$ % % & % " & ' & ' " " ( ' # 8 % # 3 - # 9+ : # 9 :

Transcription

1 PAL Holdings, Inc.! " # $ % % & % " & ' & ' " " ( ' # ) " '* ' # + &, % #, * ' ) - ' " #. /0 1 * ' " # " % 2 $ * ' - % % # % 2 # % # % # % # & % % # 9 : -; '' + ' < -= % $ " # 9+ : # 9 : 7/F Allied Bank Center, 6754 Ayala Avenue, Makati City, Philippines Tel. +63 (2) local 3785

2 PAL Holdings, Inc. * ' % # = " > '" ' " &? " % ) ' 7. ' & & / 1 ' " % ' & /5 1 ' " ' % 7 '' " 3 # -" - ' A ". ' % 7 '' ". ' & ' ' " ; B % & ' & & % ' % 2 % ' < " / < 1, ' " " /, 1. ' 7 7 " ' " " " ' * ', - / * 1 C % % & ' ' -* % - 8 % % + # 7/F Allied Bank Center, 6754 Ayala Avenue, Makati City, Philippines Tel. +63 (2) local 3785

3 Allied Banking Corporation Allied Bank Center 6754 Ayala Ave, Makati, Metro Manila, Philippines Tel. Nos to 99 ANNEX A OWNERSHIP STRUCTURE Name of Stockholder Type of Shares No. of Shares Key Landmark Investments, Ltd. Common 729,872 True Success Profits Ltd. Common 449,152 Caravan Holdings Corp. Common 449,152 Solar Holdings Corp. Common 449,152 Prima Equities and Investments Corp. Common 393,008 Infinity Equities, Inc. Common 336,864 Virgo Holdings & Dev't Corp. Common 52,617 Preferred 25,000 Jewel Holdings, Inc Common 77,005 Iris Holdings & Dev't Corp. Common 46,937 Preferred 25,000 Lucio C Tan Common 66,134 Ignacio B Gimenez Common 44,089 Willy S Co Common 38,768 Kings Investment & Dev't Corp. Common 29,571 Florencio T Santos Common 19,195 Mariano Tanenglian Common 17,635 Ramon Lee Common 17,635 Chung Poe Kee Common 9,476 Luz L Siy Common 8,759 Nelly S Sy Common 8,716 Romeo Y Co Common 4,480 Domingo T. Chua Common 3,512 Mariano Khoo Common 440 Ramon L Siy Common 150 Mariano G Ordonez Common 142 James Ang Yiok Teck Common 10 Manuel T Gonzalez Common 10 Panfilo O Domingo Common 10 Michael G Tan Common 1 Reynaldo A Maclang Common 1 Harry C Tan Common 1 Patrick L Go Common 1 Total 3,302,495 CERTIFIED CORRECT MA. CECILIA L. PESAYCO Corporate Secretary

4 Allied Banking Corporation Allied Bank Center 6754 Ayala Ave, Makati, Metro Manila, Philippines Tel. Nos to 99 ANNEX B LIST OF MEMBERS OF THE BOARD OF DIRECTORS AND KEY OFFICERS BOARD OF DIRECTORS WILLY S. CO REYNALDO A. MACLANG MARIANO TANENGLIAN HARRY C. TAN MANUEL T. GONZALES MICHAEL G. TAN PATRICK L. GO JAMES ANG YIOCK TEK KEY OFFICERS WILLY S. CO - VICE CHAIRMAN REYNALDO A. MACLANG - PRESIDENT MARIANO TANENGLIAN - TREASURER MANUEL T. GONZALES - SENIOR EXECUTIVE VICE PRESIDENT MA. CECILIA L. PESAYCO - CORPORATE SECRETARY CERTIFIED CORRECT MA. CECILIA L. PESAYCO Corporate Secretary

5 Allied Banking Corporation Allied Bank Center 6754 Ayala Ave, Makati, Metro Manila, Philippines Tel. Nos to 99 ANNEX C ANNUAL AUDITED FINANCIAL STATEMENTS OF ALLIED BANKING CORPORATION AS OF DECEMBER 31, 2007

6

7

8 COVER SHEET SEC Registration Number A L L I E D B A N K I N G C O R P O R A T I O N A N D S U B S I D I A R I E S (Company s Full Name) A l l i e d B a n k C e n t e r, A y a l a A v e n u e, M a k a t i C i t y (Business Address: No. Street City/Town/Province) Zacarias E. Gallardo, Jr (Contact Person) (Company Telephone Number) A A F S Month Day (Form Type) Month Day (Fiscal Year) (Annual Meeting) (Secondary License Type, If Applicable) Dept. Requiring this Doc. Amended Articles Number/Section Total Amount of Borrowings Total No. of Stockholders Domestic Foreign To be accomplished by SEC Personnel concerned File Number LCU Document ID Cashier S T A M P S Remarks: Please use BLACK ink for scanning purposes.

9 ALLIED BANKING CORPORATION AND SUBSIDIARIES Financial Statements December 31, 2007 and 2006 and Years Ended December 31, 2007, 2006 and 2005 and Independent Auditors Report

10 SGV & CO SyCip Gorres Velayo & Co Ayala Avenue 1226 Makati City Philippines Phone: (632) Fax: (632) BOA/PRC Reg. No SEC Accreditation No FR-1 INDEPENDENT AUDITORS REPORT The Stockholders and the Board of Directors Allied Banking Corporation Allied Bank Center 6754 Ayala Avenue, Makati City We have audited the accompanying consolidated financial statements of Allied Banking Corporation and Subsidiaries (the Group) and of the parent company financial statements of Allied Banking Corporation (the Parent Company), which comprise the consolidated and the parent company statements of condition as at December 31, 2007 and 2006, and the consolidated and the parent company statements of income, the consolidated and the parent company statements of changes in equity and the consolidated and the parent company statements of cash flows for each of the three years in the period ended December 31, 2007, and a summary of significant accounting policies and other explanatory notes. We did not audit the financial statements of Allied Bank Philippines (UK) Plc, Allied Commercial Bank, Allied Banking Corporation (Hong Kong) Limited and Oceanic Holding (BVI) Ltd. (OHBVI) as of and for the years ended December 31, 2007 and 2006, which are consolidated in the accompanying consolidated financial statements and reflected in the parent company financial statements under the cost method of accounting. Total assets of these subsidiaries constitute 15.56% and 16.96% as of December 31, 2007 and 2006, respectively, and total revenues constitute 13.81%, 14.36% and 12.05% for the years ended December 31, 2007, 2006 and 2005, respectively, of the related totals. In the accompanying parent company financial statements, the investments in these subsidiaries are carried at cost amounting to P=1.96 billion as of December 31, 2007 and The financial statements of these subsidiaries, which financial information are summarized in Note 33 to the financial statements were audited by other auditors whose reports have been furnished to us and our opinion, insofar as these relate to the amounts included for these subsidiaries, are based solely on the reports of the other auditors whose opinions are unqualified. Management s Responsibility for the Financial Statements The Group s management is responsible for the preparation and fair presentation of these financial statements in accordance with Philippine Financial Reporting Standards. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. SGV & Co is a member practice of Ernst & Young Global

11

12 ALLIED BANKING CORPORATION AND SUBSIDIARIES STATEMENTS OF CONDITION Consolidated Parent December ASSETS Cash and Other Cash Items (Notes 13 and 19) P=8,198,200 P=9,247,409 P=3,445,319 P=3,823,766 Due from Bangko Sentral ng Pilipinas (Notes 13 and 19) 14,067,457 12,545,552 13,222,310 12,090,540 Due from Other Banks (Note 19) 6,870,230 4,568,710 2,351,313 2,265,375 Interbank Loans Receivable (Note 19) 10,835,073 15,781,577 11,057,198 13,513,377 Derivative Assets (Notes 6 and 19) 355, , , ,771 Financial Assets at Fair Value through Profit or Loss (Notes 6 and 19) 4,078,038 12,577,351 4,078,038 12,577,351 Available-for-Sale Investments (Notes 6, 19 and 26) 23,503,161 21,906,913 20,574,875 20,371,472 Held-to-Maturity Investments (Notes 6, 13, 19 and 26) 5,041,773 3,557,563 4,619,812 2,720,677 Loans and Receivable (Notes 7, 19 and 28) 62,797,404 63,886,630 49,598,279 49,313,254 Investments in Subsidiaries and Associates (Notes 8 and 19) 164,083 3,052,796 2,935,627 Property and Equipment (Notes 9 and 19) At appraised values 2,508,622 2,507,662 2,496,372 2,495,412 At cost 1,559,920 1,437,588 1,443,235 1,332,898 Investment Properties (Notes 10 and 19) 5,824,529 5,396,659 5,642,847 5,199,031 Goodwill (Note 19) 88,936 Other Assets (Notes 11 and 19) 2,040,285 1,150,640 1,132, ,878 P=147,768,994 P=154,995,603 P=123,047,005 P=129,650,429 LIABILITIES AND EQUITY LIABILITIES Deposit Liabilities (Notes 13, 19 and 28) Demand P=37,035,000 P=36,015,844 P=27,798,642 P=23,279,121 Savings 54,656,630 59,245,571 52,951,482 57,895,998 Time 26,074,316 31,446,630 20,536,242 27,353, ,765, ,708, ,286, ,528,250 Derivative Liabilities (Note 19) 318,037 86, ,842 86,474 Bills Payable (Notes 14 and 19) 2,053,536 2,146, , ,719 Marginal Deposits (Note 19) 196, ,126 97,611 51,383 Manager s Checks and Demand Drafts Outstanding (Note 19) 554, , , ,602 Accrued Taxes, Interest and Other Expenses (Notes 15 and 19) 1,375,839 1,235,690 1,082,300 1,100,088 Subordinated Debt (Notes 16 and 19) 2,064,000 2,451,500 2,064,000 2,451,500 Insurance Provision (Notes 17 and 19) 1,229,920 Other Liabilities (Notes 18 and 19) 4,882,866 5,033,047 3,902,313 4,750, ,440, ,303, ,054, ,646,857 (Forward)

13 - 2 - Consolidated Parent December EQUITY Equity Attributable to Equity Holders of Parent Company Preferred stock (Note 20) P=50,000 P=50,000 P=50,000 P=50,000 Common stock (Note 20) 445, , , ,295 Surplus reserve (Notes 20 and 26) 184, , , ,426 Surplus (Notes 20 and 26) 12,436,260 10,752,353 11,158,248 9,843,530 Net unrealized gain (loss) on available-for-sale investments (Note 6) (164,889) 136,281 (203,915) 121,569 Revaluation increment of land - net (Note 9) 1,368,587 1,368,587 1,358,752 1,358,752 Equity adjustment from translation (Note 2) 629,899 1,273,377 14,949,578 14,210,319 12,992,806 12,003,572 Minority Interest 2,378,421 2,481,582 17,327,999 16,691,901 12,992,806 12,003,572 P=147,768,994 P=154,995,603 P=123,047,005 P=129,650,429 See accompanying Notes to Financial Statements.

14 ALLIED BANKING CORPORATION AND SUBSIDIARIES STATEMENTS OF INCOME (In Thousands, Except Earnings Per Share Amounts) Consolidated Parent Company Years Ended December INTEREST INCOME Loans and receivables (Notes 7 and 28) P=4,263,761 P=4,878,369 P=4,863,450 P=3,459,442 P=3,717,638 P=3,701,729 Trading and investment securities (Note 6) 3,333,923 3,451,714 3,487,879 3,244,320 3,305,116 3,344,258 Deposits with banks and interbank loans receivable 2,146,610 1,690,109 1,055,644 1,152,676 1,158, ,371 9,744,294 10,020,192 9,406,973 7,856,438 8,181,549 7,975,358 INTEREST EXPENSE Deposit liabilities (Notes 13 and 28) 3,590,044 4,306,549 3,968,190 2,807,347 3,523,720 3,452,499 Bills payable and other borrowings (Note 14) 286, , , , , ,790 3,876,993 4,632,211 4,222,841 2,989,550 3,752,439 3,645,289 NET INTEREST INCOME 5,867,301 5,387,981 5,184,132 4,866,888 4,429,110 4,330,069 Commissions and handling charges 962, , , , , ,087 Foreign exchange gains (losses) - net 268, ,600 (244,189) 345, ,616 (266,887) Trading and securities gains (losses) - net (Note 6) (95,441) 959, ,518 (225,487) 959, ,518 Miscellaneous (Notes 10 and 21) 1,960, , ,935 1,160, , ,704 TOTAL OPERATING INCOME 8,963,952 8,609,917 7,232,941 7,020,817 7,351,438 6,208,491 Compensation and fringe benefits (Notes 22 and 28) 2,503,098 2,602,003 1,924,712 2,077,165 2,259,873 1,714,786 Occupancy and other equipment-related costs (Note 23) 779, , , , , ,515 Taxes and licenses (Note 25) 712, , , , , ,583 Depreciation and amortization (Note 9) 381, , , , , ,539 Provision for impairment and credit losses (Note 12) 345, ,485 96, ,854 98,749 71,944 Miscellaneous (Note 24) 1,997,907 1,683,990 1,452,411 1,492,622 1,547,851 1,195,999 TOTAL OPERATING EXPENSES 6,719,961 6,246,843 5,209,175 5,499,723 5,576,527 4,608,366 INCOME BEFORE SHARE IN NET LOSS OF INVESTEE 2,243,991 2,363,074 2,023,766 1,521,094 1,774,911 1,600,125 Share in net loss of investee (Note 8) (62,340) (51,668) INCOME BEFORE INCOME TAX 2,243,991 2,300,734 1,972,098 1,521,094 1,774,911 1,600,125 PROVISION FOR INCOME TAX (Note 25) 363, , , , , ,318 NET INCOME P=1,880,925 P=1,820,123 P=1,496,619 P=1,314,718 P=1,429,142 P=1,236,807 ATTRIBUTABLE TO: Equity Holders of the Parent Company (Notes 27 and 31) P=1,683,907 P=1,613,772 P=1,362,386 Minority Interest (Note 27) 197, , ,233 P=1,880,925 P=1,820,123 P=1,496,619 Basic/Diluted Earnings Per Share Attributable to Equity Holders of the Parent Company (Note 31) P=3, P=3, P=3, See accompanying Notes to Financial Statements.

15 ALLIED BANKING CORPORATION AND SUBSIDIARIES STATEMENTS OF CHANGES IN EQUITY Capital Stock (Note 20) Surplus Reserve (Notes 20 and 26) Consolidated Attributable to Equity Holders of Parent Company Net Unrealized Revaluation Gain (Loss) Increment of on Available- Land - net of for-sale Deferred Tax Investments Effect (Note 6) (Note 9) Surplus (Notes 20 and 26) Equity Adjustment from Translation (Notes 2 and 8) Total Minority Interest Total Equity Balance at January 1, 2007 P=495,295 P=184,426 P=10,752,353 P=136,281 P=1,368,587 P=1,273,377 P=14,210,319 P=2,481,582 P=16,691,901 Net unrealized gain (loss) on available-for-sale investments (301,170 ) (301,170) 103,975 (197,195) Currency translation adjustment (643,478 ) (643,478) (404,154 ) (1,047,632) Income and expense for the year recognized directly in equity (301,170) (643,478) (944,648) (300,179) (1,244,827) Net income for the year 1,683,907 1,683, , 018 1,880,925 Total income and expense for the year 1,683,907 (301,170) (643,478) 739,259 (103,161) 636,098 Balance at December 31, 2007 P=495,295 P=184,426 P=12,436,260 (164,889) P=1,368,587 P=629,899 P=14,949,578 P=2,378,421 P=17,327,999 Balance at January 1, 2006 P=495,295 P=184,426 P=9,138,581 (P=173,185) P=1,388,001 P=1,495,197 P=12,528,315 P=2,486,833 P=15,015,148 Net unrealized gain (loss) on available-for-sale investments 309, ,466 (173,185) 136,281 Change in market value of land (19,414) (19,414) (19,414) Currency translation adjustment (221,820) (221,820) (38,417) (260,237) Income and expense for the year recognized directly in equity 309,466 (19,414) (221,820) 68,232 (211,602) (143,370) Net income for the year 1,613,772 1,613, ,351 1,820,123 Total income and expense for the year 1,613, ,466 (19,414) (221,820) 1,682,004 (5,251) 1,676,753 Balance at December 31, 2006 P=495,295 P=184,426 P=10,752,353 P=136,281 P=1,368,587 P=1,273,377 P=14,210,319 P=2,481,582 P=16,691,901

16 - 2 - Capital Stock (Note 20) Surplus Reserve (Notes 20 and 26) Consolidated Attributable to Equity Holders of Parent Company Net Unrealized Revaluation Gain (Loss) Increment of on Available- Land - net of for-sale Deferred Tax Investments Effect (Note 6) (Note 9) Surplus (Notes 20 and 26) Equity Adjustment from Translation (Notes 2 and 8) Total Minority Interest Total Equity Balance at January 1, 2005 P=495,295 P=184,426 P=7,776,195 (P=564,226 ) P=1,452,063 P=1,756,943 P=11,100,696 P=2,514,747 P=13,615,443 Net unrealized gain (loss) on available-for-sale investments 391, , ,115 Effects of change in the deferred tax rate on revaluation increment (64,062) (64,062) (64,062) Currency translation adjustment (261,746) (261,746) (162,221) (423,967) Income and expense for the year recognized directly in equity 391,041 (64,062) (261,746) 65,233 (162,147) (96,914) Net income for the year 1,362,386 1,362, ,233 1,496,619 Total income and expense for the year 1,362, ,041 (64,062) (261,746) 1,427,619 (27,914) 1,399,705 Balance at December 31, 2005 P=495,295 P=184,426 P=9,138,581 (P=173,185) P=1,388,001 P=1,495,197 P=12,528,315 P=2,486,833 P=15,015,148 See accompanying Notes to Financial Statements.

17 - 3 - Capital Stock (Note 20) Surplus Reserve (Notes 20 and 26) Parent Company Net Unrealized Gain (Loss) on Available- Surplus for-sale (Notes 20 Investments and 26) (Note 6) Revaluation Increment of Land - net of Deferred Tax Liability (Note 9) Balance at January 1, 2007 P=495,295 P=184,426 P=9,843,530 P=121,569 P=1,358,752 P=12,003,572 Net unrealized gain (loss) on available-for-sale investments (325,484) (325,484) Income and expense for the year recognized directly in equity (325,484) (325,484) Net income for the year 1,314,718 1,314,718 Total income and expense for the year 1,314,718 (325,484) 989,234 Balance at December 31, 2007 P=495,295 P=184,426 P=11,158,248 (P=203,915) P=1,358,752 P=12,992,806 Total Equity Balance at January 1, 2006 P=495,295 P=184,426 P=8,414,388 (P=176,001) P=1,372,331 P=10,290,439 Net unrealized gain (loss) on available-for-sale investments 297, ,570 Effects of change in the defered tax rate on revaluation increment (13,579) (13,579) Income and expense for the year recognized directly in equity 297,570 (13,579) 283,991 Net income for the year 1,429,142 1,429,142 Total income and expense for the year 1,429, ,570 (13,579) 1,713,133 Balance at December 31, 2006 P=495,295 P=184,426 P=9,843,530 P=121,569 P=1,358,752 P=12,003,572

18 - 4 - Capital Stock (Note 20) Surplus Reserve (Notes 20 and 26) Parent Company Net Unrealized Gain (Loss) on Available- Surplus for-sale (Notes 20 Investments and 26) (Note 6) Revaluation Increment of Land - net of Deferred Tax Liability (Note 9) Balance at January 1, , ,426 7,177,581 (565,137) 1,435,670 8,727,835 Net gain on available-for-sale investments 389, ,136 Effects of change in the deferred tax rate on revaluation increment (63,339) (63,339) Income and expense for the year recognized directly in equity 389,136 (63,339) 325,797 Net income for the year 1,236,807 1,236,807 Total income and expense for the year 1,236, ,136 (63,339) 1,562,604 Balance at December 31, 2005 P=495,295 P=184,426 P=8,414,388 (P=176,001) P=1,372,331 P=10,290,439 See accompanying Notes to Financial Statements. Total Equity

19 ALLIED BANKING CORPORATION AND SUBSIDIARIES STATEMENTS OF CASH FLOWS Consolidated Years Ended December 31 Parent Company CASH FLOWS FROM OPERATING ACTIVITIES Income before income tax P=2,243,991 P=2,300,734 P=1,972,098 P=1,521,094 P=1,774,911 P=1,600,125 Adjustments for: Depreciation and amortization (Note 9) 381, , , , , ,539 Provision for impairment and credit losses (Note 12) 345, ,485 96, ,854 98,749 71,944 Loss on sale of investment property 67,137 69,654 Gain on sale of property and equipment (116,265) (59,629) Unrealized gain on foreclosure of investment property (578,204) (455,437) (1,056) (571,831) (463,156) (1,056) Unrealized market loss (profit) on fair value through profit or loss investments (63,172) (611,017) 12,477 (63,172) (611,003) 12,477 Gain on sale of available-for- sale investments (368,712) (548,239) (876,501) (246,553) (548,225) (876,501) Gain on acquisition of New York Life Insurance (Philippines), Inc. (Note 8) (156,573) Equity in net loss of an associate (Note 8) 62,340 51,668 Recovery from charged-off assets (195) (63,240) (138,189) (195) (57) (138,189) Changes in operating assets and liabilities: Decrease (increase) in the amounts of: Fair value through profit or loss Investments 8,474,385 (10,367,218) (1,791,800) 8,414,954 (10,286,720) (1,789,817) Loans and receivables (69,470) (671,131) (3,211,392) (1,259,243) (2,195,092) (4,108,844). Other assets (727,496) (88,117) 1,040,542 (338,989) 70,093 2,566,002 Increase (decrease) in the amounts of: Deposit liabilities (8,942,099) 9,576,957 3,796,638 (7,241,885) 10,041,337 4,504,873 Manager s checks and demand drafts outstanding 35,937 (273,826) (228,317) 27,388 (248,843) (221,793) Accrued taxes, interest and other expenses 358, , , , , ,371 Insurance provisions 713,606 Other liabilities (254,199) (206,836) (329,606) (617,158) 310,181 (382,578) Net cash generated from (used in) operations 1,343,786 (498,579) 994, ,070 (1,432,416) 1,777,553 Income taxes paid (581,278) (485,674) (457,386) (452,389) (346,260) (338,753) Net cash provided by (used in) operating activities 762,508 (984,253) 537,536 7,681 (1,778,676) 1,438,800 CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of: Investments in subsidiaries and associates (Note 8) (43,750) (117,169) (467,541) (43,750) Available-for-sale investments (30,758,854) (25,674,287) Held-to-maturity investments (5,811,515) (5,797,532) (392,497) Property and equipment (Note 9) (712,540) (717,264) (465,078) (494,567) (686,298) (335,435) Proceeds from: Investments in subsidiaries and associates 31,238 Available-for-sale investments 30,050,194 2,806,713 6,624,654 25,391,952 2,808,928 7,827,488 Held-to-maturity investments 4,327,304 6,086,954 (419,971) 3,898,396 5,939,715 Property and equipment 378, , , , ,706 25,508 Investment property 937,298 1,248,803 1,583, ,553 1,322,013 1,673,456 Decrease (increase) in: Interbank loans receivable (Note 31) 219, ,104 Net cash outflow from acquisition of NYLIP (Note 8) (69,538) Net cash provided by (used in) investing activities (1,658,749) 9,995,853 7,665,495 (1,881,385) 9,229,523 9,005,112 (Forward)

20 - 2 - Consolidated Years Ended December 31 Parent Company CASH FLOWS FROM FINANCING ACTIVITIES Increase (decrease) in the amount of: Bills payable (P=93,128) (P=2,959,065) (P=1,386,857) P=598,058 (P=3,399,591) (P=1,144,668) Margin deposits 73,092 11,319 (52,887) 46,228 21,142 4,848 Subordinated debt (387,500) (203,000) (387,500) (203,000) Minority interest in consolidated subsidiaries (868,511) (211,602) (162,146) Net cash provided by (used in) financing activities (1,276,047) (3,362,348) (1,601,890) 256,786 (3,581,449) (1,139,820) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,172,288) 5,649,252 6,601,141 (1,616,918) 3,869,398 9,304,092 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR Cash and other cash items 9,247,409 7,506,915 3,372,210 3,823,766 3,302,226 2,680,508 Due from Bangko Sentral ng Pilipinas (BSP) 12,545,552 4,815,108 1,620,106 12,090,540 4,795,148 1,518,413 Due from other banks 4,568,710 6,491,952 12,667,392 2,265,375 2,942,531 2,986,815 Interbank loans receivable 15,781,577 17,680,021 12,233,147 13,513,377 16,783,755 11,333,832 42,143,248 36,493,996 29,892,855 31,693,058 27,823,660 18,519,568 CASH AND CASH EQUIVALENTS AT END OF YEAR Cash and other cash items 8,198,200 9,247,409 7,506,915 3,445,319 3,823,766 3,302,226 Due from BSP 14,067,457 12,545,552 4,815,108 13,222,310 12,090,540 4,795,148 Due from other banks 6,870,230 4,568,710 6,491,952 2,351,313 2,265,375 2,942,531 Interbank loans receivable 10,835,073 15,781,577 17,680,021 11,057,198 13,513,377 16,783,755 P=39,970,960 P=42,143,248 P=36,493,996 P=30,076,140 P=31,693,058 P=27,823,660 OPERATIONAL CASH FLOWS FROM INTEREST Interest paid P=3,883,120 P=4,635,276 P=4,166,173 P=3,053,169 P=3,776,612 P=3,670,946 Interest received 10,576,873 9,117,115 9,592,847 8,554,774 7,765,184 8,064,871 Dividends received , , ,189 See accompanying Notes to Financial Statements.

