Resources) include real and other properties acquired through repossession or foreclosure or purchase that certain subsidiaries intend to sell within one year from the date of classification as held-for-sale. Assets classified as held-for-sale are measured at the lower of their carrying amounts, immediately prior to their classification as held-for-sale and their fair value less costs to sell. Assets classified as held-for-sale are not subject to depreciation or amortization. The profit or loss arising from the sale or revaluation of held-for-sale assets is included in the Other Operating Income (Expenses) account in the income statement. 2.12 Intangible Assets

Goodwill represents the excess of the cost of acquisition over the fair value of the net assets acquired and branch licenses at the date of acquisition. Goodwill is classified as intangible asset with indefinite useful life and, thus, not subject to amortization but would require an annual test for impairment. Goodwill is subsequently carried at cost less accumulated impairment losses. Goodwill is allocated to cash generating units for the purpose of impairment testing. Each of those cash generating units is represented by each primary reporting segment. Computer software licenses are capitalized on the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortized on the basis of the expected useful lives (three to five years).

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Costs associated with developing or maintaining computer software programs are recognized as an expense as incurred. Costs that are directly associated with the production of identifiable and unique software products controlled by the Group, and that will probably generate economic benefits exceeding costs beyond one year, are recognized as intangible assets. Direct costs include software development employee costs and an appropriate portion of relevant overheads. Computer software development costs recognized as assets are amortized using the straight-line method over their useful lives (not exceeding five years). 2.13 Financial Liabilities

Financial liabilities include deposit liabilities, bills payable, bonds payable, subordinated debt, outstanding acceptances payable, accrued taxes, interest and other expenses, and other liabilities. Financial liabilities are recognized when the Group becomes a party to the contractual agreements of the instrument. All interest-related charges are recognized as an expense in the income statement. Financial liabilities are generally at their fair value at initial recognition and subsequently measured at amortized cost less settlement payments. Deposit liabilities are stated at amounts in which they are to be paid. Interest is accrued periodically and recognized in a separate liability account before recognizing as part of deposit liabilities. Bills payable, bonds payable and subordinated debt are recognized initially at fair value, which is the issue proceeds (fair value of consideration received) net of direct issue costs. Bills payable, bonds payable and subordinated debt are subsequently stated at amortized cost; any difference between the proceeds net of transaction costs and the redemption value is recognized in the income statement over the period of the borrowings using the effective interest method. Preferred shares, if any, which carry mandatory coupons or are redeemable on a specific date or at the option of the shareholder, are classified as financial liabilities and are presented as part of Other Liabilities in the statement of condition. The dividends on these preference shares are recognized in the income statement as interest expense on an amortized cost basis using the effective interest method. Derivative financial liabilities represent the cumulative changes in net fair value losses arising from the Group’s foreign currency forward transactions. Dividend distributions to shareholders are recognized as financial liabilities when the dividends are approved by the BSP. Financial liabilities are derecognized from the statement of condition only when the obligations are extinguished either through discharge, cancellation or expiration.

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2.14 Provisions

Provisions are recognized when present obligations will probably lead to an outflow of economic resources and they can be estimated reliably even if the timing or amount of the outflow may still be uncertain. A present obligation arises from the presence of a legal or constructive commitment that has resulted from past events. Provisions are measured at the estimated expenditure required to settle the present obligation, based on the most reliable evidence available at the statement of condition date, including the risks and uncertainties associated with the present obligation. Any reimbursement expected to be received in the course of settlement of the present obligation is recognized, if virtually certain, as a separate asset at an amount not exceeding the balance of the related provision. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. In addition, long-term provisions are discounted to their present values, where time value of money is material. Provisions are reviewed at each statement of condition date and adjusted to reflect the current best estimate. In those cases where the possible outflow of economic resource as a result of present obligations is considered improbable or remote, or the amount to be provided for cannot be measured reliably, no liability is recognized in the financial statements. Probable inflows of economic benefits that do not yet meet the recognition criteria of an asset are considered contingent assets, hence are not recorded. Prior to 2007, Bankard, under a rewards program, offers monetized rewards to active cardholders. Provisions for rewards are recognized at a certain rate of cardholders’ credit card availments, determined by management based on redeemable amounts. At present, the prescription period for the redemption of the reward points has not been set. The program was assumed by the Parent Company when Bankard sold certain assets, including credit card receivables, to the Parent Company. 2.15 Revenue and Cost Recognition

Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognized:

(a) Interest income and expenses are recognized in the income statement for all instruments

measured at amortized cost using the effective interest method. 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.

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Once a financial asset or a group of similar financial assets has been written down as a result of an impairment loss, interest income is recognized using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss.

(b) Trading and securities gains (losses) recognized when the ownership of the securities is transferred to the buyer (at an amount equal to the excess or deficiency of the selling price over the carrying amount of securities) and as a result of the mark-to-market valuation of the securities at year-end.

(c) Finance charges are recognized on credit card revolving accounts, other than those

accounts classified as installment, as income as long as those outstanding account balances are not 90 days and over past due. Finance charges on installment accounts, first year and renewal membership fees are recognized as income when billed to cardholders. Purchases by cardholders which are collected on installment are recorded at the cost of items purchased.

(d) Late payment fees are billed on delinquent credit card receivable balances until 179 days past due. These late payment fees are recognized as income upon collection.

(e) Loan fees are recognized as earned over the terms of the credit lines granted to each borrower. Loan syndication fees are recognized upon completion of all syndication activities and where there are no further obligations to perform under the syndication agreement. Service charges and penalties are recognized only upon collection or accrued where there is a reasonable degree of certainty as to its collectibility.

(f) Discounts earned, net of interchange costs, are recognized as income upon

presentation by member establishments of charges arising from Bankard and non-Bankard (associated with MasterCard, JCB and VISA labels) credit card availments passing through the credit terminals of Bankard. These discounts are computed based on agreed rates and are deducted from amounts remitted from member establishments. Interchange costs pertain to the other credit card companies’ share in Bankard’s merchant discounts whenever their issued credit cards transact in a Bankard terminal.

(g) Profit from assets sold or exchanged is recognized when the title to the acquired assets is transferred to the buyer, or when the collectibility of the entire sales price is reasonably assured.

Cost and expenses are recognized in the income statement upon utilization of the assets or services or at the date they are incurred.

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2.16 Leases (a) Group as Lessee

Leases which transfer to the Group substantially all risks and benefits incidental to ownership of the leased item are classified as finance leases and are recognized as assets and liabilities in the balance sheets at amounts equal at the inception of the lease to the fair value of the leased property or, if lower, at the present value of minimum lease payments. Lease payments are apportioned between the finance costs and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance costs are directly charged against income. Capitalized leased assets are depreciated over the shorter of the estimated useful life of the asset or the lease term. Leases, which do not transfer to the Group substantially all the risks and benefits of ownership of the asset, are classified as operating leases. Operating lease payments are recognized as expense in the income statement on a straight-line basis over the lease term. Associated costs, such as maintenance and insurance, are expensed as incurred.

(b) Group as Lessor

Leases, wherein the Group substantially transfers to the lessee all risks and benefits incidental to ownership of the leased item, are classified as finance leases and are presented as receivable at an amount equal to the Group’s net investment in the lease. Finance income is recognized based on the pattern reflecting a constant periodic rate of return on the Group’s net investment outstanding in respect of the finance lease. Leases, which do not transfer to the lessee substantially all the risks and benefits of ownership of the asset are classified as operating leases. Operating lease collections are recognized as income in the income statement on a straight-line basis over the lease term.

The Group determines whether an arrangement is, or contains a lease based on the substance of the arrangement. It makes an assessment of whether the fulfillment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset.

2.17 Functional Currency and Foreign Currency Transactions

(a) Functional and Presentation Currency

Items included in the financial statements of the Group are measured using the currency of the primary economic environment in which the entity operates (the functional currency). The financial statements are presented in Philippine pesos, which is the Group’s functional currency.

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(b) Transaction and Balances Except for the foreign subsidiaries and accounts from the Group’s foreign currency denominated unit (FCDU), the accounting records of the Group are maintained in

Philippine pesos. Foreign currency transactions during the period are translated into the functional currency at exchange rates which approximate those prevailing at transaction dates. Resources and liabilities denominated in foreign currencies are translated to Philippine pesos at prevailing Philippine Dealing System closing rates (PDSCR) at the statement of condition date.

For financial reporting purposes, the accounts of the FCDU are translated into their

equivalents in Philippine pesos based on PDSCR prevailing at the end of the year (for resources and liabilities) and at the average PDSCR for the year (for income and expenses).

Foreign exchange gains and losses resulting from the settlement of such transactions

and from the translation at year-end exchange rates of monetary resources and liabilities denominated in foreign currencies are recognized in the income statement, except when deferred in capital funds as qualifying cash flow hedges and qualifying net investment hedges. Translation differences on non-monetary items, such as equities held at fair value through profit or loss, are reported as part of the fair value gain or loss. Translation differences on non-monetary items, such as equities classified as available-for-sale financial assets, are recognized as part of the unrealized gain or loss in the market value of available-for-sale securities presented in capital funds.

(c) Translation of Financial Statements of Foreign Subsidiaries

The results and financial position of all the foreign subsidiaries (none of which has the currency dependency of a hyperinflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows: • Assets and liabilities for each statement of condition presented are translated at

the closing rate at the date of that statement of condition;

• Income and expenses for each income statement are translated at average exchange rates during the year (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transactions dates, in which case income and expenses are translated at the dates of the transactions); and

• All resulting exchange differences are recognized as a separate component of capital funds.

On consolidation, exchange differences arising from the translation of the net investment in foreign entities are taken to Capital Funds. When a foreign operation is sold, such exchange differences are recognized in the income statement as part of the gain or loss on sale. The translation on the financial statements into Philippine peso should not be construed as a representation that the amounts stated in currencies other than the Philippine peso could be converted in Philippine peso amounts at the translation rates or at any other rates of exchange.

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2.18 Impairment of Non-financial Assets The Group’s investments in associates, bank premises, furniture, fixtures and equipment, investment property and other resources (including intangible assets) are subject to impairment testing. Intangible assets with an indefinite useful life or those not yet available for use are tested for impairment at least annually. All other individual assets or cash-generating units are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. For purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). As a result, some assets are tested individually for impairment and some are tested at cash-generating unit level. An impairment loss is recognized for the amount by which the asset or cash-generating unit’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of fair value, reflecting market conditions less costs to sell and value in use, based on an internal discounted cash flow evaluation. Impairment loss is charged pro rata to the other assets in the cash generating unit. All assets are subsequently reassessed for indications that an impairment loss previously recognized may no longer exist and the carrying amount of the asset is adjusted to the recoverable amount resulting in the reversal of the impairment loss. 2.19 Employee Benefits (a) Retirement Benefit Asset/Obligation

Pension benefits are provided to employees through a defined benefit plan, as well as

defined contribution plans. A defined benefit plan is a pension plan that defines an amount of pension benefit

that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and salary. The legal obligation for any benefits from this kind of pension plan remains with the Group, even if plan assets for funding the defined benefit plan have been acquired. Plan assets may include assets specifically designated to a long-term benefit fund, as well as qualifying insurance policies. The Group’s defined benefit pension plan covers all regular full-time employees. The pension plan is tax-qualified, noncontributory and administered by a trustee.

The liability recognized in the statement of condition for defined benefit pension

plans is the present value of the defined benefit obligation (DBO) at the statement of condition date less the fair value of plan assets, together with adjustments for unrecognized actuarial gains or losses and past service costs. The DBO is calculated by independent actuaries using the projected unit credit method. The present value of the DBO is determined by discounting the estimated future cash outflows using interest rates of high quality corporate bonds that are denominated in the currency in which the benefits will be paid and that have terms to maturity approximating the terms of the related pension liability.

Actuarial gains and losses are not recognized as an expense unless the total

unrecognized gain or loss exceeds 10% of the greater of the obligation and related plan assets. The amount exceeding this 10% corridor is charged or credited to profit or loss over the employees’ expected average remaining working lives.

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Actuarial gains and losses within the 10% corridor are disclosed separately. Past-service costs are recognized immediately in the income statement, 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.

A defined contribution plan is a pension plan under which the Group pays fixed

contributions into an independent entity such as the Social Security System. The Group has no legal or constructive obligations to pay further contributions after payment of the fixed contribution. The contributions recognized in respect of defined contribution plans are expensed as they fall due. Liabilities and assets may be recognized if underpayment or prepayment has occurred and are included in current liabilities or current assets as they are normally of a short term nature.

(b) Compensated Absences

Compensated absences are recognized for the number of paid leave days

(including holiday entitlement) remaining at the statement of condition date. They are included in the Accrued Taxes, Interest and Other Expenses account at the undiscounted amount that the Group expects to pay as a result of the unused entitlement.

2.20 Income Taxes Current tax assets or liabilities comprise those claims from, or obligations to, tax authorities relating to the current or prior reporting period, that are unpaid at the statement of condition date. They are calculated according to the tax rates and tax laws applicable to the periods to which they relate, based on the taxable profit for the year. All changes to current tax assets or liabilities are recognized as a component of Tax Expense in the income statement. Deferred 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. Under the balance sheet liability method, with certain exceptions, deferred tax liabilities are recognized for all taxable temporary differences and deferred tax assets are recognized for all deductible temporary differences and the carryforward of unused tax losses and unused tax credits to the extent that it is probable that taxable profit will be available against which the deferred tax assets can be utilized. The carrying amount of deferred tax assets is reviewed at each statement of condition date and reduced to the extent that it is probable that sufficient taxable profit will be available to allow all or part of the deferred tax assets to be utilized. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realized or the liability is settled, based on tax rates and tax laws that have been enacted or substantively enacted at the statement of condition date. Most changes in deferred tax assets or liabilities are recognized as a component of tax expense in the income statement. Only changes in deferred tax assets or liabilities that relate to a change in value of assets or liabilities that is charged directly to capital funds are charged or credited directly to capital funds.

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2.21 Related Parties

Parties are considered related when one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Parties are also considered to be related if they are subject to common control or common significant influence. Related parties may be individuals or corporate entities. 2.22 Capital Funds

Preferred and common stocks are carried at their nominal values. Hybrid perpetual securities reflect the net proceeds from the issuance of non-cumulative step-up callable perpetual securities. Capital paid in excess of par includes any premiums received on the initial issuance of capital stock. Any transaction costs associated with the issuance of shares are deducted from additional paid-in capital, net of any related income tax benefits. Revaluation reserves on available-for-sale securities pertain to changes in the fair values of available-for-sale securities resulting in net gains and losses as a result of the revaluation of available-for-sale financial assets. Revaluation increment in property of an associate consists of gains arising from the revaluation of land. Accumulated translation adjustment represents the cumulative gain from the translation of the financial statements of foreign subsidiaries whose functional currency is different to that of the Group. Reserve for trust business represents the accumulated amount set aside under existing regulations requiring the Parent Company and a subsidiary to carry to surplus 10% of its net profits accruing from trust business until the surplus shall amount to 20% of authorized capital stock. The reserve shall not be paid out in dividends, but losses accruing in the course of the trust business may be charged against this account. Other Reserves refers to the amount attributable to the Parent Company arising from the change in the ownership of the minority interest in the Parent Company’s subsidiary. Share in additional paid-in capital of an associate represents the share of the Parent Company in the additional paid-in capital of an associate accounted for under the equity method in the consolidated financial statements. Surplus includes all current and prior period results as disclosed in the income statement. Minority interests represent the portion of the net assets and profit or loss not attributable to the Group and are presented separately in the Group income statement and within equity in the Group statements of condition and changes in equity.

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2.23 Earnings Per Share

Basic earnings per share is determined by dividing the net income for the year attributable to common shareholders by the weighted average number of common shares outstanding during the year, after giving retroactive effect to any stock dividends declared in the current year.

Diluted earnings per common share is also computed by dividing net income by the weighted average number of common shares subscribed and issued during the period. However, net income attributable to common shares and the weighted average number of common shares outstanding are adjusted to reflect the effects of potentially dilutive preferred shares. Preferred shares are deemed to have been converted into common shares at transaction date. 2.24 Trust Activities The Group commonly acts as trustees and in other fiduciary capacities that result in the holding or placing of assets on behalf of individuals, trusts, retirement benefit plans and other institutions. These assets and income arising thereon are excluded from these financial statements, as they are not assets of the Group. 2.25 Subsequent Events

Any post-year-end event that provides additional information about the Group’s position at the statement of condition date (adjusting event) is reflected in the financial statements. Post-year-end events that are not adjusting events, if any, are disclosed when material to the financial statements.

3. CRITICAL ACCOUNTING JUDGMENTS AND ESTIMATES

The preparation of the financial statements require management to make judgments and estimates that affect amounts reported in the financial statements and related notes. Judgments and estimates are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under circumstances. Actual results may ultimately vary from these estimates.

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3.1 Critical Management Judgments in Applying Accounting Policies

In the process of applying the Group’s and the Parent Company’s accounting policies, management has made the following judgments, apart from those involving estimation, which have the most significant effect on the amounts recognized in the financial statements.

(a) Held-to-maturity Investments

The Group follows the guidance of PAS 39, Financial Instruments: Recognition and Measurement, in classifying non-derivative financial assets with fixed or determinable payments and fixed maturity as held-to-maturity. This classification 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 at maturity other than for the allowed specific circumstances – for example, selling a not insignificant amount close to maturity – it will be required to reclassify the entire class to available-for-sale securities. However, the tainting provision will not apply if the sales or reclassifications of held-to-maturity investments are so close to maturity or the financial asset’s call date that changes in the market rate of interest would not have a significant effect on the financial asset’s fair value; or occurs after the Group has collected substantially all of the financial asset’s original principal through scheduled payments or prepayments; or are attributable to an isolated event that is beyond the control of the Group, is nonrecurring and could not have been reasonably anticipated by the Group. The investments would therefore be measured at fair value and not at amortized cost. In 2008, the Group was permitted by the BSP and SEC to reclassify certain financial assets previously classified under AFS category due to the tainting of HTM portfolio back to HTM category (see Note 2.1).

(b) Impairment of Available-for-sale Securities

The Group also follows the guidance of PAS 39 on determining when an investment is other-than-temporarily impaired. This determination requires significant judgment. In making this judgment, the Group evaluates, among other factors, the duration and extent to which the fair value of an investment is less than its cost; and the financial health of and near-term business outlook for the investee, including factors such as industry and sector performance, changes in technology and operational and financing cash flow. For investments issued by counterparty under bankcruptcy, the Group determines permanent impairment based on the price of the most recent transaction and on latest indications obtained from reputable counterparties (which regularly quotes prices for distressed securities) since current bid prices are no longer available. The Group recognized allowance for impairment on its available-for-sale financial assets amounting to P811,207 in 2008 and P779,304 in 2007 both in the consolidated and Parent Company’s financial statements (see Note 10).

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(c) Distinction Between Investment Property and Owner-occupied Properties

The Group determines whether a property qualifies as investment property. In making its judgment, the Group considers whether the property generated cash flows largely independently of the other assets held by an entity. Owner-occupied properties generate cash flows that are attributable not only to property but also to other assets used in the production or supply process. Some properties comprise a portion that is held to earn rental or for capital appreciation and another portion that is held for use in the production and supply of goods and services or for administrative purposes. If these portion can be sold separately (or leased out separately under finance lease), the Group accounts for the portions separately. If the portion cannot be sold separately, the property is accounted for as investment property only if an insignificant portion is held for use in operations or for administrative purposes. Judgment is applied in determining whether ancillary services are so significant that a property does not qualify as investment property. The Group considers each property separately in making its judgment.

(d) Operating and Finance Leases

The Group has entered into various lease agreements as either a lessor or lessee. Critical judgment was exercised by management to distinguish each lease agreement as either an operating or finance lease by looking at the transfer or retention of significant risk and rewards of ownership of the properties covered by the agreements. Rent expense charged to operations amounted to P477,383 in 2008, P440,943 in 2007 and P384,876 in 2006 in the consolidated financial statements; and P374,226 in 2008, P363,779 in 2007 and P339,240 in 2006 in the Parent Company financial statements (see Note 27).

(e) Classification of Acquired Properties and Fair Value Determination of Assets Held- for-Sale and Investment Property

The Group classifies its acquired properties as Bank Premises, Furniture, Fixtures and Equipment if used in operations, as Assets Held-for-Sale if the Group expects that the properties will be recovered through sale rather than use, as Investment Property if the Group intends to hold the properties for capital appreciation or as Financial Assets in accordance with PAS 39. At initial recognition, the Group determines the fair value of acquired properties through internally and externally generated appraisal. The appraised value is determined based on the current economic and market conditions, as well as the physical condition of the property.

(f) Provisions and Contingencies

Judgment is exercised by management to distinguish between provisions and contingencies. Policies on recognition and disclosure of provision and disclosure of contingencies are discussed in Note 2.14 and relevant disclosures are presented in Note 31.

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3.2 Key Sources of Estimation Uncertainty

The following are the key assumptions concerning the future, and other key sources of estimation uncertainty at the statement of condition date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year.

(a) Impairment Losses on Financial Assets (Loans and Receivables and Held-to-maturity

Investments)

The Group reviews its loan and held-to-maturity investments portfolios to assess impairment at least on an annual basis. In determining whether an impairment loss should be recorded in the income statement, the Group makes judgments as to whether there is any observable data indicating that there is a measurable decrease in the estimated future cash flows from the portfolio before the decrease can be identified with an individual item in that portfolio. This evidence may include observable data indicating that there has been an adverse change in the payment status of borrowers or issuers in a group, or national or local economic conditions that correlate with defaults on assets in the group. Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the portfolio when scheduling its future cash flows. The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. The Group carries certain financial assets at fair value, which requires the extensive use of accounting estimates and judgment. Significant components of fair value measurement were determined using verifiable objective evidence such as foreign exchange rates, interest rates, volatility rates. However, the amount of changes in fair value would differ if the Group utilized different valuation methods and assumptions. Any change in fair value of these financial assets and liabilities would affect profit and loss and equity.

Impairment losses-net of recoveries amounted to P998,492 in 2008, P942,490 in 2007 and P1,749,368 in 2006 in the consolidated financial statements; and P830,597 in 2008, P680,535 in 2007 and P462,528 in 2006 in the Parent Company financial statements (see Note 16).

(b) Useful Lives of Bank Premises, Furniture, Fixtures and Equipment and Investment Property

The Group estimates the useful lives of bank premises, furniture, fixtures and equipment and investment property based on the period over which the assets are expected to be available for use. The estimated useful lives of bank premises, furniture, fixtures and equipment and investment property are reviewed periodically and are updated if expectations differ from previous estimates due to physical wear and tear, technical or commercial obsolescence and legal or other limits on the use of the assets. The carrying amount of bank premises, furniture, fixtures and equipment and investment property are analyzed in Notes 13 and 14, respectively. Actual results, however, may vary due to changes in estimates brought about by changes in factors mentioned above. There are no changes in the useful lives of bank premises, furniture, fixtures and equipment and investment property during the year.

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(c) Fair Values of Financial Assets and Liabilities

The following table summarizes the carrying amounts and fair values of those significant financial assets and liabilities not presented on the statement of condition at their fair value.

Consolidated

2008 2007 Cost Fair Value Cost Fair Value

Due from BSP P 16,390,973 P 16,390,973 P 17,611,380 P 17,611,380 Due from other banks 4,862,225 4,862,225 4,744,925 4,744,925 Held-to-maturity investments 20,673,614 19,483,613 - - Loans and receivables 164,402,907 164,306,650 117,195,202 117,195,202 Deposit liabilities:

Demand 11,125,069 11,125,069 10,765,240 10,765,240 Savings 75,738,446 75,738,446 66,769,816 66,769,816 Time 109,363,471 109,363,471 98,393,819 98,393,819

Bills payable 21,452,609 21,452,609 12,820,500 12,820,500 Bonds payable 6,002,821 6,002,821 5,650,670 5,650,670 Subordinated debt 6,941,899 6,941,899 5,158,070 5,158,070

Parent

2008 2007 Cost Fair Value Cost Fair Value

Due from BSP P 15,656,119 P 15,656,119 P 16,750,323 P 16,750,323 Due from other banks 3,197,593 3,197,593 3,021,668 3,021,668 Held-to-maturity investments 17,892,114 16,764,396 - - Loans and receivables 130,292,206 130,195,949 88,056,623 88,056,623 Deposit liabilities

Demand 8,392,524 8,392,524 7,581,932 7,581,932 Time 84,267,161 84,267,161 77,219,209 77,219,209 Savings 66,269,393 66,269,393 57,690,027 57,690,027

Bills payable 21,410,087 21,410,087 12,477,910 12,477,910 Bonds payable 6,002,821 6,002,821 5,650,670 5,650,670 Subordinated debt 6,941,899 6,941,899 5,158,070 5,158,070 See Notes 2.5 and 2.13 for a description of the accounting policies for each category of financial instrument. A description of Group’s risk management objectives and policies for financial instruments is provided in Note 4.

(d) Fair Value of Derivatives

The fair value of derivative financial instruments that are not quoted in an active market are determined through valuation techniques using the net present value computation.

Valuation techniques are used to determine fair values which are validated and periodically reviewed. To the extent practicable, models use observable data, however, areas such as credit risk (both own and counterparty), volatilities and correlations require management to make estimates. Changes in assumptions could affect reported fair value of financial instruments. The Group uses judgment to select a variety of methods and make assumptions that are mainly based on market conditions existing at each statement of condition date.

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(e) Realizable Amount of Deferred Tax Assets

The Group reviews its deferred tax assets at each statement of condition date and reduces the carrying amount to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilized. The carrying value of deferred tax assets as of December 31, 2008 and 2007 is disclosed in Note 28.

(f) Impairment of Non-financial Assets

Except for intangible assets with indefinite useful lives, PFRS requires that an impairment review be performed when certain impairment indicators are present. The Group’s policy on estimating the impairment of non-financial assets is discussed in detail in Note 2.18. Though management believes that the assumptions used in the estimation of fair values reflected in the financial statements are appropriate and reasonable, significant changes in these assumptions may materially affect the assessment of recoverable values and any resulting impairment loss could have a material adverse effect on the results of operations.

(g) Retirement Benefits The determination of the Group’s obligation and cost of pension and other retirement benefits is dependent on the selection of certain assumptions used by actuaries in calculating such amounts. Those assumptions are described in Note 26 and include, among others, discount rates, expected return on plan assets and salary increase rate. In accordance with PFRS, actual results that differ from the assumptions are accumulated and amortized over future periods and therefore, generally affect the recognized expense and recorded obligation in such future periods. The retirement benefit asset and net unrecognized actuarial losses amounted to P75,583 and P168,676, respectively, in the 2008 consolidated financial statements, and P5,351 and P138,817, respectively, in the 2007 consolidated financial statements. The retirement benefit asset and net unrecognized actuarial losses amounted to P36,225 and P257,339, respectively, in the 2008 Parent Company financial statements, and P6,641 and P146,572, respectively, in the 2007 Parent Company financial statements. While the fair value of plan assets amounted to P1,167,540 and P1,670,105 in the 2008 and 2007 consolidated financial statements, respectively, and P772,209 and P1,352,251 in the 2008 and 2007 Parent Company financial statements, respectively (see Note 26).

4. RISK MANAGEMENT POLICIES AND OBJECTIVES

The Group is exposed to risks that are particular to its operating, investing, and financing activities, and the business environment in which it operates. The Group’s objective in risk management is to ensure that it identifies, measures, monitors, and controls the various risks that arise from its business activities, and that it adheres strictly to the policies, procedures, and control systems which are established to address these risks.

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4.1 Parent Company’s and RSB’s Strategy in Using Financial Instruments Majority of the Group’s operating, investing and financing activities are undertaken by the Parent Company and RSB, its subsidiary savings bank. It is the Parent Company’s and RSB’s intent to generate returns mainly from their traditional financial intermediation and service-provision activities, rather than from any substantial positions based on views of the financial markets. The main source of risk, therefore, remains to be that arising from credit risk exposures. Nevertheless, within BSP regulatory constraints, and subject to limits and parameters established by the BOD, the Parent Company and RSB are exposed to liquidity risk and interest rate risk inherent in the statement of condition, and other market risks, which include foreign exchange risk. In the course of performing financial intermediation function, the Parent Company and RSB accept deposits from customers at fixed and floating rates, and for various periods, and seek to earn above-average interest margins by investing these funds in high-quality assets. Given a normal upward-sloping yield curve, a conventional strategy to enhance margin is the investment of short-term funds in longer-term assets, including fixed-income securities. While, in doing so, the Parent Company and RSB maintain liquidity at prudent levels to meet all claims that fall due, the Parent Company and RSB fully recognize the consequent interest rate risk exposure. Foreign exchange risk arises from the Parent Company’s and RSB’s net foreign exchange positions. The investment portfolio is composed mainly of marketable, sovereign-risk fixed-income securities. It also includes a small portfolio of equity securities and a modest exposure to credit derivatives, in most of which the underlying is Republic of the Philippines sovereign debt. Other than aforementioned derivatives, short-term foreign currency forward contracts are used mostly in the context of swap transactions where an offsetting spot position is taken at the same time. There are outstanding long-term, cross-currency swaps where the Parent Company is committed to pay fixed-rate interest and principal in US dollars and is entitled to receive fixed-rate interest and principal in pesos. But these closely match, in terms of interest rate characteristics, tenor and amount, the local currency Subordinated Debt issued in 2003 which was redeemed in 2008 on one hand, and certain foreign currency denominated assets on the other. A committee system is a fundamental part of the Parent Company’s and RSB’s process of managing risk. Three committees of the BOD are relevant in this context: • The Executive Committee, which meets weekly, approves credit policies and

decides on large counter-party credit facilities and limits.

• The Risk Management Committee (RMC), which meets monthly, carries out the BOD’s oversight responsibility for risk management, covering credit, market and operational risk. Market risk limits are reviewed and approved by the RMC.

• The Audit Committee, which meets monthly, reviews results of Internal Audit examinations and recommends remedial actions to the BOD as appropriate.

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Two senior management committees also provide a regular forum, at a lower-level, to take up risk issues:

• The Credit and Collection Committee, chaired by the Chief Executive Officer and composed of the heads of credit risk-taking business units and the head of credit risk management, meets weekly to review and approve credit exposures within its authority. It also reviews plans and progress on the resolution of problem loan accounts.

• The Asset/Liability Committee (ALCO), chaired by the Treasurer of the Parent Company but with the Chief Executive Officer and key business and support unit heads including the President of RSB participating, meets weekly to appraise market trends, and economic and political developments. It provides direction in the management of interest rate risk, liquidity risk, foreign currency risk, and trading and investment portfolio decisions. It sets prices/rates for various asset and liability and trading products, in light of funding costs and competitive and other market conditions. It receives confirmation that market risk limits (as described in the succeeding page) are not breached; or if breached, provides guidance on the handling of the relevant risk exposure.

The Parent Company established a Corporate Risk Management Services (CRISMS) group, headed by a chief risk officer, to ensure that the objectives of risk identification, measurement and/or assessment, mitigation, and monitoring are pursued via practices commensurate with the risk profile. CRISMS is independent of all risk-taking business segments and reports directly to the BOD’s RMC. It participates in the Credit and Collection Committee (through the head of credit risk management) and in ALCO. In addition to the risk management systems and controls, the Parent Company and RSB hold capital commensurate with the levels of risk they undertake (see Note 5.1) in accordance with minimum regulatory capital requirements. 4.2 Liquidity Risk

Liquidity risk is the potential insufficiency of funds available to meet the credit demands of the Parent Company’s and RSB’s customers and repay maturing liabilities. The Parent Company and RSB manage liquidity risk by limiting the maturity mismatch between assets and liabilities, and by holding sufficient liquid assets of appropriate quality and marketability. The Parent Company and RSB recognize the liquidity risk inherent in their activities, and identify, measure, monitor and control the liquidity risk inherent as financial intermediaries. The Parent Company’s and RSB’s liquidity policy is to manage its operations to ensure that funds available are more than adequate to meet credit demands of its customers and to enable deposits to be repaid on maturity. The Parent Company’s and RSB’s liquidity policies and procedures are set out in its funding and liquidity plan which contains certain funding requirement based on assumptions and uses asset and liability maturity gap analysis.

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The gap analyses as of December 31, 2008 and 2007 in accordance with account classification of the BSP are presented below (amounts in millions).

Parent and RSB 2008 One to Three One to More Three Months to Five Than Five Months One Year Years Years Non-maturity Total Resources: Cash P 1,202 P - P - P - P 5,588 P 6,790 Cash equivalents 5,645 - - - 15,723 21,368 Loans and receivables 38,683 11,028 22,661 17,443 86,203 176,018 Investments 17,110 2,342 11,089 16,075 9,020 55,636 Other resources 298 53 179 114 23,591 24,235 Total resources 62,938 13,423 33,929 33,632 140,125 284,047 Liabilities: Deposits liabilities 44,142 13,766 3,771 - 136,292 197,971 Bills payable and due to other banks 11,451 5,902 3,321 771 1 21,446 Bonds payable - - - 6,003 - 6,003 Subordinated debt - 6,942 - - - 6,942 Other liabilities 3,988 10 - - 5,445 9,443 Total liabilities 59,581 26,620 7,092 6,774 141,738 241,805 Capital funds - - - - 30,674 30,674

Total liabilities and capital

funds 59,581 26,620 7,092 6,774 172,412 272,479

On-book gap 3,357 ( 13,197 ) 26,837 26,858 ( 32,287 ) 11,568 Cumulative on-book gap 3,357 ( 9,840 ) 16,997 43,855 11,568 -

Contingent resources 44,951 3,760 549 - - 49,260 Contingent liabilities 25,487 3,702 2,447 - 3,021 34,657 Total gap 19,464 58 ( 1,898 ) - ( 3,021 ) 14,603 Cumulative off-book gap 19,464 19,522 17,624 17,624 14,603 -

Cumulative total gap P 22,821 P 9,682 P 34,621 P 61,479 P 26,171 P -

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Parent and RSB 2007 One to Three One to More Three Months to Five Than Five Months One Year Years Years Non-maturity Total Resources: Cash P 1,048 P - P - P - P 4,816 P 5,864 Cash equivalents 6,129 - - - 16,443 22,572 Loans and receivables 17,450 7,890 17,137 9,738 71,559 123,774 Investments 35,479 3,931 9,489 10,871 17,690 77,460 Other resources - - - - 19,974 19,974 Total resources 60,106 11,821 26,626 20,609 130,482 249,644 Liabilities: Deposits liabilities 27,166 2,319 3,855 - 142,918 176,258 Bills payable and due to other banks 6,217 3,513 2,894 671 - 13,295 Bonds payable 441 - - 5,210 - 5,651 Subordinated debt - 5,158 - - - 5,158 Other liabilities 4,126 55 - - 5,268 9,449 Total liabilities 37,950 11,045 6,749 5,881 148,186 209,811 Capital funds - - - - 31,408 31,408

Total liabilities and capital

funds 37,950 11,045 6,749 5,881 179,594 241,219

On-book gap 22,156 776 19,877 14,728 ( 49,112 ) 8,425 Cumulative on-book gap 22,156 22,932 42,809 57,537 8,425 -

Contingent resources 23,698 8,233 - - 4,258 36,189 Contingent liabilities 24,796 7,843 - - 6,849 39,488 Total gap ( 1,098 ) 390 - - ( 2,591 ) ( 3,299 ) Cumulative off-book gap ( 1,098 ) ( 708 ) ( 708 ) ( 708 ) ( 3,299 ) -

Cumulative total gap P 21,058 P 22,224 P 42,101 P 56,829 P 5,126 P -

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Parent Only 2008 One to Three One to More Three Months to Five Than Five Months One Year Years Years Non-maturity Total Resources : Cash P 8 P - P - P - P 5,588 P 5,596 Cash equivalents 3,553 - - - 15,301 18,854 Loans and receivables 35,334 2,810 2,197 5,539 84,412 130,292 Investments 16,980 1,948 9,977 14,388 9,072 52,365 Other resources - - - - 18,745 18,745 Total resources 55,875 4,758 12,174 19,927 133,118 225,852 Liabilities: Deposits liabilities 23,415 12,142 30 - 123,342 158,929 Bills payable and due to other banks 11,416 5,902 3,321 771 1 21,411 Bonds payable - - - 6,003 - 6,003 Subordinated debt - 6,942 - - - 6,942 Other liabilities 3,605 10 - - 4,318 7,933 Total liabilities 38,436 24,996 3,351 6,774 127,661 201,218 Capital funds - - - - 24,634 24,634

Total liabilities and capital

funds 38,436 24,996 3,351 6,774 152,295 225,852

On-book gap 17,439 ( 20,238 ) 8,823 13,153 ( 19,177 ) - Cumulative on-book gap 17,439 ( 2,799 ) 6,024 19,177 - -

Contingent resources 44,951 3,760 549 - - 49,260 Contingent liabilities 25,485 3,702 2,447 - 1,235 32,869 Total gap 19,466 58 ( 1,898 ) - ( 1,235 ) 16,391 Cumulative off-book gap 19,466 19,524 17,626 17,626 16,391 -

Cumulative total gap P 36,905 P 16,725 P 23,650 P 36,803 P 16,391 P -

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Parent Only 2007 One to Three One to More Three Months to Five Than Five Months One Year Years Years Non-maturity Total Resources : Cash P 12 P - P - P - P 4,816 P 4,828 Cash equivalents 3,329 - - - 16,443 19,772 Loans and receivables 14,848 1,851 45 8 71,305 88,057 Investments 32,609 3,893 8,934 6,342 17,690 69,468 Other resources - - - - 19,396 19,396 Total resources 50,798 5,744 8,979 6,350 129,650 201,521 Liabilities: Deposits liabilities 11,212 937 16 - 130,326 142,491 Bills payable and due to other banks 6,175 3,513 2,894 671 - 13,253 Bonds payable 441 - - 5,210 - 5,651 Subordinated debt - 5,158 - - - 5,158 Other liabilities 3,782 55 - - 4,335 8,172 Total liabilities 21,610 9,663 2,910 5,881 134,661 174,725 Capital funds - - - - 26,796 26,796

Total liabilities and capital

funds 21,610 9,663 2,910 5,881 161,457 201,521

On-book gap 29,188 ( 3,919 ) 6,069 469 ( 31,807 ) - Cumulative on-book gap 29,188 25,269 31,338 31,807 - -

Contingent resources 23,695 8,233 - - - 31,928 Contingent liabilities 24,796 7,843 - - 2,588 35,227 Total gap ( 1,101 ) 390 - - ( 2,588 ) ( 3,299 ) Cumulative off-book gap ( 1,101 ) ( 711 ) ( 711 ) ( 711 ) ( 3,299 ) -

Cumulative total gap P 28,087 P 24,558 P 30,627 P 31,096 ( P 3,229 ) P - Pursuant to applicable BSP regulations, the Parent Company and RSB are required to maintain liquidity reserve and statutory legal reserve which are based on a certain percentages of deposits. A portion of the required reserve must be deposited with BSP. The remaining portion of the required reserve may be held by the Parent Company and RSB in the form of cash in vault and or government securities. Under a current BSP circular, the liquidity reserve is required to be in the form of reserve deposits with the BSP. The BSP also requires the Parent Company and RSB to maintain asset cover of 100% for foreign currency liabilities of their FCDU, of which 30% must be in liquid assets.

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4.2.1 Foreign Currency Liquidity Management The liquidity risk management policies and objectives described also apply to the management of any foreign currency to which the Parent Company and RSB maintain significant exposure. Specifically, the Parent Company and RSB ensure that their measurement, monitoring, and control systems accounts for these exposures as well. The Parent Company and RSB set and regularly review limits on the size of their cash flow mismatches for each significant individual currency and in aggregate over appropriate time horizons. The Parent Company and RSB also assess their access to foreign exchange markets when setting up their risk limits.

4.3 Market Risk The Parent Company’s and RSB’s exposure to market risk, as mentioned earlier, is the potential diminution of accrual earnings arising from the movement of market interest rates as well as the potential loss of market value, primarily of its holdings of debt securities and derivatives, due to price fluctuation. The market risks of the Parent Company and RSB are (a) foreign exchange risk, (b) interest rate risk, and (c) equity price risk. The Parent Company and RSB manage this risk via a process of identifying, analyzing, measuring and controlling relevant market risk factors, and establishing appropriate limits for the various exposures. The market risk metrics in use, each of which has a corresponding limit, include the following: • Nominal Position – an open risk position that is held as of any point in time

expressed in terms of the nominal amount of the exposure. • Value-at-Risk (VaR) – an estimate of the amount of loss that a given risk exposure

is unlikely to exceed during a given time period, at a given level of statistical confidence. Analytically, VaR is the product of: (a) the sensitivity of the market value of the position to movement of the relevant market risk factors, and (b) the volatility of the market risk factor for the given time horizon at a specified level of statistical confidence. Typically, the Bank uses a 99% confidence level for this measurement. VaR is used as a risk measure for trading positions, which are marked-to-market (as opposed to exposures resulting from banking, or accrual, book assets and liabilities). Foreign Exchange position VaR uses a 1-day holding period, while Fixed Income VaR uses a defeasance period assessed periodically as appropriate to allow an orderly unwinding of the position. VaR models are back-tested to ensure results remain consistent with the expectations based on the chosen statistical confidence level. While the Parent Company and RSB use VaR as an important tool for measuring market risk, it is cognizant of its limitations, notably the following:

− The use of historical data as a basis for determining the possible range of future

outcomes may not always cover all possible scenarios, especially those of an exceptional nature.

− VaR is based on historical volatility. Future volatility may be different due to either random, one-time events or structural changes (including changes in correlation). VaR may be unable to capture volatility due to either of these.

− The holding period assumption may not be valid in all cases, such as during periods of extremely stressed market liquidity.

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− VaR is, by definition, an estimate at a specified level of confidence. Losses may occur beyond VaR. A 99% VaR implies that losses can exceed VaR 1% of the time.

− In cases where a parametric distribution is assumed to calculate VaR, the

assumed distribution may not fit the actual distribution well.

− VaR assumes a static position over the holding period. In reality, trading positions change, even during the trading day.

• Earnings-at-Risk (EaR) – more specifically, in its current implementation, this

refers to the impact on Net Interest Income for a 12-month horizon of adverse movements in interest rates. For this purpose the Parent Company and RSB employs a gap analysis to measure the interest rate sensitivity of their statements of condition (local and foreign currencies). As of a given statement of condition date, the gap analysis (see Note 4.3.2) measures mismatches between the amounts of interest-earning assets and interest-bearing liabilities re-pricing within “time buckets” going forward from the statement of condition date. A positive gap means net asset sensitivity, which implies that an increase in the interest rates would have a positive effect on the Parent Company’s and RSB’s net interest income. Conversely, a negative gap means net liability sensitivity, implying that an increase in the interest rates would have a negative effect on the Parent Company’s and RSB’s net interest income. The rate movements assumed for measuring EaR are consistent with a 99% confidence level with respect to historical rate volatility, assuming a 1-year holding period.

In addition to the limits corresponding to the above measurements, the following are also in place:

• Loss Limit - represents a ceiling on accumulated month-to-date losses. For trading

positions, a Management Action Trigger (MAT) is also usually defined to be at 50% of the Loss Limit. When MAT is breached, the risk-taking unit must consult with ALCO for approval of a course of action moving forward.

• Product Limit – the nominal position exposure for certain specific financial

instruments is established. Stress Testing, which uses more severe rate/price volatility and/or holding period assumptions, (relative to those used for VaR) is applied to marked-to-market positions to arrive at “worst case” loss estimates. This supplements the VaR measure, in recognition of its limitations already mentioned earlier.

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A summary of the VaR position of the trading portfolios at December 31 is as follows: Parent and RSB 2008 At December 31 Average Maximum Minimum Foreign currency risk P 4,618 P 6,865 P 18,973 P 816 Interest rate risk 14,860 53,711 171,771 5,097 Overall P 19,478 P 60,576 P 190,744 P 5,913 2007 At December 31 Average Maximum Minimum Foreign currency risk P 14,289 P 9,765 P 32,763 P 8,447 Interest rate risk 38,803 69,484 134,731 45,163 Overall P 53,092 P 79,249 P 167,494 P 53,610 Parent Only 2008 At December 31 Average Maximum Minimum Foreign currency risk P 3,442 P 6,095 P 17,693 P 581 Interest rate risk 12,811 43,214 152,175 3,048 Overall P 16,253 P 49,309 P 169,868 P 3,629 2007 At December 31 Average Maximum Minimum Foreign currency risk P 14,059 P 9,465 P 32,713 P 7,867 Interest rate risk 19,833 51,444 123,911 19,233 Overall P 33,892 P 60,909 P 156,624 P 27,100 4.3.1 Foreign Exchange Risk Foreign exchange risk is the risk to earnings or capital arising from changes in foreign exchange rates. The net foreign exchange exposure, or the difference between foreign currency assets and foreign currency liabilities, is capped by current BSP regulations. Compliance with this ceiling by the Parent Company and RSB and the respective foreign currency positions of its subsidiaries are reported to the BSP on a daily basis as required. Beyond this constraint, the Parent Company and RSB manage their foreign exchange exposure by limiting it to within conservative levels justifiable from a return/risk perspective. In addition, the Parent Company and RSB regularly calculate VaR for each currency position, which is incorporated in market risk management discussion in Note 4.3.