21 ALLIED BANKING CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS 1. Corporate Information Allied Banking Corporation (the Parent Company) is a universal bank incorporated and domiciled in the Philippines with registered office address at Allied Bank Center, 6754 Ayala Avenue, Makati City. Allied Banking Corporation is the ultimate parent company of the Group. The Parent Company and its subsidiaries (the Group) are engaged in all aspects of banking, financing and leasing to personal, commercial corporate and institutional clients through a network of 312 local and international branches and offices. The Group s products and services include deposit taking, lending and related services, domestic and foreign fund transfers, treasury, foreign exchange and trust services. In addition, the Parent Company is licensed to enter into regular financial derivatives as a means of reducing and managing the Parent Company s and its customers foreign exchange exposure. The Group has a primary listing in the Philippine Stock Exchange. The Parent Company s subsidiaries and associates, which financial and operating policies are controlled by the Parent Company, follow: Country of Effective Percentage of Ownership Subsidiary/Associate Incorporation Banking Allied Savings Bank (ASB) Philippines % % Allied Bank Philippines (UK) Plc (ABUK) United Kingdom Allied Commercial Bank (ACB) People s Republic of China Allied Banking Corporation (Hong Kong) Limited (ABCHKL) Hong Kong Others Allied Forex Corporation (AFC) - Forex Company Philippines New York Life Insurance (Philippines), Inc. (NYLIP) Insurance Philippines Allied Leasing and Finance Corporation (ALFC) - Leasing and Finance Philippines Oceanic Holding (BVI) Ltd. (OHBVI) - Bank Holding Company United States of America Summary of Significant Accounting Policies Basis of Preparation The accompanying financial statements had been prepared under the historical cost convention except for financial assets at fair value through profit or loss (FVPL) which includes the fair value of derivative financial instruments, and available -for-sale (AFS) investments that have been measured at fair value, and property and equipment - land which have been measured at appraised value. All values are rounded to the nearest thousand pesos (P= 000) except when otherwise indicated.

22 - 2 - The accompanying financial statements of the Parent Company reflect the accounts maintained in the Regular Banking Unit (RBU) and Foreign Currency Deposit Unit (FCDU). The financial statements individually prepared for these units are combined after eliminating inter-unit accounts. The books of accounts of the RBU are maintained in Philippine pesos, while those of the FCDU are maintained in their original currencies. For financial reporting purposes, FCDU accounts and foreign currency-denominated accounts in the RBU are translated into their equivalents in Philippine pesos (see policy on Foreign Currency Translation). Statement of Compliance The financial statements of the Group and of the Parent Company have been prepared in compliance with Philippine Financial Reporting Standards (PFRS). Basis of Consolidation The consolidated financial statements include the accounts of the Parent Company and its subsidiaries and controlled associates mentioned in Note 1. The financial statements of the subsidiaries and controlled associates are prepared for the same reporting year of the Parent Company using uniform accounting policies for like transactions and other events in similar circumstances. Subsidiaries are all entities over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries and controlled associates are consolidated from the date on which control is transferred to the Group and cease to be consolidated from the date on which control is transferred out of the Group. Control is achieved where the Group has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. The results of subsidiaries and controlled associates acquired or disposed of during the year are included in the consolidated statement of income from the date of acquisition or up to the date of disposal, as appropriate. All intra-group balances, transactions, income and expenses and profits and losses resulting from intra-group transactions are eliminated in full. Minority Interests Minority interests represent the portion of net income or losses and the net assets not held by the Group and are presented separately in the consolidated statement of income and within equity in the consolidated statement of condition, separately from equity attributable to equity holders of parent company. Acquisitions of minority interests are accounted for using the entity concept method, whereby the difference between the consideration and the book value of the share of the net assets acquired is recognized as an equity transaction.

23 - 3 - Changes in Accounting Policy The accounting policies adopted are consistent with those of the previous financial year except for the adoption of PFRS 7. PFRS 7, Financial Instruments: Disclosures, and the complementary amendment to Philippine Accounting Standard (PAS) 1, Presentation of Financial Statements: Capital Disclosures PFRS 7 introduces new disclosures to improve the information about financial instruments. It requires the disclosure of qualitative and quantitative information about exposure to risks arising from financial instruments, including specified minimum disclosures about credit risk, liquidity risk and market risk, as well as sensitivity analysis to market risk. It replaces PAS 30, Disclosures in the Financial Statements of Banks and Similar Financial Institutions, and the disclosure requirements in PAS 32, Financial Instruments: Disclosure and Presentation. It is applicable to all entities that report under PFRS. Adoption of this standard resulted in the inclusion of additional disclosures such as market risk sensitivity analysis, contractual maturity analysis of financial liabilities for liquidity risk and aging analysis on financial assets that are either past due or impaired. The amendment to PAS 1 introduces disclosures about the level of an entity s capital and how it manages capital. The required new disclosures are reflected in the financial statements where applicable. In December 2007, the Financial Reporting Standards Council has approved an amendment to the transition provision of PFRS 7 that gives transitional relief with respect to the presentation of comparative information for the new risk disclosures about the nature and extent of risks arising from financial instruments under paragraphs 31 to 42 of PFRS 7. In relation to such relief, the Group is allowed not to present comparative information for the new risk disclosures under paragraphs 31 to 42 of PFRS 7 unless the disclosures was previously required by paragraph under PAS 30 or PAS 32. Foreign Currency Translation The consolidated financial statements and Parent Company financial statements are presented in Philippine peso, which is the Parent Company s functional and reporting currency. Each entity (subsidiaries and associates) in the Group determines its own functional currency and items included in the financial statements of each entity are measured using that functional currency. Transactions and balances The books of accounts of the RBU are maintained in Philippine pesos, while those of the FCDU are maintained in United States dollars (USD or US$). For financial reporting purposes, the monetary assets and liabilities of the FCDU and the foreign currency-denominated monetary assets and liabilities in the RBU are translated in Philippine pesos based on the Philippine Dealing System (PDS) closing rate prevailing at end of the year and foreign currency-denominated income and expenses, at the PDS weighted average rate (PDSWAR) for the year. Foreign exchange differences arising from restatements of foreign currency-denominated assets and liabilities are credited to or charged against operations in the period in which the rates change. Nonmonetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions. Nonmonetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined.

24 - 4 - Group companies As at the reporting date, the assets and liabilities of subsidiaries are translated into the Parent Company s presentation currency (the Philippine peso) at the rate of exchange ruling at the reporting date, and their income and expenses are translated at the weighted average exchange rates for the year. Exchange differences arising on translation are taken directly to a separate component of equity. On disposal of a foreign entity, the deferred cumulative amount recognized in equity relating to the particular foreign operation is recognized in the consolidated statement of income. Financial Instruments - Initial Recognition and Subsequent Measurement Date of recognition Purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or convention in the marketplace are recognized on the trade date - the date on which the Group commits to purchase or sell the assets. Derivatives are also recognized on trade date basis. Deposits, amounts due to banks and customers and loans are recognized when cash is received by the Group or advanced to the borrowers. For 2007 and 2006, securities transactions and related commission income and expense are recorded on a trade date basis. Initial recognition of financial instruments All financial assets, including trading and investment securities and loans and receivable, are initially recognized at fair value. Except for financial assets at FVPL, the initial measurement of financial assets includes transaction costs. The Group categorizes its financial assets into the following categories: derivative assets, financial assets at FVPL, AFS investments, held-tomaturity (HTM) investments, and loans and receivable. Financial liabilities are categorized as financial liabilities at FVPL which mainly represent derivative liabilities carried at fair value or other liabilities carried at cost or amortized cost. The classification depends on the purpose for which the investments were acquired and whether they are quoted in an active market. Management determines the classification of its investments at initial recognition and, where allowed and appropriate, re-evaluates such designation at every reporting date. Determination of fair value The fair value for financial instruments traded in active markets at the reporting date is based on their quoted market price or dealer price quotations (bid price for long positions and ask price for short positions), without any deduction for transaction costs. When current bid and asking prices are not available, the price of the most recent transaction provides evidence of the current fair value as long as there has not been a significant change in economic circumstances since the time of the transaction. For all other financial instruments not listed in an active market, the fair value is determined by using appropriate valuation methodologies. Valuation methodologies include net present value techniques, comparison to similar instruments for which market observable prices exist, option pricing models, and other relevant valuation models. Day 1 difference Where the transaction price in a non-active market is different to the fair value from other observable current market transactions in the same instrument or based on a valuation technique whose variables include only data from observable market, the Group recognizes the difference between the transaction price and fair value (a Day 1 profit/loss) in the statement of income in

25 - 5 - Trading and securities gain (loss) - net. In cases where nonmarket observable data is used, the difference between the transaction price and model value is only recognized in the statement of income when the inputs become observable or when the instrument is derecognized. For each transaction, the Group determines the appropria te method of recognizing the Day 1 difference amount. Derivatives The Group is a party to derivative instruments, particularly, forward exchange contracts. These contracts are entered into as a service to customers, a means of reducing and managing the Group s foreign exchange risk and for trading purposes, but these are not entered into as accounting hedges. The fair value of forward exchange contracts is calculated by using the discrete net present value (NPV) model. The resulting profit or loss is included in the statement of income in Foreign exchange gain (loss) - net. Embedded derivatives that are bifurcated from the host financial and nonfinancial contracts are also accounted for as derivative assets or liabilities. Embedded derivatives are bifurcated from their host contracts and carried at fair value with fair value changes being reported through profit or loss, when the entire hybrid contracts (composed of both the host contract and the embedded derivative) are not accounted for as financial assets at FVPL, when their economic risks and characteristics are not closely related to those of their respective host contracts, and when a separate instrument with the same terms as the embedded derivatives would meet the definition of a derivative. The Group assesses whether embedded derivatives are required to be separated from the host contracts when the Group first becomes a party to the contract. Reassessment of embedded derivatives is only done when there are changes in the contract that significantly modifies the contractual cash flows. Other financial assets or financial liabilities held for trading Other financial assets or financial liabilities held for trading (classified as Financial assets at FVPL) are recorded in the statement of condition at fair value. Changes in fair value relating to the held-for-trading positions are recognized in Trading and securities gain (loss) - net. Interest earned or incurred is recorded in interest income or expense, respectively, while dividend income is recorded in other operating income when the right to receive payment has been established. Included in this classification are debt and equity securities which have been acquired principally for the purpose of selling or repurchasing in the near term. Designated financial assets at FVPL or designated financial liabilities at FVPL Financial assets or financial liabilities classified in this category are designated by management on initial recognition when the following criteria are met:? The designation eliminates or significantly reduces the inconsistent treatment that would otherwise arise from measuring the assets or liabilities or recognizing gains or losses on them on a different basis; or

26 - 6 -? The assets and liabilities are part of a group of financial assets, financial liabilities or both which are managed and their performance evaluated on a fair value basis, in accordance with a documented risk management or investment strategy, or? The financial instrument contains an embedded derivative, unless the embedded derivative does not significantly modify the cash flows or it is clear, with little or no analysis, that it would not be separately recorded. Designated financial assets and designated financial liabilities at FVPL, if any, are recorded in the statement of condition at fair value. Changes in fair value are recorded in Trading and securities gain (loss) in the statement of income. Interest earned or incurred is recorded in interest income or interest expense, respectively, while dividend income is recorded in other operating income according to the terms of the contract, or when the right of the payment has been established. As of December 31, 2007 and 2006, the Group has no outstanding designated financial assets and designated financial liabilities at FVPL. HTM investments HTM investments are quoted non-derivative financial assets with fixed or determinable payments and fixed maturities for which the Group s management has the positive intention and ability to hold to maturity. Where the Group sells other than an insignificant amount of HTM investments, the entire category would be tainted and reclassified as AFS investments. The Group would then be unable to classify any financial asset as HTM for the next two financial years. After initial measurement, these investments are subsequently measured at amortized cost using the effective interest rate method, less impairment in value. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees that are an integral part of the effective interest rate. The amortization is included in Interest income in the statement of income. Gains and losses are recognized in income when the HTM investments are derecognized and impaired, as well as through the amortization process. The losses arising from impairment of such investments are recognized in the statement of income under Provision for impairment and credit losses. The effects of restatement on foreign currency-denominated HTM investments are recognized in the statement of income. Due from Bangko Sentral ng Pilipinas (BSP), due from other banks, interbank loans receivable, and loans and receivable This accounting policy relates to the statement of condition captions Due from BSP, Due from other banks, Interbank loans receivable and Loans and receivable. These are financial assets with fixed or determinable payments and fixed maturities that are not quoted in an active market. They are not entered into with the intention of immediate or short-term resale and are not classified as Financial assets designated at FVPL, HTM or AFS investments. Loans and receivable include receivables arising from transactions on credit cards issued directly by the Parent Company (starting in the first quarter of 2007) and those credit cards issued through a credit card company which have tie-up arrangements with the Parent Company (until the first quarter of 2007). Collection of receivables from credit cardholders of other banks is guaranteed by those banks with tie-up arrangements with the Parent Company. Loans and receivable also include the aggregate rental on finance lease transactions. Unearned income on finance lease transactions is shown as a deduction from Loans and receivables (included in Unearned interest ).

27 - 7 - After initial measurement, Due from BSP, Due from other banks, Interbank loans receivable, and Loans and receivable are subsequently measured at amortized cost using the effective interest rate method, less allowance for impairment and credit losses. Amortized cost is calculated by taking into account any discount or premium on acquisition and fees and costs that are an integral part of the effective interest rate. The amortization is included in the Interest income in the statement of income. The losses arising from impairment are recognized in Provision for impairment and credit losses in the statement of income. AFS investments AFS investments are those which are designated as such or do not qualify to be classified as financial assets at FVPL, HTM investments or loans and receivable. They are purchased and held indefinitely, and may be sold in response to liquidity requirements or changes in market conditions. They include equity investments, money market papers and other debt instruments. After initial measurement, AFS investments are subsequently measured at fair value. The effective yield component of AFS debt securities, as well as the impact of restatement on foreign currency-denominated AFS debt securities, is reported in earnings. The unrealized gains and losses arising from the fair valuation of AFS investments are excluded, net of tax, from reported earnings and are reported as Net unrealized gain (loss) on AFS investments in the equity section of the statement of condition. When the security is disposed of, the cumulative gain or loss previously recognized in equity is recognized as Trading and securities gain (loss) - net in the statement of income. Where the Group holds more than one investment in the same security, these are deemed to be disposed of on a first-in first-out basis. Interest earned on holding AFS investments are reported as Interest income using the effective interest rate. Dividends earned on holding AFS investments are recognized in the statement of income as Miscellaneous income when the right of payment has been established. The losses arising from impairment of such investments are recognized as Provision for impairment and credit losses in the statement of income. Bills payable and other borrowed funds Issued financial instruments or their components, which are not designated at FVPL, are classified as other liabilities under Bills payable or other appropriate account titles for such borrowed funds, where the substance of the contractual arrangement results in the Group having an obligation either to deliver cash or another financial asset to the holder, or to satisfy the obligation other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of own equity shares. The components of issued financial instruments that contain both liability and equity elements are accounted for separately, with the equity component being assigned the residual amount after deducting from the instrument as a whole the amount separately determined as the fair value of the liability component on the date of issue. After initial measurement, bills payable and other borrowings are subsequently measured at amortized cost using the effective interest method. Amortized cost is calculated by taking into account any discount or premium on the issue and fees that are an integral part of the effective interest rate.

28 - 8 - Derecognition of Financial Assets and Liabilities Financial assets A financial asset (or, where applicable a part of a financial asset or part of a group of financial assets) is derecognized when:? the rights to receive cash flows from the asset have expired;? the Group retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a pass-through arrangement; or? the Group has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained the risk and rewards of the asset but has transferred the control of the asset Where the Group has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognized to the extent of the Group s continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Group could be required to repay. Financial liabilities A financial liability is derecognized when the obligation under the liability is discharged, cancelled or has expired. Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognized in statement of income. Offsetting Financial Instruments Financial assets and financial liabilities are offset and the net amount reported in the statement of condition if, and only if, there is a currently enforceable legal right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the asset and settle the liability simultaneously. This is not generally the case with master netting agreements, and the related assets and liabilities are presented gross in the statement of condition. Impairment of Financial Assets The Group assesses at each reporting date whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset (an incurred loss event ) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated. Evidence of impairment may include indications that the borrower or a group of borrowers is experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganization and where there are observable data that indicates that there is measurable decrease in the estimated future cash flows, such as changes in arrears or economic conditions that correlate with defaults.

29 - 9 - Loans and receivables For loans and receivables carried at amortized cost, the Group first assesses whether objective evidence of impairment exists for financial assets that are individually significant. If the Group determines that no objective evidence of impairment exists for individually assessed financial asset, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses for impairment. Those characteristics are relevant to the estimation of future cash flows for groups of such assets by being indicative of the debtors ability to pay all amounts due according to the contractual terms of the assets being evaluated. If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the assets carrying amount and the present value of the estimated future cash flows (excluding future credit losses that have not been incurred). The carrying amount of the asset is reduced through use of an allowance account and the amount of loss is charged in the statement of income. Interest income continues to be recognized thereafter based on the interest rate used to discount the future cash flows for the purpose of measuring the impairment loss. If, in a subsequent year, the amount of the estimated impairment loss decreases because of an event occurring after the impairment was recognized, the previously recognized impairment loss is reduced by adjusting the allowance account. Loans, together with the associated allowance accounts, are written off when there is no realistic prospect of future recovery and all collateral has been realized. If a future write-off is later recovered, any amounts formerly charged are credited to the Provision for impairment and credit losses account. The present value of the estimated future cash flows is discounted at the financial asset s original effective interest rate. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate, adjusted for the original credit risk premium. The calculation of the present value of the estimated future cash flows of a collateralized financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not foreclosure is probable. For the purpose of a collective evaluation of impairment, financial assets are grouped on the basis of similar credit risk characteristics such as industry, collateral type, past-due status and term. Future cash flows in a group of financial assets that are collectively evaluated for impairment are estimated on the basis of historical loss experience for assets with credit risk characteristics similar to those in the Group. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the period on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not exist currently. Estimates of changes in future cash flows reflect, and are directionally consistent with changes in related observable data from period to period (such changes in property prices, payment status, or other factors that are indicative of incurred losses in the Group and their magnitude). The methodology and assumptions used for estimating future cash flows are reviewed regularly by the Group to reduce any differences between loss estimates and actual loss experience.

30 Restructured loans Where possible, the Group seeks to restructure loans rather than to take possession of collateral. This may involve extending the payment arrangements and/on agreement to new loan conditions. Once the terms have been renegotiated, the loan is no longer considered past due. Management continuously reviews restructured loans to ensure that all criteria are met and that future payments are likely to occur. The loans continue to be subject to an individual or collective impairment assessment, calculated using the loan s original effective interest rate. The difference between the recorded value of the original loan and the present value of the restructured cash flows, discounted at the original effective interest rate, is recognized in Provision for impairment and credit losses in the statement of income. HTM investments For HTM investments, if there is objective evidence that an impairment loss 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 expected credit losses that have not yet been incurred). The carrying amount of the asset is reduced through use of an allowance account and the amount of loss is charged to the statement of income. Interest income continues to be recognized based on the original effective interest rate of the asset. The HTM investments, together with the associated allowance accounts, are written off when there is no realistic prospect of future recovery and all collateral has been realized. If, in a subsequent year, the amount of the estimated impairment loss decreases because of an event occurring after the impairment was recognized, the previously recognized impairment loss is reduced by adjusting the allowance account. If a future write-off is later recovered, any amounts formerly charged are credited to the Provision for impairment and credit losses account. AFS Investments For AFS investments, the Group assesses at each reporting date whether there is objective evidence that a financial asset or group of financial assets is impaired. In case of equity investments classified as AFS, this would include a significant or prolonged decline in the fair value of the investments below its cost. Where there is evidence of impairment, the cumulative loss - measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognized in the statement of income - is removed from equity and recognized in the statement of income. Impairment losses on equity investments are not reversed through the statement of income. Increases in fair value after impairment are recognized directly in equity. In the case of debt instruments classified as AFS investments, impairment is assessed based on the same criteria as financial assets carried at amortized cost. Interest continues to be accrued at the original effective interest rate on the reduced carrying amount of the asset and is recorded as part of Interest income in the statement of income. If, in subsequent year, the fair value of a debt instrument increased and the increase can be objectively related to an event occurring after the impairment loss was recognized in the statement of income, the impairment loss is reversed through the statement of income.

31 Terminal Value of Leased Assets and Deposits on Finance Leases The terminal value of leased assets, which approximates the amount of guaranty deposit paid by the lessee at the inception of the lease, is the estimated proceeds from the sale of the leased asset at the end of the lease term. At the end of the lease term, the terminal value of the leased asset is generally applied against the guaranty deposit of the lessee when the lessee decides to buy the leased asset. Revenue Recognition Revenue is recognized to the extent that it is probable that economic benefits will flow to the Group and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognized: Interest income For all financial instruments measured at amortized cost and interest-bearing financial instruments classified as AFS investments, interest income is recorded at the effective interest rate, which is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset or financial liability. The calculation takes into account all contractual terms of the financial instrument, includes any fees or incremental costs that are directly attributable to the instrument and are an integral part of the effective interest rate, but not future credit losses. The adjusted carrying amount is calculated based on the original effective interest rate. The change in carrying amount is recorded as Interest income. Once the recorded value of a financial asset or group of similar financial assets has been reduced due to an impairment loss, interest income continues to be recognized using the original effective interest rate applied to the new carrying amount. Trading and securities gains Results arising from trading activities include all gains and losses from changes in fair value of financial assets and financial liabilities held for trading. It also includes gains and losses realized from sale of AFS investments. Dividends Dividend income is recognized when the Group s right to receive payment is established. Fee and commission income The Group earns fee and commission income from a diverse range of services it provides to its customers. Fee income can be divided into the following two categories: a) Fee income earned from services that are provided over a certain period of time Fees earned for the provision of services over a period of time are accrued over that period. These fees include investment fund fees, custodian fees, fiduciary fees, commission income, credit related fees, asset management fees, portfolio and other management fees, and advisory fees. Loan commitment fees for loans that are likely to be drawn down are deferred (together with any incremental costs) and recognized as an adjustment to the effective interest rate on the loan.

32 b) Fee income from providing transaction services Fees arising from negotiating or participating in the negotiation of a transaction for a third party - such as underwriting fees, corporate finance fees, and brokerage fees for the arrangement of the acquisition of shares or other securities or the purchase or sale of businesses - are recognized on completion of the underlying transaction. Fees or components of fees that are linked to a certain performance are recognized after fulfilling the corresponding criteria. Loan syndication fees are recognized in the statement of income when the syndication has been completed and the Group retains no part of the loans for itself or retains part at the same effective interest rate as for the other participants. Rental income Rental income arising on leased properties is accounted for on a straight-line basis over the lease terms on ongoing leases and is recorded in the statement of income under Miscellaneous income. Income on direct financing leases and receivables financed Income on loans and receivables financed with short-term maturities is recognized using the effective interest method. Interest and finance fees on finance leases and loans and receivables financed with long-term maturities and the excess of the aggregate lease rentals plus the estimated terminal value of the leased equipment over its cost are credited to unearned discount and amortized over the term of the note or lease using the effective interest rate method. Unearned income ceases to be amortized when receivables become past due. Cash and Other Cash Items Cash and other cash items include local and foreign currency notes and coins on hand. For purposes of reporting cash flows, cash equivalents also include amounts due from BSP and other banks, and interbank loans receivable with original maturities of three months or less from dates of placements and with insignificant risk of changes in value. Investments in Subsidiaries and Associates Investments in subsidiaries Subsidiaries pertain to all entities over which the Group has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights (see Note 8). The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity (see accounting policy on Basis of Consolidation). Investments in associates Associates pertain to all entities over which the Group has significant influence but not control, generally accompanying a shareholding of between 20.00% and 50.00% of the voting rights. In the consolidated financial statements, investments in associates are accounted for under the equity method of accounting. Under the equity method, an investment in an associate is carried in the statement of condition at cost plus post-acquisition changes in the Group s share of the net assets of the associate. Goodwill relating to an associate is included in the carrying value of the investment and is not amortized. The Group s share in an associate s post-acquisition profits or losses is recognized in the statement of income, and its share of post-acquisition movements in the associate s equity reserves

33 is recognized directly in equity. 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. Profits and losses resulting from transactions between the Group and an associate are eliminated to the extent of the interest in the associate. In the Parent Company financial statements, investments in subsidiaries and associates are carried at cost, less allowance for impairment losses. Property and Equipment Except for land, property and equipment is stated at cost, less accumulated depreciation and amortization, and any impairment in value. Land is carried at revalued amounts as determined by an independent firm of appraisers. The appraisal increase resulting from the revaluation was credited to Revaluation increment in property and equipment shown as a separate component in the statement of changes in equity. The initial cost of the Group s property and equipment consists of its purchase price, including import duties, taxes and any directly attributable cost to bring the property and equipment to its working condition and location for its intended use. Expenditures incurred after the property and equipment have been put into operation, such as repairs and maintenance, are normally charged against current operations in the year the costs are incurred. In situations where it can be clearly demonstrated that the expenditures have resulted in an increase in the future economic benefits expected to be obtained from the use of an item of property and equipment beyond its originally assessed standard of performance, the expenditures are capitalized as additional costs of property and equipment. Depreciation and amortization is calculated on a straight-line basis over the estimated useful life of the assets. The annual depreciation rates are as follows: Buildings 4.00% Furniture, fixtures and equipment 20.00% /3% Leasehold improvements 20.00% /3% or over the period of tenancy, whichever is shorter The useful life and the depreciation and amortization method are reviewed periodically to ensure that the period and the method of depreciation and amortization are consistent with the expected pattern of economic benefits from items of property and equipment. The carrying values of property and equipment are reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. If any such indication exists and where the carrying values exceed the estimated recoverable amount, the assets or cash-generating units are written down to their recoverable amount (see Policy on Impairment of Nonfinancial Assets).

34 An item of property and equipment is derecognized upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the statement of income in the period the asset is derecognized. Investment Properties Initially, investment properties are measured at cost including certain transaction costs. Investment properties acquired through a nonmonetary asset exchange is measured initially at fair value unless (a) the exchange lacks commercial substance or (b) the fair value of neither the asset received nor the asset given up is reliably measurable. Subsequent to initial recognition, investment properties are stated at cost less accumulated depreciation and any accumulated impairment in value. Investment properties are derecognized when they have either been disposed of or when the investment properties are permanently withdrawn from use and no future benefit is expected from its disposal. Any gains or losses on the retirement or disposal of an investment property are recognized in the statement of income in Miscellaneous income in the year of retirement or disposal. Expenditures incurred after the investment properties have been put into operations, such as repairs and maintenance costs, are normally charged against current operations in the period in which the costs are incurred. Depreciation is calculated on a straight-line basis using the estimated useful life from the time of acquisition of the investment properties. The estimated useful life of the depreciable investment properties which generally include building and improvements range from 25 to 50 years. Transfers are made to investment property only when there is a change in use evidenced by cessation of owner-occupation or of construction or development, or commencement of an operating lease to another party. Transfers are made from investment property when, and only when, there is a change in use, evidenced by commencement of owner-occupation or commencement of development with a view to sale. Goodwill Goodwill acquired in a business combination is initially measured at cost being the excess of the cost of the business combination over the Group's interest in the net fair value of the acquiree's identifiable assets, liabilities and contingent liabilities. With respect to investment in associates, goodwill is included in the carrying amounts of the investments. Following initial recognition, goodwill is measured at cost less any allowance for impairment losses. The carrying value of goodwill is reviewed for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable.

35 Impairment of Nonfinancial Assets Property and Equipment and Investment property At each reporting date, the Group assesses whether there is any indication that its nonfinancial assets may be impaired. When an indicator of impairment exists or when an annual impairment testing for an asset is required, the Group makes a formal estimate of recoverable amount. Recoverable amount is the higher of an asset s (or cash-generating unit s) fair value less costs to sell and its value in use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets, in which case the recoverable amount is assessed as part of the cash-generating unit to which it belongs. Where the carrying amount of an asset (or cash-generating unit) exceeds its recoverable amount, the asset (or cash-generating unit) is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset (or cash-generating unit). An impairment loss is charged to operations in the year in which it arises, unless the asset is carried at a revalued amount, in which case the impairment loss is charged to the revaluation increment of the said asset. For nonfinancial assets, excluding goodwill, an assessment is made at each reporting date as to whether there is any indication that previously recognized impairment losses may no longer exist or may have decreased. If such indication exists, the recoverable amount is estimated. A previously recognized impairment loss is reversed only if there has been a change in the estimates used to determine the asset s recoverable amount since the last impairment loss was recognized. If that is the case, the carrying amount of the asset is increased to its recoverable amount. That increased amount cannot exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognized for the asset in prior years. Such reversal is recognized in the statement of income unless the asset is carried at a revalued amount, in which case the reversal is treated as a revaluation increase. After such a reversal, the depreciation expense is adjusted in future years to allocate the asset s revised carrying amount, less any residual value, on a systematic basis over its remaining life. The following criteria are also applied in assessing impairment of specific assets: Goodwill Goodwill is reviewed for impairment, annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. Impairment is determined for goodwill by assessing the recoverable amount of the cash-generating unit (or group of cash-generating units) to which the goodwill relates. Goodwill sometimes cannot be allocated on a non-arbitrary basis to individual cash operating units, but only to the groups of cash-generating units. As a result, the lowest level within the Parent Company at which the goodwill is monitored for internal management purposes sometimes comprises a number of cashgenerating units to which the goodwill relates but cannot be allocated. Where the recoverable

36 amount of the cash-generating unit (or group of cash-generating units) is less than the carrying amount of the cash-generating unit (or group of cash-generating units) to which goodwill has been allocated (or to the aggregate carrying amount of a group of cash-generating units to which the goodwill relates but cannot be allocated), an impairment loss is recognized immediately in the statement of income. Impairment losses relating to goodwill cannot be reversed for subsequent increases in its recoverable amount in future periods. The Group performs its annual impairment test of goodwill as at year end. Intangible assets Intangible assets with indefinite useful lives are tested for impairment annually at year end either individually or at the cash-generating unit level, as appropriate. Intangible assets with finite lives are assessed for impairment whenever there is an indication that the intangible asset may be impaired. Segregated Funds Segregated funds are lines of business in which NYLIP issues a contract where the benefit amount is directly linked to the market value of investments held in the particular segregated fund. Although the underlying assets are registered in the name of NYLIP and is shown in the accompanying consolidated statements of condition in accordance with the guidelines of the Insurance Commission (IC), the segregated fund policyholder bears the risk and rewards of the fund s investment performance. NYLIP derives fee income from segregated funds, which is included in the statements of income. Fee income includes fund management fees and periodic charges as well as mortality, policy administration and surrender charges on segregated funds. Changes in NYLIP s interest in the segregated funds, including undistributed net investment income, are reflected in Miscellaneous income. Policyholder transfers between general funds and segregated funds are included in transfers to segregated funds account in the statement of income. Segregated fund assets are carried at fair value. Fair values of quoted investments in active markets are based on current bid prices. The investment results of the segregated funds are reflected directly in Segregated fund assets account in the statement of condition. Deposits to segregated funds are reported as increases in segregated fund liabilities and are not reported as revenues in the statement of income. Segregated fund assets may not be applied against liabilities that arise from any other business of NYLIP. Classification of Insurance and Investment Contracts NYLIP issues contracts that transfer insurance risk or financial risk or both. Insurance contracts are those contracts that transfer significant insurance risk. Such contracts may also transfer financial risk. As a general guideline, NYLIP defines as significant insurance risk the possibility of having to pay benefits on the occurrence of an insured event that are at least 10.00% more than what would be payable if the policy was surrendered. Investment contracts are those contracts that transfer financial risk with no significant insurance risk.

37 Based on NYLIP guidelines, all products in the portfolio are considered insurance contracts, including unit-linked products, which contain features that make use of funds specifically segregated for the benefit of unit-linked policyholders. Insurance Contracts Recognition and measurement Premiums arising from these contracts are recognized as revenue when received or on the issue date of insurance policies for first year premiums. For renewal business, premiums are recognized as revenue when still in force and in the process of collection based on the historical persistency rate. Premiums are shown before deduction of commissions. Claims and benefits are recorded as expense when incurred. They are set-up when notices of claims have been received and dividends have been earned or when policies reach maturity. For unpaid claims and benefits, a provision is made for the estimated cost of all claims and dividends notified but not settled at the statement of condition less reinsurance recoveries, using the information available at the time. Provision is also made for the cost of claims incurred but not reported (IBNR) until after the statement of condition date based on NYLIP s experience and historical data. Differences between the provision for outstanding claims at the statement of condition date and subsequent revisions and settlements are included in the statement of income in later years. Policy and contract claims payable forms part of the liability section of the statement of condition under Insurance provisions. Aggregate reserve for life policies represents the accumulated total liability for policies in force on the statement of condition date. Such reserves are established at amounts adequate to meet the estimated future obligations of all life insurance policies in force. The reserves are calculated using actuarial methods and assumptions in accordance with statutory requirements and as approved by the IC, subject to the minimum liability adequacy test. A number of insurance contracts are participating and contain a discretionary participating feature (DPF). This feature entitles the contract holder to receive, as a supplement to guaranteed benefits, annual policy cash dividends: - that are credited at each policy anniversary, as long as the policy is in force; - whose amount is not guaranteed and subject to review by NYLIP; and - that represent a portion of the theoretical underwriting and investment gains from a specified pool of contracts. Local statutory regulations and the terms and conditions of these contracts set out the bases for the determination of the annual cash dividends at the time the product is priced. NYLIP may exercise its discretion to revise the dividend scale in consideration of the emerging actual experience on each block of participating policies. Reserve for dividends to policyholders on contracts with DPF is shown in the statement of condition under Insurance provisions. There is no statutory requirement as to the level of eligible surplus that may be attributed to participating policyholders. The amount distributed to individua l contract holders is at the discretion of NYLIP, subject to the endorsement of the Chief Finance Officer and approval by the board of directors (BOD).

38 Unit-linked insurance contracts insure human life events (for example death or survival) over a long duration. However, insurance payments are recognized directly as deposit liabilities. These liabilities are increased by further payments and increases in the unit prices and are decreased by administration fees, cost of insurance (COI) charges, and any withdrawals. These liabilities are the policyholders account values. The COI charges deducted in each period from the contract holders as a group are based on established mortality tables and are considered adequate to cover the expected total death benefits in excess of the contract account balances. A unit-linked insurance contract is an agreement whereby payments less charges are used to buy units of a chosen investment fund. The liability for such contracts is adjusted for all changes in the fair value of the underlying assets. Revenue consists of fees deducted for mortality, policy administration and surrender charges. Changes in the unit prices credited to the account balances and excess benefit claims in excess of the account balances incurred in the period are charged as expenses in the statement of income. Acquisition costs Commissions and other acquisition costs are expensed when incurred. Liability adequacy test At each statement of condition date, liability adequacy tests are performed following the provisions of PFRS 4, Insurance Contracts, to ensure the adequacy of the contract liabilities. In performing these tests, current best estimates of future contractual cash flows and administration expenses, as well as investment income from the assets backing such liabilities, are used. Any deficiency is immediately charged against income by establishing a provision for losses arising from liability adequacy tests. The adequacy of the liability on insurance contracts is tested based on the pricing assumptions set out at the inception of the contract. When the liability adequacy test requires the adoption of a new set of revised best estimate assumptions, such assumptions are used for the subsequent measurement of these liabilities. Reinsurance contracts held Contracts entered by NYLIP with reinsurers which compensate NYLIP for losses and meet the classification requirements for insurance contracts are classified as reinsurance contracts held. Insurance contracts entered into by NYLIP under which the contract holder is another insurer (inward reinsurance) are classified as insurance contracts. The benefits to which NYLIP is entitled under its reinsurance contracts held are recognized as reinsurance assets. These assets consist of due from reinsurers (classified within Loans and receivable) and reinsurers share in insurance liabilities. Amounts recoverable from or due to reinsurers are measured consistently with the amounts associated with the reinsured insurance contracts and in accordance with terms of each reinsurance contract. Reinsurance liabilities are primarily premiums payable for reinsurance contracts and are recognized as an expense upon recognition of related premiums.

39 NYLIP assesses its reinsurance assets for impairment annually. If there is objective evidence that the reinsurance asset is impaired, NYLIP reduces the carrying amount of the reinsurance asset to its recoverable amount and recognizes that impairment loss in the statement of income. NYLIP gathers the objective evidence that a reinsurance asset is impaired using the same process adopted for financial assets held at amortized cost. The impairment loss is also calculated following the same method used for these financial assets. Receivables and payables related to insurance contracts Receivables and payables are recognized when due. These include amounts due to and from agents, brokers and insurance contract holders. Leases The determination of whether an arrangement is, or contains a lease is based on the substance of the arrangement and requires an assessment of whether the fulfillment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset. A reassessment is made after inception of the lease only if one of the following applies: (a) There is a change in contractual terms, other than a renewal or extension of the arrangement; (b) A renewal option is exercised or extension granted, unless the term of the renewal or extension was initially included in the lease term; (c) There is a change in the determination of whether fulfillment is dependent on a specified asset; or (d) There is a substantial change to the asset. Where a reassessment is made, lease accounting shall commence or cease from the date when the change in circumstances gave rise to the reassessment for scenarios (a), (c) or (d) above, and at the date of renewal or extension period for scenario (b). For arrangements entered into prior to January 1, 2005, the date of inception is deemed to be January 1, 2005 in accordance with the transitional requirements of Philippine Interpretation IFRIC 4. Group as Lessee Finance leases, which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item, are capitalized at the inception of the lease at the fair value of the leased property or, if lower, at the present value of the minimum lease payments and included in Property and equipment account with the corresponding liability to the lessor included in Other liabilities account. Lease payments are apportioned between the finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly to Interest expense. Capitalized leased assets are depreciated over the shorter of the estimated useful lives of the assets or the respective lease terms, if there is no reasonable certainty that the Group will obtain ownership by the end of the lease term. Leases where the lessor retains substantially all the risks and benefits of ownership of the asset are classified as operating leases. Operating lease payments are recognized as an expense in the statement of income on a straight-line basis over the lease term.

40 Group as Lessor Finance leases, where the Group transfers substantially all the risk and benefits incidental to ownership of the leased item to the lessee, are included in the statement of condition under Loans and receivable account. A lease receivable is recognized at an amount equivalent to the net investment (asset cost) in the lease. All income resulting from the receivable is included in Interest income in the statement of income. Leases where the Group does not transfer substantially all the risk and benefits of ownership of the assets are classified as operating leases. Initial direct costs incurred in negotiating operating leases are added to the carrying amount of the leased asset and are recognized over the lease term on the same basis as the rental income. Contingent rents are recognized as revenue in the period in which they are earned. Retirement Benefits The Parent Company has a noncontributory defined benefit retirement plan. The retirement cost of the Parent Company and its subsidiaries is determined using the projected unit credit method. Under this method, the current service cost is the present value of retirement benefits payable in the future with respect to services rendered in the current period. The liability recognized in the statement of condition in respect of defined benefit retirement plan is the fair value of plan assets at the statement of condition date less present value of the defined benefit obligation, together with adjustments for unrecognized actuarial gains or losses and past service costs. The defined benefit obligation is calculated annually by an independent actuary using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rate on government bonds that have terms to maturity approximating the terms of the related retirement liability. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are credited to or charged against income when the net cumulative unrecognized actuarial gains and losses at the end of the previous period exceeded 10.00% of the higher of the defined benefit obligation or the fair value of plan assets at that date. These gains or losses are recognized over the expected average remaining working lives of the employees participating in the plan. Past-service costs, if any, are recognized immediately in income, unless the changes to the retirement plan are conditional on the employees remaining in service for a specified period of time (the vesting period). In this case, the past-service costs are amortized on a straight-line basis over the vesting period. The defined benefit asset or liability comprises the present value of the defined benefit obligation less past service costs not yet recognized and less the fair value of plan assets out of which the obligations are to be settled directly. The value of any asset is restricted to the sum of any past service cost not yet recognized and the present value of any economic benefits available in the form of refunds from the plan or reductions in the future contributions to the plan. Borrowing Costs Borrowing costs are recognized as expense in the year in which these costs are incurred.

41 Provisions and Contingencies Provisions are recognized when the Group has a present obligation (legal or constructive) as a result of a past event and it is probable that an outflow of assets embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Where the Group expects some or all of a provision to be reimbursed, for example, under an insurance contract, the reimbursement is recognized as a separate asset but only when the reimbursement is virtually certain. The expense relating to any provision is presented in the statement of income, net of any reimbursement. If the effect of the time value of money is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognized as an Interest expense. Contingent liabilities and contingent assets Contingent liabilities are not recognized in the financial statements but are disclosed unless the possibility of an outflow of resources embodying economic benefits is remote. Contingent assets are not recognized but are disclosed in the financial statements when an inflow of economic benefits is probable. Income Taxes Current tax Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted as of the reporting date. Deferred tax 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. Deferred tax liabilities are recognized for all taxable temporary differences, including asset revaluations. Deferred tax assets are recognized for all deductible temporary differences, carryforward of unused tax credits from the excess of minimum corporate income tax (MCIT) over the regular corporate income tax (RCIT), and unused net operating loss carryover (NOLCO), to the extent that it is probable that sufficient taxable profit will be available against which the deductible temporary differences and carryforward of unused tax credits from MCIT and unused NOLCO can be utilized. Deferred tax, however, is not recognized on temporary differences that arise from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting income nor taxable income. Deferred tax liabilities are not provided on nontaxable temporary differences associated with investments in domestic subsidiaries and associates. The carrying amount of deferred tax assets is reviewed at each statement of condition date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilized. Unrecognized deferred tax assets are reassessed at each statement of condition date and are recognized to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered.

42 Deferred tax assets and liabilities are measured at the tax rates that are applicable to the period when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the statement of condition date. Current tax and deferred tax relating to items recognized directly in equity are also recognized in equity and not in the statement of income. Deferred tax assets and deferred tax liabilities are offset if a legally enforceable right exists to set off current tax assets against current tax liabilities and deferred taxes related to the same taxable entity and the same taxation authority. Earnings per Share Basic earnings per share (EPS) is computed by dividing net income for the year by the weighted average number of common shares outstanding during the year after giving retroactive effect to stock dividends declared and stock rights exercised during the year, if any. Diluted EPS is calculated by dividing the net income attributable to common shareholders by the weighted average number of common shares outstanding during the year for the effects of dilutive convertible preferred shares. Dividends on Common Shares Dividends on common shares are recognized as a liability and deducted from equity when approved by the respective shareholders of the Parent Company and its subsidiaries. Dividends for the year that are approved after the reporting date are dealt with as an event after the reporting date. Subsequent Events Any post-year-end event that provides additional information about the Group s position at the reporting date (adjusting event) is reflected in the financial statements. Post-year-end events that are not adjusting events, if any, are disclosed when material to the financial statements. Segment Reporting The Group s operating businesses are organized and managed separately according to the nature of the products and services provided, with each segment representing a strategic business unit that offers different products and serves different markets. Financial information on business segments is presented in Note 27. Fiduciary Activities Assets and income arising from fiduciary activities together with related undertakings to return such assets to customers are excluded from the financial statements where the Parent Company acts in a fiduciary capacity such as nominee, trustee or agent.

43 Future Changes in Accounting Policies The Group has not applied the following PFRS and Philippine Interpretations which are not yet effective as of December 31, 2007: PFRS 8, Operating Segments (effective for annual periods beginning on or after January 1, 2009) This PFRS adopts a management approach to reporting segment information. The information reported would be that which management uses internally for evaluating the performance of operating segments and allocating resources to those segments. Such information may be different from that reported in the statements of condition and statements of income and companies will need to provide explanations and reconciliations of the differences. PFRS 8 will replace PAS 14, Segment Reporting. The Group will assess the impact of the standard on its current manner of reporting segment information. PAS 1, (Revised) Presentation of Financial Statements (effective for annual periods beginning on or after January 1, 2009) In accordance with the amendment to PAS 1, the statement of changes in equity shall include only transactions with owners, while all non-owner changes will be presented in equity as a single line with details included in a separate statement. Owners are defined as holders of instruments classified as equity. The amendment to PAS 1 also provides for the introduction of a new statement of comprehensive income that combines all items of income and expense recognized in the statement of income together with other comprehensive income. The revisions specify what is included in other comprehensive income, such as gains and losses on available-for-sale assets, actuarial gains and losses on defined benefit pension plans and changes in the asset revaluation reserve. Entities can choose to present all items in one statement, or to present two linked statements, a separate statement of income and a statement of comprehensive income. PAS 23, (Revised) Borrowing Cost (effective for annual periods beginning on or after January 1, 2009) The revised standard requires capitalization of borrowing costs that relate to a qualifying asset. The transitional requirements of the standard require it to be adopted as a prospective change from the effective date. The Group will assess the impact of the standard on the financial statements. Philippine Interpretation IFRIC 11, PFRS 2 Company and Treasury Share Transactions effective for annual periods beginning on or after March 1, 2007 This Interpretation requires arrangements whereby an employee is granted rights to an entity s equity instruments to be accounted for as an equity-settled scheme by the entity even if (a) the entity chooses or is required to buy those equity instruments (e.g., treasury shares) from another party, or (b) the shareholder(s) of the entity provide the equity instruments needed. It also provides guidance on how subsidiaries, in their separate financial statements, account for such schemes when their employees receive rights to the equity instruments of the parent. The Group does not have any stock option plan and therefore, does not expect this Interpretation to have significant impact to its financial statements.

44 Philippine Interpretation IFRIC 12, Service Concession Arrangements (effective for annual periods beginning on or after January 1, 2008) This Interpretation covers contractual arrangements arising from private entities providing public services and is not relevant to the Group s current operations. Philippine Interpretation IFRIC 13, Customer Loyalty Programmes (effective for annual periods beginning on or after July 1, 2008) This Interpretation specifies how these loyalty programmes should be accounted for. The Group is presently assessing the impact of this Interpretation on the financial statements. Philippine Interpretation IFRIC 14, The Limit on a Defined Benefit Asset (effective for annual periods beginning on or after July 1, 2008) This Interpretation provides general guidelines 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 also explains how this limit, also referred to as the asset ceiling test, may be influenced by a minimum funding requirement. This Interpretation standardizes current practice and ensures that companies recognize an asset in relation to a surplus on a consistent basis. This Interpretation has no impact on the financial statements of the Group as the retirement plan is not funded. 3. Significant Accounting Judgments, Estimates and Assumptions The preparation of the financial statements in accordance with PFRS requires the Group to make judgments and estimates that affect the reported amounts of assets, liabilities, income and expenses and disclosure of contingent assets and contingent liabilit ies at the reporting date. Future events may occur which will cause the judgments and assumptions used in arriving at the estimates to change. The effects of any change in judgments and estimates are reflected in the financial statements as they become reasonably determinable. Judgments and estimates are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Judgments a) Group as lessor under operating leases The Group has entered into commercial property leases on its investment property portfolio. The Group has determined that it retains all the significant risks and rewards of ownership of these properties which are leased out on operating leases. Group as lessee under operating leases The Group has entered into property leases as a lessee for its office premises. The Group has determined that the lessors retained all the significant risks and rewards of ownership of these properties. Finance lease commitment ALFC has determined that it has transferred all the significant risks and rewards of ownership of the properties which are leased out on finance leases.

45 b) Fair value of financial instruments Where the fair values of financial assets and financial liabilities recorded on the statement of condition cannot be derived from active markets, they are determined using a variety of valuation techniques that involve the use of mathematical models. The inputs to these models are taken from observable markets where possible. But where this is not feasible, a degree of judgment is required in establishing fair values. These judgments include consideration of liquidity and model inputs such as correlation and volatility. c) HTM investments The classification under HTM investments requires significant judgment. In making this judgment, the Group evaluates its intention and ability to hold such investments to maturity. If the Group fails to keep these investments to maturity other than in certain specific circumstances - for example, selling an insignificant amount close to maturity - it will be required to reclassify the entire portfolio as AFS investments for the current year and would be unable to classify any financial asset under HTM for the next two years. Refer to Notes 5 and 6 for the information on the market value and carrying value of HTM investments. d) Financial assets not quoted in an active market The Group classifies financial assets by evaluating, among others, whether the asset is quoted or not in an active market. Included in the evaluation on whether a financial asset is quoted in an active market is the determination on whether quoted prices are readily and regularly available, and whether those prices represent actual and regularly occurring market transactions on an arm s length basis. Estimates a) Impairment losses of loans and receivable The Group reviews its impaired loans and receivables quarterly to assess whether additional provision for credit losses should be recorded in the statement of income. Judgment by management is required in the estimation of the amount and timing of future cash flows when determining the level of allowance required. Such estimates are based on assumptions regarding factors which management determines to be good predictors of the counterparty s ability to pay. In addition to allowance provided for individually significant loans and receivables over P=5.00 million, the Group also provides allowance for exposures which are impaired though not yet specifically identified. Collective allowance is based on historical loss experience adjusted by effects of changes in factors that are indicative of incurred losses, based on characteristics of the individual risk groupings. As of December 31, 2007 and December 31, 2006, allowance for credit losses on loans and receivables of the Group amounted to P=1.86 billion and P=5.23 billion, of which P=1.57 billion and P=4.92 billion belong to the Parent Company, respectively. The carrying value of loans and receivable as of the said date amounted to P=62.80 billion and P=63.89 billion for the Group and P=49.60 billion and P=49.31 billion for the Parent Company (see Note 7).

46 b) Fair values of structured debt instruments and derivatives The fair values of structured debt instruments and derivatives that are not quoted in active markets are determined using internal valuation techniques. These internal valuation techniques uses generally accepted market valuation models. For models requiring inputs other than market observable data, management uses estimates. Changes in assumptions about these factors could affect reported fair value of financial instruments. As of December 31, 2007 and 2006, the net fair value of derivatives of the Parent Company that were determined using valuation techniques amounted to negative P=84.56 million and positive P=98.30 million, respectively (see Notes 6 and 19). c) Valuation of unquoted debt investments Valuation of unquoted debt investments is normally based on one of the following:? recent arm s length market transactions;? current fair value of another instrument that is substantially the same;? the expected cash flows discounted at current rates applicable for items with similar terms and risk characteristics; or? other valuation models Refer to Note 6 for the information on the carrying amounts of these investments. d) Impairment of AFS equity investments The Group treats AFS equity investments as impaired when there has been a significant or prolonged declined in the fair value below its cost or where other objective evidence of impairment exists. The determination of what is significant or prolonged requires judgment. The Group treats significant generally a 20.00% decline of the original cost of investment, and prolonged as greater than 6 months. In addition, the Group evaluates other factors, including normal volatility in share price for quoted equities and the future cash flows and the discount factors for unquoted equities. As of December 31, 2007 and 2006, allowance for impairment losses on AFS investments of the Group and Parent Company amounted to P=2.62 million (see Note 6). The carrying value of AFS investments as of said date amounted to P=23.50 billion and P=21.91 billion for the Group, and P=20.57 billion and P=20.37 billion for the Parent Company, respectively (see Note 6).