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The breakdown of the financial resources and liabilities as to foreign and peso-denominated balances as of December 31 is as follows: Parent and RSB 2008 Foreign Currency Peso Total

Resources: Due from BSP P - P 16,360,396 P 16,360,396 Due from other banks 4,620,947 386,560 5,007,507 Financial assets at fair value through profit or loss 2,578,987 505,393 3,084,380 Available-for-sale securities 8,382,477 13,416,268 21,798,745 Held-to-maturity investments 18,143,421 2,350,997 20,494,418 Loans and receivables 43,626,103 120,605,063 164,231,166 Other resources 2,935,430 8,585,520 11,520,950

Liabilities: Deposit liabilities 52,767,476 145,203,807 197,971,283 Bills payable 13,675,252 7,770,269 21,445,521 Derivative liabilities 248,075 81,430 329,505 Bonds payable 6,002,821 - 6,002,821 Other liabilities 2,072,869 4,436,714 6,509,583 Due to other banks - 1,452 1,452 Subordinated debt - 6,941,899 6,941,899 2007 Foreign Currency Peso Total

Resources: Due from BSP P - P 17,584,379 P 17,584,379 Due from other banks 2,938,031 1,220,045 4,158,076 Financial assets at fair value through profit or loss 4,313,952 4,750,354 9,064,306 Available-for-sale securities 35,390,075 18,695,784 54,085,859 Loans and receivables 27,203,864 89,193,377 116,397,241 Other resources 1,822,470 10,167,255 11,989,725

Liabilities: Deposit liabilities 38,708,494 137,550,070 175,258,564 Bills payable 12,441,308 78,231 12,519,539 Derivative liabilities 9,849 374,487 384,336 Bonds payable 5,650,670 - 5,650,670 Due to other banks 774,040 1,452 775,492 Other liabilities 815,219 5,023,409 5,838,628 Subordinated debt - 5,158,070 5,158,070

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Parent Only 2008 Foreign Currency Peso Total Resources: Due from BSP P - P 15,656,119 P 15,656,119 Due from other banks 2,943,916 253,677 3,197,593 Financial assets at fair value through profit or loss 2,578,987 505,393 3,084,380 Available-for-sale securities 8,382,477 12,694,684 21,077,161 Held-to-maturity investments 15,541,116 2,350,998 17,892,114 Loans and receivables 42,923,236 87,368,970 130,292,206 Other resources 2,728,038 8,089,510 10,817,548 Liabilities: Deposit liabilities 47,961,695 110,967,383 158,929,078 Bills payable 13,675,252 7,734,835 21,410,087 Derivative liabilities 248,075 81,430 329,505 Bonds payable 6,002,821 - 6,002,821 Due to other banks - 1,452 1,452 Other liabilities 1,934,482 3,702,968 5,637,450 Subordinated debt - 6,941,899 6,941,899

2007 Foreign Currency Peso Total Resources: Due from BSP P - P 16,750,323 P 16,750,323 Due from other banks 2,911,819 109,849 3,021,668 Financial assets at fair value through profit or loss 4,313,952 4,750,354 9,064,306 Available-for-sale securities 32,402,941 18,109,671 50,512,612 Loans and receivables 26,880,643 61,175,980 88,056,623 Other resources 1,667,569 9,738,258 11,405,827 Liabilities: Deposit liabilities 34,437,109 108,054,059 142,491,168 Bills payable 12,441,308 36,602 12,477,910 Derivative liabilities 9,849 374,487 384,336 Bonds payable 5,650,670 - 5,650,670 Due to other banks 774,040 1,452 775,492 Other liabilities 751,959 4,312,415 5,064,374 Subordinated debt - 5,158,070 5,158,070 4.3.2 Interest Rate Risk The interest risk inherent in the Parent Company’s and RSB’s statement of condition arises from re-pricing mismatches between resources and liabilities. The Parent Company and RSB follow a policy on managing its assets and liabilities so as to ensure that exposure to fluctuations in interest rates is kept within acceptable limits. ALCO meets at least weekly to set rates for various financial assets and liabilities and trading products. ALCO employs interest rate gap analysis to measure interest rate sensitivity of its assets and liabilities.

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The interest rate gap analyses of resources and liabilities as of December 31 based on re-pricing maturities appears below and on the succeeding pages. It should be noted that this interest rate gap analysis is based on certain assumptions, the key ones being: • Loans and time deposits are subject to re-pricing on their contractual maturity

dates. Non-performing loans, however, do not re-price.

• Held-for-trading securities are treated as if they are assets subject to re-pricing within the first month maturity bucket; available-for-sale securities re-price on contractual maturity.

• Non-rate sensitive deposits such as Demand Accounts and Savings Accounts have

a certain volatile portion that is responsive to interest rate changes. The size of this portion as well as its rate sensitivity was determined from historical analysis.

Parent and RSB 2008 One to Three One to More Three Months to Five Than Five Non-rate Months One Year Years Years Sensitive Total Resources : Cash and cash equivalents P 8,143 P - P - P - P 24,442,499 P 24,450,642 Loans and advances to banks 22,113,666 381,709 - 381,709 - 22,877,084 Loans and advances to customers 12,463,680 2,396,373 1,469,394 5,952,017 85,184,862 107,466,326 Investment securities 17,702,663 2,058,149 5,591,439 10,455,496 6,249,179 42,056,926 Total resources P 52,288,152 P 4,836,231 P 7,060,833 P 16,789,222 P 115,876,540 P 196,850,978

Liabilities: Deposits from banks P 7,460,783 P 9,859,434 P 3,320,562 P 770,759 P - P 21,411,538 Deposits from customers 18,950,677 16,628,757 33,571 - 123,355,115 158,968,120 Debt securities issued - - 6,002,821 - - 6,002,821 Subordinated liabilities - - 6,941,899 - - 6,941,899 Total liabilities P 26,411,460 P 26,488,191 P 16,298,853 P 770,759 P 123,355,115 P 193,324,378 Gap 1 P 25,876,692 ( P 21,651,960 ) ( P 9,238,020 ) P 16,018,463 ( P 7,478,575 ) P 3,526,600 Cumulative gap P 25,876,692 P 4,224,732 ( P 5,013,288 ) P 11,005,175 P 3,526,600

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Parent and RSB 2007 One to Three One to More Three Months to Five Than Five Non-rate Months One Year Years Years Sensitive Total Resources : Cash and cash equivalents P 3,021,668 P - P - P - P 24,583,863 P 27,605,531 Loans and advances to banks 11,322,703 331,586 - - - 11,654,289 Loans and advances to customers 54,380,357 5,814,194 18,397,603 19,595,387 9,171,793 107,359,334 Investment securities 9,271,036 2,862,311 19,538,077 25,392,994 6,085,500 63,149,918 Total resources P 77,995,764 P 9,008,091 P 37,935,680 P 44,988,381 P 39,841,156 P 209.769,072

Liabilities: Deposits from banks P 9,040,049 P 4,175,814 P 28,043 P 9,496 P - P 13,253,402 Deposits from customers 89,189,286 5,218,425 3,986,489 - 77,863,959 176,258,159 Debt securities issued 482,788 - 5,209,882 - - 5,692,670 Subordinated liabilities - 5,158,070 - - - 5,158,070 Total liabilities P 98,712,123 P 14,552,309 P 9,224,414 P 9,496 P 77,863,959 P 200,362,301 Gap 1 ( P 20,716,359 ) ( P 5,544,218 ) P 28,711,266 P 44,978,885 ( P 38,022,803 ) P 9,406,771 Cumulative gap (P 20,716,359 ) ( P 26,260,577 ) P 2,450,689 P 47,429,574 P 9,406,771 Parent Only 2008 One to Three One to More Three Months to Five Than Five Non-rate Months One Year Years Years Sensitive Total Resources: Cash and cash equivalents P 8,119 P - P - P - P 24,441,329 P 24,449,448 Loans and advances to banks 22,112,203 381,709 - 381,709 - 22,875,621 Loans and advances to customers 12,461,783 2,388,112 1,448,759 5,940,000 85,177,931 107,416,585 Investment securities 17,702,533 2,057,755 5,590,327 10,453,809 6,249,231 42,053,655 Total

resources (Carried

forward) P 52,284,638 P 4,827,576 P 7,039,086 P 16,775,518 P 115,868,491 P 196,795,309

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2008 One to Three One to More

Three Months to Five Than Five Non-rate Months One Year Years Years Sensitive Total

Total

resources (Brought

forward) P 52,284,638 P 4,827,576 P 7,039,086 P 16,775,518 P 115,868,491 P 196,795,309 Liabilities: Deposits from banks P 7,460,783 P 9,859,434 P 3,320,562 P 770,759 P - P 21,411,538 Deposits from customers 18,929,955 16,627,133 29,830 - 123,342,160 158,929,078 Debt securities issued - - 6,002,821 - - 6,002,821 Subordinated liabilities - - 6,941,899 - - 6,941,899 Total liabilities P 26,390,738 P 26,486,567 P 16,295,112 P 770,759 P 123,342,160 P 193,285,336 Gap 1 P 25,893,900 ( P 21,658,991 ) ( P 9,256,026 ) P 16,004,759 ( P 7,473,669 ) P 3,509,973 Cumulative gap P 25,893,900 P 4,234,909 ( P 5,021,117 ) P 10,983,642 P 3,509,973 Parent Only 2007 One to Three One to More Three Months to Five Than Five Non-rate Months One Year Years Years Sensitive Total Resources: Cash and cash equivalents P 3,021,668 P - P - P - P 21,577,863 P 24,599,531 Loans and advances to banks 10,285,703 331,586 - - - 10,617,289 Loans and advances to customers 53,749,357 4,604,194 7,764,603 3,500,387 7,820,793 77,439,334 Investment securities 6,433,036 2,862,311 19,538,077 25,392,994 5,350,500 59,576,918 Total resources P 73,489,764 P 7,798,091 P 27,302,680 P 28,893,381 P 34,749,156 P 172,233,072

Liabilities: Deposits from banks P 9,040,049 P 4,175,814 P 28,043 P 9,496 P - P 13,253,402 Deposits from customers 73,235,286 3,836,425 147,498 - 65,271,959 142,491,168 Debt securities issued 440,788 - 5,209,882 - - 5,650,670 Subordinated liabilities - 5,158,070 - - - 5,158,070 Total liabilities P 82,716,123 P 13,170,309 P 5,385,423 P 9,496 P 65,271,959 P 166,553,310 Gap 1 ( P 9,226,359 ) ( P 5,372,218 ) P 21,917,257 P 28,883,885 ( P 30,522,803 ) P 5,679,762 Cumulative gap (P 9,226,359 ) ( P 14,598,577 ) P 7,318,680 P 36,202,565 P 5,679,762

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4.3.3 Equity Price Risk The Parent Company and RSB have minimal exposures to equity securities price risk on their investments held and classified on the statement of condition as available-for-sale. The Group is not exposed to commodity price risk. To manage this risk, the Parent Company and RSB diversify their portfolio. Diversification of the portfolio is done in accordance with the limits set by the Parent Company and RSB. 4.4 Credit Risk Credit risk is the risk that the counterparty in a transaction may default, and arises from lending, trade finance, treasury, derivatives and other activities undertaken by the Parent Company and RSB. The Group manages credit risk through a system of policies and authorities that govern the processes and practices of all credit-originating and borrowing relationship management units. Credit Risk Division of CRISMS assists senior management : (a) to develop credit policy; (b) to establish risk concentration limits accepted at the level of the single borrower, related-borrower group, industry segments, and sovereign jurisdiction; and, (c) to continuously monitor the actual credit risk portfolio from the perspective of those limits and other risk management objectives. In performing this function, the Credit Risk Division works hand in hand with the business units and with the Corporate Planning Group. At the individual borrower level, exposure to credit risk is managed via adherence to a set of policies, the most notable features of which, in this context, are: (a) credit approving authority, except as noted below, is not exercised by a single individual but rather, through a hierarchy of limits, is effectively exercised collectively; (b) branch managers have limited approval authority only for credit exposure related to deposit-taking operations in the form of bills purchased, acceptance of second endorsed checks, and 1: 1 loan accommodations; (c) an independent credit risk assessment by the Credit Risk Division of large corporate and middle-market borrowers, summarized into a borrower risk rating, is provided as input to the credit decision-making process; and, (d) borrower credit analysis is performed at origination and at least annually thereafter. Impairment provisions are recognized for losses that have been incurred at the statement of condition date. Significant changes in the economy, or in particular industry segments that represent a concentration in the Parent Company’s and RSB’s portfolio, could result in losses that are different from those provided for at the statement of condition date. Management therefore carefully monitors the changes and adjusts its exposure to such credit risk, as necessary.

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4.4.1 Exposure to Credit Risk The carrying amount of financial resources recorded in the consolidated financial statements, grossed up for any allowances for losses, which represents the maximum exposure to credit risk, without taking into account of the value of any collateral obtained, as of December 31 follows: Parent and RSB 2008 Loans and Investment Receivables Securities Carrying Amount P 164,231,165 P 45,377,712 Individually Impaired Grade 1 to 5: Unclassified 629,000 - Grade 6 to 7: Impaired 477,319 - Grade 8: Impaired 1,699,807 - Grade 9: Impaired 999,817 - Grade 10: Impaired 874,873 - Gross amount 4,680,816 2,466,280 Allowance for impairment ( 1,571,731 ) ( 811,207 ) Carrying amount 3,109,085 1,655,073 Collectively Impaired Grade 1 to 5: Unclassified 111,883,119 - Grade 6 to 7: Impaired 9,691,743 - Grade 8: Impaired 1,438,809 - Grade 9: Impaired 29,840 - Grade 10: Impaired 548,000 - Gross amount 123,591,511 - Allowance for impairment ( 4,745,066 ) - Carrying amount 118,846,445 - Unquoted debt securities classified as loans 6,621,885 - Allowance for impairment ( 1,082,467) - Carrying amount 5,539,418 - Neither Past Due Nor Impaired 36,736,217 43,722,639 Total Carrying Amount P 164,231,165 P 45,377,712

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Parent and RSB

2007 Loans and Investment Receivables Securities Carrying Amount P 101,492,822 P 62,217,827 Individually Impaired Grade 1 to 5: Unclassified 705,000 - Grade 6 to 7: Impaired 32,349 - Grade 8: Impaired 2,949,671 - Grade 9: Impaired 659,775 - Grade 10: Impaired 559,916 - Gross amount 4,906,711 2,430,958 Allowance for impairment ( 2,182,543) ( 779,304) Carrying amount 2,724,168 1,651,654 Collectively Impaired Grade 1 to 5: Unclassified 76,210,609 - Grade 6 to 7: Impaired 14,218,293 - Grade 8: Impaired 2,664,211 - Grade 9: Impaired - - Grade 10: Impaired 657,000 - Gross amount 93,750,113 - Allowance for impairment ( 4,477,187) - Carrying amount 89,272,926 - Neither Past Due Nor Impaired 9,495,728 60,566,173 Total Carrying Amount P 101,492,822 P 62,217,827 Parent Only

2008 Loans and Investment Receivables Securities Carrying Amount P 130,292,206 P 41,135,509 Individually Impaired Grade 6: Impaired 383,219 - Grade 7: Impaired 94,100 - Grade 8: Impaired 1,699,807 - Grade 9: Impaired 999,817 - Grade 10: Impaired 874,873 - Gross amount 4,051,816 2,466,280 Allowance for impairment ( 1,571,731 ) ( 811,207 ) Carrying amount (Carried Forward) P 2,480,085 P 1,655,073

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2008 Loans and Investment

Receivables Securities Carrying amount (Brought Forward) P 2,480,085 P 1,655,073 Collectively Impaired Grade 1 to 5: Unclassified 94,300,118 - Grade 6: Watchlist 2,797,107 - Grade 7: Special Mention 303,637 - Grade 8: Sub-standard 711,809 - Grade 9: Doubtful 29,840 - Grade 10: Loss - - Gross amount 98,142,511 - Allowance for impairment ( 1,526,066) - Carrying amount 96,616,445 - Unquoted debt securities classified as loans 6,621,885 - Allowance for impairment ( 1,082,467) - Carrying amount 5,539,418 - Neither Past Due Nor Impaired 25,661,921 39,480,436 Total Carrying Amount P 130,292,206 P 41,135,509

Parent Only

2007 Loans and Investment Receivables Securities Carrying Amount P 88,056,623 P 58,644,580 Individually Impaired Grade 6: Impaired - - Grade 7: Impaired 32,349 - Grade 8: Impaired 2,949,671 - Grade 9: Impaired 659,775 - Grade 10: Impaired 526,916 - Gross amount 4,168,711 2,430,958 Allowance for impairment ( 2,105,543 ) ( 779,304 ) Carrying amount 2,063,168 1,651,654 Collectively Impaired Grade 1 to 5: Unclassified 61,466,609 - Grade 6: Watchlist 3,954,714 - Grade 7: Special Mention 2,324,579 - Grade 8: Sub-standard 2,002,211 - Grade 9: Doubtful - - Grade 10: Loss - - Gross amount 69,748,113 - Allowance for impairment ( 1,644,187 ) - Carrying amount 68,103,926 - Neither Past Due Nor Impaired 17,889,529 56,992,926 Total Carrying Amount P 88,056,623 P 58,644,580

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The credit risk for cash and cash equivalents such as Due from BSP and Due from Other Banks is considered negligible, since the counterparties are reputable banks with high quality external credit ratings. 4.4.2 Collateral Held as Security and Other Credit Enhancements The Parent Company and RSB hold collateral against loans and advances to customers in the form of mortgage interests over property, other registered securities over assets, and guarantees. Estimates of fair value are based on the value of collateral assessed at the time of borrowing and are generally updated annually. Collateral, generally, is not held over loans and advances to banks, except when securities are held as part of reverse repurchase and securities borrowing activity. Collateral usually is not held against investment securities, and no such collateral was held at December 31, 2008 and 2007. The Parent Company and RSB hold collateral against Loans and Other Receivables in the form of hold-out on deposits, real estate mortgage, standby letters of credit or bank guaranty, government guaranty, chattel mortgage, assignment of receivables, pledge of shares, personal and corporate guaranty and other forms of security. An estimate of the fair value of collateral and other security enhancements held against financial assets as of December 31, 2008 and 2007 are shown below and on the following page: Parent and RSB

2008 2007 Against individually impaired Real property P 4,648,242 P 4,967,627 Chattels 392,084 231,333 Equities 461,000 - Others 236,980 - Against past due but not impaired Real property 18,700,355 25,554,016 Chattels 12,751,047 10,028,630 Equities 710,190 597,000 Debt securities - 3,236,318 Others 1,422,824 1,276,546 Against neither past due nor impaired Real property 42,111,183 5,464,428 Chattels 486,000 1,294,887 Others 14,645,252 24,471,318 Total P 96,565,157 P 77,122,103

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Parent Only 2008 2007

Against individually impaired Real property P 4,020,242 P 4,230,628 Chattels 392,084 231,333 Equities 461,000 - Other 236,980 - Against past due but not impaired Real property 5,983,355 12,800,016 Chattels 837,047 134,630 Equities 710,190 597,000 Debt securities - 3,236,318 Other 814,824 801,546 Against neither past due nor impaired Real property 34,407,183 1,308,428 Chattels - 747,887 Other 14,645,252 24,471,318 Total P 62,508,157 P 48,559,104 4.4.3 Concentrations of Credit Risk The Parent Company and RSB monitor concentrations of credit risk by sector. An analysis of concentrations of credit risk at the reporting date is shown in Note 11. 4.5 Operations Risk and Reputation Risk Operations risk is the risk arising from the potential that inadequate information systems, operations or transactional problems (relating to service or product delivery), breaches in internal controls and fraud or unforeseen catastrophes will result in unexpected loss. Operations risk includes the risk of loss arising from various types of human or technical error, the risk of settlement or payments failures, the risk of business interruption, administrative and legal risks and the risk arising from systems not performing adequately. Reputation risk is the risk to earnings or capital arising from negative public opinion. This affects the Parent Company’s and RSB’s ability to establish new relationships or services, or to continue servicing existing relationships. This risk can expose the Parent Company and RSB to litigation, financial loss, or damage to their reputation. Reputation risk arises whenever technology-based banking products, services, delivery channels, or processes may generate adverse public opinion such that it seriously affects the Parent Company’s and RSB’s earnings or impairs capital. This risk is present in activities such as asset management and regulatory compliance.

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The Parent Company and RSB maintain departmental operations manuals that are periodically updated. The Parent Company and RSB have also developed a Business Contingency Plan which is tested at least annually and updated for any major changes in systems procedures. Transactions and items of value are subject to a system of dual control whereby the work of one person is verified by a second person to ensure that the transaction is properly authorized, recorded and settled. The Parent Company and RSB place emphasis on the security of its computer system and has a comprehensive information technology (IT) security policy. The Parent Company and RSB designate a security administrator independent of the front office who is responsible for maintaining strict control over user access privileges to the Parent Company and RSB’s information systems. The Parent Company’s and RSB’s IT Groups have also created a disaster recovery plan to cover the recovery of critical data and contingency processing requirements in the event of a disaster. 4.6 Legal Risk and Regulatory Risk Management Changes in laws and regulations could adversely affect the Parent Company and RSB. In addition, the Parent Company and RSB face legal risks in enforcing its rights under its loan agreements, such as foreclosing on collateral. Legal risk is higher in new areas of business where the law remains untested by the courts. The Parent Company and RSB use a legal review process as the primary control mechanism for legal risk. Such a legal review aims to verify and validate the existence, genuineness and due execution of legal documents, and verify the capacity and authority of counterparties and customers to enter into transactions. In addition, the Parent Company and RSB seek to minimize its legal risk by using stringent legal documentation, imposing certain requirements designed to ensure that transactions are properly authorized and consulting internal and external legal advisors. Regulatory risk refers to the potential for the Parent Company and RSB to suffer financial loss due to changes in the laws or monetary, tax or other governmental regulations of a country. The Parent Company’s and RSB’s Compliance Program, the implementation of which is overseen and coordinated by the Compliance Office, is the primary control process for regulatory risk issues. The Compliance Office is responsible for communicating and disseminating new rules and regulations to all units, analyzing and addressing compliance issues, performing periodic compliance testing on branches and Head Office units, and reporting compliance findings to the Audit Committee and the Board of Directors.

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4.7 Anti-Money Laundering Controls The Anti-Money Laundering Act was passed in September 2001 and was amended in March 2003. Under the Anti-Money Laundering Act, as amended, the Parent Company and RSB are required to submit “Covered Transaction Reports” involving single transactions in cash or other equivalent monetary instruments in excess of P500,000 within one banking day. The Parent Company and RSB are also required to submit “Suspicious Transaction Reports” to the Anti-Money Laundering Council of the BSP in the event that there are reasonable grounds to believe that any amounts processed are the proceeds of money-laundering activities. The Parent Company and RSB are required to establish and record the identities of its clients based on official documents. In addition, all records of transactions are required to be maintained and stored for five years from the date of the transaction. Records of closed accounts must also be kept for five years after their closure. Under BSP Circular No. 279 dated April 2, 2001, within 20 banking days after the end of each financial year, the Parent Company and RSB are required to submit to the BSP a certificate signed by the President and the Chief Compliance Officer stating that they have monitored compliance and that the Parent Company and RSB are complying with the anti-money laundering rules and regulations. In an effort to further prevent money laundering activities, the Parent Company and RSB have adopted Know Your Customer policies and guidelines. Under the guidelines, each business unit is required to validate the true identity of a customer based on official or other reliable identifying documents or records before an account may be opened. Each business unit is also required to monitor account activities to determine whether transactions conform to the normal or expected transactions for a customer or an account. For a high-net worth individual whose source of funds is unclear a more extensive due diligence is required. Decisions to enter into a business relationship with a higher risk customer, such as a politically exposed person or a private individual holding a prominent position, are made exclusively at the senior management level. The Parent Company’s and RSB’s procedures for compliance with the Anti-Money Laundering Act are set out in its Anti-Money Laundering Policy Manual. The Parent Company’s and RSB’s Compliance Offices monitor compliance and conduct compliance testing of business units. The Parent Company’s and RSB’s Anti-Money Laundering Committee evaluates suspicious transaction reports submitted by branches for final determination if the suspicions are based on reasonable grounds and are therefore reportable to the Anti-Money Laundering Council. All banking groups are required to submit to the Compliance Office certificates of compliance with the Anti-Money Laundering Rules & Regulations on a quarterly basis. 4.8 Other Subsidiaries’ Policies and Objectives

The other subsidiaries have essentially the same risk management policies and objectives as that of the Parent Company and RSB. The other subsidiaries risk management is coordinated with the Parent Company, in close cooperation with their respective BOD.