47 e) Recognition of deferred income taxes Deferred tax assets are recognized for all unused tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilized. Significant management judgment is required to determine the amount of deferred tax assets that can be recognized, based upon the likely timing and level of future taxable profits together with future tax planning strategies. As of December 31, 2007 and 2006, the recognized deferred tax assets of the Group amounted to P= million and P= million, respectively, while deferred tax liability of the Group amounted to P=1.64 billion and P=1.54 billion, respectively. The deferred tax assets of the Parent Company as of December 31, 2007 and 2006 amounted to P= million and P= million, respectively and the deferred tax liability amounted to P=1.61 billion and P=1.49 billion, respectively (see Note 25). The Parent Company s unrecognized deferred tax assets amounted to P=3.61 million and P=4.38 million as of December 31, 2007 and 2006, respectively. f) Present value of retirement obligation The cost of defined benefit pension plan and other post-employment benefits is determined using actuarial valuations. The actuarial valuation involves making assumptions about discount rates, expected rates of return on assets, future salary increases, mortality rates and future pension increases. Due to the long term nature of these plans, such estimates are subject to significant uncertainty. The expected rate of return on plan assets of 9.00% was based on the average historical premium of the fund assets. The assumed discount rates were determined using the market yields on Philippine government bonds with terms consistent with the expected employee benefit payout as of the reporting dates. As of December 31, 2007 and 2006, the present value of the retirement obligation of the Parent Company amounted to P=1.67 billion and P=1.68 billion, respectively. In addition, the present value of the other employee benefits representing accumulated leave absences as of December 31, 2007 and 2006 amounted to P= million and P= million, respectively (see Note 22). g) Impairment of nonfinancial assets Property and equipment and Investment properties The Group assesses impairment on assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The factors that the Group considers important which could trigger an impairment review include the following:? significant underperformance relative to expected historical or projected future operating results;? significant changes in the manner of use of the acquired assets or the strategy for overall business; and? significant negative industry or economic trends The Group recognizes an impairment loss whenever the carrying amount of an asset exceeds its recoverable amount. The recoverable amount is computed using the value in use approach. Recoverable amounts are estimated for individual assets or, if it is not possible, for the cashgenerating unit to which the asset belongs.

48 The useful life and depreciation and amortization method are reviewed periodically to ensure that the period and method of depreciation and amortization are consistent with the expected pattern of economic benefits from items of property and equipment. The carrying values of property and equipment and investment properties follow: Consolidated Parent Company Property and equipment (Note 9) At appraised value P=2,508,622 P=2,507,662 P=2,496,372 P=2,495,412 At cost 1,559,920 1,437,588 1,443,235 1,332,898 Investment properties (Note 10) 5,824,529 5,396,659 5,642,847 5,199,031 h) Goodwill The Parent Company s management conducts an annual review for any impairment in value of the goodwill. Goodwill is written down for impairment where the net present value of the forecasted future cash flows from the business is insufficient to support its carrying value. The Parent Company estimated the discount rate used for the computation of the net present value by reference to its internal cost of capital. As of December 31, 2007, goodwill amounted to P=88.94 million for the Group (see Note 8). i) Estimated useful lives of property and equipment and investment properties The Group reviews on an annual basis the estimated useful lives of buildings, leasehold impairments, furniture, fixtures and equipment and depreciable investment properties based on expected asset utilization as anchored on business plans and strategies that also consider expected future technological developments and market behavior. It is possible that future results of operations could be materially affected by changes in these estimates brought about by changes in the factors mentioned. A reduction in the estimated useful lives of bank premises, furniture, fixtures and equipment and depreciable investment properties would decrease their respective balances and increase the recorded depreciation and amortization expense. j) Contingencies The Group is currently involved in various legal proceedings. The estimate of the probable costs for the resolution of these claims has been developed in consultation with outside counsel handling the Group s defense in these matters and is based upon an analysis of potential results. The Group currently does not be lieve that these proceedings will have a material adverse effect on its financial position. It is possible, however, that future results of operations could be materially affected by changes in the estimates or in the effectiveness of the strategies relating to these proceedings (Note 30).

49 Financial Risk Management Policies and Objectives Introduction The Group activities are principally related to the use of financial instruments. The Group accepts deposits from customers at fixed and floating interest rates, and for various periods, and seeks to earn above-average interest margins by investing these funds in high-quality assets. The Group also seeks to raise its interest margins by obtaining above-average margins, net of allowances, through lending to commercial and retail borrowers with a range of credit standing. Such exposures involve not just loans and advances taken to the statements of condition; the Group also enters into guarantees and other commitments such as letters of credit and performance, and other bonds. The Group trades in financial instruments where it takes positions in traded and over-the-counter instruments, to take advantage of short-term market movements in equities and bonds and in currency and interest rate. The Group enters into interest rate and currency swap and certain currency forwards which are among the generally authorized derivative activities that banks may engaged in as stated under BSP Circular 594. The Group places trading limits on the level of exposure that can be taken in relation to both overnight and intra-day market positions. Risk is inherent in Group activities but it is carefully managed through a process of ongoing identification, measurement and monitoring subject to prudent risk limits and strong control. This procedure of risk management is critical to the Group s continuing profitability and each individual within the Group is accountable for the risk exposures relating to his/her responsibilities. The Group is exposed to credit risk, liquidity risk and market risk. Risk management structure The Group manages risk through a framework of organizational structures and risk metrics and monitoring systems that capture all risks inherent in all its business activities. The following committees and units whose functions are clearly defined are tasked as follows:? The BOD establishes and supervises risk management. It periodically reviews the existing risk policies, approves new ones and decides on issues that are relevant to the process.? The Risk Management Committee (RMC) is mandated by the BOD to perform oversight of risk management role and operate within risk policies developed by it and approved by the BOD. The process requires regular reporting back to the BOD for information and review. It periodically reviews the Bank s risk management infrastructures, metrics, policies, and limits. All risk policy changes and major actions are referred back to the BOD for decision. It supervises the Risk Management Unit s (RMU s) performance of its duties and responsibilities.

50 The structure of the RMC involves a subset of Board members, including non-executive Board Members. The Board members selected are generally with finance background and represent the full BOD in this forum. In each case, the committee may be supported by the following structures: - Special non-executive and external personnel may be invited to be members of the risk committee. These individuals shall be independent risk professionals with special expertise in risk management. - The role of these members is to assist the other Board members on technical matters and to provide an expert, independent and objective overview of risk matters. This is designed to ensure that matters are fully understood and independently reviewed prior to any decisions.? RMU is responsible for carrying out independent risk management functions, including identification, measurement, monitoring and controlling of risks. RMU is headed by the Chief Risk Officer (CRO) who regularly reports to RMC. RMU is further subdivided into three groups covering three major risk areas, namely Market, Credit and Operational Risk.? Internal Audit Department (IAD) plays a crucial role by way of performing regular audit of the Risk Management Unit (RMU). Frequency of periodic audit done by IAD on RMU ranges from 1-2 times a year. This involves periodic assessment of the risk management process employed by RMU, including determination of adequacy, validity and appropriateness of risk measurement metrics, as well as reviewing the depth and quality of risk monitoring and risk control mechanisms in place. Results of periodic audit are elevated to Audit Committee and subsequently to the Board of Directors. IAD audit exceptions and recommendations are used as inputs of RMU in enhancing the risk management system. Another function of IAD is to participate in various cycles of User Acceptance Testing (UAT) by means of working closely with RMU in validating system-generated reports prior to the live implementation of a risk application system or solution. Excessive Concentration Risk Concentrations arise when a number of counterparties belong to a group controlled by a family or a conglomerate or are engaged in similar business activities or activities in the same geographical region, or have some similar economic, political, or other conditions. Concentrations indicate the relative sensitivity of the Group performance to developments affecting a particular industry or geographical location. In order to avoid excessive concentrations of risk the Group s policies and procedures include specific guidelines to focus on maintaining a diversified portfolio, such as the setting of concentration limits.

51 The management of the Group reviews the policies for managing each risk which are summarized as follows: Credit risk Credit risk is the risk that the Group will incur loss because its obligors failed to discharge their contractual obligations. This risk may further be classified as pre-settlement and settlement risk (PSR and SR respectively). PSR is the risk that the obligor will fail to meet the terms of the contract and default before the contract s settlement date, prematurely ending the contract. SR, on the other hand, is the risk that the obligor will fail to deliver the terms of a contract with another party at the time of settlement. SR can be the risk associated with default at settlement and any timing differences in settlement between the Group and the counterparty. The management therefore carefully assesses and manages its exposures to both types of credit risk. The Group has structured the levels of credit risk it undertakes by placing limits on the amount risk accepted in relation to a single or group of obligors, geographical, and industry segments. Such risks are monitored on a continuing basis and subject to annual or more frequent review. Limits on the level of credit risk by product, industry sector and by country are approved regularly by the BOD. The exposure to any one obligor, including banks and brokers is further restricted by sub-limits covering the on and off-balance sheet exposures, and daily delivery risk limits in relation to trading items such as forward foreign exchange contracts. Actual exposures against limits are monitored daily and reported to the RMC at least once a month. Exposure to credit risk is managed through a credit review process wherein a regular analysis of the ability of the obligors and potential obligors to meet interest and capital repayment obligations is performed. Existing limits are adjusted based on the result of the review when appropriate. Exposure to credit risk is also managed in part by obtaining collateral and corporate and personal guarantees. Similarly, the Group manages credit risk through a continuing review of credit policies, systems, and procedures. In compliance with BSP requirements, the Parent Company also adopts an internal credit rating system for the purpose of measuring credit risk for every exposure in a consistent manner as accurately as possible and uses this information as a tool for business and financial decisionmaking. This rating system covers companies with assets of over P=15.00 million with audited financial statements by Securities and Exchange Commission (SEC)-accredited auditors. A separate risk scoring system is used for small and medium companies with assets of P=15.00 million and below. The Parent Company adopts the Banker s Association of the Philippines (BAP) model which has been approved by the BSP as a minimum standard for an internal risk rating system under BSP Circular 439. This rating system has two components namely: (a) Borrower Risk Rating System which provides an assessment of credit risk without considering the security arrangements and; (b) Facility Risk Rating which takes into account the collateral and other credit risk mitigants. The rating scale consists of 10 grades, the top six of which falls under unclassified accounts and the bottom four under classified accounts, consistent with regulatory provisioning guidelines.

52 Unclassified loans These are loans that do not have a greater-than normal risk and do not possess the characteristics of classified loans as defined below. The borrower has the apparent ability to satisfy his obligations in full and therefore no loss in ultimate collection is anticipated. Classified loans These are loans which possess the characteristics outlined hereunder. Classified loans are subdivided into (1) loans especially mentioned; (2) substandard; (3) doubtful; and (4) loss. 1) Loans especially mentioned These are loans and advances that have potential weaknesses that deserve management s close attention. 2) Substandard These are loans or portions thereof which appear to involve a substantial and unreasonable degree of risk to the Bank because of unfavorable record or unsatisfactory characteristics. There exists in such loans the possibility of future loss to the Bank unless given closer supervision. Those classified as Substandard must have a well-defined weakness or weaknesses that jeopardize their liquidation. Such well-defined weaknesses may include adverse trends or development of financial, managerial, economic or political nature, or a significant weakness in collateral. 3) Doubtful These are loans or portions thereof which have the weaknesses inherent in those classified as Substandard, with the added characteristics that existing facts, conditions, and values make collection or liquidation in full highly improbable and in which substantial loss is probable. 4) Loss These are loans or portions thereof which are considered uncollectible or worthless and of such little value that their continuance as bankable assets is not warranted although the loans may have some recovery or salvage value. The amount of loss is difficult to measure and it is not practical or desirable to defer writing off these basically worthless assets even though partial recovery may be obtained in the future. Stress testing analyses In addition to regular monitoring and management reports on limits utilization, the Parent Company also performs regular stress testing analyses on its credit risk exposure. What-if scenarios are performed to test the effect of defaults and possible obligor rating downgrades on liquidity and capital adequacy. Credit-related commitment risks Commitment to extend credit represents unused portions of authorizations to extend credit in the form of loans, guarantees, or letters of credit. With these, the Group is potentially exposed to loss in the amount equal to the total unused commitments. However, the likely amount of potential loss is less than the total unused commitments, as most commitments to extend credit are contingent upon customers maintaining specific credit standards. The Group monitors the term to maturity of credit commitments because long-term commitments generally have a greater degree of credit risk than short-term commitments.

53 Maximum exposure to credit risk without taking into account the collateral and credit enhancements The table below shows the maximum exposure to credit risk for the components of the statements of condition, including derivatives. The maximum exposure is shown, before the effect of mitigation through the use of master netting and collateral agreements. Consolidated Parent Due from BSP P=14,067,457 P=13,222,310 Due from other banks 6,870,230 2,351,313 Interbank loans receivable 10,835,073 11,057,198 Derivative assets 355, ,302 Financial assets at FVPL Debt securities-government 3,024,495 3,024,495 Debt securities-private 969, ,987 Equity securities 83,556 83,556 AFS investments Debt securities-government 12,707,733 9,857,559 Debt securities-private 10,559,566 10,518,131 Equity securities 235, ,185 HTM investments Debt securities-government 4,419,020 3,997,844 Debt securities-private 622, ,968 Loans and receivable Corporate lending 36,664,974 27,630,438 Small business lending 8,092,500 5,427,076 Consumer lending 8,101,442 7,147,519 Other receivables 9,938,488 9,393,246 Other assets 892, ,434 Total 128,441, ,124,561 Contingent accounts* 12,883,236 11,342,915 Commitments* 595, ,599 Total 13,479,049 11,885,514 Total Credit Risk Exposure P=141,920,053 P=118,010,075

54 December 31, 2006 Consolidated Parent Due from BSP P=12,545,552 P=12,090,540 Due from other banks 4,568,710 2,265,375 Interbank loans receivable 15,781,577 13,513,377 Derivative assets 267, ,771 Financial assets at FVPL 12,577,351 12,577,351 AFS investments 21,906,913 20,371,472 HTM investments 3,557,563 2,720,677 Loans and receivable 63,886,630 49,313,254 Other assets 303, ,957 Total 135,395, ,338,774 Contingent accounts* 11,917,365 9,984,050 Commitments* 651, ,563 Total 12,568,523 10,613,613 Total Credit Risk Exposure P=147,963,748 P=123,952,387 *These include deficiency claims receivable, inward bills for collection, unused commercial letters of credit, outstanding guarantees issued, outward bills for collection, late deposits/payment received and confirmed export letters of credit and others. Refer to Note 30 for the equivalent peso contractual amounts. The fair values of derivatives shown on the statements of condition represent the current credit risk exposure but not the maximum risk exposure that could rise in the future as a result of the change in values. Concentration of risks of financial assets with credit risk exposure An industry analysis of concentrations of credit risk at the reporting date is shown below: Parent Consolidated Company Manufacturing (various industries) P=21,782,024 P=19,815,356 Wholesale and retail trade 15,596,065 13,253,505 Real estate, renting and business activities 14,621,051 6,983,696 Transportation, storage and communication 5,620,886 5,445,762 Other community, social and personal activities 3,940,525 3,004,204 Agricultural, hunting and forestry 2,272,170 2,264,427 Financial institutions/intermediaries 41,254,003 32,042,019 Others* 38,949,221 36,973, ,035, ,782,899 Less: Contra-asset accounts 254, ,509 Allowance for credit and impairment losses 1,861,662 1,574,315 Total Credit Risk Exposure 141,920,053 P=118,010,075 *Others include community service and miscellaneous business

55 Parent Consolidated Company Philippines P=112,410,665 P=107,480,230 Asia 11,602, ,073 United States 5,809, ,082 Europe 734, ,556, ,897,385 Less: Contra-asset accounts 254, ,509 Allowance for credit and impairment losses 1,861,662 1,574,315 Total 128,441, ,124,561 Contingent accounts 12,883,236 11,342,915 Commitments 595, ,599 Total 13,479,049 11,885,514 Total Credit Risk Exposure 141,920, ,010,075 * Others include community service and miscellaneous business Note 7 shows information on the concentration of credit on loans and receivables from customers. Collateral and other credit risk mitigation The amount and type of collateral required depends on an assessment of the credit risk of the obligor. The Group implements certain requirements regarding the acceptability of types of collateral and valuation. Collateral comes in the form of financial or non-financial assets. The main types of collateral obtained include cash or securities, charges over real estate properties, inventory and trade receivables, and mortgages over residential properties. The Group also obtains guarantees from parent companies for loans of borrowing entities belonging to a group of companies. The Group monitors the market value of collateral, and request for additional collateral in accordance with the underlying agreement, and monitors the market value of collateral obtained during its review of the adequacy of the allowances for credit losses. It is the Group s policy to dispose of investment properties in an orderly fashion. The proceeds are used to reduce or repay outstanding claim. The credit quality of financial assets is managed by the Group using internal and external credit ratings. The table below shows the credit quality by class of asset for loan-related balance sheet lines, based on the Group s credit rating system. Consolidated Satisfactory Acceptable Watchlist Unrated Total Loans and receivables Corporate lending P=7,243,954 P=15,437,438 P=4,661,363 P=10,678,901 P=38,021,656 Small business lending 805,700 3,571,216 1,517,311 2,611,037 8,505,264 Consumer lending 1,491,585 4,410, ,077 1,438,711 8,186,801 Other receivables 6,518,027 3,678,929 10,196,956 Total P=9,541,239 P=29,937,109 P=7,024,751 P=18,407,578 P=64,910,677

56 Parent Company Satisfactory Acceptable Watchlist Unrated Total Loans and receivables Corporate lending P=6,996,209 P=9,881,743 P=4,611,922 P=7,198,221 P=28,688,095 Small business lending 620,929 1,396,316 1,133,749 2,659,254 5,810,248 Consumer lending 1,413, , ,456 4,871,174 7,221,288 Other receivables 6,342,212 3,306,641 9,648,853 Total P=9,030,996 P=17,815,071 P=6,487,127 P=18,035,290 P=51,368,484 The Parent Company initially adopted the BAP CRRS model comprised of ten (10) categories which were regrouped and presented based on the following levels of quality: Satisfactory - consists of ratings 1 to 4: excellent, good, strong, and satisfactory, wherein the borrower has low probability of default and could withstand normal business cycle; Acceptable - consists of ratings from acceptable and specially mentioned where the risk elements of the Parent Company are sufficiently pronounced. Borrowers could withstand normal business cycles but any prolonged unfavorable economic scenario would create an immediate deterioration beyond acceptable levels; Watchlist - consists of ratings under substandard, doubtful, and loss, the borrowers for which unfavorable industry or company-specific risk factors represent a concern; and Unrated - represents borrowers that were not yet classified but will be covered in the subsequent phase of CRRS. Unquoted debt securities booked under Loans and receivable are those issued by the governmentowned and controlled corporations on which the Parent Company places high rating. Refer also to Note 2 for the loan impairment policy of the Parent Company. Credit ratings from Standard and Poors of Due from other banks and Investment securities: Consolidated December 31, 2007 AAA** AA-A BBB Below BBB and Unrated Total Due from BSP and other banks P=14,448,667 P=2,982,947 P= P=14,341,146 P=31,772,760 Derivative assets* 1,981 31, , ,366 Financial assets at FVPL Debt securities - government 165,481 2,859,014 3,024,495 Debt securities - private 42, ,412 19, , ,987 Equity securities 83,556 83,556 AFS investments Debt securities - government 84, ,902 1,198,179 11,299,041 12,707,733 Debt securities -private 359,508 2,671,914 2,244,586 5,283,558 10,559,566 Equity securities 4,258 31, , ,862 HTM investments Debt securities - government 387,124 18,516 4,013,380 4,419,020 3 Debt securities - private 622, ,753 Total P=15,487,666 P=6,292,930 P=3,525,153 P=39,445,349 P=64,751,098

57 Parent Company December 31, 2007 AAA** AA-A BBB Below BBB and Unrated Total Due from BSP and other banks P= P=1,277,393 P= P=25,353,428 P=26,630,821 Derivative assets* 10, , ,302 Financial assets at FVPL Debt securities - government 165,481 2,859,014 3,024,495 Debt securities - private 42, ,412 19, , ,987 Equity securities 83,556 83,556 AFS investments Debt securities -government 84, , ,080 9,510,966 9,857,559 Debt securities -private 346,980 1,717,008 2,127,829 6,326,314 10,518,131 Equity securities 199, ,185 HTM investments Debt securities -government 18,516 3,979,328 3,997,844 3 Debt securities - private 621, ,968 Total P=639,347 P=3,626,231 P=2,293,429 P=49,676,841 P=56,235,848 * Unrated derivative assets pertain to swaps and forwards. ** Investment securities under AAA rating relate to nonresident government, private debt securities and placements with BSP. Set out below is an analysis of the Group s Loans and receivable, the gross and net (of allowances for impairment) amounts of individually impaired assets by risk grade. Consolidated Parent Gross Net Gross Net Satisfactory P=691,221 P=689,054 P= P= Acceptable 186, , , ,488 Watchlist 1,496, ,571 1,199, ,258 P=2,373,760 P=1,387,962 P=1,331,376 P=391,746 The table below shows the aging analysis of past due but not impaired loans and receivable per class and the fair value of the collateral that the Group and Parent Company held as of December 31, days 91-1 days Consolidated 181 days- 1 year More than 1 year Total Fair Market Value Corporate lending P=64,838 P=4,773 P=5,000 P=39,033 P=113,644 P=22,754 Small business lending 22,625 40,189 4,168 66, Consumer lending ,934 5,068 17, P=87,988 P=56,896 P=5,000 P=48,269 P=198,153 P=22, days 91-1 days Parent Company 181 days- 1 year More than 1 year Total Fair Market Value Corporate lending P=5,800 P=4,443 P=5,000 P=850 P=16,093 P=21,954 Small business lending P=5,800 P=4,443 P=5,000 P=890 P=16,133 P=22,017

58 Liquidity Risk Liquidity risk is the risk that the Group will be unable to meet its payment obligations when they fall due under normal and stress circumstances. To limit this risk, management has arranged diversified funding sources in addition to its core deposit base, manages assets with liquidity in mind, and monitors future cash flows and liquidity on a daily basis. This incorporates an assessment of expected cash flows and the availability of high grade collateral which could be used to secure additional funding if required. The Group maintains a portfolio of highly marketable and diverse assets that can be easily liquidated in the event of an unforeseen interruption of cash flow. The Group also has committed borrowing facilities in the form of commercial paper facilities and other stand-by facilities that it can access to meet liquidity needs. In addition, the Group maintains a statutory deposit with the Bangko Sentral ng Pilipinas equal to 10.00% of customer deposits. The liquidity position is assessed and managed under a variety of scenarios, giving due consideration to stress factors relating to both the market in general and specifically to the Group. The most important of these is to maintain limits on the ratio of net liquid asset to customer liabilities, set to reflect market conditions. Net liquid assets consist of cash, short term bank deposits and liquid debt securities available for immediate sale, less deposits for banks and other issued securities to mature within the next month. The liquidity ratios of the Parent Company are as follows: Parent Average during the period 67.29% 65.99% Highest Lowest The Parent Company uses a set of tools to manage its liquidity risk, as follows: Maximum Cumulative Outflow (MCO) is defined as the amount of prospective funding that the bank will require at pre-specified future dates in normal operating environment. This monetary amount is a measure of liquidity gap (difference) between the maturing liabilities and assets. In an MCO report, accounts are bucketed according to their residual maturity. On and off-balance sheet accounts are incorporated in MCO analysis. This is prepared on a per currency basis and institutional basis. An MCO Gap Limit complements the MCO tool. Stress testing on its liquidity position is periodically done to determine the potential effects of extreme market developments on the value of market-risk sensitive exposures and the amount of economic capital needed to cover such a situation. Liquidity Contingency Plan is also in place. This covers both quantitative and procedural elements. Quantitative elements include establishing the estimated value of funding requirements and sources under stress conditions, as well as the expected receipt from selling assets under forced-sale conditions and adjusting the funding cost of liabilities. Procedural elements deal with roles and responsibilities at various levels of management, actions to be undertaken, and communication requirements for internal and external audiences.