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5. CAPITAL MANAGEMENT

5.1 Regulatory Capital The BSP, Group’s lead regulator, sets and monitors capital requirements of the Parent Company, RSB and RCBC Capital and the Group as a whole. In implementing current capital requirements, BSP requires the Parent Company and the Group to maintain a minimum capital amount and a prescribed ratio of qualifying capital to risk-weighted assets or the capital adequacy ratio (CAR). Risk-weighted assets is the sum of credit risk, market risks, and operational risks, computed based on BSP-prescribed formula provided under its circulars. Under the relevant provisions of the current BSP regulations, the minimum capitalization of the Parent Company, RSB and RCBC Capital is P4.95 billion, P325 million and P300 million, respectively. In computing CAR, the regulatory qualifying capital is analyzed into two tiers which are: (i) Tier 1 Capital, and (ii) Tier 2 Capital; less deductions from the Total Tier 1 and Tier 2 for the following: a. Investments in equity of unconsolidated subsidiary banks and other financial allied

undertakings, but excluding insurance companies; b. Investments in debt capital instruments of unconsolidated subsidiary banks; c. Investments in equity of subsidiary insurance companies and non-financial allied

undertakings; d. Reciprocal investments in equity of other banks/enterprises; and, e. Reciprocal investments in unsecured subordinated term debt instruments of other

banks/quasi-banks qualifying as Hybrid Tier 1, Upper Tier 2 and Lower Tier 2, in excess of the lower of (i) an aggregate ceiling of 5% of total Tier 1 capital of the bank excluding Hybrid Tier 1; or (ii) 10% of the total outstanding unsecured subordinated term debt issuance of the other bank/quasi-banks. Provided, that any asset deducted from the qualifying capital in computing the numerator of the risk-based capital ratio shall not be included in the risk-weighted assets in computing the denominator of the ratio.

Tier 1 Capital and Tier 2 Capital are defined as follows:

a. Tier 1 Capital includes the following:

i. paid-up common stock; ii. paid-up perpetual and non-cumulative preferred stock; iii. common and perpetual, non-cumulative preferred stock dividends distributable; iv. surplus; v. surplus reserves; vi. undivided profits (for domestic banks only); vii. unsecured subordinated debt (with prior BSP approval); and, viii. minority interest in the equity of subsidiary financial allied undertakings;

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Subject to following deductions:

i. treasury shares; ii. unrealized losses on underwritten listed equity securities purchased; iii. unbooked valuation reserves, and other capital adjustments based on the latest report of examination; iv. outstanding unsecured credit accommodations, both direct and indirect, to directors, officers, stockholders and their related interests (DOSRI); v. goodwill; and, vi. deferred income tax.

b. Tier 2 Capital includes:

i. perpetual and cumulative preferred stock; ii. limited life redeemable preferred stock with or without the replacement requirement upon subject to BSP conditions; iii. dividends distributable of i and ii above; iv. appraisal increment reserve – bank premises, as authorized by the Monetary

Board(MB); v. net unrealized gains on underwritten listed equity securities purchased; vi general loan loss provision; vii. unsecured subordinated debt with a minimum original maturity of at least ten years (with prior BSP approval); viii. unsecured subordinated debt with a minimum original maturity of at least five years (with prior BSP approval); and, ix. deposit for stock subscription on:

- common stock, - perpetual and non-cumulative preferred stock, - perpetual and cumulative preferred stock subscription, and, - limited life redeemable preferred stock subscription with the replacement

requirement upon redemption;

Subject to following deductions:

i. Perpetual and cumulative preferred stock treasury shares; ii. Limited life redeemable preferred stock treasury shares with the replacement requirement upon redemption; iii. Sinking fund for redemption of limited life redeemable preferred stock with the replacement requirement upon redemption; iv. Limited life redeemable preferred stock treasury shares without the replacement requirement upon redemption; and, v. Sinking fund for redemption of limited life redeemable preferred stock without the replacement requirement upon redemption.

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The Group’s regulatory capital position as of December 31 is presented as follows:

2008 2007

Tier 1 Capital P 26,015,850 P 25,143,941 Tier 2 Capital 8,111,092 6,070,738 Total Regulatory Capital 34,126,942 31,214,679 Reciprocal investment in equity of other banks - -

Total Qualifying Capital, after deductions P 34,126,942 P 31,214,679

Total Risk Weighted Assets P 197,222,586 P 166,908,472 Capital ratios:

Total regulatory capital expressed as percentage of total risk weighted assets 17.30% 18.70%

Total Tier 1 expressed as percentage of total risk weighted assets 13.19% 15.06%

The Parent Company’s regulatory capital position as of December 31 is presented as follows:

2008 2007

Tier 1 Capital P 21,369,107 P 21,137,684 Tier 2 Capital 3,235,534 1,633,362 Total Regulatory Capital 24,604,641 22,771,046 Reciprocal investment in equity of other banks - -

Total Qualifying Capital, after deductions P 24,604,641 P 22,771,046

Total Risk Weighted Assets P 151,148,326 P 125,040,924

Capital ratios:

Total regulatory capital expressed as percentage of total risk weighted assets 16.28% 18.21% Total Tier 1 expressed as percentage of total risk weighted assets 14.14% 16.90%

The preceding capital ratios comply with the related BSP prescribed ratio of at least 10%.

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6. SEGMENT INFORMATION

The Group’s operating businesses are recognized and managed separately according to the nature of services provided (primary segments) and the different markets served (secondary segments) with a segment representing a strategic business unit. The Group’s business segments follow: a. Retail Banking – principally handles the business centers offering a wide range of

financial products and services to the commercial “middle market” customers. Products offered include individual customer’s deposits, term loans, revolving credit lines, overdraft facilities, trade finance, payment remittances, and foreign exchange transactions.

b. Corporate Banking – principally handles loans and other credit facilities and deposit and current accounts for corporate and institutional customers.

c. Treasury – principally provides money market, trading and treasury services, as well as

the management of the Group’s funding operations by use of treasury bills, government securities and placements and acceptances with other banks, through treasury and wholesale banking.

d. Others – consists of the Parent Company’s various support group and consolidated

subsidiaries.

These segments are the basis on which the Group reports its primary segment information. Other operations of the Group comprise the operations and financial control groups. Transactions between segments are conducted at estimated market rates on an arm’s length basis. Segment revenues and expenses that are directly attributable to primary business segment and the relevant portions of the Group’s revenues and expenses that can be allocated to that business segment are accordingly reflected as revenues and expenses of that business segment. For secondary segment, revenues and expenses are attributed to geographic areas based on the location of the resources producing the revenues, and in which location the expenses are incurred.

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Primary segment information (by business segment) on a consolidated basis as of and for the years ended December 31, 2008 and 2007 (in millions of Philippine Pesos) follows: 2008 Retail Corporate Banking Banking Treasury Group Group Group Others Total

Results of operations Net interest income P 3,123 P 930 P 311 P 4,106 P 8,470 Non-interest income 1,177 548 1,014 1,858 4,597 Total revenue 4,300 1,478 1,325 5,964 13,067 Non-interest expense 2,349 411 227 6,988 9,975 Income (loss) before tax 1,951 1,067 1,098 ( 1,024 ) 3,092 Tax expense - - - 919 919 Minority interest in net income - - - ( 19 ) ( 19 ) Net income (loss) P 1,951 P 1,067 P 1,098 (P 1,962 ) 2,154 Statement of condition Total Resources P 144,720 P 63,248 P 69,421 (P 9,119 ) P 268,270 Total Liabilities P 144,720 P 63,248 P 69,421 (P 36,756 ) P 240,633 Other segment information Capital expenditures P 225 P 38 P 7 P 765 P 1,035 Depreciation and amortization P 131 P 9 P 11 P 257 P 408 2007 Retail Corporate Banking Banking Treasury Group Group Group Others Total

Results of operations Net interest income P 1,847 P 3,246 P 179 P 3,547 P 8,819 Non-interest income 833 638 1,965 945 4,381 Total revenue 2,680 3,884 2,144 4,492 13,200 Non-interest expense 1,084 416 284 7,326 9,110 Income (loss) before tax 1,596 3,468 1,860 ( 2,834 ) 4,090 Tax expense - - - 846 846 Minority interest in net income - - - 36 36 Net income (loss) P 1,596 P 3,468 P 1,860 ( P 3,716 ) 3,208 Statement of condition Total Resources P 100,445 P 52,497 P 67,472 P 18,684 P 239,098 Total Liabilities P 100,445 P 52,497 P 74,797 P 17,661 P 210,078 Other segment information Capital expenditures P 78 P 8 P 4 P 482 P 572 Depreciation and amortization P 93 P 10 P 7 P 205 P 315

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Secondary information (by geographical location) as of and for the years ended December 31, 2008 and 2007 (in millions of Philippine pesos) follows: 2008 Asia and Philippines United States Europe Total Results of operations Total revenues P 20,045 P 97 P 114 P 20,256 Total expenses 17,873 132 97 18,102 Net income (loss) P 2,172 ( P 35 ) P 17 P 2,154 Statement of condition Total resources P 267,490 P 246 P 534 P 268,270 Total liabilities P 240,138 P 207 P 288 P 240,633 Other segment information Capital expenditures P 1,008 P 23 P 4 P 1,035 Depreciation and amortization P 405 P 2 P 1 P 408

2007 Asia and Philippines United States Europe Total Results of operations Total revenues P 19,518 P 115 P 78 P 19,711 Total expenses 16,328 104 71 16,503 Net income P 3,190 P 11 P 7 P 3,208 Statement of condition Total resources P 238,530 P 255 P 313 P 239,098 Total liabilities P 209,792 P 177 P 109 P 210,078 Other segment information Capital expenditures P 567 P 3 P 2 P 572 Depreciation and amortization P 313 P 2 P - P 315

7. CASH AND CASH EQUIVALENTS

The components of Cash and Cash Equivalents are as follows: Consolidated Parent 2008 2007 2008 2007 Cash and other cash items P 6,807,939 P 5,875,727 P 5,595,736 P 4,827,540 Due from BSP 16,390,973 17,611,380 15,656,119 16,750,323 Due from other banks 4,862,225 4,744,925 3,197,593 3,021,668 P 28,061,137 P 28,232,032 P 24,449,448 P 24,599,531

Cash consists primarily of funds in the form of Philippine currency notes and coins in the bank’s vault and those in the possession of tellers, including automated teller machines. Other cash items includes cash items (other than currency and coins on

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hand), such as checks drawn on other banks or other branches after the bank’s clearing cut-off time until the close of the regular banking hours. Due from BSP represents the aggregate balance of deposit accounts maintained with the BSP primarily to meet reserve requirements and to serve as clearing account for interbank claims.

The balance of Due from Other Banks account represents regular deposits with the following:

Consolidated Parent 2008 2007 2008 2007 Foreign banks P 3,120,283 P 2,914,996 P 1,872,693 P 2,477,636 Local banks 1,741,942 1,829,929 1,324,900 544,032 P 4,862,225 P 4,744,925 P 3,197,593 P 3,021,668 The breakdown of Due from Other Banks by currency is shown below: Consolidated Parent 2008 2007 2008 2007 Foreign currencies P 4,116,106 P 3,352,723 P 2,943,916 P 2,911,819 Philippine pesos 746,119 1,392,202 253,677 109,849 P 4,862,225 P 4,744,925 P 3,197,593 P 3,021,668 Interest rates on these deposits range from 0.5% to 7% in 2008 and 1% to 4.5% in

2007. 8. FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS

This account is composed of the following: Consolidated Parent 2008 2007 2008 2007 Government bonds P 1,940,272 P 4,274,136 P 1,619,470 P 4,100,968 Other debt securities 1,059,205 3,111,253 1,059,205 3,111,253 Derivative financial assets 405,705 1,852,085 405,705 1,852,085 Equity securities Quoted 31,431 721,177 - - Unquoted 525 536 - - P 3,437,138 P 9,959,187 P 3,084,380 P 9,064,306

The carrying amounts of the above financial assets are classified as follows:

Consolidated Parent 2008 2007 2008 2007 Held-for-trading P 1,762,624 P 4,822,731 P 1,619,470 P 4,100,968 Designated as fair value through profit or loss on initial recognition 1,674,514 5,136,456 1,464,910 4,963,338 P 3,437,138 P 9,959,187 P 3,084,380 P 9,064,306

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Financial assets at fair value through profit or loss represent various treasury bills and other securities issued by the government and other private corporations earning annual interest as follows:

2008 2007 2006 Peso denominated 5.50% - 18.75% 5.50% - 16.50% 5.65% - 14.50% Foreign currency denominated 6.25% - 10.625% 6.38% - 10.63% 6.88% - 10.63%

All amounts presented have been determined directly by reference to published price quoted in an active market. Fair values of government bonds were determined directly by reference to published closing prices available from electronic financial data service providers which had been based on price quoted or actually dealt in an active market.

Fair values of derivative financial assets were determined through valuation techniques using net present value computation. Derivatives instruments used by the Parent Company include foreign currency short term forwards and cross-currency swaps. Foreign currency forwards represent commitments to purchase/sell on a future date at a specific exchange rate. Foreign currency short term swaps are simultaneous foreign currency spot and forward deals with tenor of one year. The aggregate contractual or notional amount of derivatives financial instruments and the aggregative fair values of derivative financial assets and liabilities as of December 31 both in the consolidated and Parent Company financial statements are set out below:

2008 Notional Fair Values Amount Assets Liabilities

Currency swaps (P 1,911,200) P 192,752 P 247,108 Currency forwards/futures ( 4,447,600) 176,751 82,397 Debt warrants - 36,202 - (P 6,358,800) P 405,705 P 329,505

2007 Notional Fair Values Amount Assets Liabilities

Currency swaps (P 4,614,059) P 1,299,581 P 7,372 Currency forwards/futures ( 6,569,843) 472,236 376,964 Credit default swaps - 80,268 - (P 11,183,902) P 1,852,085 P 384,336

The derivative liabilities of P329,505 and P384,336 as of December 31, 2008 and 2007, respectively, are shown as part of Other Liabilities (see Note 21).

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The Group recognized the decrease in value of financial assets designated as at fair value through profit or loss of P1,316,222 in 2008, and the increase in value of P80,504 in 2007 and P71,613 in 2006 both in the consolidated and Parent Company financial statements, which were included under the line item Trading and Securities Gains (Losses)-Net in the income statements. In 2008, the Group reclassified certain debt securities and embedded derivatives of CLNs from financial assets at fair value through profit or loss to held-to-maturity investments, available-for-sale securities and loans and receivables categories (see Notes 9, 10 and 11).

9. HELD-TO-MATURITY INVESTMENTS

The balance of this account as of December 31, 2008 is composed of the following: Consolidated Parent Government bonds P 20,621,861 P 17,840,361 Other debt securities 51,753 51,753 P 20,673,614 P 17,892,114

As to currency, held-to-maturity investments comprise of the following:

Consolidated Parent Foreign currency P 18,143,420 P 15,541,116 Philippine pesos 2,530,194 2,350,998 P 20,673,614 P 17,892,114 Changes in the held-to-maturity investments account in 2008 are summarized below:

Notes Consolidated Parent Balance at beginning of year P - P - Reclassification from financial assets at fair value through profit or loss 8 411,228 411,228 Reclassification from available-for-sale securities 10 20,373,408 17,588,835 Amortization/ accretion of discount or premium ( 111,022 ) ( 107,949) Balance at end of year P 20,673,614 P 17,892,114

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9.1 Reclassification to HTM The Monetary Board of the BSP, through BSP Circular No. 628, approved the prudential reporting guidelines for banks governing the reclassification of investments in debt and equity securities between categories in accordance with the provisions of the amendments to the PAS 39 and PFRS, and provided additional guidelines which include, among others, the reclassification of certain financial assets previously classified under available-for-sale securities due to tainting of held-to-maturity portfolio back to held-to-maturity investments category. On February 2, 2009, the SEC approved the adoption of such BSP Circular No. 628 as being compliant with generally accepted accounting principles for banks. Pursuant to these amendments and guidelines, the Group and the Parent Company reclassified certain financial assets classified under AFS Securities due to the tainting of HTM portfolio and certain financial assets at fair value through profit or loss to HTM Investments category with an aggregate carrying value of P20,784,636 and P18,000,063, respectively, as presented below: Consolidated At Reclassification Date At December 31, 2008 Carrying Estimated Carrying

Reclassifications Value Fair Value Cash Flows Amount Fair Value

From FVTPL to HTM P 411,228 P 411,228 P 411,228 P 409,180 P 424,548 From AFS to HTM 20,373,408 20,373,408 20,373,408 20,264,434 19,059,065 P 20,784,636 P 20,784,636 P 20,784,636 P 20,673,614 P 19,483,613

Parent At Reclassification Date At December 31, 2008 Carrying Estimated Carrying

Reclassifications Value Fair Value Cash Flows Amount Fair Value From FVTPL to HTM P 411,228 P 411,228 P 411,228 P 409,180 P 424,548 From AFS to HTM 17,588,835 17,588,835 17,588,835 17,482,934 16,339,848 P 18,000,063 P 18,000,063 P 18,000,063 P 17,892,114 P 16,764,396

Total trading gains of FVTPL reclassified to HTM both in the consolidated and Parent Company financial statements which were recognized in profit or loss in 2008 amounted to P26,908. On the other hand, the net trading gain that would have been recognized in the period following the reclassification during 2008 if the reclassifications had not been made amounted to P13,319 both for the consolidated and Parent Company financial statements. Also, had no reclassification been made, interest income on investment securities would have increased by P2,048 both in the consolidated and Parent Company financial statements. Effective interest rates of FVTPL denominated in foreign currency and peso which were reclassified to HTM range from 7.75% to 10.63% and 8.43% to 8.85%, respectively, both in the consolidated and Parent Company financial statements.

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Net unrealized fair value losses in debt securities reclassified from AFS to HTM at reclassification dates amounted to P217,265 and P200,569 in the consolidated and Parent Company financial statements, respectively, while amortization of net unrealized fair value losses recognized in the profit or loss from the date of reclassification to December 31, 2008 amounted to P29,651 and P36,598 in the consolidated and Parent Company financial statements, respectively. The balance of net unrealized fair value losses that would have been recognized in capital funds as of December 31, 2008 if the reclassifications had not been made amounted to P1,311,269 for the Group and P1,248,986 for the Parent Company.

10. AVAILABLE-FOR-SALE SECURITIES

The Group’s available-for-sale securities consist of the following:

Consolidated Parent Note 2008 2007 2008 2007

Government bonds P 17,424,645 P 42,287,281 P 16,338,845 P 38,223,557 Debt securities 4,632,718 12,148,338 4,631,377 12,136,021 Equity securities 1,453,888 969,044 918,146 932,338 23,511,251 55,404,663 21,888,368 51,291,916 Allowance for impairment 16 ( 811,207 ) ( 779,304) ( 811,207) ( 779,304 ) P 22,700,044 P 54,625,359 P 21,077,161 P 50,512,612

Available-for-sale securities include government bonds and other debt securities which earn annual interest as follows:

2008 2007 2006 Consolidated 5.00% - 17.50% 4.00% - 13.00% 5.00% - 13.00% Parent 5.23% - 17.50% 4.00% - 10.625% 6.56% - 11.50%

Changes in available-for-sale securities are as follows: Consolidated Parent 2008 2007 2008 2007

Balance at beginning of year P 54,625,359 P 47,816,694 P 50,512,612 P 43,571,270

Additions 45,142,502 80,694,324 44,793,212 80,121,964 Reclassification from FVTPL 527,223 - - - Reclassification to

held-to-maturity investments ( 20,373,408) - ( 17,588,835) - Reclassification to loans and receivables ( 5,960,822) - ( 5,960,822) - Provision for impairment losses ( 31,903) ( 230,226 ) ( 31,903) ( 230,226) Fair value losses ( 2,600,845) ( 1,875,304 ) ( 2,328,671) ( 1,769,582) Amortization / accretion of discount or premium ( 2,492,453) 1,426,024 ( 2,521,051) 1,426,024 Sale/disposal ( 50,132,550) ( 68,628,236 ) ( 49,794,322) ( 68,028,921)

Revaluation impact of foreign currency investments 3,996,941 ( 4,577,917 ) 3,996,941 ( 4,577,917)

P 22,700,044 P 54,625,359 P 21,077,161 P 50,512,612

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The changes in fair values from available-for-sale securities which was recognized directly to capital funds amounted to fair value losses of P2,601,102 in 2008 and P1,875,304 in 2007, and fair value gain of P2,868,402 in 2006 in the consolidated financial statements; and fair value losses of P2,328,671 in 2008 and P1,769,582 in 2007, and fair value gain of P2,723,047 in 2006 in the Parent Company financial statements.

Certain government securities are deposited with BSP as security for the Group’s faithful compliance with its fiduciary obligations in connection with the Bank’s trust operations (see Note 29).

In 2008, the Group reclassified financial assets at FVTPL to AFS in accordance with

PFRS. The carrying value and fair value of the securities at the date of reclassification amounted to P527,223. Had no reclassification been made, the Group would have incurred additional loss of P232,726. The carrying amount of the securities as of December 31, 2008 amounted to P294,497 in the consolidated financial statements.

Also in 2008, the Group reclassified private and government debt securities with carrying

value at the date of reclassification of P20,373,408 to held-to-maturity investments in accordance with FRSPB (see Note 9). In addition, the Parent Company reclassified CDOs and CLNs that are linked to ROP bonds, with an aggregate carrying value of P5,960,822 to loans and receivables (see Note 11).

11. LOANS AND RECEIVABLES This account consists of the following:

Consolidated Parent 2008 2007 2008 2007

Loans and discounts P 113,607,267 P 94,606,067 P 78,727,671 P 64,973,609 Customers’ liabilities on acceptances, import bills and trust receipts 15,883,708 6,723,996 15,883,708 6,723,997 Bills purchased 2,106,007 2,243,512 2,085,789 2,219,217 Securities purchased under reverse repurchase agreements 488,000 554,000 - - 132,084,982 104,127,575 96,697,168 73,916,823 Interbank loans receivables 23,598,507 11,420,289 22,875,621 10,617,289 Unquoted debt securities classified as loans 6,621,885 - 6,621,885 - Credit card receivables 8,256,256 8,454,403 5,497,159 5,475,414 Accrued interest receivable 2,205,587 2,472,697 1,955,747 2,220,735 Accounts receivable 1,921,735 1,585,008 1,247,660 924,871 Sales contract receivables 1,196,328 1,323,138 767,117 963,985 Miscellaneous 52,721 102,497 30,979 - 175,938,001 129,485,607 135,693,336 94,119,117 Allowance for impairment (see Note 16) ( 7,943,278) ( 9,935,036) ( 4,943,286) ( 5,812,828) Unearned discount ( 2,149,136) ( 1,840,833 ) ( 155,933) ( 39,029) Prompt payment discount ( 363,597) ( 303,899) - - Reserves for credit card ( 1,079,083) ( 210,637) ( 301,911) ( 210,637 )

P 164,402,907 P 117,195,202 P 130,292,206 P 88,056,623

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Loans and receivables bear average interest rates of 3.4% to 9.7% per annum in 2008, 3.4% to 10.5% in 2007 and 2.5% to 10.6% in 2006 in the consolidated and Parent Company financial statements. Included in these accounts in the consolidated financial statements are non-performing loans amounting to P3,930,841, net of allowance of P1,799,778 as of the end of 2008 and P6,479,981, net of allowance of P1,080,311 as of the end of 2007, and in the Parent Company financial statements amounting to P3,141,378, net of allowance of P1,352,750 as of the end of 2008 and P5,458,916, net of allowance of P787,442 as of the end of 2007. Loans and receivables amounting to P10,729,055 and P38,013 as of December 31, 2008 and 2007, respectively, both in the consolidated and Parent Company financial statements are assigned as collateral to BSP as security for rediscounting availments (see Note 18). The concentration of credit as to industry follows:

Consolidated Parent 2008 2007 2008 2007

Real estate, renting and other related activities P 46,547,757 P 39,780,197 P 13,733,296 P 12,067,003 Manufacturing (various industries) 30,281,180 21,236,268 30,261,981 21,213,697 Other community, social and personal activities 13,925,284 3,838,427 13,923,573 3,676,655 Wholesale and retail trade 10,165,040 10,415,186 9,002,426 9,392,375 Transportation and communication 7,503,127 1,377,094 7,503,127 1,220,327 Financial intermediaries 7,481,284 14,175,833 7,456,284 14,044,550 Agriculture, fishing and forestry 663,740 1,839,424 299,469 1,548,689 Others 15,517,570 11,465,146 14,517,012 10,753,527

P 132,084,982 P 104,127,575 P 96,697,168 P 73,916,823 The BSP considers that loan concentration exists when the total loan exposure to a particular industry exceeds 30% of the total loan portfolio. The breakdown of total loans as to secured and unsecured follows:

Consolidated Parent 2008 2007 2008 2007 Secured: Real estate mortgage P 47,739,934 P 28,704,547 P 26,646,468 P 11,003,443 Deposit hold-out 11,731,613 15,506,711 11,123,949 15,032,087 Chattel mortgage 12,549,276 10,998,449 148,981 556,875 Other securities 6,207,297 14,666,166 5,744,296 14,074,095 78,228,120 69,875,873 43,663,694 40,666,500 Unsecured 53,856,862 34,251,702 53,033,474 33,250,323 P 132,084,982 P 104,127,575 P 96,697,168 P 73,916,823

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A reconciliation of the allowance for impairment at the beginning and end of 2008 and 2007 is shown below:

Consolidated Parent 2008 2007 2008 2007 Balance at beginning of year P 9,935,036 P 10,394,956 P 5,812,828 P 6,011,367 Provisions during the year 1,928,086 859,864 1,830,597 680,535 Recovery of impairment losses ( 1,054,541 ) - ( 1,000,000 ) - Accounts written off/others ( 2,865,303 ) ( 1,319,784 ) ( 1,700,139 ) ( 879,074 ) Balance at end of year P 7,943,278 P 9,935,036 P 4,943,286 P 5,812,828

The maturity profile of loans follows:

Consolidated Parent 2008 2007 2008 2007 Due within one year P 52,497,992 P 57,364,437 P 49,816,491 P 54,568,838 Due beyond one year 79,586,990 46,763,138 46,880,677 19,347,985 P 132,084,982 P 104,127,575 P 96,697,168 P 73,916,823

11.1 Reclassification to Loans and Receivables Presented below is the reclassification of CLNs linked to ROP bonds (including embedded derivatives) and collateralized debt obligations (CDOs) to Loans and Receivables made by the Parent Company in 2008 in accordance with FRSPB (see Notes 8 and 10): At Reclassification Date At December 31, 2008 Estimated Carrying Future Carrying Reclassification Value Fair Value Cash Flows Amount Fair Value CLNs: From AFS – host contract P 6,321,713 P 6,321,713 P 5,916,240 P 6,028,297 P 6,295,730 From FVTPL – embedded derivative ( 307,836 ) ( 307,836 ) - - ( 952,361 ) CDOs – from AFS 594,000 118,801 380,160 593,588 99,792 6,607,877 6,132,678 6,296,400 6,621,885 5,443,161 Less allowance for impairment ( 954,891 ) - - ( 1,082,467) - Net carrying amount P 5,652,986 P 6,132,678 P 6,296,400 P 5,539,418 P 5,443,161 Unrealized fair value losses in equity of CLNs (host contract) linked to ROP bonds and CDOs which were reclassified from AFS to Loans and Receivables at reclassification dates amounted to P93,487 and P356,400, respectively. Effective interests at reclassification date range from 4.9% to 10.5% and 5.0% to 8.8% for CLNs and CDOs, respectively. Unrealized fair value losses as of December 31, 2008 that should have been recognized in the Parent Company’s capital funds had the CLNs and CDOs not been reclassified to Loans and Receivables amounted to P134,962 and P375,408, respectively. Had the embedded derivatives not been reclassified by the Parent Company, interest income on loans and receivables would have decreased by P7,477 while additional trading losses to be recognized in profit or loss amounted to P644,524 from the date of reclassification to December 31, 2008.

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11.2 Bankard On August 21, 2003, the BSP issued Memo Circular No. 398 which became effective on December 1, 2003. The BSP Circular prescribes, among others, the standard valuation reserves requirements for delinquent and potentially non-collectible credit card receivables. Based on this BSP Circular, Bankard has determined that the required allowance for impairment in the amount of P3,602,000 on the total credit card receivable portfolio as of December 31, 2003 would have a significant impact on the 2003 financial statements of Bankard if the whole amount would be recognized as of December 31, 2003. Bankard’s management requested an approval from the BSP to allow the staggered booking of the required allowance for impairment in 2003 over a period of seven years starting in 2004. The BSP, through its letter dated January 14, 2004, informed Bankard that the MB, under its Resolution No. 1872 dated December 22, 2003, has granted its request to stagger the booking of the valuation reserves of P3,602,000 over seven years. Also, Resolution No. 1872 requires it to infuse fresh capital equal to the amount of valuation reserves booked in accordance with the terms of the BSP approval. On December 29, 2005, the Parent Company made a fresh capital infusion amounting to P190,474 to comply with this BSP requirement. The BSP-approved staggered booking of valuation reserves over the seven year period is shown below: Year Percentage Amount 2004 5 P 180,100 2005 5 180,100 2006 18 648,360 2007 18 648,360 2008 18 648,360 2009 18 648,360 2010 18 648,360 100 P 3,602,000 Based on a separate determination made by Bankard of the required valuation reserves as of December 31, 2003 following the provisions of the BSP Circular, the computed required additional allowance for impairment approximates the BSP-approved amount of P3,602,000. However, in connection with the review of the allowance for impairment as of December 31, 2005, it was ascertained that this required additional allowance of P3,602,000 determined in 2003 did not pertain wholly to 2003, but a significant portion of such amount pertained to 2002 and prior years. Based on Bankard’s recomputation, of the required additional allowance, P749,355 pertained to 2003 and P2,852,645 pertained to 2002 and prior years. In computing these amounts, the rules under BSP Circular No. 398 were applied. Of the P3,602,000 required additional allowance, Bankard already recognized P846,470 in its books as of December 31, 2006 as follows: P180,100 in 2004, P180,100 in 2005 and P486,270 in 2006. PFRS, however, requires the full recognition of the required allowance for impairment against current operations in the period such losses were determined.

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As mentioned in Note 11.4, Bankard sold and transferred to the Parent Company its various credit card receivables on December 29, 2006 totaling P7,239,913 under a Deed of Assignment of Receivables. The credit card receivables that were sold and transferred by Bankard to the Parent Company included credit card receivables amounting to P2,755,530 which, as approved by the BSP, are provided with allowance for impairment on a staggered basis. After the sale and transfer, the Parent Company charged in 2006 the impairment loss for the credit card receivables transferred amounting to P162,090 and wrote-off the remaining balance of these impaired credit card receivables amounting to P2,593,440 against the “freed” allowance for impairment pertaining to the non-performing assets (NPAs) transferred as discussed in Note 11.3. The confirmation from the BSP that it interposes no objection to the sale and transfer of the credit card receivables was obtained by the Parent Company through a letter from the BSP dated March 15, 2007. However, the write-off of the remaining balance of impaired credit card receivables should have been charged against the 2006 operations. Had the write-off of the impaired credit card receivables been charged against the 2006 operations, the Parent Company’s Loans and Receivables and Surplus would have decreased by P2,593,440 as of December 31, 2008 and 2007, and its 2006 net income would have decreased by the same amount (see also Note 34). In the consolidated financial statements, had the write-off of the impaired credit card receivables been charged by the Parent Company against the 2006 operations and had Bankard recognized the required allowance for impairment in the period the losses were determined, the Group Loans and Receivables account and Surplus account would have decreased by P2,593,440 as of December 31, 2008 and 2007, and the consolidated net income would have decreased by P2,107,170 in 2006 (see also Note 34). 11.3 Special Purpose Vehicle (SPV) Transactions In accordance with the provisions of Republic Act No. 9182 (the SPV Act) and BSP Resolution No. 135, the Parent Company entered into either “sale and purchase” or “asset sale” agreements with SPVs, namely: • New Pacific Resources Management (SPV-AMC), Inc. (NPRMI) on May 14, 2008

and February 26, 2007, • Star Two (SPV-AMC), Inc. (Star Two) on November 15, 2006,

• Philippine Investments One, Inc. (PIOI) on August 25, 2004 and April 12, 2005,

• Global Ispat Holdings and Global Steelworks International (collectively referred

herein as the Global SPVs) on October 15, 2004, and

• Asian Pacific Recoveries (SPV-AMC) Corporation (Asian Pacific Recoveries) on February 21, 2005.

The agreements cover the transfer of specific NPAs, consisting of non-performing loans (NPLs) and real and other properties acquired (ROPA; presented as Investment Property), amounting to P50,728 in 2008 and P1,698,558 in 2007 to NPRMI; P3,878,781 in 2006 to Star Two, P3,770,948 and P1,433,228 in 2004 and 2005, respectively to PIOI; P685,561 to Global SPVs in 2004; and P2,070,064 to Asian Pacific Recoveries in 2005. The agreement with the Global SPVs was made in conjunction with other participating banks.

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The agreement with Star Two also covers the sale of NPAs not eligible under the SPV Act amounting to P486,142. The loss on sale related to the sale of NPAs to Star Two not eligible under the SPV Act amounting to P169,160 is recognized as part of Miscellaneous Other Operating Expenses in the 2006 income statement. The Certificates of Eligibility, obtained for purposes of availing of the tax exemptions and privileges on the NPLs transferred and ROPAs sold were completely issued by the BSP to the Parent Company on various dates in 2004, 2005, 2007 and 2008. The significant terms and conditions of the “sale and purchase” agreements with PIOI and the “asset sale” agreement with NPRMI, among others, follow: • The SPV shall issue 10-year subordinated/SPV notes in exchange for the NPLs

transferred. The issuance of the subordinated/SPV notes constitutes full settlement for the NPLs transferred.

• The subordinated/SPV notes are subordinated in priority of payment to the senior

notes and any other working capital notes of the SPV.

• The amount and schedule of payment of the subordinated/SPV notes shall be contingent and dependent on the amount and timing of collections to be made by the SPV on the NPLs transferred, subject to the rights and privileges of the SPV’s other creditors.

In addition, the SPV note issued by PIOI to the Parent Company relative to the April 12, 2005 “sale and purchase” agreement shall have a maturity of 10 years. Interest shall accrue on the amount of the aggregate allocated loan asset amount and shall be payable for each quarter in arrears in reckoning date at an interest rate equal to the 91-day rate for Philippine treasury bills per annum. The total consideration for the sale of NPAs (for eligible and not eligible under the SPV Act) to Star Two amounted to P1,190,410. Based on the terms and conditions of the “asset sale and purchase” agreement with Star Two, the risk and rewards of the ownership of the sold NPAs was transferred completely to Star Two. The asset sale and purchase agreement also requires Star Two to pay an earnest money deposit equivalent to 20% of the total purchase price within five days after the bid award date. The 20% earnest money deposit amounting to P238,082 was received by the Parent Company in November 2006. The remaining outstanding balance of the purchase price amounting to P952,328 was recorded as part of Loans and Receivable in the statement of condition as of December 31, 2006. Such amount was subsequently collected on February 9, 2007. The significant terms and conditions of the Parent Company’s “sale and purchase” agreement with the Global SPVs, among others, follow: • The SPVs shall pay cash up front and issue 8-year zero-coupon subordinated notes

to the Parent Company and other participating banks in exchange for the NPLs transferred. The issuance of the subordinated notes and the upfront cash payment to the Parent Company constitute full settlement for the NPLs transferred.

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• The subordinated notes shall be issued to the Parent Company and other participating banks in two tranches, namely, Tranche A and Tranche B. The subordinated notes shall be secured by a first-ranking mortgage and security interest over the plant assets of the Global SPVs and standby letters of credit to be delivered by the Global SPVs from time to time in accordance with the agreement subject to the rights and privileges of the SPVs’ other creditors.

• The amount and schedule of payment of the subordinated notes to the Parent

Company and other participating banks shall be based on the repayment schedule set forth in the “sale and purchase” agreement.

The significant terms and conditions of the Parent Company’s “sale and purchase” agreement with Asian Pacific Recoveries, among others, follow: • The SPV shall pay P20 million as bid deposit. • On closing date, the SPV shall pay the Parent Company the purchase price balance

by wire transfer in full settlement of the NPLs transferred. • SPV acknowledges and agrees that if there is occurrence of a default by any obligor

under any loan document, SPV will remain bound by all terms and conditions to purchase all the loans in the transaction without any adjustment or alteration in the purchase price unless the Bank removes loans from the transaction prior to closing.

In relation to such transactions, the BSP has informed the Parent Company that the allowance for impairment amounting to P23,280 and P289,994 on the NPAs transferred to NPRMI in 2008 and 2007, respectively; P1,474,440 on the NPAs transferred to Star Two in 2006, P2,225,558 and P163,814 to PIOI and the Global SPVs, respectively, in 2004; and P1,211,332 to PIOI and P245,477 to Asian Pacific Recoveries in 2005, shall be “freed” and used only for general loan loss provision and/or for specific provision of loan accounts that may be classified in the future. In 2006, the Parent Company charged the freed allowance for the write-off of the remaining balance of impaired credit card receivables amounting to P2,593,440 (see Note 11.2). In 2008, the Parent Company reversed portion of the freed allowance amounting to P1,000,000 by charging it to the current operations. PFRS, however, requires the derecognition of the related allowance for impairment of the NPAs transferred that qualified for derecognition at the time of sale.

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The face value of the subordinated/SPV notes issued by NPRMI in 2008 amounted to P48,192 and P1,688,902 in 2007; subordinated/SPV notes issued by PIOI in 2005 amounted to P1,418,896 and P3,770,948 in 2004; the SPV note issued by Global SPVs amounted to P548,930 in 2004. In addition to the subordinated notes, the Global SPV also paid cash to the Parent Company amounting to P27,439 in 2004 and PIOI and Asian Pacific Recoveries paid cash amounting to P14,332 and 427,564, respectively, for the 2005 transfer, and NPRMI paid cash amounting to P2,536 in 2008 and P9,656 in 2007. In recording the transfers of the NPAs, the Parent Company derecognized the NPAs from their financial records and recorded the subordinated/SPV notes as part of Available-for-sale Securities (unquoted debt securities) at their fair values as of the dates of issuance. However, one of the significant conditions stated in the terms of the subordinated/SPV notes from NPRMI and PIOI is that the amount and timing of payment of the subordinated/SPV notes are dependent on the collections to be made by NPRMI and PIOI on the NPAs transferred. Under PFRS, this is indicative of an incomplete transfer of the risks and rewards of ownership of the NPAs from the Parent Company to NPRMI and PIOI. PFRS requires that: (a) the entity retaining majority of the residual risks and rewards of ownership of certain assets of SPV should reflect in its financial statements its proportionate interest in such SPV; and (b) an entity should substantially transfer all the risks and rewards of ownership of an asset before such asset could be derecognized. As permitted under BSP Resolution No. 135, the Parent Company has deferred over 10 years the recognition of the required additional allowance for impairment as determined from the NPAs transferred to PIOI, and the losses determined from the NPAs transferred to the Star Two, Global SPVs and Asian Pacific Recoveries, totaling to P1,335,149 in 2006, P1,604,587 in 2005 and P1,955,768 in 2004. The schedule of amortization of the required additional allowance for impairment and losses as prescribed under BSP Resolution No. 135 shall be 5% for the first three years, 10% for the next four years, and 15% for the remaining three years. The Parent Company recorded the amortization determined in accordance with BSP Resolution No. 135 amounting to P536,683 in 2008 and P503,268 in 2007 (charged against the “freed” allowance for impairment as discussed above) and P208,658 in 2008 and P15,712 in 2004 (charged against operations). In addition, the Parent Company recorded in 2005 an additional amortization of P37,556, on top of the amount of amortization prescribed by BSP Resolution No. 135. While this accounting treatment is allowed under BSP Resolution No. 135, PFRS, however, requires the full recognition of the required additional allowance for impairment and losses against current operations in the period such impairment and losses were determined instead of capitalizing it as deferred charges and amortizing it over future periods.

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Had the Parent Company (i) reflected in its financial statements its interest in NPRMI and PIOI and not derecognized the NPAs transferred; (ii) derecognized the allowance for impairment related to the NPAs transferred that qualified for derecognition at the time of sale; and, (iii) not deferred the recognition of the required additional allowance for impairment and the losses determined from the NPAs transferred in accordance with PFRS, the gross balance of the Group’s and Parent Company’s Loans and Receivables account would have increased by P5,204,176 in 2008 and 2007, respectively; Allowance for Impairment would have increased by P1,979,036 and P1,442,354 in 2008 and 2007, respectively; Available-for-sale Securities would have decreased by P1,423,820 and P1,398,908 in 2008 and 2007, respectively; Investment Property would have increased by P1,436,012 and P1,408,564 in 2008 and 2007, respectively; Deferred Charges (part of Other Resources account in Note 15) would have decreased by P7,844,385 and P8,589,726 in 2008 and 2007, respectively; Other Liabilities would have increased by P26,524 and P23,988 in 2008 and 2007, respectively; net income would have decreased by P791,342 and P1,335,149 in 2008 and 2006, respectively (see also Note 34).

11.4 Acquisition of Credit Card Receivables and Other Assets and Assumption of Certain Liabilities of Bankard On November 27, 2006, the BOD of the Parent Company approved the acquisition of credit card receivables and other assets and assumption of certain liabilities of Bankard. This was effected by the Parent Company on December 29, 2006 through the following transactions with Bankard:

a. Bankard executed a Deed of Assignment of Receivables in favor of the Parent

Company under which both parties agreed that in consideration of the assumption by the Parent Company of certain liabilities due to creditors and other suppliers, Bankard irrevocably sold and transferred its credit card receivables to the Parent Company with an estimated amount of P7,239,913. Both parties also agreed that the credit card accounts of Bankard’s cardholders will be transferred to the Parent Company;

b. The Parent Company and Bankard executed a Deed of Absolute Sale for the sale of

Bankard’s 30 condominium units located at the Robinsons Equitable Tower, Bankard’s principal place of business, with a net book value of P278,120 for a consideration of P285,029;

c. Bankard executed a Deed of Sale of Assets with Parent Company for the sale of its

various assets amounting to P72,148 in consideration for the assumption by the Parent Company of certain liabilities due to creditors and suppliers totaling P2,791,418. Bankard paid the Parent Company P2,719,270 for the net liabilities that were assumed by the Parent Company.

Relative to the above transaction, on December 29, 2006, Bankard entered into a service agreement with the Parent Company. Under this agreement, Bankard agreed to provide the Parent Company with marketing, distribution, technical, collection and selling assistance and processing services to the Parent Company in connection with the operation of the credit card business. This agreement is pursuant to the terms and conditions of the Deed of Assignment of Receivables where Bankard sold its right, title and interest to its receivables to the Parent Company.

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The Parent Company requested for BSP’s confirmation on the above transactions and the BSP formally informed the Parent Company on March 15, 2007 that it interposes no objection.

12. INVESTMENTS IN SUBSIDIARIES AND ASSOCIATES

The components of the carrying values of investments in subsidiaries and associates are as follows:

Consolidated Effective Percentage of Ownership 2008 2007 Acquisition costs of associates: RRC 25.00 P 1,999,934 P 2,071,777 RLI 49.00 921,076 921,076 GLFAC 20.00 200,000 200,000 SPC 26.50 120,095 120,095 RHI 4.71 101,665 101,665 HCPI 12.88 91,050 91,050 LIPC 35.00 52,500 52,500 YCS 40.00 5,070 5,070 NPRMI - - 1,563 3,491,390 3,564,796

Equity in net earnings (losses): Balance at beginning of year 128,006 ( 38,472 ) Equity in net earnings 404,192 351,842 Dividends ( 230,718) ( 185,364 ) Balance at end of year 301,480 128,006 3,792,870 3,692,802 Share in additional paid-in capital of an associate 532,583 532,583 Increase in revaluation reserves 21,229 - 4,346,682 4,225,385 Allowance for impairment (see Note 16) ( 52,500) ( 52,500 ) P 4,294,182 P 4,172,885

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Parent Effective Percentage of Ownership 2008 2007 Subsidiaries: RSB 100.00 P 3,190,000 P 3,190,000 RCBC Capital 99.96 2,230,673 2,230,673 Bankard 66.58 1,000,000 - Merchants Bank 96.38 493,039 - RCBC Forex 100.00 150,000 150,000 RCBC IFL 99.99 58,013 58,013 RCBC North America* 100.00 36,046 36,046 RCBC Telemoney Europe 100.00 16,055 16,055 7,173,826 5,680,787 Associates: RRC 25.00 1,999,934 2,071,777 RLI 49.00 921,076 921,076 GLFAC 20.00 200,000 200,000 SPC 26.50 120,095 120,095 HCPI 12.88 91,050 91,050 LIPC 35.00 52,500 52,500 YCS 40.00 5,070 5,070 NPRMI - - 1,563 3,389,725 3,463,131 10,563,551 9,143,918 Allowance for impairment ( 252,500) ( 252,500 ) Deposit for future stock subscription - 1,000,000 P 10,311,051 P 9,891,418

*Includes the 31% ownership of RCBC IFL in RCBC North America The following table presents audited financial information (except for GLFAC for which 2008 information were based on unaudited financial statements) on the significant associates as of and for the years ended December 31, 2008 and 2007: Income Assets Liabilities Revenues (Loss) 2008: RRC P 9,060,000 P 2,608,410 P 1,154,322 P 335,398 RLI 1,027,227 175,198 38,747 ( 17,750 ) GLFAC 3,210,333 2,148,668 617,376 26,981 2007: RRC P 9,911,743 P 2,793,516 P 953,671 P 318,002 RLI 2,529,152 1,659,373 548,682 293,439 GLFAC 2,890,716 1,691,248 456,245 13,504

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The Parent Company under a shareholders agreement, agreed with another stockholder of HCPI, to commit and undertake to vote as a unit the shares of stock thereof, which they proportionately own and hold, and to regulate the conduct of the voting and the relationship between them with respect to their exercise of their voting rights. As a result of this agreement, the Parent Company is able to exercise significant influence over the operating and financial policies of HCPI. Thus, HCPI has been accounted for using the equity method. RCBC Capital entered into an agreement with another stockholder of RHI to commit and undertake to vote as a unit the shares of stock of RHI, representing 54.68% of the outstanding capital stock thereof, which they respectively own and hold, to regulate the conduct of the voting and the relationship between them with respect to the exercise of the voting rights. Thus, notwithstanding the RCBC Capital’s ownership of only 4.71% in RHI, its investment is carried under the equity method of accounting. NPRMI was incorporated with the SEC on September 17, 2004 as a 100%-owned RCBC shelf-SPV solely for the purpose of facilitating the sale of the Bank's NPAs under the SPV Act of 2002. Financial institutions’ formation of shelf-SPVs was encouraged by the BSP particularly to cater to the requirements of NPA investors which lacked the SPV vehicles which would purchase these assets from certain banks, provided these shelf-SPVs were duly incorporated not later than the SPV Act's original deadline of September 18, 2004. Although the SPV Act expired in the first semester of 2005, RCBC was allowed by the BSP to retain its shelf-SPV in a MB approval of October 6, 2005 in consideration of the likely extension/renewal of the SPV Act, and the Parent Company's plan to dispose of more NPAs, together with the remaining shelf-SPV, within the extended law's parameters. In 2006, the SPV Act was extended up to May 2008. On February 26, 2007, the Parent Company sold total NPAs of P1,698,558 to Innovative Property Solutions (IPS), a corporation duly organized and existing under Philippine Laws. On July 16, 2007, IPS through an Accession Agreement, assigned to NPRMI all of the former’s rights and obligations as purchaser of NPAs sold. On June 27, 2007, the Parent Company sold, transferred and assigned to third parties its 95% interests in NPRMI including subscription liabilities for P30,278. The financial statement accounts of NPRMI are accordingly deconsolidated starting with the 2007 statement of condition. On November 27, 2006, as part of its corporate restructuring strategy, the Parent Company’s BOD approved the capital infusion of P1 billion each into Bankard and RCBC Capital. The Parent Company, in its letter to the BSP dated January 9, 2007, requested for the approval of such capital infusion by way of conversion of Bankard’s and RCBC Capital’s debt to the Parent Company into equity. The Parent Company reflected the effects of the transaction in its 2006 financial statements by recording the capital infusion as part of Investments in Subsidiaries and Associates - Deposit for Future Stock Subscription and, in addition, provided for allowance for impairment amounting to P200,000. However, BSP approved the transaction only on February 23, 2007. Had the capital infusion not been recorded in 2006, the Parent Company’s Loans and Receivables would have increased by P2,000,000, Investments in Subsidiaries and Associates would have been decreased by P1,800,000 and its 2006 net income would have been increased by P200,000 (see Note 34). Thereafter, on January 4, 2008, the application for increase in Bankard’s authorized capital to cover the Parent Company’s capital infusion was approved by the SEC. Starting 2008, with the capital infusion (previously classified as Deposit for Stock Subscription) applied against subscription to Bankard’s capital stock, the Parent Company now holds direct percentage interest of 66.58%. Prior to 2008 and the additional capital infusion made by the Parent Company to Bankard, the Parent Company owns 59% indirectly of Bankard’s net assets through RCBC Capital. As a result of the capital infusion, the

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Parent Company’s interest in Bankard’s net assets increased to 91.69% (representing 66.58% direct ownership and 25.11% indirect ownership through RCBC Capital). This change in ownership with Bankard did not result on gaining or losing control. In accordance with the relevant accounting standards, Parent Company and Minority Interest (other than RCBC Capital) share in Bankard’s net assets were adjusted to reflect the changes in their relative interest. The difference between the amount of additional investment made by the Parent Company and the adjustment in the Minority Interest share in Bankard’s net assets amounting to P240,889, was recognized directly in equity and presented as Other Reserves. On July 30, 2007, the Parent Company’s BOD approved the capital infusion to RSB amounting to P1,000,000. The request of the Parent Company to increase its equity investment in RSB was approved by the BSP on September 26, 2007.