59 Analysis of financial liabilities by remaining contractual maturities The table below summarizes the maturity profile of the Group s financial liabilities as of December 31, 2007 based on contractual undiscounted repayment obligations. See Note 19 for the expected maturities of these liabilities. Consolidated On Demand Less than 3 months 3-12 months 1-2 years Over 2 years Total Deposit liabilities P=58,891,119 P=18,177,194 P=40,947,426 P=31,214 P= P=118,046,953 Derivative liabilities Pay 6,112,855 6,127,221 12,240,076 Receive 5,864,589 6,026,880 11,891,469 Bills payable 710,578 1,299,435 43,832 2,053,845 Marginal deposits 196, ,218 Manager s checks and demand drafts 554, ,633 Accrued taxes, interest and other expenses 1,354,770 21,069 1,375,839 Subordinated debt 51,600 2,115,600 2,167,200 Insurance provision 1,229,919 1,229,920 Other liabilities 2,535, ,081 98,834 3,160,730 Total Financial Liabilities P=65,472,464 P=31,475,730 P=53,723,040 P=31,214 P=2,214,434 P=152,916,883 Parent Company On Demand Less than 3 months 3-12 months 1-2 years Over 2 years Total Deposit liabilities P=48,335,505 P=15,741,402 P=37,459,252 P=31,214 P= 101,567,373 Derivative liabilities* Pay 2,765,760 4,755,456 7,521,216 Receive 5,861,760 6,026,880 11,888,640 Bills payable 704,578 28,774 33, ,086 Marginal deposits 97,611 97,611 Manager s checks and demand drafts 536, ,990 Accrued taxes, interest and other expenses 1,082,300 1,082,300 Subordinated loans 51,600 2,115,600 2,167,200 Other liabilities 2,241, ,242,578 Total Financial Liabilities P=52,998,974 P=24,398,284 P=48,326,922 P=31,214 P=2,115,600 P=127,870,994 * Amounts are translated using spot rate as of December 31, The table below shows the contractual maturity of the Parent Company s contingent liabilities and commitments as of December 31, 2007 and On Demand Less t han 3 months 3 to 12 months Total Contingent liabilities P=2,995,460 P=4,849,187 P=3,498,268 P=11,342,915 Commitments 542, ,599 P=3,538,059 P=4,849,187 P=3,498,268 P=11,885, On Demand Less than 3 months 3 to 12 months Total Contingent liabilities P=346,013 P=5,808,113 P=3,829,926 P=9,984,052 Commitments 629, ,563 P=346,013 P=5,808,113 P=4,459,489 P=10,613,615 Market Risk Market risk is the potential loss that may arise from decrease in earning due to the decline in prices or present value of future cash flows of financial instruments. The value of these financial instruments may change as a result of changes in interest rates, foreign exchange rates, equity prices and other market changes. The Group s market risk originates from its inventory of foreign exchange, debt and equity securities and free standing derivatives.

60 Market Risk in the Trading Book The BOD has set limits on the level of market risk acceptable to the Parent Company that is monitored by the Treasury Group on a daily basis. Exposure to market risk is estimated using the value-at-risk (VaR) methodology. VaR is a technique that estimates the potential losses that could occur on risk positions as a result of movements in market rates and prices over a specified time horizon at a given confidence level under normal market conditions. On a daily basis,var is calculated and monitored by RMU. VaR is also reported to the RMC and BOD, on a monthly basis, along with the VaR limits established for the period and the exposures against these VAR limits and the results of quarterly backtesting employed. VaR assumptions/parameters The Parent Company utilizes an automated risk management solution to calculate VaR using a parametric method which assumes that returns follow a normal distribution. The VaR model makes use of a 99.00% confidence level and a one-day holding period for foreign exchange contracts exposures while a ten-day holding period for equity and fixed income exposures. This means that under a normal distribution assumption on asset return, the Parent Company s losses on trading activity will exceed the calculated VaR on 1 out of 100 trading days. VaR is an integral part of the Parent Company s market risk management through the VaR limits established for all trading operations. Management reviews daily exposures against the VaR limits. Foreign exchange contracts Interest rate fixed income Equity Total December 31, 2007 P=8,059 P=73,744 P=11,043 P=92, Average Daily 3, ,562 11, , Highest 19, ,546 14, , Lowest ,267 48,117 The high and low of the total trading portfolio may not equal to the sum of the individual components as the high and lows of the individual portfolios may have occurred on different trading days. The Bank s total VaR does not consider the correlation among market risk factors. Objectives and limitations of the VaR methodology The use of VaR has limitations because this model makes use of volatilities based on historical market prices and assume that future price movements will follow a normal distribution. Hence, it may not clearly predict the future changes in risk factors and the effect of large market movements may be underestimated if the changes in risk factors fail to align with the normal distribution assumption. The VaR may also be under or over-estimated due to the use of assumptions on the risk factors. Likewise, the Parent Company s positions throughout the day varies but the VaR calculated only represent the positions as of end-of-day and it does not account for losses that may occur beyond the 99.00% confidence level.

61 Due to these limitations, the actual trading results may differ from the VaR calculations; in particular it does not provide a meaningful indication of possible losses during stressed market conditions. Hence, to determine the reliability of the VaR model, quarterly backtesting is employed. This exercise examines the accuracy of VaR estimates with the given assumptions and parameters. Given these limitations, the Parent Company employs stress testing to determine possible decline in the value of the portfolio which may decline under abnormal market conditions to supplement the VaR. Currently, the stress test adopts sensitivity analyses guided by the following scenarios: Desk Foreign Exchange Fixed Income Equity Scenario 10.00% adverse movement of the USD:PHP spot rate 150 basis point shift of the yield curve 15.00% decline in the PSE Index The Parent Company reviews this model annually or as deemed necessary based on BODapproved policies. Market Risk in the Non-Trading Book Interest rate risk Interest rate risk arises from the possibility that changes in interest rates will affect future cash flows or fair values of financial instruments. The Group follows a set of policies in managing its assets and liabilities so as to ensure that exposure to fluctuations in interest rates are kept within acceptable limits. The Group uses two major risk measurement tools to manage interest rate risk, namely Interest Rate Gap (IRG) and Earnings-at-Risk (EAR). The IRG report shows the net difference between interest income and interest expense in various interest rate bands/buckets. It gives a snapshot of how much net interest spread can be realized per interest rate band. All interest rate risk sensitive assets, liabilities and off-balance sheet accounts are identified and the weighted average yield of all relevant accounts is determined afterwards. EAR refers to the risk exposure in the Group s accrual books arising from repricing gaps. Since the EAR measures the sensitivity of assets and liabilities to interest rate swings, EAR effectively measures the potential adverse effects on earnings using preset confidence levels. It is measured using the Cost-to-Close concept. Cost-to-close is a calculation of what the actual cost would be of having to liquidate (or close) outstanding asset, liability and off-balance sheet contracts at the prevailing market rates. An EAR is constructed by classifying all rate-sensitive assets and liabilities according to their repricing dates or maturity, whichever is earlier. Repricing gap refers to the difference between rate sensitive assets and liabilities per repricing bucket/column. Per Bank of International Settlements recommendation, the Group uses 99.00% confidence level for vola tility/standard deviation computation of benchmark rate. The Group s EAR model also assumes that defeasance period is one month.

62 All repriceable (rate-sensitive) accounts are affected by any rate changes, consequently, affecting the Group s Net Interest Income. For example, if interest rates move against/in favor of the Group s positions, asset yields and liability costs will change. Whether the net interest income will increase or decrease depends on the size of the repricing gap. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. Accordingly, during a year of rising interest rates, a company with a positive gap would be better positioned than one with a negative gap to invest in higher yielding assets more quickly than it would need to refinance its interest-bearing liabilities. During a year of falling interest rates, a company with a positive gap would tend to see its assets repricing at a faster rate than one with a negative gap, which may restrain the growth of its net income. In addition, an EAR limit is set by the BOD to minimize the extent of volatility in the Group s net interest income. EAR limit is effectively the monetary amount of risk (or potential loss) deemed tolerable by top management for the accrual portfolios. An EAR limit system is designed to automatically decrease the size of open risk positions when increases in market volatility occur. EAR calculated from repricing rate gap positions is to be compared against EAR limits. An excess over the limit means that the open gap position, even within its nominal limit, has potential to cause more loss than management can accept, and must be trimmed down. The Parent Company monitors its exposure to fluctuations in interest rates by measuring the impact of interest rate movements on its interest income. This is done by modeling the impact of various changes in interest rates to the Parent Company s interest-related income and expenses. The following table demonstrates the Parent Company s sensitivity to a reasonably possible change in interest rates (amounts in Thousands): Impact of Changes in Interest Rates on Net Income Increase (Decrease) in Basis Points PHP (4,889,023) (2,444,512) 2,444,512 4,889,023 USD (3,100,829) (1,550,414) 1,550,414 3,100,829 EUR (356,198) (178,099) 178, ,198 Others (414,053) (207,027) 207, ,053 Impact of Changes in Interest Rates on Equity Increase (Decrease) in Basis Points (In Thousand) PHP 252, ,357 (120,351) (236,899) USD 640, ,217 (295,266) (576,050) EUR 153,581 74,670 (70,868) (138,214) Currency risk Currency risk is the risk that the value of financial instruments will fluctuate due to changes in foreign exchange rates. It is inherent in the Parent Company s books that it holds financial instruments of varied currencies. These exposures are monitored on a daily basis.

63 The Group takes on exposure to effects of fluctuations in the prevailing foreign currency exchange rates on its financial position and cash flows. Foreign currency liabilities generally consist of foreign currency deposits in the Group's FCDU, accounts made in the Philippines or which are generated from remittances to the Philippines by Filipino expatriates and overseas Filipino workers who retain, for their own benefit or for the benefit of a third party, foreign currency deposit accounts with the Group and foreign currencydenominated borrowings appearing in the RBU of the Group. Foreign currency deposits are generally used to fund the Group s foreign currency-denominated loan and investment portfolio in the FCDU. Banks are required by the BSP to match the foreign currency assets with the foreign currency liabilities held through FCDUs. In addition, the BSP requires a 30.00% liquidity reserve on all foreign currency liabilities held through FCDUs. Outside the FCDU, the Group has additional foreign currency assets and liabilities in its foreign branch network. The Group policy is to maintain foreign currency exposure within acceptable limits and within existing regulatory guidelines. The Group believes that its profile of foreign currency exposure on its assets and liabilities is within conservative limits for a financial institution engaged in the type of business in which the Group is engaged. The following table summarizes the Group and the Parent Company s exposure to foreign exchange risk as of December 31, 2007 and Included in the table are the Group and the Parent Company s assets and liabilities at carrying amounts, categorized by currency (amounts in thousand US dollars): Consolidated 2007 USD Others Total Assets Cash and due from BSP 68,651 32, ,250 Due from other banks 103,356 23, ,920 Interbank loans receivable 97,811 1,585 99,396 Derivative assets 8, ,104 Financial assets at FVPL 33,493 3,025 36,518 AFS investments 369,432 52, ,396 HTM investments 23, ,732 Loans and receivable 306,545 83, ,379 Other assets 6,723 10,092 16,815 Total assets 1,017, ,137 1,225,510 Liabilities Deposit liabilities 736,349 90, ,020 Derivative liabilities 6, ,552 Bills payable 40,884 14,730 55,614 Accrued taxes, interest and other expenses 3, ,579 Other liabilities 67,366 2,045 69,411 Total liabilities 854, , ,176 Net Exposure 163, , ,334

64 Consolidated 2006 USD Others Total Assets Cash and due from BSP 31, , ,482 Due from other banks 41,422 51,760 93,182 Interbank loans receivable 100, , ,876 Derivative assets 3,769 3,769 Financial assets at FVPL 109, , ,975 AFS investments 330, , ,807 HTM investments 27,531 45,028 72,559 Loans and receivable 245,430 1,057,708 1,303,138 Other assets 23,841 8,984 32,825 Total assets 914,662 2,065,951 2,980,613 Liabilities Deposit liabilities 746,712 1,811,831 2,558,543 Derivative liabilities 1,764 1,764 Bills payable 36,088 2,444 38,532 Accrued taxes, interest and other expenses 2,315 23,895 26,210 Other liabilities 66,513 41, ,059 Total liabilities 853,392 1,879,716 2,733,108 Net Exposure 61, , ,505 Parent Company 2007 USD Others Total Assets Cash and due from BSP 14,245 1,348 15,593 Due from other banks 26,104 8,503 34,607 Interbank loans receivable 72,438 1,585 74,023 Derivative assets 8,051 8,051 Financial assets at FVPL 33,493 3,025 36,518 AFS investments 344,020 52, ,856 HTM investments 13, ,354 Loans and receivable 97,768 2, ,314 Other assets 2, ,745 Total assets 612,540 70, ,061 Liabilities Deposit liabilities 456,505 5, ,862 Derivative liabilities 6,547 6,547 Bills payable 3,114 14,730 17,844 Accrued taxes, interest and other expenses 1, ,395 Other liabilities 59,700 1,338 61,038 liabilities 527,260 21, ,686 Net Exposure 85,280 49, ,375

65 Parent Company 2006 USD Others Total Assets Cash and due from BSP 13, , ,583 Due from other banks 11,732 34,472 46,204 Interbank loans receivable 100, , ,614 Derivative assets 3,769 3,769 Financial assets at FVPL 108, , ,292 AFS investments 330,772 84, ,490 HTM investments 14,150 41,340 55,490 Loans and receivable 44, ,514 1,006,350 Other assets 22,223 3,025 25,248 Total assets 649,506 1,763,534 2,413,040 Liabilities Deposit liabilities 531,711 1,681,796 2,213,507 Derivative liabilities 1,764 1,764 Bills payable 2, ,441 Accrued taxes, interest and other expenses 1,481 27,456 28,937 Other liabilities 66,394 35, ,138 Total liabilities 603,966 1,745,821 2,349,787 Net Exposure 45,540 17,713 63,253 The table below indicates the currencies to which the Parent Company had substantial exposures as of December 31, 2007 on its non-trading book. The result calculates the effect of a reasonably possible change in the spot rates on currencies with significant exposures, when all other variables are held constant. Negative values in the table reflect a potential reduction in income and equity while a positive amount reflects a potential increase. Effect on income before tax (in millions) Effect on income before tax (in millions) Currency Change in spot rate Change in spot rate USD (10.00%) (P= 2.158) 12.00% P=2.590 JPY (2.50) (0.561) GBP (2.50) (2.403) EUR (1.50) (17.988) There is no other effect to equity other than the effect of a reasonably possible change in the spot rates on currencies to income before tax. Prepayment Risk Prepayment risk in the Parent Company is deemed to be relatively low. The Parent Company projects prepayment ratio by way of using historical data on loan prepayment rate. The Parent Company s loan prepayment rate is less than of the total loan portfolio (equal to 0.13%). In view of this, management believes that 0.13% is not material enough to warrant a separate set of cash flow analyses. All calculations related to asset and liability management (e.g. as net interest margin analysis) take into account the contractual terms of the financial instrument.

66 Insurance and Financial Risk Management Objectives and Policies Although life insurance companies are in the business of taking risks, NYLIP limits its risk exposure only to measurable and quantifiable risks. The main objective in NYLIP s risk management policy is to ensure that NYLIP remains financially viable and capable in paying its liabilities. There are many risks associated in the life insurance business such as insurance risks, investment risks, asset depreciation and other business risks. These risks are managed separately to ensure that NYLIP is not exposed to risks that are unnecessary or risk with no commensurate expected benefits or return. Insurance risk The risk under any one insurance contract is the possibility that the insured event occurs. This event may be death, or in the case of some riders, disability, accidental injury, or contraction of critical illness. By the very nature of an insurance contract, this risk is random and unpredictable. For a portfolio of insurance contracts where the theory of probability is applied to pricing, the principal risk that NYLIP faces under its insurance contracts is that future claim on death, accident, disability, and critical illness claims exceed the future premiums plus the carrying amount of the insurance liabilities. This could occur if the frequency and magnitude of claims is greater than the assumption used in calculating NYLIP s liability. Occurrence of insured events is random and the actual number of claims will vary from year to year from the mortality assumptions made during product pricing. However, the law of large number is expected to be applicable as the pool of risk increases in volume and aggregate claims becomes more predictable. Experience shows that the larger the portfolio of similar insurance contracts, the smaller is the relative variability compared to the expected. Insurance risks generally vary by gender and age of the insured as these factors correlate greatly with the incidence rates of the insured events. Because of this, a more diverse demographic profile of insured lives may be more desirable since a more diverse risk profile reduces variability. To minimize insurance risks, NYLIP strictly adheres to prudent underwriting standards in assessing insurance applications. These underwriting standards include a schedule of medical and non-medical requirements for specific range of ages and sum assured. Some policyholders are charged with additional premium in the form of flat or multiple extra premiums due to extra risks resulting from the applicant s occupation, health and lifestyle. Applications for insurance may be denied or postponed for certain substandard cases. To guard against anti-selection, insurance applications that do not establish insurable interest are rejected. Statements of assets and liabilities may also be required from the applicant to justify the sum assured applied for, and his ability to pay the premium. Frequency of claims For contracts where death is the insured risk, the most significant factors that could increase the overall frequency of claims are epidemics or wide spread changes in lifestyle resulting in earlier or more claims than expected. In the Philippines, higher-than-expected claims also arise from typhoons, landslides, and other geologic events.

67 For contracts with DPF, a portion of the insurance risk is effectively shared with the policy owner, as policy dividends may be reduced due to adverse claims and investment experience. For unit-linked policies where the COI charges are not guaranteed, insurance risk is borne mostly by the policyholders. NYLIP has the right to alter these charges based on its mortality experience and hence minimize its exposure to mortality risk. Delays in implementing increases in charges and market or regulatory restraints over the extent of the increases may reduce its mitigating effect. NYLIP manages these risks through its underwriting strategy and reinsurance arrangements. The underwriting strategy is intended to ensure that the risks underwritten are pooled into a sufficiently large portfolio. Medical selection is also included in the underwriting procedures with premiums varied to reflect the health condition and family medical history of the applicants. NYLIP has a retention limit of P=2.00 million on any single life insured. NYLIP reinsures the excess of the insured benefit over P=2.00 million for standard risks (from a medical point of view) under an excess of loss reinsurance arrangement. NYLIP s risk retention is lower for medically impaired or substandard lives, which involves higher risks. NYLIP also has a Catastrophe Reinsurance agreement, which protects NYLIP in case of a catastrophic event resulting in multiple death claims. The table below presents the concentration of individually insured benefits across different bands of insured ages as measured by the face amount (before reinsurance) and net amount at risk or NAAR (after reinsurance) as of December 31, 2007: Age bands (in years) Policy count Face amount (in thousands) Before reinsurance Concentration (%) NAAR (in thousands) After reinsurance Concentration (%) ,812 P=907, P=542, , , , ,341 1,234, ,072, , , , , , , , , ,178 5, and above ,933 P=4,644, P=3,577, The above table includes whole life, endowment, anticipated endowment, and term insurance contracts, thus the insured risk is a mixture of death and continued survival. NAAR is the net amount at risk, which is the difference between the face amount and the policy reserve. It is the net amount that would be payable upon death less liability released. The risk is spread over the younger through middle-aged bands. This profile has not changed significantly from last year. Sources of uncertainty in the estimation of future benefit payments and premium receipts.

68 Uncertainty in the estimation of future benefit payments and premium receipts for long-term insurance contracts arises from the unpredictability of long-term changes in overall levels of mortality and the variability in policyholder behavior. NYLIP uses appropriate tables of standard mortality for pricing and valuation of liabilities. An investigation into the actual mortality experience of NYLIP is carried out annually, but the experience is not yet considered statistically significant. NYLIP maintains persistency statistics to monitor actual lapse experience against pricing assumptions and performance standards. Statutory reserves are calculated using mortality decrement only, without considering possibility of lapses. This results in a more conservative liability as gains on surrender are not anticipated in the valuation method. Financial risk Financial risk comprises interest rate risk, credit risk, liquidity, currency and price risk. Interest rate risk Interest rate risk is the risk that future cash flows of a financial instrument will fluctuate because of changes in market interest rate. NYLIP s portfolio is invested primarily in Philippine government securities. The strategy of NYLIP is to buy and hold, unless the need to sell arises, and to reduce the duration gap between assets and liabilities to minimize the interest rate risk. Securities are also marked-to-market monthly to reflect and account for both unrealized gains and losses. Credit risk Credit risk represents the loss that would be recognized if counterparties to investment transactions are unable or unwilling to fulfill their payment obligations. The credit risk arising from investment transactions is not significant as most of NYLIP s investments are in government securities, which are by definition risk-free. In addition, availability and trading of private debt securities are very limited. At present, NYLIP has an exposure with two private debt securities. All purchases, especially private debt securities, goes through a stringent process of credit review by the Investment Committee and subject to approval of the Insurance Commission. Credit valuations and review are performed on a regular basis. NYLIP does not have any credit risk concentrations other than to the National Government due to its government bond investments. Based on established investment policy of NYLIP, no issuer (except obligations of the government) will comprise more than 5.00% of the portfolio on a market value basis at purchase, unless otherwise approved by the Investment Committee. Investments in private debt securities, structured notes and other non-government paper, if any, shall have a credit quality of at least local AAA or international A. For short-term investments such as commercial papers, the minimum credit quality is A1/P1 (or country equivalent), or as approved by the Investment Committee. Reinsurance is used to manage insurance risks. This does not, however, discharge NYLIP s liability as primary insurer. If a reinsurer fails to pay a claim for any reason, NYLIP remains liable for the payment to policyholders. The credit worthiness of reinsurers is considered on an annual basis by reviewing their financial strength prior to finalization of any contract.

69 Price risk Price risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market prices (other than those arising from interest rate risk or currency risk), whether those changes are caused by factors specific to the individual financial instrument or its issuer, or factors affecting all similar financial instruments traded in the market. NYLIP has no significant price risk. NYLIP s investment in equity markets relates mainly to separate funds from variable life products, the risk of which is entirely bourne by the policyholders. Insurance Capital Management The primary objective of NYLIP is to ensure that it complies with capital requirements of IC. These requirements are put in place to ensure that NYLIP remains financially viable to pay its short and long-term liabilities. There are three capital requirements imposed by the Insurance Commission, which NYLIP closely monitors to ensure compliance. a) Minimum Margin Solvency The Margin of Solvency is defined as statutory admitted assets less liabilities and minimum paid-up capital. The Minimum Margin of Solvency is P=2.00 per 1000 of sum assured inforce at the end of the previous year, other than term plans, but not less than P=0.50 million. b) Minimum Surplus Minimum Surplus refers to the requirements set by Department Order For whollyowned Filipino life insurance companies such as NYLIP, the minimum surplus requirement at the end of 2007 is P=0.15 million. c) Risk Based Capital Requirement The Risk Based Capital (RBC) Requirement is based on Insurance Memorandum Circula r , whereby the RBC ratio is defined as the ratio of Net Worth over the required capital. The Required Capital is defined in the said memorandum and the minimum ratio required to avoid any form of regulatory intervention is %. The table below shows the capital requirement and the status of NYLIP as of December 31, 2007 Regulatory Requirement Minimum Required Actual Minimum Statutory Surplus P=150,000 P=404,855,008 RBC Ratio 125% 520% Margin of Solvency P=500,000 P=299,698,514 During the period, NYLIP had complied with all IC imposed capital requirements.

70 Fair Values of Financial Assets and Liabilities The following table summarizes the carrying amounts and fair values of those financial assets and liabilities as of December 31, 2007 and 2006 not presented on the Group statement of condition at their fair values. Generally, bid prices are used to estimate fair values of assets, whereas offer prices are applied for liabilities Consolidated Parent Company Carrying Value Fair Value Carrying Value Fair Value Financial Assets Cash and other cash items P=8,198,200 P=8,198,200 P=3,445,319 P=3,445,319 Due from BSP 14,067,457 14,067,457 13,222,310 13,222,310 Due from other banks 6,870,230 6,870,230 2,351,313 2,351,313 Interbank loans receivable 10,835,073 10,835,073 11,057,198 11,057,198 Derivative asset 355, , , ,302 FVPL investments Debt securities-government 3,024,495 3,024,495 3,024,495 3,024,495 Debt securities-private 969, , , ,987 Equity securities 83,556 83,556 83,556 83,556 AFS investments Debt securities-government 12,707,733 12,707,733 9,857,559 9,857,559 Debt securities-private 10,559,566 10,559,566 10,518,131 10,518,131 Equity securities 235, , , ,185 HTM investments Debt securities-government 4,419,020 4,519,044 3,997,844 4,097,296 Debt securities-private 622, , , ,964 Loans and receivables Corporate lending 36,664,974 36,667,234 27,630,438 27,632,698 Small business lending 8,092,500 8,092,500 5,427,076 5,427,076 Consumer lending 8,101,442 8,213,779 7,147,519 7,259,856 Other receivables 9,938,488 11,629,762 9,393,246 11,084,520 Other assets 892, , , ,434 Financial Liabilities Deposit liabilities 117,765, ,765, ,286, ,286,366 Subordinated debt 2,064,000 1,963,304 2,064,000 1,963,304 Bills payable 2,053,536 2,053, , ,777 Manager s checks and demand drafts outstanding 554, , , ,990 Derivative liability 318, , , ,842 Insurance provision 196, ,218 97,611 97,611 Other liability 3,160,730 3,160,730 2,242,578 2,242,578

71 Consolidated 2006 Parent Company Carrying Value Fair Value Carrying Value Fair Value Financial Assets Cash and other cash items P=9,247,409 P=9,247,409 P=3,823,766 P=3,823,766 Due from BSP 12,545,552 12,545,552 12,090,540 12,090,540 Due from other banks 4,568,710 4,568,710 2,265,375 2,265,375 Interbank loans receivable 15,781,577 15,781,577 13,513,377 13,513,377 Derivative asset 267, , , ,771 FVPL investments 12,577,351 12,577,351 12,577,351 12,577,351 AFS investments 21,906,913 21,906,913 20,371,472 20,371,472 HTM investments 3,557,563 3,669,781 2,720,677 2,834,590 Loans and receivables 63,886,630 64,827,997 49,313,254 50,343,843 Other assets 303, , , ,957 Financial Liabilities Deposit liabilities 126,708, ,979, ,528, ,528,250 Subordinated debt 2,451,500 2,172,538 2,451,500 2,172,538 Bills payable 2,146,664 2,147, , ,719 Manager s checks and demand drafts outstanding 518, , , ,602 Derivative liability 86,934 86,934 86,474 86,474 Other liability 2,018,225 2,018,225 1,981,471 1,981,471 The following table shows an analysis of financial instruments recorded at fair value, between those whose fair value is based on quoted market prices, those involving valuation techniques where all the model inputs are observable in the market and those where the valuation techniques use of non-market observable inputs. Consolidated Valuation Techniques (Market Observable) Parent Company Valuation Techniques (Market Observable) Quoted Market Price Cost Quoted Market Price Cost Financial Assets Derivative assets P=344,988 P=10,378 P= P=321,924 P=10,378 P= Financial assets at FVPL 4,078,038 4,078,038 AFS investments 23,267, ,862 20,375, ,185 Financial Liabilities Derivative liabilities P= P=318,037 P= P= P=317,842 P= Cash and other cash items, due from BSP and other banks and interbank loans receivable - The carrying amounts approximate fair values, considering that these accounts consist mostly of overnight deposits and floating rate placements. Debt securities - Fair values are generally based upon quoted market prices. If the market prices are not readily available, fair values are estimated using either values obtained from independent parties offering pricing services or adjusted quoted market prices of comparable investments or using the discounted cash flow methodology.