After a series of earlier consultations and discussions among the parties and BSP, the Parent Company entered into a formal Reorganization Agreement and Deed of Assignment of Rights with PMMIC and RLI on December 26, 2007 to transfer RLI’s ownership with RRC to the Parent Company and PMMIC by 25% and 15%, respectively, in exchange of partial and full settlement of RLI’s obligations with the Parent Company and PMMIC, respectively. The Parent Company recorded its equity investment with RRC by the carrying amount of loan paid and the interest income accrued which amounted to P2,071,777. This was earlier approved by the BSP on September 27, 2007 through MB Resolution No. 1097. In 2008, RRC redeemed a certain percentage of its preferred shares which resulted to the decrease in the Parent Company’s cost of investment by P71,843. On October 30, 2007, the Parent Company’s BOD approved the acquisition of 96.38% interest in Merchants Bank for P493,039.

13. BANK PREMISES, FURNITURE, FIXTURES AND EQUIPMENT

The gross carrying amounts and accumulated depreciation, amortization and impairment at the beginning and end of 2008 and 2007 are shown below: Consolidated

Furniture, Leasehold Fixtures and Rights and Land Buildings Equipment Improvements Total December 31, 2008 Cost P 1,102,951 P 1,579,867 P 2,941,206 P 956,548 P 6,580,572 Accumulated depreciation, amortization and impairment ( 10,831 ) ( 616,060 ) ( 1,878,153 ) ( 45,759 ) ( 2,550,803 ) Net carrying amount P 1,092,120 P 963,807 P 1,063,053 P 910,789 P 4,029,769 December 31, 2007 Cost P 1,074,222 P 1,494,050 P 2,420,036 P 799,484 P 5,787,792 Accumulated depreciation, amortization, and impairment - ( 533,786 ) ( 1,735,538 ) ( 14,652 ) ( 2,283,976 ) Net carrying amount P 1,074,222 P 960,264 P 684,498 P 784,832 P 3,503,816

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Consolidated Furniture, Leasehold Fixtures and Rights and Land Buildings Equipment Improvements Total January 1, 2007 Cost P 1,089,649 P 1,506,340 P 2,476,470 P 741,591 P 5,814,050 Accumulated depreciation, amortization, and impairment - ( 517,394 ) ( 1,893,827 ) ( 15,290 ) ( 2,426,511 ) Net carrying amount P 1,089,649 P 988,946 P 582,643 P 726,301 P 3,387,539

Parent Furniture, Leasehold Fixtures and Rights and Land Buildings Equipment Improvements Total December 31, 2008 Cost P 668,740 P 1,288,176 P 2,195,692 P 821,491 P 4,974,099 Accumulated depreciation and amortization - ( 484,029 ) ( 1,452,442 ) - ( 1,936,471 ) Net carrying amount P 668,740 P 804,147 P 743,250 P 821,491 P 3,037,628 December 31, 2007 Cost P 678,438 P 1,269,650 P 1,821,953 P 731,406 P 4,501,447 Accumulated depreciation and amortization - ( 431,924 ) ( 1,355,549 ) - ( 1,787,473 ) Net carrying amount P 678,438 P 837,726 P 466,404 P 731,406 P 2,713,974 January 1, 2007 Cost P 678,492 P 1,285,623 P 1,937,097 P 697,150 P 4,598,362 Accumulated depreciation and amortization - ( 424,359 ) ( 1,539,170 ) - ( 1,963,529 ) Net carrying amount P 678,492 P 861,264 P 397,927 P 697,150 P 2,634,833

A reconciliation of the carrying amounts at the beginning and end of 2008 and 2007, of bank premises, furniture, fixtures and equipment is shown below.

Consolidated

Furniture, Leasehold Fixtures and Rights and Land Buildings Equipment Improvements Total Balance at January 1, 2008, net of accumulated depreciation, amortization, and impairment P 1,074,222 P 960,264 P 684,498 P 784,832 P 3,503,816 Additions 69,358 96,851 650,963 218,287 1,035,459 Disposals ( 40,629 ) ( 15,988 ) ( 29,091 ) - ( 85,708 ) Depreciation and amortization charge for the year - ( 72,234 ) ( 243,317 ) ( 92,330 ) ( 407,881 ) Impairment loss (see Note 16) ( 10,831 ) ( 5,086 ) - - ( 15,917 ) Balance at December 31, 2008, net of accumulated depreciation, amortization, and impairment P 1,092,120 P 963,807 P 1,063,053 P 910,789 P 4,029,769

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Consolidated Furniture, Leasehold Fixtures and Rights and Land Buildings Equipment Improvements Total Balance at January 1, 2007, net of accumulated depreciation, amortization, and impairment P 1,089,649 P 988,946 P 582,643 P 726,301 P 3,387,539 Additions 9,791 44,885 381,591 135,248 571,515 Disposals ( 25,218 ) ( 7,712 ) ( 97,008 ) ( 9,934 ) ( 139,872 ) Depreciation and amortization charge for the year - ( 65,855 ) ( 182,728 ) ( 66,783 ) ( 315,366 ) Balance at December 31, 2007, net of accumulated depreciation, amortization, and impairment P 1,074,222 P 960,264 P 684,498 P 784,832 P 3,503,816 Parent Furniture, Leasehold Fixtures and Rights and Land Buildings Equipment Improvements Total Balance at January 1, 2008, net of accumulated depreciation and amortization P 678,438 P 837,726 P 466,404 P 731,406 P 2,713,974 Additions 650 25,093 455,382 168,023 649,148 Disposals ( 10,348 ) ( 4,455 ) ( 22,192 ) - ( 36,995 ) Depreciation and amortization charge for the year ( - ) ( 54,217 ) ( 156,344 ) ( 77,938 ) ( 288,499 ) Balance at December 31, 2008, net of accumulated depreciation and amortization P 668,740 P 804,147 P 743,250 P 821,491 P 3,037,628 Balance at January 1, 2007, net of accumulated depreciation and amortization P 678,492 P 861,264 P 397,927 P 697,150 P 2,634,833 Additions - 32,539 271,696 103,745 407,980 Disposals ( 54 ) ( 3,162 ) ( 91,196 ) ( 9,857 ) ( 104,269 ) Depreciation and amortization charge for the year ( - ) ( 52,915 ) ( 112,023 ) ( 59,632 ) ( 224,570 ) Balance at December 31, 2007, net of accumulated depreciation and amortization P 678,438 P 837,726 P 466,404 P 731,406 P 2,713,974

Under BSP rules, investments in bank premises, furniture, fixtures and equipment should not exceed 50% of the respective unimpaired capital of the Parent Company and RSB. As of December 31, 2008 and 2007, the Parent Company and RSB have satisfactorily complied with this BSP requirement.

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14. INVESTMENT PROPERTY Investment property consists of various land and building acquired through foreclosure or dacion as payment of outstanding loans by the borrowers. A reconciliation of the carrying amounts at the beginning and end of 2008 and 2007, and the gross carrying amounts and the accumulated depreciation and impairment of investment property are as follows:

Consolidated Parent 2008 2007 2008 2007 Balance at January 1, net of accumulated depreciation and impairment P 7,761,435 P 9,984,857 P 3,887,545 P 6,079,179 Additions 1,338,653 913,378 563,040 244,684 Disposal ( 1,338,863) ( 3,010,401 ) ( 886,704) ( 2,370,800 ) Write-off ( 244,779) - - - Depreciation and impairment charges for the year ( 128,833) ( 126,399 ) ( 63,421) ( 65,518 ) Balance at December 31, net of accumulated depreciation and impairment P 7,387,613 P 7,761,435 P 3,500,460 P 3,887,545 December 31 Cost P 9,013,278 P 9,894,299 P 4,354,687 P 5,024,112 Accumulated depreciation and impairment (see Note 16) ( 1,625,665) ( 2,132,864) ( 854,227) ( 1,136,567 ) Net carrying amount P 7,387,613 P 7,761,435 P 3,500,460 P 3,887,545

The fair value of investment property as of December 31, 2008 and 2007, based on the available appraisal values, amounted to P11,025,506 and P11,786,383, respectively, for the Group and P5,670,707 and P7,126,826, respectively, for the Parent Company. In November 2003, RSB entered into a memorandum of Agreement (MOA) with certain borrowers for the settlement of their indebtedness with RSB amounting to P4.1 billion through dacion of certain real properties. Under the MOA, the transfer of the properties may be effected through the creation of special purpose companies (SPCs). On June 17, 2004, RSB entered into another MOA setting the guidelines in creating the SPC as well as the ultimate assignment to RSB of the shares of stock of the SPCs. On various dates in 2005 and 2004, certain SPCs were incorporated and created, covering certain real properties with carrying values of P2,472,830 and P1,938,234 in 2005 and 2004, respectively, being assigned to the SPCs. Moreover, the shares of stock of certain SPCs were transferred to RSB in 2005 and 2004. In 2008, the remaining properties covered by the MOA have been transferred to specific SPCs, and the ultimate assignment of the corresponding shares of stock of these specific SPCs to RSB has been effected. There were no new SPCs that were incorporated nor shares of stock that were transferred to RSB in 2006, 2007 and 2008. The real properties, although assigned to the incorporated SPCs or will be incorporated SPCs, are recognized by RSB as part of Investment Property on the basis that the SPCs are merely transitory holders of the assets while RSB is looking for ways to eventually dispose of such assets. This treatment is consistent with the letter of the BSP to RSB which emphasized that the dacioned properties be recorded as ROPA-Real Properties, and which were subsequently reclassified as Investment Property when RSB transitioned to PFRSs. In addition, the management of RSB believes that there is no transfer of risks and rewards over the properties as the management and control of these assets still rest with RSB.

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In its meeting on February 19, 2007, RSB’s BOD approved the sale of certain non-performing assets (NPAs) to Innovative Property Solutions, Inc. (IPSI), a corporation duly organized and existing under Philippine laws. An Asset Sale Agreement was executed by both parties on February 26, 2007 to formalize the sale of the NPAs. Subsequently, in a separate Accession Agreement dated July 16, 2007, IPSI assigned all its rights and obligations as the purchaser in the aforementioned Asset Sale Agreement to NPRMI, an SPV entity. The BSP approved and issued on August 28, 2007 the certificate of eligibility of the NPAs under the SPV Act of 2002 and transfer/sale of the assets to NPRMI. In November 2008, RSB completed the obligations as stated under the Asset Sale Agreement and Accession Agreement to fully consummate the transaction and in accordance with the provisions of Republic Act No. 9182 (the SPV Act) and BSP Resolution No. 135, recognized the aforementioned sale. The significant terms and conditions of the “asset sale” agreement follow:

• The SPVs shall issue 10-year subordinated/SPV notes in exchange for the NPLs

transferred. The issuance of the subordinated/SPV notes constitutes full settlement for the NPLs transferred.

• The subordinated/SPV notes are subordinated in priority of payment to the senior

notes and any other working capital notes of the SPV.

• The amount and schedule of payment of the subordinated/SPV notes shall be contingent and dependent on the amount and timing of collections to be made by the SPVs on the NPLs transferred, subject to the rights and privileges of the SPV’s other creditors.

In consideration of the sale, RSB received cash amounting to P347 and subordinated note with a face value of P 60,097. One of the significant conditions stated in the terms of the subordinated/SPV notes from New Pacific is that the amount and timing of payment of the subordinated/SPV notes are dependent on the collections to be made by New Pacific on the NPAs transferred. RSB initially recognized the subordinated note as AFS securities amounting to P60,097 but subsequently provided an allowance for impairment for the entire amount.

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15. OTHER RESOURCES Other resources consist of the following:

Consolidated Parent 2008 2007 2008 2007 Deferred charges - net (see Note 11.3) P 8,094,653 P 9,167,132 P 8,094,653 P 9,167,132 Foreign currency notes and coins on hand 1,701,866 1,199,001 1,494,082 1,166,636 Prepaid expenses 510,866 253,218 457,683 224,929 Goodwill - net 426,635 268,655 - - Returned checks and other cash items 168,469 365,476 168,465 210,612 Unused stationery and supplies 154,954 120,227 153,843 120,041 Inter-office float items 59,721 211,550 187,909 307,674 Miscellaneous checks and other cash items 20,492 13,991 20,487 13,986 Miscellaneous (see Note 26) 919,987 787,495 372,429 384,640 12,057,643 12,386,745 10,949,551 11,595,650 Accumulated depreciation ( 15,270) ( 15,270) ( 15,270) ( 15,270) Allowance for impairment (see Note 16) ( 150,280) ( 369,225) ( 116,733) ( 174,553) P 11,892,093 P 12,002,250 P 10,817,548 P 11,405,827

Deferred charges mainly represent the unamortized balance of the required additional allowance for impairment and losses as determined from the asset exchanges of the Parent Company’s NPAs to certain SPVs; these are amortized over a period of 10 years in accordance with BSP Resolution No. 135 (see Note 11.3). In addition, this account also includes the cost of software, net of accumulated amortization. The following shows the movement in the Group’s Deferred Charges account.

Consolidated Parent 2008 2007 2008 2007 Balance at beginning of year P 9,167,132 P 9,791,124 P 9,167,132 P 9,791,124 Additions 167,089 13,139 167,089 13,139 Amortization/disposals ( 1,239,568 ) ( 637,131 ) ( 1,239,568 ) ( 637,131 ) Balance at end of year P 8,094,653 P 9,167,132 P 8,094,653 P 9,167,132

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16. ALLOWANCE FOR IMPAIRMENT Changes in the allowance for impairment are summarized as follows: Consolidated Parent Notes 2008 2007 2008 2007 Balance at beginning of year Loans and receivables 11 P 9,935,036 P 10,394,956 P 5,812,828 P 6,011,367 Available-for-sale securities 10 779,304 549,078 779,304 549,078 Investment in subsidiaries and associates 12 52,500 52,500 252,500 252,500 Investment properties 14 1,244,281 1,546,005 491,015 539,388 Other resources 15 369,225 307,008 174,553 186,600 12,380,346 12,849,547 7,510,200 7,538,933

Provisions during the year 2,053,033 942,490 1,830,597 680,535 Recovery of impairment losses ( 1,054,541 ) - ( 1,000,000) - Charge-offs during the year ( 3,439,196 ) ( 1,411,691 ) ( 1,787,888) ( 709,268) Balance at end of year

Loans and receivables 11 7,943,278 9,935,036 4,943,286 5,812,828 Available-for-sale securities 10 811,207 779,304 811,207 779,304 Investment in subsidiaries and associates 12 52,500 52,500 252,500 252,500 Bank premises 13 18,911 - - -

Investment properties 14 963,466 1,244,281 429,183 491,015 Other resources 15 150,280 369,225 116,733 174,553 P 9,939,642 P 12,380,346 P 6,552,909 P 7,510,200

17. DEPOSIT LIABILITIES

The following is the breakdown of the deposit liabilities: Consolidated Parent 2008 2007 2008 2007 Demand P 11,125,069 P 10,765,240 P 8,392,524 P 7,581,932 Savings 75,738,446 66,769,816 66,269,393 57,690,027 Time 109,363,471 98,393,819 84,267,161 77,219,209 P 196,226,986 P 175,928,875 P 158,929,078 P 142,491,168

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The maturity profile of the deposit liabilities follows: Consolidated Parent 2008 2007 2008 2007 Within one year P 191,875,263 P 171,727,385 P 158,739,468 P 142,360,714 Beyond one year, within five years 4,351,723 4,201,490 189,610 130,454 P 196,226,986 P 175,928,875 P 158,929,078 P 142,491,168

Deposit liabilities are in the form of savings, demand and time deposit accounts with annual interest rates of 0.5% to 5% in 2008, 0.5% to 4.25% in 2007 and 1% to 5% in 2006. Deposit liabilities are stated at amounts they are to be paid which approximate the market value.

Under existing BSP regulations, non-FCDU deposit liabilities of the Group are subject to liquidity reserves equivalent to 11% as of December 31, 2008 and 2007, and statutory reserves of 8% and 10% as of December 31, 2008 and 2007, respectively. As of December 31, 2008 and 2007, the Group is in compliance with such regulations. Available reserves as of December 31, 2008 and 2007 follow:

Consolidated Parent 2008 2007 2008 2007 Cash and other cash items P 6,409,809 P 7,092,927 P 5,215,356 P 6,073,680 Due from BSP 4,240,275 5,650,159 3,535,622 4,816,103 Reserve deposit account (BSP) 11,797,000 11,591,200 11,797,000 11,591,200 Available-for-sale securities 553,498 515,902 110,361 100,664 Securities purchased under reverse repurchase agreement 25,000 - - - P 23,025,582 P 24,850,188 P 20,658,339 P 22,581,647 18. BILLS PAYABLE

This account consists of borrowings from:

Consolidated Parent 2008 2007 2008 2007 Foreign banks P 12,842,101 P 12,214,400 P 12,842,101 P 12,214,400 BSP 7,925,719 19,840 7,925,719 19,840 Local banks - - 523,142 207,068 Others 684,789 586,260 119,125 36,602 P 21,452,609 P 12,820,500 P 21,410,087 P 12,477,910

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The maturity profile of bills payable follows: Consolidated Parent 2008 2007 2008 2007 Within one year P 21,388,718 P 9,876,373 P 21,381,630 P 9,575,055 Beyond one year, within five years 63,891 2,944,127 28,457 2,902,855 P 21,452,609 P 12,820,500 P 21,410,087 P 12,477,910

Interbank borrowings with foreign and local banks are mainly short-term borrowings. In the consolidated financial statements, peso borrowings are subject to annual fixed interest rates ranging from 5% to 12% in 2008 and 2007, and 5% to 15% in 2006, while foreign currency-denominated borrowings are subject to annual fixed interest rates ranging from 0.25% to 5% in 2008, 2% to 8.41% in 2007 and 2.5% to 12% in 2006. In the Parent Company financial statements, peso borrowings are subject to annual fixed interest rates ranging from 5% to 6.7% in 2008 and 5% to 12% in 2007 and 2006, while foreign currency-denominated borrowings are subject to annual fixed interest rates ranging from 0.25% to 5% in 2008, 2% to 8.41% in 2007 and 2.5% to 12% in 2006. The interest rates on bills payable maturing beyond one year are repriced semi-annually at effective market interest rates. Bills payable include rediscounting availments from the BSP amounting to P7,925,719 and P19,840 as of December 31, 2008 and 2007, respectively, both in the consolidated and Parent Company financial statements. Such investments are collateralized by the assignment of certain loans amounting to P10,729,055 and P38,013 as of December 31, 2008 and 2007, respectively, both in the consolidated and Parent Company financial statements (see Note 11).

19. BONDS PAYABLE On February 23, 2005, the Parent Company issued to local and foreign entities (excluding those in the United States of America) unsecured bonds (Global Notes) with a principal amount of US$150,000 at an issue price of 99.67% and bearing an interest of 6.875% per annum. The Global Notes, unless previously redeemed or cancelled, will be redeemed on February 24, 2010. The Parent Company, at the option of the holder of the Global Notes, redeemed portion of the Global Notes with principal amount of US$10,678 on February 23, 2008. Interest is payable semi-annually in arrears on February 23 and August 23 of each year commencing on August 23, 2005, except that the last payment of the interest will be on February 24, 2010. As of December 31, 2008 and 2007, the peso equivalent of the outstanding bond issue amounted to P6,002,821 and P5,650,670, respectively.