72 Equity securities - For publicly traded equity securities, fair values are based on quoted prices published in markets. For unquoted equity securities, fair values could not be reliably determined due to the unpredictable nature of future cash flows and the lack of suitable methods of arriving at a reliable fair value. Loans and receivables - Fair values of loans and receivables are estimated using the discounted cash flow methodology, using the Parent Company s current incremental lending rates for similar types of loans and receivables. RCOCI included in other assets - Quoted market prices are not readily available for these assets. They are not reported at fair value and are not significant in relation to the Parent Company s total portfolio of securities. Deposit liabilities - For demand and savings account deposit, carrying amounts approximate fair values considering that these are currently due and demandable. For time deposits, carrying amounts approximate fair values (see Notes 4 and 19) since these accounts have short-term maturities. Bills payable - Fair values are estimated using the discounted cash flow methodology using the Parent Company s current incremental borrowing rates for similar borrowings with maturities consistent with those remain ing for the liability being valued. Unsecured subordinated debt - Fair value was estimated using the discounted cash flow methodology, using the Parent Company s current credit spread for similar types borrowings.

73 The Group and Parent Company s assets and liabilities by category are set out below: December 31, 2007 Consolidated Assets Loans and Receivables Derivatives FVPL Investments AFS Investments HTM Investments Other Liabilities Nonfinancial Assets/Liabilities Total Cash and other cash items P=8,198,200 P= P= P= P= P= P= P=8,198,200 Due from BSP 14,067,457 14,067,457 Due from other banks 6,870,230 6,870,230 Interbank loans receivable 10,835,073 10,835,073 Derivative asset 355, ,366 FVPL invest,ments 4,078,038 4,078,038 AFS invest,ments 23,503,161 23,503,161 HTM invest,ments 5,041,773 5,041,773 Loans and receivable 62,797,404 62,797,404 Property and equipment 4,068,542 4,068,542 Investment property 5,824,529 5,824,529 Goodwill 88,936 88,936 Deferred tax assets 42,959 42,959 Other assets 366, ,081 1,104,824 1,997,326 P=103,134,785 P=355,366 P=4,604,119 P=23,503,161 P=5,041,773 P= P=11,129,790 P=147,768,994 Liabilities Deposit liabilities P= P= P= P= P= P=117,765,946 P= P=117,765,946 Derivative liability 318, ,037 Bills payable 2,053,536 2,053,536 Marginal deposits 196, ,218 Manager s checks and demand drafts outstanding Accrued taxes, interest and 554, ,633 other expenses 1,375,839 1,375,839 Subordinated debt 2,064,000 2,064,000 Insurance provision 1,229,920 1,229,920 Other liabilities 526,081 2,634,649 1,722,136 4,882,866 P= P=318,037 P=526,081 P= P= P=126,302,684 P=3,294,193 P=130,440,995

74 December 31, 2007 Parent Company Assets Loans and Receivables Derivatives FVPL Investments AFS Investments HTM Investments Other Liabilities Nonfinancial Assets/Li abilities Total Cash and other cash items P=3,445,319 P= P= P= P= P= P= P=3,445,319 Due from BSP 13,222,310 13,222,310 Due from other banks 2,351,313 2,351,313 Interbank loans receivable 11,057,198 11,057,198 Derivative asset 332, ,302 FVPL investments 4,078,038 4,078,038 AFS investments 20,574,875 20,574,875 HTM investments 4,619,812 4,619,812 Loans and receivable 49,598,279 49,598,279 Investment in subsidiaries and associates 3,052,796 3,052,796 Property and equipment 3,939,607 3,939,607 Investment property 5,642,847 5,642,847 Other assets 290, ,875 1,132,309 P=79,964,853 P=332,302 P=4,078,038 P=20,574,875 P=4,619,812 P= P=13,477,125 P=123,047,005 Liabilities Deposit liabilities P= P= P= P= P= P=101,286,366 P= P=101,286,366 Derivative liability 317, ,842 Bills payable 766, ,777 Marginal deposits 97,611 97,611 Manager s checks and demand drafts outstanding 536, ,990 Accrued taxes, interest and other expenses 1,082,300 1,082,300 Subordinated debt 2,064,000 2,064,000 Other liabilities 2,242,578 1,659,735 3,902,313 P= P=317,842 P= P= P= P=106,896,711 P=2,839,646 P=110,054,199

75 Trading and Investment Securities Derivative assets of the Group and of the Parent Company consist of the following: Consolidated Parent Company Derivative assets: Mark-to-market of forward exchange contracts P=344,988 P=256,984 P=321,924 P=174,489 Bifurcated from its host financial instrument 10,378 10,282 10,378 10,282 P=355,366 P=267,266 P=332,302 P=184,771 The table below shows the positive and negative fair values of option and forward exchange contracts of the Parent Company as of December 31, 2007 and 2006 together with the notional amounts analyzed by the term to maturity. The notional amount is the amount of a derivative s underlying asset upon which changes in the value of derivatives are measured Positive fair value Php321,924 Php174,489 Negative fair value 226,790 38,676 Notional amount USD437,375 USD446,165 Within 3 months 301, , months 136,375 40,665 The notional amounts indicate the volume of transactions outstanding at the end of period and are neither indicative of the market risk nor the credit risk. Foreign currency forwards are contractual agreements to either buy or sell a specified currency at a specific price and date in the future. Forwards are customized contracts transacted in the overthe-counter market. As of December 31, 2007, the contractual amounts of the outstanding forward sold and forward bought contracts amounted to P= billion and P= billion for the Group, and P= million and P= million for the Parent Company, respectively. Financial assets at FVPL consist of the following: Consolidated Parent Company Held for trading: Debt securities: Government P=3,024,495 P=10,250,887 P=3,024,495 P=10,250,887 Private 969,987 2,264, ,987 2,264,442 Equity securities 83,556 62,022 83,556 62,022 P=4,078,038 P=12,577,351 P=4,078,038 P=12,577,351

76 As of December 31, 2007, 2006 and 2005, held-for-trading include net unrealized loss of P=63.2 million, net unrealized gain of P=25.7 million and net unrealized loss of P=12.9 million, respectively, for both the Group and the Parent Company. AFS investments consist of the following: Consolidated Parent Company Debt securities: Government (Note 26) P=12,707,733 P=7,040,241 P=9,857,559 5,528,167 Private 10,559,566 14,652,487 10,518,131 14,629,120 23,267,299 21,692,728 20,375,690 20,157,287 Equity securities: Quoted 31,877 Unquoted - net of allowance for impairments losses amounting to P2,619,002 (Note 12) 203, , , , , , , ,185 P=23,503,161 P=21,906,913 P=20,574,875 P=20,371,472 As of December 31, 2007, 2006, and 2005, AFS investments of the Group include net unrealized loss amounting to P= million, net unrealized gain of P= million, and net unrealized loss of P= million, respectively, of which net unrealized loss of P= million, net unrealized gain of P= million, and net unrealized gain of P= million, respectively, pertains to the Parent Company. Equity securities booked under AFS investments pertain to quoted and unquoted investments in shares of stocks. Unquoted equity securities are carried at cost less allowance for impairment losses since its fair value cannot be reliably estimated. There is no market for these investments and the Parent Company intends to hold it for the long-term. HTM investments as of December 31, 2007 and 2006 consist of: Consolidated Parent Company Debt securities: Government (Note 26) P=4,419,020 P=2,875,817 P=3,997,844 P=2,056,378 Private 622, , , ,299 P=5,041,773 P=3,557,563 P=4,619,812 P=2,720,677 As of December 31, 2007 and 2006, foreign currency-denominated HTM investments of the Group and of the Parent Company bear nominal annual interest rates ranging from 6.78% to 8.60% and 2.44% to 10.63%, respectively. Peso-denominated HTM investments of the Group bear nominal annual interest rates ranging from 4.00% to 17.50% for both years of which 6.88% to 17.50% and 9.75% to 17.50%, respectively, represents annual interest rates of the Parent Company.

77 The aggregate market value of HTM investments amounted to P=5.52 billion and P=3.67 billion for the Group, of which P=5.10 billion and P=2.83 billion, respectively, as of December 31, 2007 and 2006, pertains to the Parent Company. In accordance with BSP Circular No. 558, the Parent Company was allowed to reclassify investments in foreign currency denominated non-government/bsp bonds/debt securities booked under HTM category to AFS investments and be exempted from tainting provisions of Circular No. 476, as amended, which requires reclassification of the entire HTM portfolio to AFS investments and prohibits the use of the HTM category during the reporting year and for the succeeding two full financial years whenever a financial institution sells or reclassifies more than an insignificant amount of HTM investments before maturity for reasons other than those specified under the said Circular. The Parent Company reclassified foreign currency denominated BSP bonds amounting to P= million to AFS investments as of December 31, Interest income on trading and investment securities consists of: Consolidated Parent Company Financial assets at FVPL P=869,929 P=334,952 P=45,572 P=869,929 P=301,075 P=45,572 AFS investments 1,601,102 1,929,959 1,888,341 1,538,423 1,874,228 1,842,544 HTM investments 862,892 1,186,803 1,553, ,968 1,129,813 1,456,142 P=3,333,923 P=3,451,714 P=3,487,879 P=3,244,320 P=3,305,116 P=3,344,258 The details of trading and investment securities gains (losses) follows: Consolidated Parent Company Derivative assets (P=4,517) P=3,586 P= (P=12,404) P=3,586 P= Financial assets at FVPL (459,636) 407,851 (4,148) (459,636) 407,851 (4,148) AFS investments 368, , , , , ,666 (P=95,441) P=959,675 P=883,518 (P=225,487) P=959,662 P=883,518

78 Loans and Receivables This account consists of: 2007 Consolidated Parent Company Corporate lending P=38,021,656 P=28,688,095 Small business lending 8,505,264 5,810,248 Consumer lending 8,186,801 7,221,288 54,713,721 41,719,631 Unearned interest (Note 19) (180,089) (142,572) Prompt payment and discount (Note 19) (28,188) (10,639) Capitalized interest (Note 19) (45,953) (45,298) 54,459,491 41,521,122 Other Receivables (Note 19): Unquoted debt securities 6,518,027 6,342,212 Accrued interest receivable 1,143,843 1,005,775 Sales contract receivable 1,994,040 1,867,973 Accounts receivable 541, ,893 10,196,956 9,648,853 64,656,447 51,169,975 Less allowance for credit losses (Notes 12 and 19) 1,859,043 1,571,696 P=62,797,404 P=49,598, Consolidated Parent Company Receivable from receivables (Note 19): Loans and discounts P=53,440,009 P=40,032,268 Customers liabilities under letters of credit and trust receipts 2,936,440 2,883,998 Bills purchased (Note 18) 1,881, ,799 58,257,522 43,805,065 Unearned interest (Note 19) (262,670) (253,412) Prompt payment and discount (Note 19) (6,680) (6,031) Capitalized interest (Note 19) (114,207) (94,594) 57,873,965 43,451,028 Other Receivables (Note 19): Unquoted debt securities 6,883,867 6,648,724 Accrued interest receivable 2,030,614 1,758,305 Sales contract receivable 1,956,120 1,956,120 Accounts receivable 367, ,211 11,238,224 10,779,360 69,112,189 54,230,388 Less allowance for credit losses (Notes 12 and 19) 5,225,559 4,917,134 P=63,886,630 P=49,313,254

79 Loans amounting to P=62.19 million and P=52.27 million as of December 31, 2007 and 2006, respectively, have been pledged to the BSP to collateralize the Parent Company s availments under BSP rediscounting privileges included in Bills Payable (see Note 14). The pledged loans will be released when the underlying transaction is terminated but, in the event of the Parent Company's default, BSP is entitled to apply the collateral in order to settle the rediscounted bills. Interest income accrued on impaired loans and receivables amounted to P= million, P= million and P= million in 2007, 2006 and 2005, respectively. Unquoted debt securities consist of: Consolidated Parent Company Government debt securities P=6,507,941 P=6,873,781 P=6,332,126 P=6,638,638 Private debt securities 10,086 10,086 10,086 10,086 P=6,518,027 P=6,883,867 P=6,342,212 P=6,648,724 The Parent Company plans to hold on these investments as part of its reserves for deposit liabilities and agri-agra loan requirement. Of the total loans of the Parent Company, 83.86% and 62.50% as of December 31, 2007 and 2006, respectively, are subject to periodic interest repricing for the Parent Company. Remaining loans earn annual fixed interest rates ranging from 5.09% to 9.08% in December 31, 2007, 5.47% to 19.00% in December 31, 2006 and 5.00% to 19.00% in December 31, BSP Reporting As of December 31, 2007 and 2006, nonperforming loans (NPLs) follow: Consolidated Parent Company Secured P=1,070,724 P=4,432,594 P=809,419 P=4,208,636 Unsecured 654,646 1,619, ,659 1,619,177 P=1,725,370 P=6,051,771 P=1,459,078 P=5,827,813 Current banking regulations allow banks with no unbooked valuation reserves and capital adjustments to exclude from nonperforming classification those loans classified as loss in the latest examination of the BSP, which are fully covered by allowance for credit losses, provided that interest on said loans shall not be accrued. As of December 30, 2007 and 2006, NPLs not fully covered by allowance for credit losses follow: Consolidated Parent Company Total NPLs P=1,725,370 P=6,051,771 P=1,459,078 P=5,827,813 Less NPLs fully covered by allowance for credit losses 649,467 1,089, ,482 1,000,770 P=1,075,903 P=4,962,485 P=895,596 P=4,827,043

80 NPLs shall, as a general rule, refer to loan accounts whose principal and/or interest is unpaid for thirty (30) days or more after due date or after they have become past due in accordance with existing rules and regulations. This applies to loans payable in lump sum and loans payable in quarterly, semi-annual, or annual installments, in which case, the total outstanding balance thereof is considered nonperforming. In the case of receivables that are payable in monthly installments, the total outstanding balance is considered nonperforming when three or more installments are in arrears. In the case of receivables that are payable in daily, weekly, or semi-monthly installments, the total outstanding balance thereof is considered nonperforming at the same time that they become past due in accordance with existing BSP regulations, i.e., the entire outstanding balance of the receivable is considered as past due when the total amount of arrearages reaches ten percent (10.00%) of the total receivable balance. Receivables are classified as nonperforming in accordance with BSP regulations, or when, in the opinion of management, collection of interest or principal is doubtful. Receivables are not reclassified as performing until interest and principal payments are brought current or the loans are restructured in accordance with existing BSP regulations, and future payments appear assured. Restructured loans which do not meet the requirements to be treated as performing receivables are also considered as NPLs. As of December 31, 2007 and 2006, restructured loans of the Parent Company amounted to P=0.70 billion and P=1.40 billion, respectively. Restructured loans as of December 31, 2007 coming from corporate, small and medium, and consumer class amounted to P= million, P= million, and P=37.24 million, respectively. In December 2007, the Parent Company sold P=2.74 billion non-performing assets, of which P=2.40 billion were NPLs and P=0.34 billion were investment properties, to an SPV pursuant to RA No. 9182, as amended by RA No The Parent Company received a 20.00% cash settlement amounting to P= million, with the balance charged completely against existing allowance for impairment losses of P=2.01 million and against current operations as Profit (loss) on assets sold amounting to P=85.94 million. The following table shows the breakdown of receivables from customers as to collateral: Consolidated Amount % Amount % Secured by: Real estate P=25,316, P=26,775, Deposit hold-out 8,589, ,960, Securities 2,654, ,922, Chattel 1,507, ,287, Others 4,253, ,707, ,321, ,654, Unsecured 12,392, ,603, P=54,713, P=58,257,

81 Amount % Parent Company Amount % Secured by: Real estate P=15,565, P=16,516, Deposit hold-out 7,040, ,149, Securities 2,654, ,922, Chattel 1,313, ,063, Others* 3,897, , ,471, ,345, Unsecured 11,248, ,459, P=41,719, P=43,805, * These include post dated checks and receivables from third parties. As of December 31, 2007 and 2006, information on concentration of receivables from customers as to economic activity follows (amounts in thousands): Consolidated Amount % Amount % Manufacturing (various industries) P=15,840, P=15,261, Wholesale and retail trade 12,233, ,674, Real estate, renting and business services 11,729, ,991, Transportation, storage and communication 3,489, ,226, Other community, social and personal activities 3,225, ,059, Agriculture 1,788, ,587, Others** 6,406, ,456, **These include mining and quarrying, services, miscellaneous business, personal, and social activities. P=54,713, P=58,257, Parent Company Amount % Amount % Manufacturing (various industries) P=13,321, P=13,619, Wholesale and retail trade 10,280, ,204, Real estate, renting and business services 4,767, ,038, Transportation, storage and communication 3,317, ,111, Other community, social and personal activities 2,513, ,685, Agriculture 1,780, ,937, Others** 5,737, ,207, P=41,719, P=43,805, The BSP considers that concentration of credit exists when total loan exposure to a particular industry or economic sector exceeds 30.00% of total loan portfolio.

82 Investment in Subsidiaries and Associates This account consists of the following investments: Consolidated Parent Company Acquisition cost of: Wholly owned subsidiaries (Note 1) ASB P= P= P=500,000 P=500,000 ABUK 226, ,181 AFC 50,000 50,000 Majority owned subsidiaries (Note 1) ACB 1,582,601 1,582,601 ABCHKL 129, ,095 NYLIP (75.00% owned) 517,169 Significantly owned and controlled associates (Note 1) ALFC 27,250 27,250 OHBVI 20,500 20,500 Significantly owned associate (Note 1) NYLIP (25.00% owned) 400, , ,000 3,052,796 2,935,627 Accumulated equity in net loss of an associate: Balance at beginning of year (235,917) (173,577) Equity in net loss during the year (62,340) Transfer 235,917 Balance at end of year (235,917) P= P=164,083 P=3,052,796 P=2,935,627 The total investments of the Parent Company in ABUK, ACB, ABCHKL and OHBVI amounted to P=1.96 billion in 2007 and The movements in this account follow: Consolidated Parent Company Balance at beginning of year P=164,083 P=226,423 P=2,935,627 P=2,468,086 Additional investments ACB (73.94% to 78.78%) 467,541 NYLIP (25.00% to 75.00%) 117,169 Equity in net loss of NYLIP (62,340) Change in percentage of ownership in NYLIP from significantly owned associate to majority owned subsidiary (164,083) Balance at end of year P= P=164,083 P=3,052,796 P=2,935,627

83 ACB On February 6, 2006, the Parent Company increased its equity investments in ACB by USD11.29 million by way of additional cash investment of USD9.00 million or P= million and share in the conversion of ACB s surplus and undivided profit into equity of USD2.29 million, thus increasing the Parent Company s ownership from 73.94% to 78.78%. AFC On February 24, 2003, the stockholders and BOD of AFC authorized AFC to suspend its operations effective March 1, Management of AFC believes that the suspension of AFC operations will not have a material impact on the realizability of the carrying amounts of its assets and liabilities as of December 31, 2007 and NYLIP On February 28, 2007, the BOD authorized the Parent Company to purchase the shares of stocks owned by New York Life Insurance, Inc. equivalent to 75% of the total outstanding and issued shares of NYLIP in the amount of P= million. The purchase was to be executed in two tranches of 50.00% and 25.00%, provided that the last tranche be completed not later than October 31, Upon full execution of the sale, the Parent Company was supposed to own % of NYLIP. On July 10, 2007, the Parent Company purchased 12,500 shares of NYLIP representing an additional 50.00% ownership, for P= million, increasing its equity holdings therein, from 25.00% to 75.00%. Subsequent to the Parent Company s purchase, a number of the Group s key shareholders purchased the remaining 25.00% of NYLIP. Accounting for the Acquisition of NYLIP PFRS 3 provides that if the initial accounting for a business combination can be determined only provisionally by the end of the period in which the combination is effected because either the fair values to be assigned to the acquiree s identifiable assets, liabilities or contingent liabilities or the cost of the combination can be determined only provisionally, the acquirer shall account for the combination using those provisional values. The acquirer shall recognize any adjustments to those provisional values as a result of completing the initial accounting within twelve months of the acquisition date as follows; (i) the carrying amounts of the identifiable asset, liability or contingent liability that are recognized or adjusted as a result of completing the initial accounting shall be calculated as if its fair value at the acquisition date had been recognized from that date; (ii) goodwill or any gain recognized shall be adjusted by an amount equal to the adjustment to the fair value at the acquisition date of the identifiable asset, liability or contingent liability being recognized or adjusted; and (iii) comparative information presented for the periods before the initial accounting for the combination is complete shall be presented as if the initial accounting had been completed from the acquisition date.

84 The purchase price allocation has been prepared on a provisional basis, and reasonable changes are expected as additional information becomes available. The following is a summary of the provisional fair values of the assets acquired and liabilities assumed as of the date of the acquisition: Fair Value Recognized on Acquisition (in Thousands) Assets Cash and other cash items P=95,262 Loans and receivable 92,726 Invested assets 1,640,093 Prepayments 10,306 Property and equipment 29,994 Other assets 1,890 Segregated fund assets 477,665 2,347,936 Liabilities Legal policy reserves 1,032,628 Premium deposit fund 118,571 Other policyholders funds 125,388 Accounts payable 46,200 Segregated fund liabilities 477,665 1,800,452 Net assets 547,484 Total ownership acquired 50% Fair value of net assets acquired 273,742 Gain on acquisition of additional 50% of NYLIP (156,573) Total consideration, satisfied by cash P=117,169 Total cash flow on acquisition at the consolidated level follows: Net cash acquired from NYLIP P=47,631 Cash paid (117,169) Net cash outflow P=69,538 If the combination had taken place at the beginning of the year, the net income for the Group would have decreased by P=7.60 million.