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20. ACCRUED INTEREST, TAXES AND OTHER EXPENSES The composition of this account follows:

Consolidated Parent 2008 2007 2008 2007 Accrued interest payable P 1,055,671 P 1,411,676 P 929,048 P 1,330,244 Taxes payable 69,172 96,530 17,843 20,381 Other accrued expenses 1,662,613 1,579,304 1,029,161 1,137,872 P 2,787,456 P 3,087,510 P 1,976,052 P 2,488,497 21. OTHER LIABILITIES

Other liabilities consist of the following:

Consolidated Parent 2008 2007 2008 2007 Accounts payable P 2,788,020 P 2,148,151 P 2,024,610 P 1,591,687 Bills purchased - contra 1,675,239 1,732,227 1,675,239 1,732,227 Manager’s checks 643,652 763,162 433,551 500,629 Unearned income 518,400 651,675 518,400 651,674 Derivatives with negative fair values (see Note 8) 329,505 384,336 329,505 384,336 Payment orders payable 196,071 138,411 151,212 112,056 Other credits 154,426 129,578 125,268 108,582 Withholding taxes payable 125,103 100,399 96,634 78,757 Due to BSP 107,923 93,766 93,365 78,911 Guaranty deposits 60,369 79,993 60,369 79,993 Sundry credits 23,741 54,709 23,651 6,853 Due to other banks 1,452 775,492 1,452 775,492 Miscellaneous (see Note 24) 278,902 145,301 105,646 123,005 P 6,902,803 P 7,197,200 P 5,638,902 P 6,224,202 22. SUBORDINATED DEBT

On April 3, 2008, BSP Monetary Board Resolution No. 410, approved the Parent Company’s request to redeem its P5.0 billion 12% unsecured subordinated debt prior to maturity under the exercise of call option which the Parent Company exercised on July 11, 2008. This P5.0 billion 12% unsecured subordinated debt, which the Parent Company previously issued in June 20, 2003, has following significant terms and conditions: a. The Notes shall mature on July 11, 2013, provided that they are not previously

redeemed. b. Subject to satisfaction of certain regulatory approval requirements, the Parent

Company may, on July 11, 2008, redeem all of the outstanding notes at redemption price equal to 100% of the face value of the Notes together with accrued and unpaid interest thereon.

c. The Notes bear interest at the rate of 12% per annum and shall be payable semi-annually on January 11 and July 11 each year, commencing January 11, 2004.

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d. Unless the Notes are previously redeemed, the interest rate from 2008 to 2013 will be reset at the equivalent of the five-year MART1 FXTN as of July 11, 2008 multiplied by 80% plus 5.59% per annum. Such stepped-up interest shall be payable semi-annually commencing 2009.

On November 26, 2007, the Parent Company’s BOD approved another issuance of P7 billion unsecured subordinated notes (the “Notes”) with the following significant terms and conditions: a. The Notes shall mature on February 22, 2018, provided that they are not previously

redeemed. b. Subject to satisfaction of certain regulatory approval requirements, the Parent

Company may, on February 22, 2013, redeem all of the outstanding notes at redemption price equal to 100% of the face value of the Notes together with accrued and unpaid interest thereon.

c. The Notes bear interest at the rate of 7% per annum from February 22, 2008 and

shall be payable quarterly in arrears at the end of each interest period on May 22, August 22, November 22 and February 22 each year.

d. Unless the Notes are previously redeemed, the interest rate from 2013 to 2018 will be reset at the equivalent of the five-year Fixed Rate Treasury Note benchmark bid yield as of February 22, 2013 multiplied by 80% plus 3.53% per annum. Such stepped-up interest shall be payable quarterly commencing 2013.

The Notes were issued on February 22, 2008 and were fully subscribed.

The subordinated debt is measured at amortized cost at each statement of condition

date.

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23. MATURITY PROFILE OF FINANCIAL RESOURCES AND FINANCIAL LIABILITIES

The following tables present other financial resources and liabilities accounts (not disclosed elsewhere) by contractual maturity and settlement dates as of December 31, 2008 and 2007.

Consolidated

2008 2007 Due Due Due Due Financial Within Beyond Within Beyond Resources One Year One Year Total One Year One Year Total Due from BSP P 16,390,973 P - P 16,390,973 P 17,611,380 P - P17,611,380 Due from other banks 4,862,225 - 4,862,225 4,744,925 - 4,744,925 Other Resources: Foreign currency notes and coins on hand 1,701,866 - 1,701,866 1,199,001 - 1,199,001 Returned checks and other cash items 168,469 - 168,469 365,476 - 365,476 Miscellaneous checks and other cash items 20,492 - 20,492 13,991 - 13,991 Inter-office float items 59,721 - 59,721 211,550 - 211,550 Miscellaneous 919,987 - 919,987 787,495 - 787,495 P 24,123,733 P - P 24,123,733 P 24,933,818 P - P 24,933,818

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Consolidated 2008 2007

Due Due Due Due Financial Within Beyond Within Beyond Liabilities One Year One Year Total One Year One Year Total Bonds payable P - P 6,002,821 P 6,002,821 P - P 5,650,670 P 5,650,670 Outstanding acceptances payable 318,908 - 318,908 234,717 - 234,717 Accrued taxes, interest and other expenses 2,787,456 - 2,787,456 3,087,510 - 3,087,510 Subordinated debt - 6,941,899 6,941,899 - 5,158,070 5,158,070 Other Liabilities: Accounts payable 2,788,020 - 2,788,020 2,148,151 - 2,148,151 Manager’s checks 643,652 - 643,652 763,162 - 763,162 Payment orders payable 196,071 - 196,071 138,411 - 138,411 Withholding taxes payable 125,103 - 125,103 100,399 - 100,399 Due to BSP 107,923 - 107,923 93,766 - 93,766 Guaranty deposits 60,369 - 60,369 79,993 - 79,993 Sundry credits 23,741 - 23,741 54,709 - 54,709 Due to other banks 1,452 - 1,452 775,492 - 775,492 Miscellaneous 278,902 - 278,902 145,301 - 145,301 P 7,331,597 P 12,944,720 P 20,276,317 P 7,621,611 P 10,808,740 P 18,430,351

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Parent 2008 2007

Due Due Due Due Financial Within Beyond Within Beyond Resources One Year One Year Total One Year One Year Total Due from BSP P 15,656,119 P - P 15,656,119 P 16,750,323 P - P16,750,323 Due from other banks 3,197,593 - 3,197,593 3,021,668 - 3,021,668 Other Resources: Foreign currency notes and coins on hand 1,494,082 - 1,494,082 1,166,636 - 1,166,636 Inter-office float items 187,909 - 187,909 307,674 - 307,674 Returned checks and other cash items 168,465 - 168,465 210,612 - 210,612 Miscellaneous checks and other cash items 20,487 - 20,487 13,986 - 13,986 Miscellaneous 372,429 - 372,429 384,640 - 384,640 P 21,097,084 P - P 21,097,084 P 21,855,539 P - P21,855,539

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Parent 2008 2007

Due Due Due Due Financial Within Beyond Within Beyond Liabilities One Year One Year Total One Year One Year Total Bonds payable P - P 6,002,821 P 6,002,821 P - P 5,650,670 P 5,650,670 Outstanding acceptances payable 318,908 - 318,908 234,717 - 234,717 Accrued taxes, interest and other expenses 1,976,052 - 1,976,052 2,488,497 - 2,488,497 Subordinated debt - 6,941,899 6,941,899 - 5,158,070 5,158,070 Other Liabilities Bills purchased -contra 1,675,239 - 1,675,239 1,732,227 - 1,732,227 Accounts payable 2,024,610 - 2,024,610 1,591,687 - 1,591,687 Manager’s checks 433,551 - 433,551 500,629 - 500,629 Payment orders payable 151,212 - 151,212 112,056 - 112,056 Guaranty deposits 60,369 - 60,369 79,993 - 79,993 Due to BSP 93,365 - 93,365 78,911 - 78,911 Withholding taxes payable 96,634 - 96,634 78,757 - 78,757 Sundry credits 23,651 - 23,651 6,853 - 6,853 Due to other banks 1,452 - 1,452 775,492 - 775,492 Miscellaneous 105,646 - 105,646 123,005 - 123,005 P 6,960,689 P 12,944,720 P 19,905,409 P 7,802,824 P 10,808,740 P 18,611,564

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24. CAPITAL FUNDS

24.1 Capital Stock

Capital stock consists of (amounts and shares in thousands, except per par value): Shares 2008 2007 2006 Preferred stock – voting, non-cumulative non-redeemable, participating, convertible into common shares – P10 par value Authorized – 200 million shares Issued and outstanding 85,934 85,951 105,494 Common stock – P10 par value Authorized – 1,100 million shares Issued and outstanding 962,843 962,837 632,964 Amount 2008 2007 2006 Preferred stock – voting, non-cumulative non-redeemable, participating, convertible into common shares – P10 par value Authorized – 200 million shares Issued and outstanding P 859,335 P 859,512 P 1,054,940 Common stock – P10 par value Authorized – 1,100 million shares Issued and outstanding P 9,628,430 P 9,628,369 P 6,329,640

On January 22, 2007, the Parent Company stockholders, owning or representing more than 2/3 of the outstanding capital stock, unanimously confirmed and ratified the approval by the majority of the BOD held on December 4, 2006, the increase of the Parent Company’s authorized capital stock from P9,000,000 to P13,000,000, by amending its Articles of Incorporation. The increase in authorized capital stock of the Parent Company was approved by the BSP and SEC on February 12, 2007 and March 8, 2007, respectively. The authorized capital of the Parent Company of P13 billion is divided into the following classes of shares:

a. One billion one hundred million (1,100 million) common shares of stock with

par value of ten pesos (P10.00) per share; and,

b. Two hundred million (200 million) preferred shares of stock with par value of ten pesos (P10.00) per share.

On March 29, 2007 and April 13, 2007, the Parent Company issued additional shares from its unissued common shares with total par value amounting to P1,826,087 and P273,913, respectively. The corresponding additional paid-in capital on the additional issuances of shares amounted to P3,362,275.

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On May 29, 2006, the Parent Company’s stockholders approved the issuance of up to 200,000 thousand convertible preferred shares with a par value of P10 per share, subject to the approval, among others of the PSE. The issuance of the convertible preferred shares was also approved by the Parent Company’s stockholders on May 29, 2006. The purpose of the issuance of the preferred shares is to raise the Tier 1 capital pursuant to BSP regulations, thereby strengthening the capital base of the Parent Company and allowing it to expand its operations. On February 13, 2007, the PSE approved the listing application of the underlying common shares for the 105,494 thousand convertible preferred shares, subject to the compliance of certain conditions of the PSE. Preferred shares have the following features: a. Entitled to dividends at floating rate equivalent to the applicable base rate plus a

spread of 2% per annum, calculated quarterly;

b. Convertible to common stocks at any time after the issue date at a conversion price using the adjusted net book value per share of the Parent Company based on the latest available financial statements prepared in accordance with PFRS adjusted by local regulations;

c. Non-redeemable; and,

d. Participating as to dividends on a pro rata basis with the common stockholders in the Surplus of the Parent Company after dividends payments had been made to the preferred shares.

As of December 31, 2008 and 2007, the conversion of preferred shares to common shares amounted to P0.2 million and P195.4 million, or 17 thousand and 19,543 thousand preferred shares equivalent to 6 thousand and 10,460 thousand common shares, respectively. The preferred shares in 2004 with a carrying value of P100, which were reclassified to financial liabilities starting in 2005 in accordance with PAS 32, Financial Instruments: Presentation and Disclosures, have the following features: entitled to cumulative dividends at floating rate based on the weighted average rate of 91-day treasury bill rate; nonconvertible; redeemable five years from date of issue subject to prior approval of the BSP and the shares to be redeemed are replaced with at least an equivalent amount of newly paid-in shares; and non-participating and non-voting. These preferred shares are presented as part of Other Liabilities - Miscellaneous (see Note 21) in the statements of condition as of December 31, 2008 and 2007. Common shares may be transferred to Philippine and foreign nationals and shall, at all times, not be less than 60% and not more than 40% of the voting stock, be beneficially owned by Philippine nationals and by foreign nationals, respectively. 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) required and reported to the BSP, determined on the basis of regulatory accounting policies, which differ from PFRS in some aspects. Specifically, under existing banking regulations, the combined capital accounts of the Parent Company should not be less than an amount equal to 10% of its risk assets.

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A portion of the Group’s surplus corresponding to the undistributed income of subsidiaries and equity in net earnings of certain associates totaling P1,450,528, P1,216,532, and P275,555 as of December 31, 2008, 2007 and 2006, respectively, is not currently available for distribution as dividends. 24.2 Declaration of Stock Dividends The shareholders confirmed and ratified the approval by the majority of the BOD during the December 4, 2006 meeting, a 15% stock dividend corresponding to 109,413 thousand shares, to support the foregoing increase of authorized capital stock, payable to holders of common and preferred class shares of record as of March 14, 2007. The declaration of 15% stock dividends was approved by the BSP on January 26, 2007 and by the SEC on March 8, 2007, and was issued on March 19, 2007. Documentary stamp tax (DST) on the stock dividends amounting to P15,325 was deducted from capital paid in excess of par. 24.3 Cash Dividend Declaration The details of the cash dividend declarations and distributions in 2008 and 2007 follow: Date Dividend Stockholders of Date Approved by Date Declared Per Share Total Amount Record as of BOD BSP Paid/Payable August 1, 2005 P 0.30 P 189,889 February 6, 2007 August 1, 2005 January 16, 2007 February 7, 2007 March 26, 2007 * P 234,210 * March 26, 2007 April 26, 2007 April 26, 2007 March 26, 2007 P 0.184125 P 15,835 March 21, 2007 March 26, 2007 May 2, 2007 May 4, 2007 May 28, 2007 P 0.1878 P 15,994 June 21, 2007 May 28, 2007 July 13, 2007 July 18, 2007 June 25, 2007 P 0.35 P 367,079 September 12, 2007 June 25, 2007 August 30, 2007 September 24, 2007 July 30, 2007 P 0.1881 P 15,966 September 21, 2007 July 30, 2007 October 5, 2007 October 18, 2007 July 30, 2007 P * P 217,546 * July 30, 2007 October 5, 2007 October 26, 2007 October 30, 2007 P 0.1829 P 15,054 December 21, 2007 October 30, 2007 January 4, 2008 January 10, 2008 January 28, 2008 P 0.174 P 14,945 March 21, 2008 January 28, 2008 April 4, 2008 April 17, 2008 July 30, 2007 * P 207,572 * July 30, 2007 April 4, 2008 April 25, 2008 March 31, 2008 P 0.1177 P 10,671 June 21, 2008 March 31, 2008 June 19, 2008 July 3, 2008 March 31, 2008 P 0.4800 P 462,165 June 29, 2008 March 31, 2008 June 19, 2008 June 30, 2008 March 31, 2008 P 0.4800 P 41,248 June 29, 2008 March 31, 2008 June 19, 2008 June 30, 2008 June 30, 2008 P 0.1227 P 10,445 September 21, 2008 June 30, 2008 September 3, 2008 September 30, 2008 July 30, 2007 P * P 241,893 * July 30, 2007 September 3, 2008 October 24, 2008 September 29, 2008 P 0.1331 P 11,317 December 21, 2008 September 29, 2008 February 10, 2009 February 23, 2009 * Cash dividends on Hybrid perpetual securities

25. HYBRID PERPETUAL SECURITIES On October 30, 2006, the Parent Company received the proceeds from the issuance of Non-Cumulative Step-Up Callable Perpetual Securities (“Perpetual Securities”) amounting to US$98.045 million, net of fees and other charges. Net proceeds were used to strengthen the CAR of the Parent Company, repay certain indebtedness and, thereby, enhance its financial stability and for general corporate purposes. The issuance of the Perpetual Securities was approved by the Parent Company’s BOD on June 7, 2006.

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The Perpetual Securities represent US$100 million, 9.875%, non-cumulative step-up callable perpetual securities issued pursuant to a trust deed dated October 27, 2006 between the Parent Company and Bank of New York - London Branch each with a liquidation preference of US$1 thousand per US$1 thousand in principal amount of the Perpetual Securities. The actual listing and quotation of the Perpetual Securities in a minimum board lot size of US$1 hundred with the Singapore Exchange Securities Trading Limited (“SGX-ST”) was on November 1, 2006. The Perpetual Securities were issued pursuant to BSP Circular 503 dated December 22, 2005 allowing the issuance of perpetual, non-cumulative securities up to US$125 million which are eligible to qualify as Hybrid Tier 1 Capital. The significant terms and conditions of the issuance of the Perpetual Securities, among others, follow: • Interest will be paid from and including October 27, 2006 (the “issue date”) to

(but excluding) October 27, 2016 (the “First Optional Redemption Date”) at a rate of 9.875% per annum payable semi-annually in arrears from April 27, 2007 and, thereafter at a rate preset and payable quarterly in arrears, of 7.02% per annum (which incorporates a step-up in margin equal to 1% above the initial credit spread after adjusting for the applicable swap spread) above the then prevailing London interbank offered rate (“LIBOR”) for three-month US dollar deposits;

• Except as described below, interest will be payable on April 27 and October 27 in each year, commencing on April 27, 2007 and ending on the First Optional Redemption Date, and thereafter (subject to adjustment for days which are not business days) on January 27, April 27, July 27, October 27 in each year commencing on January 27, 2016;

• The Parent Company may, in its absolute discretion, elect not to make any interest payment in whole or in part if the Parent Company has not paid or declared a dividend on its common shares in the preceding financial year; or determines that no dividend is to be paid on such shares in the current financial year;

• The rights and claims of the holders will be subordinated to the claims of all senior creditors (as defined in the conditions) and the holders of any priority preference shares (as defined in the conditions), in that payments in respect of the securities are conditional upon the Parent Company being solvent at the time of payment and in that no payments shall be due except to the extent the Parent Company could make such payments and still be solvent immediately thereafter;

• The Perpetual Securities are not deposits of the Parent Company and are not guaranteed or insured by the Parent Company or any party related to the Parent Company or the Philippine Deposit Insurance Corporation and they may not be used as collateral for any loan made by the Parent Company or any of its subsidiaries or affiliates;

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• The Parent Company undertakes that, if on any Interest Payment Date payment of all Interest Payments scheduled to be made on such date is not made in full it shall not declare or pay any distribution or dividend or make any other payment on, and will procure that no distribution or dividend or other payment is made on, any junior share capital or any parity security, and it shall not redeem, repurchase, cancel, reduce or otherwise acquire any junior share capital or any parity securities, other than in the case of any partial interest payment, pro rata payments on, or redemptions of, parity securities the dividend and capital stopper shall remain in force so as to prevent the Parent Company from undertaking any such declaration, payment or other activity as aforesaid unless and until a payment is made to the holders in an amount equal to the unpaid amount (if any) of interest payments in respect of interest periods in the twelve months including and immediately preceding the date such interest payment was due and the BSP does not otherwise object; and,

• The Perpetual Securities will have fixed or final redemption date although the Parent Company may, having given not less than 30 nor more than 60 days’ notice to the Trustee, the Registrar, the Principal Paying Agent and the Holders, redeem all (but not some only) of the securities (i) on the first optional redemption date; and (ii) on each interest payment date thereafter, at an amount equal to the liquidation preference plus accrued interest.

26. EMPLOYEE BENEFITS

Expenses recognized for employee benefits are analyzed below:

Consolidated 2008 2007 2006 Salaries and wages P 1,580,233 P 1,436,465 P 1,358,255 Bonuses 442,669 416,427 402,079 Retirement - defined benefit plan 145,566 151,015 84,150 Compensated absences 83,847 78,250 96,562 Social security costs 68,739 65,477 57,482 Other short-term benefits 203,902 236,764 185,889 P 2,524,956 P 2,384,398 P 2,184,417 Parent 2008 2007 2006 Salaries and wages P 970,772 P 905,528 P 843,901 Bonuses 338,112 315,513 303,211 Retirement - defined benefit plan 115,610 107,394 72,992 Compensated absences 82,628 76,475 94,827 Social security costs 45,975 44,671 39,204 Other short-term benefits 129,090 190,574 144,191 P 1,682,187 P 1,640,155 P 1,498,326

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The Parent Company and its subsidiaries maintain a tax-qualified, noncontributory retirement plan that is being administered by a trustee covering all of their respective regular full-time employees. The amounts of retirement benefit asset (presented as part of Other Resources - Miscellaneous) recognized in the financial statements (see Note 15) are determined as follows:

Consolidated Parent 2008 2007 2008 2007 Fair value of plan assets P 1,167,540 P 1,670,105 P 772,209 P 1,352,251 Present value of the obligation 1,257,968 1,826,186 993,323 1,516,414 Excess of obligation ( 90,428) ( 156,081) ( 221,114 ) ( 164,163 ) Reduction due to ceiling ( 2,665) ( 1,617 ) - - Unrecognized actuarial losses 168,676 138,817 257,339 146,572 Unrecognized net transition obligation - 24,232 - 24,232

Retirement benefit asset P 75,583 P 5,351 P 36,225 P 6,641 The movements in the present value of the retirement benefit obligation recognized in the books are as follows:

Consolidated Parent 2008 2007 2008 2007 Balance at the beginning of year P 1,826,186 P 1,075,722 P 1,516,414 P 760,716 Current service cost and interest cost 234,271 235,245 175,221 173,602 Actuarial losses/(gains) ( 596,644) 671,102 ( 501,823 ) 718,208 Benefits paid by the plan ( 205,845) ( 155,883 ) ( 196,489 ) ( 136,112) Balance at end of the year P 1,257,968 P 1,826,186 P 993,323 P 1,516,414

The movements in the fair value of plan assets are presented below.

Consolidated Parent 2008 2007 2008 2007 Balance at the beginning of year P 1,670,105 P 1,348,651 P 1,352,252 P 1,059,775 Actuarial gains (losses) ( 624,621) 361,014 ( 612,591 ) 341,199 Expected return on plan assets 110,963 108,190 83,841 84,782 Contributions paid into the plan 216,938 8,133 145,196 2,607 Benefits paid by the plan ( 205,845) ( 155,883 ) ( 196,489 ) ( 136,112 ) Balance at end of the year P 1,167,540 P 1,670,105 P 772,209 P 1,352,251

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The plan assets consist of the following:

Consolidated Parent 2008 2007 2008 2007 Assets Equity securities P 918,136 P 1,732,058 P 906,877 P 1,722,860 Government securities 461,955 228,789 276,047 75,373 Deposit with banks 181,944 114,883 26,349 8,435 Loans and receivables 47,456 60,504 27,848 24,870 Long-term equity investments 44,220 50,220 44,220 50,220 ROPA 35,906 47,654 35,905 47,654 Unit investment trust fund 30,000 44,001 30,000 44,001 Other investments 23,496 13,159 - - 1,743,113 2,291,268 1,347,246 1,973,414 Liabilities 575,573 621,163 575,037 621,162 P 1,167,540 P 1,670,105 P 772,209 P 1,352,251

Actual loss on plan assets were P513 million and P529 million in 2008, while actual return on plan assets were P351 million and P426 million in 2007, for the Group and the Parent Company, respectively.

The amounts of retirement benefit expense recognized as part of Employee Benefits account in the income statement are as follows:

Consolidated 2008 2007 2006 Current service costs P 83,301 P 122,242 P 58,305 Interest costs 151,536 113,002 106,438 Expected return on plan assets ( 110,963) ( 108,191) ( 94,923) Net transition obligation recognized 24,232 24,232 24,232 Retirement expense (income) due to ceiling 1,048 1,161 ( 10,787) Net actuarial losses (gains) recognized during the year ( 3,588) ( 1,431) 885 Retirement benefits P 145,566 P 151,015 P 84,150 Parent 2008 2007 2006 Current service costs P 49,205 P 82,315 P 35,130 Interest costs 126,014 91,286 86,865 Expected return on plan assets ( 83,841) ( 84,782) ( 69,695) Net transition obligation recognized 24,232 24,232 24,232 Net actuarial gains recognized during the year - ( 5,657) ( 3,540) Retirement benefits P 115,610 P 107,394 P 72,992

For determination of the pension liability, the following actuarial assumptions were used: Consolidated 2008 2007 2006 Discount rates 11.2% 8.3% 12% Expected rate of return on plan assets 6.3% 6.3% 8% Expected rate of salary increases 2.5% 5% 3%

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Parent 2008 2007 2006 Discount rates 11.2% 8.3% 12% Expected rate of return on plan assets 6.3% 6.3% 8% Expected rate of salary increases 2.5% 5% 2.5%

27. LEASE CONTRACTS

The Parent Company and certain subsidiaries lease some of the premises occupied by their respective branches/business centers. The Group’s rental expense (included in Occupancy and Equipment-related account in the income statement) based on the lease contracts amounted to P477,383 in 2008, P440,943 in 2007 and P384,876 in 2006, of which P374,226 in 2008, P363,779 in 2007 and P339,240 in 2006 and pertains to the Parent Company. The lease periods are from 1 to 25 years. Most of the lease contracts contain renewal options, which give the Parent Company and its subsidiaries the right to extend the lease on terms mutually agreed upon by both parties. As of December 31, 2008, future minimum rentals payable under non-cancelable operating leases follow:

Consolidated Parent Within one year P 472,117 P 413,752 After one year but not more than five years 900,231 742,253 More than five years 152,365 132,624 P 1,524,713 P 1,288,629

28. INCOME AND OTHER TAXES

Under Philippine tax laws, the Parent Company and its domestic subsidiaries are subject to percentage and other taxes (presented as Taxes and Licenses in the income statement), as well as income taxes. Percentage and other taxes paid consist principally of the gross receipts tax (GRT) and DST. In 2003, the Parent Company and its financial intermediary subsidiaries were subjected to the value-added tax (VAT) instead of GRT. However, effective January 1, 2004 as prescribed under Republic Act (RA) No. 9238, the Parent Company and certain subsidiaries were again subjected to GRT instead of VAT. RA No. 9238, which was enacted on February 10, 2004, provides for the reimposition of GRT on banks and non-bank financial intermediaries performing quasi-banking functions and other non-bank financial intermediaries beginning January 1, 2004. The liability of the Parent Company and certain subsidiaries for GRT is based on the related regulations issued by the authorities. Income taxes include the corporate income tax discussed below, and final tax paid at the rate of 20%, which represents the final withholding tax on gross interest income from government securities and other deposit substitutes.

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Under current tax regulations, the regular corporate income tax rate (RCIT) applicable is 32% up to October 31, 2005 and 35% up to December 31, 2008. In accordance with Republic Act (RA) No. 9337 which amended certain sections of the National Internal Revenue Code of 1997, RCIT rate is reduced from 35% to 30% beginning January 1, 2009. Effective July 2008, Republic Act (RA) No. 9504 was approved giving corporate taxpayers an option to claim itemized deduction or optional standard deduction (OSD) equivalent to 40% of gross sales. Once the option to use OSD is made, it shall be irrevocable for the taxable year for which the option was made. In 2008, the Group opted to continue claiming itemized deductions

Interest allowed as a deductible expense is reduced by an amount equivalent to certain percentage of interest income subjected to final tax. Minimum corporate income tax (MCIT) of 2% on modified gross income is computed and compared with the RCIT. Any excess of the MCIT over the RCIT is deferred and can be used as a tax credit against future income tax liability for the next three years. In addition, the Group net operating loss carry over (NOLCO) is allowed as a deduction from taxable income in the next three years. In accordance with the Revenue Regulation (RR) No. 09-05 relative to the tax exemptions and privileges granted under the SPV Act, the losses incurred by the Group as a result of transferring its NPA to an SPV within the period of 2 years from April 12, 2003 shall be carried over as a deduction from its taxable gross income for a period of 5 consecutive taxable years. Effective May 2004, Republic Act (RA) No. 9294 restored the tax exemption of FCDUs and offshore banking units (OBUs). Under such law, the income derived by the FCDU from foreign currency transactions with nonresidents, 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% gross income tax. Interest income on deposits with other FCDUs and offshore banking units is subject to 7.5% final tax. The Parent Company’s foreign subsidiaries are subject to income and other taxes based on the enacted tax laws of the countries where they operate. The components of tax expense as reported in income statements consist of:

Consolidated 2008 2007 2006 Current Final withholding tax P 480,272 P 473,421 P 456,978 RCIT 95,833 102,667 69,187 MCIT 88,619 87,754 93,173 Deferred tax expense 254,700 181,808 7,545 Tax expense reported in the income statements P 919,424 P 845,650 P 626,883

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Parent 2008 2007 2006 Current Final withholding tax P 444,858 P 455,622 P 430,785 RCIT 43,870 - 1,601 MCIT 79,992 87,754 40,794 Tax expense reported in the income statements P 568,720 P 543,376 P 473,180

A reconciliation of tax on pretax income computed at the applicable statutory rates to tax expense reported in the income statements is as follows:

Consolidated 2008 2007 2006 Statutory income tax at 35% P 1,082,385 P 1,431,258 P 880,694 Adjustments for income subjected to lower income tax rates 145,775 431,965 148,084 Tax effects of: Non-deductible interest expense 234,596 198,266 224,175 Non-deductible expenses 114,421 31,223 109,255 Decrease in deferred tax assets due to reduction in RCIT rate 276 - - Unrecognized temporary differences ( 117,428) 221,193 1,516,508 Non-taxable income ( 247,305) ( 828,917) ( 1,515,932) Income subjected to final tax ( 531,585) ( 458,003) ( 614,707) Others 238,289 ( 181,335) ( 121,194) Tax expense reported in the income statements P 919,424 P 845,650 P 626,883 Parent 2008 2007 2006 Statutory income tax at 35% P 608,661 P 868,954 P 690,786 Adjustments for income subjected to lower income tax rates 136,792 422,987 118,664 Tax effects of: Non-deductible expense 245,463 215,293 309,132 Unrecognized temporary differences ( 62,429) 251,312 935,905 Tax paid trading gain and other income ( 86,183) ( 181,780) ( 394,038) FCDU income ( 93,936) ( 420,605) ( 591,175) Income subjected to final tax ( 531,585) ( 458,003) ( 474,726) Application of unrecognized NOLCO - ( 187,416) - Others 351,937 32,634 ( 121,368) Tax expense reported in the income statements P 568,720 P 543,376 P 473,180

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The components of deferred tax assets as of December 31 follow: Consolidated Parent 2008 2007 2008 2007 Allowance for impairment P 1,391,302 P 1,640,766 P 1,389,497 P 1,389,497 Unamortized past services costs 1,100 4,726 - - Gain on rediscounting ( 799) ( 1,259) - - Accrued rent 99 - - - Accounts receivable 7 - - - Unrealized foreign exchange losses - 983 - - Retirement benefits - 552 - - P 1,391,709 P 1,645,768 P 1,389,497 P 1,389,497

The Group did not set up deferred tax liabilities on accumulated translation adjustment, particularly those relating to its foreign subsidiaries, since their reversal can be controlled, and it is probable that the temporary difference will not reverse in the foreseeable future. In light of the provision of PAS 12, the Parent Company and certain subsidiaries have taken a conservative position by not recognizing deferred tax assets (liabilities) on certain temporary differences. Accordingly, the Group did not set up the net deferred tax assets on the following temporary differences:

Consolidated Parent 2008 2007 2008 2007 NOLCO P 10,319,892 P 10,135,215 P 10,217,785 P 10,114,126 Allowance for impairment 6,375,047 7,668,913 1,538,670 3,287,708 MCIT 212,249 248,229 208,540 173,633 Unamortized past service cost ( 160,671) ( 191,963) ( 169,817) ( 93,066 ) Retirement liability 38,964 968 - - Unrealized foreign exchange (gains) losses ( 4,973) - - - Gain (loss) on revaluation 421 ( 611) - - Accrued rent 31 69 - - P 16,780,960 P 17,860,820 P 11,795,178 P 13,482,401

The breakdown of the Group’s NOLCO, which can be claimed as deduction from future taxable income within three years from the year the taxable loss was incurred and within five years from the year SPV losses were incurred, is shown below: Inception Used/ Expiry Year Amount Expired Balance Year 2005 P 568,324 P 568,324 P - 2008 2005 3,061,396 - 3,061,396* 2010 2005 3,629,720 568,324 3,061,396 2010 2006 6,484,406 - 6,484,406 2009 2007 21,089 - 21,089 2010 2008 753,001 - 753,001 2011 P 10,888,216 P 568,324 P 10,319,892 *Refers to losses incurred from SPV transactions in 2005

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The breakdown of the Parent Company’s NOLCO, which can be claimed as deduction from future taxable income within three years from the year the taxable loss was incurred and within five years from the year SPV losses were incurred, is shown below: Inception Expiry Year Amount Expired Balance Year 2005 P 568,324 P 568,324 P - 2008 2005 3,061,396 - 3,061,396* 2010 2005 3,629,720 568,324 3,061,396 2008 2006 6,484,406 - 6,484,406 2009 2008 671,983 - 671,983 2011 P 10,786,109 P 568,324 P 10,217,785

*Refers to losses incurred from SPV transactions in 2005 As of December 31, 2008, the Group has MCIT of P232,304 that can be applied against RCIT for the next three consecutive years after the MCIT was incurred. The breakdown of MCIT with the corresponding validity periods follow: Inception Used/ Expiry Year Amount Expired Balance Year 2005 P 67,302 P 67,302 P - 2008 2006 93,173 29,007 64,166 2009 2007 87,754 - 87,754 2010 2008 80,384 - 80,384 2011 P 328,613 P 96,309 P 232,304 The breakdown of the Parent Company’s MCIT with the corresponding validity periods follow: Inception Expiry Year Amount Expired Balance Year

2005 P 45,085 P 45,085 P - 2008 2006 40,794 - 40,794 2009 2007 87,754 - 87,754 2010 2008 79,992 - 79,992 2011 P 253,625 P 45,085 P 208,540

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29. TRUST OPERATIONS

Securities and properties (other than deposits) held by the Parent Company and RSB in fiduciary or agency capacities for their respective customers are not included in the accompanying financial statements, since these are not resources of the Parent Company and RSB. The Group’s total trust resources amounted to P46,945,928 and P53,627,739 as of December 31, 2008 and 2007, respectively. The Parent Company’s total trust resources amounted to P45,193,199 and P49,552,269 as of December 31, 2008 and 2007, respectively. In connection with the trust operations of the Parent Company and RSB, time deposit placements and government securities with a total face value of P860,667 (Group) and P769,715 (Parent Company); and P663,967 (Group) and P605,967 (Parent Company) as of December 31, 2008 and 2007, respectively, are deposited with the BSP in compliance with existing trust regulations (see Notes 7 and 10). In compliance with existing BSP regulations, 10% of the Parent Company’s and RSB’s profit from trust business is appropriated to surplus reserve. This yearly appropriation is required until the surplus reserve for trust business equals 20% of the Parent Company’s and RSB’s regulatory capital. The surplus reserve is shown as Reserve for Trust Business in the statements of changes in capital funds.

30. RELATED PARTY TRANSACTIONS

30.1 DOSRI In the ordinary course of business, the Group has loan transactions with each other, their other affiliates, and with certain DOSRIs. Under existing policies of the Group, these loans are made substantially on the same terms as loans to other individuals and business of comparable risks. Under current BSP regulations, the amount of individual loans to a DOSRI, 70% of which must be secured, should not exceed the amount of his deposit and book value of his investment in the Parent Company and/or any of its lending and nonbanking financial subsidiaries. In the aggregate, loans to DOSRIs, generally, should not exceed the total capital funds or 15% of the total loan portfolio of the Parent Company and/or any of its lending and nonbanking financial subsidiaries, whichever is lower. BSP Circular No. 423 dated March 15, 2004 amended the definition of DOSRI accounts.

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The following table shows information relating to the loans, other credit accommodations and guarantees classified as DOSRI accounts under regulations existing prior to said circular and new DOSRI loans, other credit accommodations and guarantees granted under said circular as of December 31, 2008 and 2007:

Consolidated Parent 2008 2007 2008 2007 Total outstanding DOSRI loans P 9,213,808 P 9,246,598 P 9,142,497 P 9,172,399 Percent of DOSRI accounts granted prior to the effectivity of BSP Circular No. 423 to the total loans 5.94% 7.46% 7.65% 10.19% Percent of DOSRI accounts to total loans 5.94% 7.46% 7.65% 10.19% Percent of unsecured DOSRI accounts to total DOSRI accounts 2.35% 1.50% 2.29% 1.51% Percent of past due non-DOSRI accounts prior to BSP Cir. No. 423 to total loans - - - - Percent of nonaccruing non-DOSRI accounts prior to BSP Cir. No. 423 to total loans - - - -

30.2 Key Management Personnel Compensation The key management personnel compensation follow:

Consolidated 2008 2007 2006 Short-term benefits P 186,231 P 159,410 P 117,798 Post-employment benefits 38,022 38,428 40,699 Termination benefits 48 254 1,147 Other long-term benefits 404 634 516 P 224,705 P 198,726 P 160,160

Parent 2008 2007 2006 Short-term benefits P 59,789 P 53,040 P 42,997 Post-employment benefits 37,421 37,946 40,217 P 97,210 P 90,986 P 83,214 30.3 Lease Contract with RRC

The Parent Company and certain subsidiaries occupy several floors of RCBC Plaza as leaseholders of RRC. Related rental expense reported in the consolidated and Parent Company financial statements amounted to P163,027 and P156,063 in 2008 and P170,147 and P162,075 in 2007, respectively, and is included as part of Occupancy and Equipment-related account in the income statement. While advance rentals included as part of Deferred Charges under Other Resources in the statement of condition amounted to P249,734 and P405,797 as of December 31, 2008 and 2007, respectively, both in the consolidated and Parent Company financial statements. The Parent Company’s lease contract with RRC is until December 31, 2010.

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30.4 Deposits As of December 31, 2008 and 2007, certain related parties have deposits with the Parent Company.

31. COMMITMENTS AND CONTINGENCIES

In the normal course of operations of the Group, there are various outstanding commitments and contingent liabilities such as guarantees, commitments to extend credit, tax assessments, etc., which are not reflected in the accompanying financial statements. Management does not anticipate losses from these transactions that will adversely affect the Group’s operations. Several suits and claims remain unsettled. In the opinion of management, the suits and claims, if decided adversely, will not involve sums with a material effect on the Parent Company and its subsidiaries’ financial position or operating results. The following is a summary of contingencies and commitments arising from off-statement of condition items at their equivalent peso contractual amounts as of December 31, 2008 and 2007:

Consolidated Parent 2008 2007 2008 2007 Trust department accounts (see Note 29) P 46,945,928 P 53,627,739 P 45,193,199 P 49,552,269 Derivatives 24,776,281 27,448,053 24,776,281 27,447,557 Unused commercial letters of credit 5,646,927 6,792,708 5,646,927 6,792,708 Spot exchange bought 3,520,890 3,222,455 3,520,890 3,222,455 Inward bills for collection 1,261,327 2,640,192 1,259,476 2,637,266 Spot exchange sold 3,310,091 619,739 3,310,091 3,154,313 Outward bills for collection 412,444 516,108 412,444 111,406 Late deposits/payments received 260,874 180,241 227,892 619,739 Minimum lease rentals under non-cancellable operating lease 222,291 - - - Traveller’s check unsold 21,577 25,415 21,577 25,415 Items held for safekeeping/collateral 3,587 194 3,561 33 Outstanding guarantees issued - 3,154,313 - 516,108

Derivatives include the Parent Company’s outstanding long-term cross currency swap contracts wherein it is committed to sell US dollars and buy Philippine pesos in the future at a precontracted rate from a counterparty bank, with an aggregate notional amount of P1,911,200 or $40million and P4,614,059 or $93.55 million as of December 31, 2008 and 2007, respectively. The Parent Company then invested the proceeds from the cross currency swap contracts in interbank placements with various foreign banks. The US dollar placements outstanding as of December 31, 2007 have a “credit link” to underlying securities that would be received by the Parent Company in lieu of the US dollar funds it originally invested in case of a credit default event as defined in the agreement between the Parent Company and its counterparties.

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In 2004, the Bureau of Internal Revenue (BIR) assessed the Parent Company and RSB, together with a number of other banks in the Philippines, for DST in connection with its special savings accounts. The BIR claimed that such account is equivalent to a “certificate of deposit” for tax purposes and is subject to DST under local tax regulations. The BIR assessed the Parent Company and RSB the basic tax, surcharges, penalties and interest thereon of 20% per annum with respect to DST payable over the past five years. The Parent Company initially filed a protest against this assessment, however, in 2006, the Parent Company and RSB settled the tax assessment on DST through availment of the tax abatement program of the BIR. The BIR has also sent the Parent Company and RSB, as well as other banks, a series of demand letters for the payment of deficiency GRT and DST on certain accounts of the Parent Company’s FCDU. The BIR’s assessment of the deficiency GRT and DST of the FCDU was based on the deletion of the phrase “shall be exempt from all taxes” in Section 24, now Sections 27 and 28 of the Philippine Tax Code. The Parent Company, however, argued that the removal of the exemptions from GRT and DST was not contemplated under the Comprehensive Tax Reform Program and that the deletion of the phrase “shall be exempt from all taxes” is the result of the inaccurate drafting of the amendment of the tax provisions of FCDUs rather than of legislative intent. The Parent Company has filed a protest to the BIR’s claim, however, in 2007, the Parent Company and RSB settled the tax assessment on GRT and DST through availment of the tax abatement program of BIR. RCBC Capital has filed an arbitration claim with the International Chamber of Commerce against a local bank relating to RCBC Capital’s acquisition of Bankard. RCBC Capital is seeking a rescission of the sale or compensation for damages. In September 2007, the arbitral tribunal upheld the claim of RCBC Capital and stated that RCBC Capital is entitled to damages for the breach, the amount of which would be determined by an expert appointed by the arbitral tribunal and still be proven by the RCBC Capital in the second phase of the arbitration, the hearing of which has been tentatively set by the arbitral tribunal on October 26, 2009.

32. EARNINGS PER SHARE

The following reflects the income and per share data used in the basic and diluted earnings per share (EPS) computations (figures in thousands, except EPS data):

Consolidated 2008 2007 2006

Basic Earnings Per Share

a. Net income attributable to parent company’s shareholders P 2,153,740 P 3,207,632 P 2,052,638 Less allocated for preferred and Hybrid Tier 1 dividends ( 496,844 ) ( 544,691) - 1,656,896 2,662,941 2,052,638 b. Weighted average number of outstanding common shares 962,841 909,325 727,909 c. Basic EPS (a/b) P 1.72 P 2.93 P 2.82

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Consolidated 2008 2007 2006

Diluted Earnings Per Share

a. Net income attributable to parent company’s shareholders P 1,656,896 P 2,662,941 P 2,052,638 b. Weighted average number of outstanding common shares 999,344 939,168 729,692 c. Diluted EPS (a/b) P 1.66 P 2.84 P 2.81 Parent 2008 2007 2006

Basic Earnings Per Share

a. Net income attributable to parent company’s shareholders P 1,170,314 P 1,939,350 P 1,500,495 Less allocated for preferred and Hybrid Tier 1 dividends ( 496,844) ( 544,691) - 673,470 1,394,659 1,500,495 b. Weighted average number of outstanding common shares 962,841 909,325 727,909 c. Basic EPS (a/b) P 0.70 P 1.53 P 2.06

Diluted Earnings Per Share a. Net income attributable to parent company’s shareholders P 673,470 P 1,394,659 P 1,500,495 b. Weighted average number of outstanding common shares 999,344 939,168 729,692 c. Diluted EPS (a/b) P 0.67 P 1.48 P 2.06

The 2006 EPS was restated after giving retroactive effect to the 15% stock dividends. The above computation does not take into consideration the effects of certain accounting treatment allowed by BSP but not allowed under PFRS as summarized in Note 34 and discussed in Notes 11 and 12.

33. SELECTED FINANCIAL PERFORMANCE INDICATORS

The following basic ratios measure the financial performance of the Group and the Parent Company:

Consolidated 2008 2007 2006 Return on average capital funds (ROE) 7.40% 12.43% 12.64% Return on average assets (ROA) 0.87% 1.42% 1.01% Net interest margin 4.25% 5.00% 4.84% Capital adequacy ratio 17.30% 18.70% 20.30%

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Parent 2008 2007 2006 Return on average capital funds (ROE) 3.56% 7.26% 9.14% Return on average assets (ROA) 0.56% 1.04% 0.89% Net interest margin 3.57% 4.47% 3.53% Capital adequacy ratio 16.28% 18.21% 20.47%

The above computation does not take into consideration the effects of certain accounting treatment allowed by BSP but not allowed under PFRS as summarized in Note 34 and discussed in Notes 11 and 12.

34. DIFFERENCES BETWEEN CERTAIN ACCOUNTING TREATMENT ALLOWED BY BSP AND PFRS

There were certain transactions that were not accounted for by the Group in accordance with PFRS although the accounting treatments applied by the Group for such transactions were allowed by BSP. A summary of the effects of these transactions on the Group’s and Parent Company’s total resources, liabilities, capital funds and profit and loss had PFRS been used, is presented below. Detailed discussions of these transactions are presented in Notes 11 and 12. Consolidated

Increase (Decrease) Total Total Total Total Resources Liabilities Capital Funds Profit or Loss 2008

SPV transactions (P 4,607,053 ) P 26,524 ( P 4,633,577 ) ( P 791,342 ) Staggered booking of required additional allowance for impairment on, and subsequent write-off of, credit card receivables ( 2,593,440 ) - ( 2,593,440 ) - (P 7,200,493 ) P 26,524 ( P 7,227,017 ) ( P 791,342) 2007

SPV transactions ( P 4,818,248 ) P 23,988 ( P 4,842,236 ) P - Staggered booking of required additional allowance for impairment on, and subsequent write-off of, credit card receivables ( 2,593,440 ) - ( 2,593,440 ) - ( P 7,411,688 ) P 23,988 ( P 7,435,676 ) P - 2006 SPV transactions ( P 4,827,904 ) P 14,332 ( P 4,842,236 ) ( P 1,335,149 ) Staggered booking of required additional allowance for impairment on, and subsequent write-off of, credit card receivables ( 2,593,440 ) - ( 2,593,440 ) ( 2,107,170 ) ( P 7,421,344 ) P 14,332 ( P 7,435,676 ) ( P 3,442,319 )

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Parent

Increase (Decrease) Total Total Total Total Resources Liabilities Capital Funds Profit or Loss

2008 SPV transactions ( P 4,607,053 ) P 26,524 ( P 4,633,577 ) ( P 791,342 ) Transactions with Bankard ( 2,593,440 ) - ( 2,593,440 ) - (P 7,200,493 ) P 26,524 ( P 7,227,017 ) ( P 791,342)

2007 SPV transactions ( P 4,818,248 ) P 23,988 ( P 4,842,236 ) P - Transactions with Bankard ( 2,593,440 ) - ( 2,593,440 ) - 2006 transactions with RCBC Capital and Bankard approved by BSP in 2007 - - - ( 200,000 ) (P 7,411,688 ) P 23,988 ( P 7,435,676 ) ( P 200,000 ) 2006 SPV transactions ( P 4,827,904 ) P 14,332 ( P 4,842,236 ) ( P 1,335,149 ) Transactions with Bankard ( 2,593,440 ) - ( 2,593,440 ) ( 2,593,440 ) 2006 transactions with RCBC Capital and Bankard approved by BSP in 2007 200,000 - 200,000 200,000 (P 7,221,344 ) P 14,332 ( P 7,235,676 ) ( P 3,728,589