85 Property and Equipment The composition of and movements in this account during the year follow: Consolidated At Appraised Value At Cost Furniture, Land Buildings Leasehold Improvements Fixtures and Equipment Total - At Cost Cost/Appraised Value Balance at January 1, 2007 P=2,507,662 P=1,226,487 P=221,575 P=2,473,022 P=3,921,084 Transfers ,574 95, ,730 Additions , , , ,580 Disposals/others (881) (72,788) (614,212) (687,881) Balance at December 31, ,508,622 1,272, ,596 2,489,704 4,093,513 Accumulated Depreciation and Amortization Balance at January 1, ,483 57,746 1,910,915 2,479,144 Transfers ,280 50, ,731 Depreciation and amortization 43,835 34, , ,609 Disposals/others (425,243) (425,243) Balance at December 31, , ,145 1,800,295 2,529,241 Allowance for Impairment Losses (Notes 12 and 19) 4,352 4,352 Net Book Value as at December 31, 2007 P=2,508,622 P=713,060 P=157,451 P=689,409 P=1,559,920 Consolidated At Appraised Value At Cost Furniture, Land Buildings Leasehold Improvements Fixtures and Equipment Total - At Cost Cost/Appraised Value Balance at January 1, 2006 P=2,534,654 P=1,194,838 P=272,846 P=2,355,205 P=3,822,889 Additions 14,350 32,409 69, , ,914 Disposals/others (41,342) (760) (121,083) (482,876) (604,719) Balance at December 31, ,507,662 1,226, ,575 2,473,022 3,921,084 Accumulated Depreciation and Amortization Balance at January 1, ,232 1,729,877 2,195,109 Depreciation and amortization 45,251 42, , ,939 Disposals/others 15,661 (16,565) (904) Balance at December 31, ,483 57,746 1,910,915 2,479,144 Allowance for Impairment Losses (Notes 12 and 19) 4,352 4,352 Net Book Value as at December 31, 2006 P=2,507,662 P=711,652 P=163,829 P=562,107 P=1,437,588

86 Parent Company At Appraised Value At Cost Furniture, Land Buildings Leasehold Improvements Fixtures and Equipment Total - At Cost Cost/Appraised Value Balance at January 1, 2007 P=2,495,412 P=1,213,590 P=140,583 P=2,272,814 P=3,626,987 Additions ,671 24, , ,607 Disposals/others (398) (505,483) (505,881) Balance at December 31, ,496,372 1,256, ,276 2,192,574 3,614,713 Accumulated Depreciation and Amortization Balance at January 1, ,330 36,575 1,751,832 2,289,737 Depreciation and amortization 43,834 28, , ,632 Disposals/others (425,243) (425,243) Balance at December 31, ,164 65,279 1,556,683 2,167,126 Allowance for Impairment Losses (Notes 12 and 19) 4,352 4,352 Net Book Value as at December 31, 2007 P=2,496,372 P=707,347 P=99,997 P=635,891 P=1,443,235 Parent Company At Appraised Value At Cost Furniture, Land Buildings Leasehold Improvements Fixtures and Equipment Total - At Cost Cost/Appraised Value Balance at January 1, 2006 P=2,508,132 P=1,182,455 P=157,951 P=2,036,193 P=3,376,599 Additions 14,350 31,357 63, , ,948 Disposals/others (27,070) (222) (80,669) (340,669) (421,560) Balance at December 31, ,495,412 1,213, ,583 2,272,814 3,626,987 Accumulated Depreciation and Amortization Balance at January 1, ,440 1,596,716 2,053,156 Depreciation and amortization 44,890 36, , ,674 Disposals/others (27,093) (27,093) Balance at December 31, ,330 36,575 1,751,832 2,289,737 Allowance for Impairment Losses (Notes 12 and 19) 4,352 4,352 Net Book Value as at December 31, 2006 P=2,495,412 P=707,908 P=104,008 P=520,982 P=1,332,898

87 The details of depreciation and amortization recognized in the statements of income follow: Consolidated Parent Company Property and equipment: Building P=43,835 P=45,251 P=49,099 P=43,834 P=44,890 P=41,103 Leasehold improvements 34,119 42,085 63,764 28,704 36,575 41,038 Furniture, fixtures and equipment 263, , , , , ,083 Investment properties (Note 10) 39,222 54,558 71,315 37,856 54,176 71,315 Other assets (Note 11) P=381,331 P=339,535 P=327,573 P=340,556 P=317,888 P=307, Investment Properties The composition of and movements in this account follow: Land Consolidated Buildings and Improvements 2007 Cost Balance, January 1, 2007 P=4,833,779 P=1,528,683 P=6,362,462 Additions 1,018, ,526 1,432,475 Transfers/disposals (749,867) (351,527) (1,101,394) Balance, December 31, ,102,861 1,590,682 6,693,543 Accumulated Depreciation and Amortization Balance, January 1, , ,682 Depreciation and amortization 39,222 39,222 Transfers/disposals (96,959) (96,959) Balance, December 31, , ,945 Allowance for Impairment Losses (Notes 12 and 19) 466, , ,069 Net Book Value, December 31, 2007 P=4,636,479 P=1,188,050 P=5,824,529

88 Consolidated Land Buildings and Improvements 2006 (In Thousand) Cost Balance, January 1, 2006 P=4,288,590 P=1,081,454 P=5,370,044 Additions 1,011, ,929 1,581,092 Transfers/disposals (465,974) (122,700) (588,674) Balance, December 31, ,833,779 1,528,683 6,362,462 Accumulated Depreciation and Amortization Balance, January 1, , ,795 Depreciation and amortization 54,558 54,558 Transfers/disposals (34,671) (34,671) Balance, December 31, , ,682 Allowance for Impairment Losses (Notes 12 and 19) 472, , ,121 Net Book Value, December 31, 2006 P=4,361,466 P=1,035,193 P=5,396,659 Parent Company Land Buildings and Improvements 2007 Cost Balance, January 1, 2007 P=4,809,725 P=1,347,778 P=6,157,503 Additions 1,018, ,878 1,283,827 Transfers/disposals (749,867) (187,467) (937,334) Balance, December 31, ,078,807 1,425,189 6,503,996 Accumulated Depreciation and Amortization Balance, January 1, , ,918 Depreciation and amortization 37,856 37,856 Transfers/disposals (96,127) (96,127) Balance, December 31, , ,647 Allowance for Impairment Losses (Notes 12 and 19) 468, , ,502 Net Book Value, December 31, 2007 P=4,610,029 P=1,032,818 P=5,642,847 Parent Company Land Buildings and Improvements 2006 Cost Balance, January 1, 2006 P=4,273,604 P=1,068,400 P=5,342,004 Additions 1,001, ,082 1,399,691 Transfers/disposals (465,488) (118,704) (584,192) Balance, December 31, ,809,725 1,347,778 6,157,503 Accumulated Depreciation and Amortization Balance, January 1, , ,795 Depreciation and amortization 54,176 54,176 Transfers/disposals (36,053) (36,053) Balance, December 31, , ,918 Allowance for Impairment Losses (Notes 12 and 19) 466, , ,554 Net Book Value, December 31,2006 P=4,342,979 P=856,052 P=5,199,031

89 The Group s investment properties represent real estate properties acquired in settlement of loans and receivables. The difference between the fair value of the asset upon foreclosure and the carrying value of the loan is recognized as Gain on acquisition of investment properties under Miscellaneous income in the statements of income (see Note 21). The Parent Company s gain (loss) on sale of investment properties recognized as Profit (Loss) from assets sold included under Miscellaneous income in the statements of income amounted to a loss of P=67.14 million and a gain of P=18.93 million as of December 31, 2007 and 2006, respectively (see Note 21). The aggregate fair value of the Group s investment properties as of December 31, 2007 and 2006 amounted to P=7.47 billion and P=10.12 billion, respectively, of which P=7.22 billion and P=10.09 billion, respectively, pertains to the Parent Company. The fair values of the Group s investment properties have been determined by the appraisal method on the basis of recent sales of similar properties in the same areas as the investment properties and taking into account the economic conditions prevailing at the time the valuations were made. Rental income included in Miscellaneous income on the investment properties of the Group amounted to P=27.15 million, P=34.21 million, and P=22.36 million as of December 31, 2007, 2006 and 2005, respectively. 11. Other Assets This account consists of: Consolidated Parent Company Segregated fund asset P=526,081 P= P= P= Prepaid expenses 281, ,118 80,702 69,657 Returned checks and other cash items (Note 19) 216, , , ,559 Documentary stamps 180,801 32, ,589 32,793 Other in vestments 100,050 27,415 26,719 27,398 Due from BIR 87,507 32,958 86,753 32,958 Bond sinking fund (Notes 19 and 20) 50,000 50,000 50,000 50,000 Unused stationery and supplies 45,180 43,317 43,849 41,967 Deferred tax asset (Note 25) 42,959 48,791 Chattels 1,601 7,328 1,601 7,328 Others 510, , , ,932 2,042,803 1,158,354 1,134, ,592 Accumulated depreciation (Note 19) (1,601) (7,328) (1,601) (7,328) Allowance for impairment losses (Notes 12 and 19) (917) (386) (917) (386) P=2,040,285 P=1,150,640 P=1,132,309 P=826,878

90 As of December 31, 2007 and 2006, others at the consolidated level include goodwill amounting to P=0.35 million and P=0.81 million, respectively, resulting from the difference between the funding received from Philippine Deposit Insurance Corporation and the fair value of the deposits assumed from Orient Commercial Banking Corporation (OCBC). As of December 31, 2007, others at the consolidated level also include security fund which is maintained by NYLIP amounting to P=0.12 million in compliance with Sections 365 and 367 of the Insurance Code. The amount of such fund is determined by and deposited with the IC to pay benefit claims against insolvent companies. On March 15, 2005 and June 17, 2005, the IC approved NYLIP s license to sell single-pay and regular-pay investment-linked insurance products, respectively. These are life insurance products that have policy benefits that are linked to investment funds. The payments received for this product, less charges for mortality and administration, are invested to a segregated fund. The equity of each policyholder in the segregated fund is determined by assigning number of units to each policyholder, corresponding to the net amount deposited in relation to the market value at the time of contribution. The value per unit may increase or decrease depending on the market value of the underlying assets of the segregated fund. The funds are valued regularly and the value of each unit is equal to the market value of the segregated fund divided by the number of outstanding units of the fund. Total premiums and other fee charges under Miscellaneous income in the statements of income arising from the unit-linked product amounted to P=60.19 million in The balance of segregated fund asset as of December 31, 2007 represents the cumulative investments in such funds including the related earnings. 12. Allowance for Impairment and Credit Losses The movements in this account during the year follow: Consolidated Parent Company Balance at beginning of year Loans and receivables P=5,225,559 P=5,662,957 P=4,917,134 P=5,448,918 Investment properties 632, , , ,615 Property and equipment 4,352 4,352 AFS investments 2,619 2,619 2,619 2,619 Other assets ,865,037 5,947,146 5,551,045 5,727,539 Provisions charged to operations 345, , ,854 98,749 Reversals (Note 7) (3,750,460) (252,594) (3,640,813) (275,243) (Forward) (3,405,037) (82,109) (3,383,959) (176,494)

91 Consolidated Parent Company Balance at end of year Loans and receivables (Note 7) P=1,859,043 P=5,225,559 P=1,571,696 P=4,917,134 Investment properties (Note 10) 593, , , ,554 Property and equipment (Note 9) 4,352 4,352 4,352 4,352 AFS investments (Note 6) 2,619 2,619 2,619 2,619 Other assets (Note 11) P=2,460,000 P=5,865,037 P=2,167,086 P=5,551,045 Reversals of the Parent Company represent allowance for credit losses relating to loans amounting to P=2.14 billion which were sold to special purpose vehicles and allowance for credit losses amounting to P=1.50 billion which were settled through foreclosure of collaterals. A reconciliation of the allowance for impairment losses for loans and advances by class is as follows: 2007 Consolidated Corporate lending Small business lending Consumer lending Total Balance, January 1 P=3,724,480 P=1,043,062 P=458,017 P=5,225,559 Additions 135, ,304 18, ,450 Transfers/disposals (2,930,020) (579,522) (136,424) (3,645,966) Balance, December 31 P=930,451 P=588,844 P=339,748 P=1,859,043 Individual impairment P=472,018 P=416,112 P=112,723 P=1,000,853 Collective impairment 458, , , ,190 P=930,451 P=588,844 P=339,748 P=1,859,043 Gross amount of loans, individually determined to be impaired, before deducting any individually assessed impairment allowance P=606,522 P=544,087 P=206,785 P=1,357, Parent Company Corporate lending Small business lending Consumer lending Total Balance, January 1 P=3,632,530 P=838,156 P=446,448 P=4,917,134 Additions 135,991 31,378 16, ,083 Transfers/disposals (2,909,373) (486,362) (133,786) (3,529,521) Balance, December , , ,376 1,571,696 Individual impairment 472, , , ,629 Collective impairment 387,130 25, , , , , ,376 1,571,696 Gross amount of loans, individually determined to be impaired, before deducting any individually assessed impairment allowance P=556,657 P=453,526 P=180,939 P=1,191,122

92 The following is a reconciliation of the individual and collective allowance for impairment losses and advances: Consolidated Parent Company Individual impairment Collective impairment Total Individual impairment Collective impairment Total Balance, January 1 P=3,440,390 P=1,785,169 P=5,225,559 P=3,380,215 P=1,536,919 P=4,917,134 Additions 100, , ,450 6, , ,083 Transfers/disposals (2,539,737) (1,106,229) (3,645,966) (2,446,860) (1,082,661) (3,529,521) Balance, December 31 P=1,000,853 P=858,190 P=1,859,043 P=939,629 P=632,067 P=1,571,696 The fair value of the collateral that the Group and Parent Company holds relating to loans individually determined to be impaired as at December 31, 2007 amounts to P=533.8 million. Collateral consists of real properties and chattel mortgages, deposit hold out, securities, postdated checks and receivables from third parties (see Note 7). 13. Deposit Liabilities Under existing BSP regulations, non-fcdu deposit liabilities of the Parent Company are subject to liquidity reserves equivalent to 10.00% which increased to 11.00% starting July 15, 2005, and statutory reserves equivalent to 10.00%. On the other hand, non-fcdu deposit liabilities of ASB are subject to liquidity and statutory reserves equivalent to 2.00% and 6.00%, respectively. The total liquidity and statutory reserves maintained by the Group and the Parent Company in the weeks towards the years ending December 31, 2007 and 2006 are as follows: Consolidated Parent Company Cash and other cash items P=2,921,568 P=3,496,412 P=2,851,762 P=3,433,908 Due from BSP 13,469,418 12,313,436 13,399,271 12,287,601 HTM investments 631,025 1,405, ,000 1,383,165 P=17,022,011 P=17,215,792 P=16,851,033 P=17,104,674 Of the total interest-bearing deposit liabilities of the Parent Company as of December 31, 2007 and 2006, 52.24% and 78.21%, respectively, are subject to periodic interest repricing. Remaining deposit liabilities earn annual fixed interest rates.

93 Bills Payable This account consists of borrowings from: Consolidated Parent Company Foreign banks P=1,945,076 P=2,063,330 P=674,162 P=101,514 BSP 62,188 52,269 62,188 52,269 Others 46,272 31,065 30,427 14,936 P=2,053,536 P=2,146,664 P=766,777 P=168,719 Bills Payable - Foreign Banks are short-term foreign currency borrowings bearing annual interest rates ranging from 4.25% to 6.46% and 3.75% to 5.50% in December 31, 2007 and December 31, 2006, respectively. Bills Payable - Foreign Banks of the Group include borrowings of Oceanic Bank Holdings, Inc. from Federal Home Loan Bank (FHLB) amounting to P=1.56 billion (US$37.77 million) and P=1.72 billion (US$35.05 million) as of December 31, 2007 and 2006, respectively, which bear average interest rate of 4.87% and 4.88% as of December 31, 2007 and 2006, respectively. As of December 31, 2007, borrowing from FHLB amounting to P= million (US$14.50 million) is due within one year while P= million (US$23.27 million) is due beyond one year. Bills Payable - BSP mainly represents term borrowings availed through normal open market transactions with the BSP. These are collateralized by eligible loans (see Note 7). These bear annual interest rates ranging from 4.71% to 5.32% in December 31, 2007, 4.17% to 5.39% in December 31, 2006 and 6.74% to 8.85% in December 31, Bills Payable - Others mainly represent funding from Development Bank of the Philippines and Social Security System whereby the Parent Company acts as conduit for certain financing programs of these institutions. These bear annual interest rates ranging from 5.66% to 11.00% in December 31, 2007, 5.66% to 9.01% in December 31, 2006 and 6.00% to 12.81% in December 31, Accrued Taxes, Interest and Other Expenses This account consists of: Consolidated Parent Company Accrued interest payable P=330,798 P=336,925 P=169,876 P=233,494 Income tax payable 22,064 3, ,615 Accrued other taxes and licenses 13,018 38,765 2,454 12,676 Accrued fringe benefit payable 5,826 5,537 1,789 1,499 Accrued other expenses payable 1,004, , , ,804 P=1,375,839 P=1,235,690 P=1,082,300 P=1,100,088

94 Accrued other expenses payable includes accumulated leave absences amounting to P= million and P= million in December 31, 2007 and 2006, respectively. This account also include accruals for bonuses and director s fees, rent, medical, dental and hospitalization fees, repairs and maintenance fees, representation, litigation, traveling and other expenses. 16. Subordinated Debt On April 10, 2002, the BOD of the Parent Company through a special BOD meeting, approved the raising of Upper Tier 2 capital of the Parent Company through the issuance in the international market of subordinated debt amounting to US$50.00 million, callable in 2009, subject to the provisions of BSP Circular No. 280 and BSP Memorandum to all Banks and Non-Bank Financial Institutions dated February 17, The issuance of the foregoing subordinated debt was approved by the Monetary Board in its Resolution No dated October 14, 2004, subject to the Parent Company s compliance with certain conditions. Relative to this, on December 23, 2004, the Parent Company issued US$50.00 million, 5.00% Unsecured Subordinated Notes (the Notes) due on December 23, Among the significant terms and conditions of the issuance of the subordinated notes are: a) Issue price is at % of the Principal amount. b) The Notes bear interest at 5.00% per annum, payable to the noteholder for the period from and including the issue date up to the maturity date if the call option is not exercised on the call option date. Interest shall be payable semi-annually in arrears on June 23 and December 23 of each year, commencing December 23, c) The Notes will constitute direct, unconditional, unsecured and subordinated obligations of the Parent Company ranking pari passu and without any preference among themselves and at least equally with all other present and future unsecured and subordinated obligations of the Parent Company.

95 d) The Parent Company may redeem the Notes in whole, but not in part, at a redemption price equal to % of the principal amount of the Notes together with accrued and unpaid interest after the tenth interest period from issue date subject to at least 30 banking days prior written notice to noteholders as well as prior approval from the BSP, subject to the compliance of the Parent Company with the prevailing requirements for the granting of BSP of its consent therefore. e) Each noteholder may convert the Notes into shares of the Parent Company at the noteholder s option, provided that such option may not be exercised and the conversion feature of the Notes shall be deferred until after the shareholders of the Parent Company owning or representing at least 2/3 of the Parent Company s outstanding capital stock shall have approved such conversion feature of the Notes. The conversion price will be based on the PDSWAR at the close of the banking day immediately preceding the issue date and a conversion price equivalent to the par value of P=1, per common share. As of December 31, 2007, the conversion feature of the Note is not yet approved by the stockholders of the Parent Company. f) The Notes are not deposits of the Parent Company and are not guaranteed by the Parent Company or any related party. The Notes are likewise not deposit instruments and are not insured by the Philippine Deposit Insurance Company (PDIC) and they may not be used as collateral for any loan made by the Parent Company or any of its subsidiaries or associate. Also, the Notes may not be redeemed at the option of the noteholders. On January 30, 2008, the BOD of the Parent Company approved the increase in the authorized capital stock of the Bank from P= million to P=20.00 billion and approved to present for stockholders approval on its annual stockholders meeting on March 12, 2008 the conversion of US$50.00 million worth of Upper Tier 2 subordinated debt to capital stock. Subsequently, in a special stockholders meeting held on March 12, 2008, the stockholders owning at least two thirds (2/3) of the outstanding capital stock, which includes the majority members of the BOD, approved the increase in capital stock of the Bank from P= million to P=11.50 billion. Of the increase in authorized capital stock of the Bank, P=2.81 billion will be subscribed and fully paid by way of conversion of the Notes amounting to US$50.00 million (equivalent to P=2.81 million at P=56.00 spot rate). 17. Insurance Provision Details of the account at December 31, 2007 are as follows: Aggregate reserve for life policies P=1,135,482 Policyholders dividends due and unpaid 92,915 Provisions for IBNR 1,248 Policy and contract claims payable 275 P=1,229,920

96 Details of aggregate reserve for life policies at December 31, 2007 are as follows: Traditional life insurance P=1,134,951 Accident and health Unit-linked insurance 1,724 Reinsurance credit (1,193) P=1,135,482 Insurance contract liabilities at December 31, 2007 may be analyzed as follows: Insurance contract liabilities Reinsurer s share of liabilities Net Aggregate reserves for ordinary life policies P=1,131,247 P=576 P=1,130,671 Aggregate reserves for group life insurance 3, ,086 Aggregate reserves unit-linked 1,725 1,725 P=1,136,675 P=1,193 P=1,135,482 The movements during the period in aggregate reserves are as follows: Insurance contract liabilities Reinsurer s share of liabilities Total At January 1, 2007 P=932,099 P=1,253 P=930,846 Premiums received 502,524 2, ,815 Liability released for payments of death, maturity and surrender benefits and claims (374,484) (2,923) (371,561) Accretion of investment income or change in unit prices 76, ,382 At December 31, 2007 P=1,136,676 P=1,194 P=1,135,482 a. Process used to decide on assumptions Assumptions used for product pricing is different from the assumption used in calculating aggregate reserves. Pricing assumptions make use of best estimates in relation to future deaths, voluntary terminations, investment returns and administration expenses. These assumptions are used for evaluating the overall profitability of the product and the adequacy of the rates. In calculating aggregate reserves liability, assumptions on mortality and investment include a margin for risk and uncertainty. The effect of voluntary termination is not considered, although the inclusion of which would result to a lower liability due to the gains from surrender charges. Expenses are partially considered through a theoretical first year allowance as a result of the valuation method used by NYLIP, which is the Commissioners Reserve Valuation Method (CRVM). The unearned premiums and cost of insurance charges are also held as an additional insurance liability.

97 The assumptions used in calculating the aggregate policy reserve liabilities for insurance contracts are as follows: Mortality The 1980 Commissioner s Standard Ordinary (1980 CSO), age last birthday, male/female unismoke table is the chosen valuation mortality table for Company - developed plans. For the acquired Mapfre plans, the Philippine Intercompany Mortality (PICM) table is the valuation mortality basis. An investigation into NYLIP s experience is performed annually, but the number and amount of claims have not reached a statistically significant level. Over the long run, the expected number of deaths is estimated to be 10.00% less than assumed in the calculation of liabilities. Investment returns Philippine Peso 5.00% for the long-term, participating whole life and endowment plans (2001 series) 6.00% for the Mapfre whole life and endowment plans (2003 acquired block) 6.00% for the long-term, participating endowment plans (2006 series) US Dollar 3.50% for the long-term, participating whole life and endowment plans (2002 Series) 5.00% for the 12-Year Anticipated Endowment (2005 Series) b. Changes in assumptions NYLIP did not change its valuation assumptions for the insurance contracts disclosed in this note. These assumptions are integral part of the insurance products submitted and approved by the Insurance Commission. c. Liability adequacy A test of the effect of a change in mortality or investment return assumption while the other valuation assumption is held constant is part of NYLIP s liability adequacy testing. When testing adequacy of reserves, gross premium valuation is used so that the effect of voluntary terminations, expenses and commissions, and margins in gross premiums are considered in testing the statutory reserve. If a liability adequacy adjustment is indicated, this will trigger a review of the valuation assumptions in order to address the inadequacy through a higher statutory reserve.

98 d. Sensitivity The following table presents the sensitivity of the value of insurance liabilities to changes in the assumptions used in the estimation of insurance liabilities. Changes in assumptions will not cause a change to the amount of the liability, unless the change is severe enough to trigger a minimum liability adequacy test adjustment. The table below indicates the level of the respective variable that will trigger an adjustment and then indicates the liability adjustment required as a result of a further deterioration in the variable. As each assumption is tested, all other assumptions are held constant. Impact on statutory reserve Assumption Scenario Trigger level Amount % Mortality Higher by 10.00% 42.00% P=77, Interest rate Lower by 100 basis points , The trigger level above is the degree to which the assumption can deteriorate before the lia bility is considered inadequate. In particular, future mortality can increase by an estimated 42.00% or alternatively interest rates can drop by approximately 205 basis points across the board before the liability adequacy test will indicate a deficiency. 18. Other Liabilities This account consists of: Consolidated Parent Company Domestic bills purchased (Note 19) P=936,310 P=790,800 P=936,310 P=790,800 Net deferred tax liability (Notes 19 and 25) 802,840 1,130, ,398 1,129,896 Accounts payable (Note 19) 529, , , ,276 Segregated fund liability 526,081 Other credits (Note 19) 358, , , ,897 Outstanding acceptances payable (Note 19) 353, , , ,547 Net retirement liability (Note 22) 321, , , ,072 Cash letters of credit (Note 19) 286, , , ,436 Due to other banks (Note 19) 206, Payment orders payable (Note 19) 188, , , ,014 Premium deposit fund 98,834 Withholding taxes payable (Note 19) 49,434 50,381 48,388 49,230 Due to BSP (Note 19) 31,304 53,158 31,304 53,158 SSS, Medicare, EC, Pag-ibig Fund 6,376 1,223 6,350 1,210 Deposits for keys on safety deposit 4,694 4,364 4,694 4,364 Due to the Treasurer of the Philippines 4,491 4,034 4,426 3,972 Special time deposits (Note 19) 2,956 4,779 2,956 4,779 Advance rentals on bank premises 2,330 2,084 2,330 2,084 Miscellaneous (Note 19) 171, , , ,645 P=4,882,866 P=5,033,047 P=3,902,313 P=4,750,841 Premium deposit fund pertains to funds held by NYLIP for policyholders with interests ranging from 4.50% to 5.00% in Interest expense charged to income is P=4.39 million. The carrying amount of premium deposit fund approximates fair value.

99 Miscellaneous liabilities include payable of the Parent Company to nonresident exporter amounting to P= million in 2006, which was originally booked as Bills payable but was reclassified as Miscellaneous liabilities as recommended by BSP. This account was fully paid as of December 31, On November 15, 1999, the Parent Company entered into a memorandum of agreement with the PDIC whereby the Parent Company shall assume the uninsured deposits of OCBC up to an aggregate amount of P=2.34 billion under certain terms and conditions. OCBC-assigned deposits shown as Special time deposits amounted to P=2.96 million and P=4.78 million as of December 31, 2007 and 2006, respectively. The difference between the funding received from PDIC and the face value of the deposits assumed amounting to P=0.35 million and P=0.81 million as of December 31, 2007 and 2006, respectively, was deemed as goodwill payment booked under Other assets (see Note 11). 19. Maturity Profile of Assets and Liabilities The following tables present the assets and liabilities by contractual maturity and settlement dates as of December 31, 2007 and 2006: Consolidated Due Within One Year Due Beyond One Year Total Due Within One Year Due Beyond One Year Total Financial Assets Cash and other cash items P=8,198,200 P= P=8,198,200 P=9,247,409 P= P=9,247,409 Due from BSP 14,067,457 14,067,457 12,545,552 12,545,552 Due from other banks 6,870,230 6,870,230 4,568,710 4,568,710 Interbank loans receivable 10,835,073 10,835,073 15,699,860 81,717 15,781,577 Derivative asset* 355, , , ,266 Financial assets at FVPL 2,036,765 2,041,273 4,078, ,795 12,208,556 12,577,351 AFS investments gross 16,835,591 6,670,189 23,505,780 1,846,852 20,062,680 21,909,532 HTM investments 2,516,052 2,525,721 5,041,773 2,022,884 1,534,679 3,557,563 Loans and receivable - gross Loans 46,357,794 8,355,926 54,713,720 47,685,746 10,571,776 58,257,522 Unquoted debt securities 6,387, ,754 6,518, ,805 6,466,062 6,883,867 Accrued interest receivable 1,143,843 1,143,843 2,030,614 2,030,614 Sales contracts receivable 1,994,040 1,994,040 1,956,120 1,956,120 Accounts receivable 541, , , ,623 Other assets (Note 11) Segregated fund asset 526, ,081 Returned checks and other cash Items 216, , , ,248 Bond sinking fund 50,000 50,000 50,000 50,000 Others 100, ,050 27,415 27,415 Nonfinancial Assets Investments in subsidiaries and associates 164, ,083 Property and equipment - at cost 4,093,513 4,093,513 3,921,084 3,921,084 Property and equipment - at appraised 2,508,622 2,508,622 2,507,662 2,507,662 Investment properties gross 6,481, ,052 6,693,543 6,362,462 6,362,462 Goodwill 88,936 88,936 Other assets gross 507, ,956 1,150, , , ,691 P=125,970,069 P=27,319, ,290,011 P=104,060,469 P=60,003, ,064,351 (Forward)

100 Consolidated Due Within One Year Due Beyond One Year Total Due Within One Year Due Beyond One Year Total Unearned interest (Note 7) (P=180,089) (P=262,670) Prompt payment and discount (Note 7) (28,188) (6,680) Capitalized interest (Note 7) (45,953) (114,207) Accumulated depreciation and amortization Property and equipment (Note 9) (2,529,241) (2,479,144) Investment properties (Note 10) (275,945) (333,682) Other assets (Note 11) (1,601) (7,328) Allowance for impairment and credit losses AFS investments (Note 6) (2,619) (2,619) Loans and receivable (Note 7) (1,859,043) (5,225,559) Property and equipment (Note 9) (4,352) (4,352) Investment properties (Note 10) (593,069) (632,121) Other assets (Note 11) (917) (386) P=147,768,994 P=154,995,603 Financial Liabilities Deposit liabilities P=117,735,846 P=30,100 P=117,765,946 P=124,214,683 P=2,493,362 P=126,708,045 Derivative liabilities 274,782 43, ,037 86,934 86,934 Bills payable 2,053,536 2,053, ,122 1,719,542 2,146,664 Marginal deposits 196, ,218 78,999 44, ,126 Manager s checks and demand drafts outstanding 554, , , ,696 Accrued taxes, interest and other expenses 1,375,839 1,375,839 1,235,690 1,235,690 Subordinated debt 2,064,000 2,064,000 2,451,500 2,451,500 Insurance provision 1,229,920 1,229,920 Other liabilities (Note 18): Accounts payable 529, , , ,030 Segregated fund liability 526, ,081 Outstanding acceptances payable 353, , , ,547 Cash letters of credit 286, , , ,436 Due to other banks 206, , Payment orders payable 188, , , ,014 Due to BSP 31,304 31,304 53,158 53,158 Special time deposits 2,956 2,956 4,779 4,779 Domestic bills purchased 936, , , ,800 Miscellaneous 99,785 98, ,619 Nonfinancial Liabilities Other liabilities (Note 18): Net deferred tax liability 802, ,840 1,130,288 1,130,288 Withholding taxes payable 49,434 49,434 50,381 50,381 Net retirement liability 321, , , ,072 Other liabilities 435,720 12, , , ,907 1,389, ,389,177 3,051, ,440, ,461,976 8,841, ,303,702 (Forward)

101 Parent Company Due Within One Year Due Beyond One Year Total Due Within One Year Due Beyond One Year Total Financial Assets Cash and other cash items P=3,445,319 P= P=3,445,319 P=3,823,766 P= P=3,823,766 Due from BSP 13,222,310 13,222,310 12,090,540 12,090,540 Due from other banks 2,351,313 2,351,313 2,265,375 2,265,375 Interbank loans receivable 11,057,198 11,057,198 13,431,660 81,717 13,513,377 Derivative assets 332, , , ,771 Financial assets at FVPL 2,036,765 2,041,273 4,078, ,529 12,475,822 12,577,351 AFS investments gross 14,005,780 6,571,714 20,577,494 1,138,154 19,235,937 20,374,091 HTM investments 2,108,432 2,511,380 4,619,812 1,185,998 1,534,679 2,720,677 Loans and receivable - gross Loans 35,471,700 6,247,931 41,719,631 38,469,480 5,335,585 43,805,065 Unquoted debt securities 6,342,212 6,342, ,509 6,317,215 6,648,724 Sales contracts receivable 1,867,973 1,867,973 1,956,120 1,956,120 Accrued interest receivable 1,005,775 1,005,775 1,758,305 1,758,305 Accounts receivable 432, , , ,211 Other assets (Note 11): Returned checks and other cash items 213, , , ,559 Bond sinking fund 50,000 50,000 50,000 50,000 Others 26,719 26,719 27,398 27,398 Nonfinancial Assets Investment in subsidiaries and associate 3,052,796 3,052,796 2,935,627 2,935,627 Property and equipment - at cost 3,614,713 3,614,713 3,626,987 3,626,987 Property and equipment - at appraised 2,496,372 2,496,372 2,495,412 2,495,412 Investment properties gross 6,503,996 6,503,996 6,157,503 6,157,503 Other assets gross 305, , , , , ,635 P=100,729,542 P=27,125, ,854,974 P=81,751,175 P=56,433, ,184,494 Unearned interest (Note 7) (142,572) (253,412) Prompt payment and discount (Note 7) (10,639) (6,031) Capitalized interest (Note 7) (45,298) (94,594) Accumulated depreciation Property and equipment (Note 9) (2,167,126) (2,289,737) Investment properties (Note 10) (273,647) (331,918) Other assets (Note 11) (1,601) (7,328) Allowance for impairment losses AFS investments (Note 6) (2,619) (2,619) Loans and receivables (Note 7) (1,571,696) (4,917,134) Property and equipment (Note 9) (4,352) (4,352) Investment properties (Note 10) (587,502) (626,554) Other assets (Note 11) (917) (386) P=123,047,005 P=129,650,429 (Forward)

102 Due Within One Year Parent Company Due Beyond Due Within Due Beyond One Year Total One Year One Year Total Financial Liabilities Deposit liabilities P=101,256,266 P=30,100 P=101,286,366 P=106,034,888 P=2,493,362 P=108,528,250 Derivative liabilities 274,587 43, ,842 86,474 86,474 Bills payable 766, , ,679 1, ,719 Marginal deposits 97,611 97,611 51,383 51,383 Manager s checks and demand drafts outstanding 536, , , ,602 Accrued taxes, interest and other expenses 1,082,300 1,082,300 1,100,088 1,100,088 Subordinated debt 2,064,000 2,064,000 2,451,500 2,451,500 Other liabilities (Note 18): Domestic bills purchased 936, , , ,800 Outstanding acceptances payable 353, , , ,547 Accounts payable 457, , , ,276 Cash letters of credit 286, , , ,436 Payment orders payable 173, , , ,014 Due to BSP 31,304 31,304 53,158 53,158 Special time deposits 2,956 2,956 4,779 4,779 Due to other banks Nonfinancial Liabilities Net deferred tax liability 802, ,398 1,129,896 1,129,896 Net retirement liability 321, , , ,072 Withholding tax payable 48,388 48,388 49,230 49,230 Other liabilities 369, , , , ,093 1,145,172 P=106,781,428 P=3,272,771 P=110,054,199 P=110,365,894 P=7,280,963 P=117,646, Equity Capital stock as of December 31, 2007 and 2006 consists of (in thousands except for par value and number of shares): Preferred - P=1,000 par value Authorized, issued and outstanding - 50,000 shares P=50,000 Common - P=1,000 par value Authorized - 450,000 shares Issued and outstanding - 445,295 shares 445,295 P=495,295 The Parent Company s preferred shares have the following features: a. nonvoting, cumulative and entitled to guaranteed dividends of 15.00% per annum; b. convertible into common stock in case of nonpayment of dividends for three consecutive years. The conversion value of the preferred stock is at the rate of peso for peso of its par value to prevailing book value of the common stock at the time of conversion; and c. redeemable in whole or in part at the option of the Parent Company, upon 30-day notice at par value plus accrued dividends at the time of redemption.

103 On January 29, 2003, the BOD approved the establishment of a sinking fund of P=50.00 million, equal to the outstanding preferred shares redeemable at their maturity dates. As of December 31, 2007 and 2006, the fund is shown under other assets - others in the statements of condition. Dividend in arrears on the preferred shares amounted to P= million and P= million as of December 31, 2007 and 2006, respectively. Capital Management The primary objectives of the Group s capital management are to ensure that it complies with externally imposed capital requirements and it maintains strong credit ratings and healthy capital ratios in order to support its business and to maximize shareholders value. The Group manages its capital structure and makes adjustments to it in the light of changes in economic conditions and the risk characteristics of its activities. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividend payment to stockholders, return capital to stockholders, or issue capital securit ies. No changes were made in the objectives, policies and processes from the previous years. The Group and its individual regulatory operations have complied with all externally imposed capital requirements throughout the period. Regulatory Capital The following table sets the regulatory capital as reported to BSP as at December 31, 2007 and 2006: Consolidated Parent Company Tier 1 Capital P=12,736,689 P=10,636,609 P=8,864,862 P=7,443,960 Tier 2 Capital 2,633,249 3,136, ,538 1,422,449 15,369,938 13,772,919 9,756,400 8,866,409 Risk weighted assets P=108,354,131 P=86,308,961 P=85,287,067 P=75,276,444 Tier 1 capital ratio 11.75% 12.32% 10.39% 9.89% Total capital ratio 14.19% 15.96% 11.44% 11.78% The risk-weighted assets of the Group and Parent Company as of December 31, 2007 are as follow: Consolidated Parent Company Credit risk-weighted assets P=91,298,351 P=68,747,782 Market risk-weighted assets 4,875,555 4,359,060 Operational risk-weighted assets 12,180,225 12,180,225 Risk-weighted assets P=108,354,131 P=85,287,067 Under existing BSP regulations, the determination of the Parent Company s compliance with regulatory requirements and ratios is based on the amount of the Parent Company s unimpaired capital (regulatory net worth) as reported to the BSP, which is determined on the basis of regulatory accounting policies which differ from PFRS in some respects.

104 The regulatory qualifying capital of the Parent Company consists of Tier 1 capital, which is the sum of Core Tier 1 capital and allowable amount of Hybrid Tier 1 capital. Core Tier 1 capital consists of paid-up common stock, paid-up perpetual and non-cumulative preferred stock, surplus including current year profit, surplus reserves less required deductions such as unsecured credit accommodations to DOSRI, deferred income tax, and goodwill while Hybrid Tier 1 capital includes perpetual preferred stock and perpetual unsecured subordinated debt. Certain adjustments are made to PFRS - based results and reserves, as prescribed by the BSP. The other component of regulatory capital is Tier 2 (supplementary) capital, which includes unsecured subordinated debt and general loan loss provision. Specifically under existing BSP regulations, the risk-based capital adequacy ratio of a bank, expressed as a percentage of qualifying capital to risk-weighted assets, should not be less than 10.00% for both solo basis (head office and branches) and consolidated basis (Parent Company and subsidiaries engaged in financial allied undertakings but excluding insurance companies). Qualifying capital and risk-weighted assets are computed based on BSP regulations. Credit riskweighted assets consist of total assets less cash on hand, due from BSP, loans covered by hold-out on or assignment of deposits, loans or acceptances under letters of credit to the extent covered by margin deposits and other non-risk items determined by the Monetary Board (MB) of the BSP. Under BSP Circular No. 360, effective July 1, 2003, the capital-to-risk assets ratio (CAR) is to be inclusive of a market risk charge. In August 2006, the BSP issued Circular No. 538 which contains the implementing guidelines for the revised risk-based capital adequacy framework to conform to Basel II recommendations. Under the revised framework, capital requirements for operational risk, credit derivatives and securitization exposures are to be included in the calculation of the Bank s capital adequacy. The revised framework also prescribes a more granular mapping of external credit ratings to the capital requirements and recognizes more types of financial collateral and guarantees as credit risk mitigants. Changes in the credit risk weights of various assets, such as foreign currency denominated exposures to the Philippine National Government, non-performing exposures and ROPA, were also made. Exposures shall be riskweighted based on third party credit assessment of the individual exposure given by eligible external credit assessment institutions. Credit risk-weights range from 0% to 150% depending on the type of exposure and/or credit assessment of the obligor. The new guidelines took effect last July 1, Under BSP Circular regulations, the capital-to-risk assets ratio (CAR) of the Group as reported to the BSP was 14.19% and 15.96% as of December 31, 2007 and 2006, respectively, while that of the Parent Company was 11.44% and 11.78%, respectively. The Parent Company embarked on a comprehensive program to update existing products, policies and procedures manuals incorporating new bank policies, laws and regulations and BSP requirements to further strengthen the management and operations of the Parent Company including its branches, affiliates and subsidiaries. In addition, the Parent Company has been implementing continuous enhancements in the areas of risk management, internal controls, technology and strategic planning to streamline management oversight and performance monitoring of its head office, branches, affiliates and subsidiaries. This is in preparation for more competitive business environment and much tougher requirements of Basel II, the international banking standards adopted by BSP.

105 As discussed in Note 16, on January 30, 2008, the BOD of the Parent Company approved to present for stockholders approval on its annual stockholders meeting on March 12, 2008 the conversion of US$50.00 million worth of Upper Tier 2 subordinated debt to capital stock. The Parent Company intends to increase its authorized capital stock to P=20.00 billion from P= million. On July 25, 2007, the BOD of the Parent Company approved and authorized the management to conduct capital raising activity by way of issuance of Lower Tier 2 capital up to the maximum amount of P=5.00 billion through a public offering subject to the provisions of BSP Circular No. 280 and BSP Memorandum to all banks and financial institutions dated February 17, The issuance of the foregoing subordinated debt was approved by the MB in its Resolution No. 98 dated January 24, Relative to this, on March 6, 2008, the Parent Company issued P=4.50 billion, 7.13% Subordinated Notes due on 2018, callable with step-up in Among the significant terms and conditions of the issuance of the subordinated notes are: a). Issue price is at % of the Principal amount. b). The Notes bear interest at 7.13% per annum, payable to the noteholder for the period from and including the issue date up to the maturity date if the call option is not exercised on the call option date. Interest shall be payable quarterly in arrears on March 6, June 6, September 6 and December 6 of each year, commencing June 6, The Subordinated Notes will mature on March 6, 2018, if not redeemed earlier. c). The Subordinated Notes will constitute direct, unconditional, unsecured and subordinated obligations of the Parent Company. The Subordinated Notes will at all times rank pari passu and without any preference among themselves, but in priority to the rights and claims of holders of all classes of equity securities of the Bank, including holders of preferences shares. d). The Parent Company may redeem the notes in whole, but not in part, at a redemption price equal to % of the principal amount of the Notes together with accrued and unpaid interest at first banking day after the 20 th interest period from issue date subject to at least 30- day prior written notice to noteholders and prior approval of the BSP, subject to the following conditions: (i) the capital adequacy ratio of the Parent Company is at least equal to the required minimum ratio; and (ii) the Subordinated Note is simultaneously replaced with the issues of new capital which are neither smaller in size nor lower in quality than the Subordinated Notes. e). The Subordinated Note shall not be redeemable or terminable at the instance of any noteholder before maturity date.

106 Miscellaneous Income This account consists of: Consolidated Parent Company Gain on foreclosures (Note 10) P=578,204 P=455,437 P=1,056 P=571,831 P=463,156 P=1,056 Premiums-net of reinsurance 525,438 Gain on acquisition of additional interest in NYLIP (Note 8) 156,574 Rental (Notes 10 and 23) 96, ,550 82,452 93, ,888 82,452 Income from trust operations 56,102 48,676 43,115 56,102 48,676 43,115 Profit (loss) from assets sold 49,128 18,931 75,321 (10,025) 18,931 75,321 Leasing and finance 17,991 12,241 4,970 Dividends 9,335 1,614 4,692 9,335 1,612 4,692 Recovery on charged-off assets , , ,189 Miscellaneous 470, , , , , ,879 P=1,960,238 P=998,856 P=586,935 P=1,160,122 P=850,066 P=507,704 Gain on acquisition of additional interest in NYLIP represents excess of Parent Company's additional interest in the net fair value of NYLIP's identifiable assets and liabilities over its acquisition cost (see Note 8). The details net premiums on insurance contracts are shown below: Ordinary life insurance P=453,563 Unit-linked 66,043 Group life insurance 8,541 Life insurance premiums revenue 528,147 Ordinary life insurance 1,692 Group life insurance 1,017 Reinsurers share of life insurance contracts premiums revenue 2,709 Total net insurance premiums P=525, Retirement Plan The Parent Company has a funded, noncontributory defined benefit retirement plan (the Plan) covering substantially all of its employees. Qualified employees of the Parent Company which have been seconded to its subsidiaries are covered by the Parent Company s Plan. Under this Plan, the employees receive a defined amount of pension benefit upon retirement dependent on one or more factors such as age, years of service and salary.

107 For maximum benefits under the Plan, the Parent Company provides an Employee Investment Program (EIP) wherein an employee may invests monthly during his employment with the Parent Company an amount not less than 1.00% of monthly salary but not more than 50.00% of his net monthly salary in the EIP. Upon retirement, employee who also availed of the EIP shall receive an additional benefit from the Plan plus a return of his investment in EIP plus related interests. A full actuarial valuation of the EIP and the Plan is carried out by a qualified independent actuary at least once every two years. The Parent Company s annual contribution to the retirement plan consists of a payment covering the current service cost, amortization of the unfunded actuarial accrued liability and interest on such unfunded actuarial liability. The principal actuarial assumptions used in determining the retirement liability for the Parent Company s retirement plan are shown below: January 1, 2007 January 1, 2006 Discount rate 6.71% 10.53% Expected rate of return on assets 9.00% 9.00% Future salary increases 5.00% 5.00% Average remaining working life The discount rate used in computing the present value of obligation as of December 31, 2007 and 2006 is 6.71%. The summary of the valuation results for both the Plan and EIP follows: Present value of obligation P=1,672,069 P=1,679,471 Fair value of plan assets 1,141, ,131 Deficit 530, ,340 Unrecognized actuarial gains (208,737) (500,268) Net retirement liability P=321,568 P=445,072 The movements in the present value of obligations of the Plan and EIP follow: Balance at beginning of year P=1,679,471 P=965,681 Current service costs 88, ,349 Interest costs 112, ,619 Actuarial loss 272,866 Benefits paid (209,013) (80,044) Balance at end of year P=1,672,069 P=1,679,471

108 The movements in the fair value of the assets of the Plan and EIP follow: Balance at beginning of year P=734,131 P=470,629 Expected return 66,072 51,445 Contributions 286, ,000 Benefits paid (209,013) (80,044) Actuarial gain 263,838 10,101 Balance at end of year P=1,141,764 P=734,131 The Parent Company expects to contribute P= million to its defined benefit plan in Actual return on plan assets amounted to P= million and P=61.55 million as at December 31, 2007 and 2006, respectively. The major categories of plan assets of the Plan as a percentage of the fair value of total plan assets are as follows: Debt instruments 64.39% 52.33% Deposits in banks 34.31% 42.70% Other assets 1.30% 4.97% % % The overall expected rate of return on plan assets is determined based on the market prices prevailing on that date applicable to the period over which the obligation is to be settled. The amounts included in Compensation and fringe benefits of the Parent Company in the statements of income follow: Current service costs P=88,918 P=388,349 Interest costs 112, ,619 Expected return on plan assets (66,072) (51,445) Actuarial loss recognized during the year 27,693 12,813 P=163,232 P=482,336 Movements in the net retirement liability included in other liabilities are as follows: Balance at beginning of year P=445,072 P=244,736 Retirement expense 163, ,336 Contribution (286,736) (282,000) Balance at end of year P=321,568 P=445,072

109 Movements in the accumulated unrecognized actuarial gains of the Plan and EIP follow: Balance at beginning of year (P=500,268) (P=250,316) Actuarial loss on the present value of the defined benefit obligations (272,866) Actuarial gain on plan assets 263,838 10,101 Actuarial loss recognized during the year 27,693 12,813 Balance at end of year (P=208,737) (P=500,268) Amounts for the current and previous years are as follows: Present value of obligations P=1,672,069 P=1,679,471 Fair value of plan assets 1,141, ,131 Deficit 530, ,340 Change in assumptions on plan liabilities 273,059 Experience adjustments on plan liabilities (193) Experience adjustments on plan assets 263,838 10,101 The amounts of long-term benefits expense representing Accumulated leave absences (included in Compensation and fringe benefits) in the statements of income are as follows: Current service cost P=265,075 P=50,507 Actuarial loss 224,357 P=265,075 P=274,864 The movements in the present value of unfunded accumulated leave absences (included in Accrued Taxes, Interest and Other Expenses) (see Note 15) recognized in the statements of condition follow: Balance, January 1 P=346,493 P=71,629 Current service cost 265,075 50,507 Actuarial loss 224,357 Balance, December 31 P=611,568 P=346,493 The movements in the accumulated leave absences are as follow: Balance at beginning of year P=346,493 P=71,629 Long-term benefits expense 265, ,864 Balance at end of year P=611,568 P=346,493 The Parent Company has no plan assets yet for the accumulated leave absences.

110 Lease Contracts The Parent Company leases the premises occupied by some of its branches including those of its subsidiaries for periods ranging from 2 to 20 years, renewable upon mutual agreement of the parties. Various lease contracts include escalation clauses, most of which bear an annual rent increase of 5.00% to 10.00%. Rent expense charged against current operations (included in Occupancy and other equipmentrelated costs in the statement of income) amounted to P= million in December 31, 2007, P= million in December 31, 2006 and P= million in December 31, 2005, for the Group, of which P= million in December 31, 2007, P= million in December 31, 2006 and P= million in December 31, 2005, was incurred by the Parent Company. As of December 31, 2007 and 2006, the Group had no lease arrangements with contingent provisions. Future minimum rentals payable under non-cancellable operating leases follow: Consolidated Parent Company Within one year P=188,869 P=55,318 P=159,496 P=8,811 Beyond one year but not more than five years 433, , , ,830 Beyond five years 43, ,481 36, ,195 P=665,630 P=879,046 P=598,434 P=534,836 Future minimum rentals receivable under non-cancellable operating leases follow: Consolidated Parent Company Within one year P=40,102 P=62,421 P=40,019 P=62,421 Beyond one year but not more than five years 42,905 68,974 28,954 68,974 Beyond five years 2,085 P=85,092 P=131,395 P=68,973 P=131,395

111 Miscellaneous Expenses This account consists of: Consolidated Parent Company Insurance P=276,988 P=260,557 P=259,289 P=271,705 P=257,547 P=259,032 Increase in aggregate reserve for life Policies 204,636 Repairs and maintenance 191, , , , , ,162 Fines, penalties and other charges 180,974 76,004 2, ,974 76,004 2,823 Litigation/assets acquired expenses 153,541 15,449 96, ,538 15,209 95,677 Information technology expenses 139, , , , , ,585 Stationery and office supplies 113, ,874 55, , ,466 50,184 EAR (Note 25) 79,773 57,175 46,280 69,496 54,127 45,614 Management and professional fees 75,227 76,658 66,865 53,224 66,401 66,865 Postage, telephone, cable 66,958 46,841 45,242 57,581 44,286 45,123 Policyholder benefits and claim Benefits 61,696 Commissions 49,317 Brokers fees and charges 44,957 46,052 40,134 40,805 40,400 40,134 Donations 35,877 26,570 69,405 35,860 26,525 69,405 Traveling expenses 31,496 36, ,315 26,414 32, ,088 PCHC processing fee 15,761 16,143 15,958 15,761 16,143 15,958 Membership fees 13,190 8,812 7,419 11,020 7,709 7,385 Advertising 10,222 4,308 6,706 5,167 3,706 6,706 Periodicals and magazines 1,950 1,785 1,910 1,840 1,697 1,910 Miscellaneous 251, , , , , ,348 P=1,997,907 P=1,683,990 P=1,452,411 P=1,492,622 P=1,547,851 P=1,195,999 There are pending tax assessments on the Parent Company by the BIR relating to prior tax periods, a substantial portion of which pertains to issues affecting the banking industry. As of December 31, 2006, the Parent Company accrued P= million as estimated settlement which was booked under fines, penalties and other charges. Miscellaneous includes finance charges, other occupancy expenses, other equipment expenses, freight expenses, and appraisal expenses. 25. Income and Other Taxes Under Philippine tax laws, the RBU of the Parent Company and its banking subsidiary 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 gross receipts tax (GRT) and documentary stamp taxes. Income taxes include the corporate income tax, discussed below, and final tax paid at the rate of 20.00%, which represents final withholding tax on gross interest income from government securities and other deposit substitutes. These income taxes, as well as the deferred tax benefits and provisions, are presented as Provision for income tax in the statement of income.

112 Provision for income tax consists of: Consolidated Parent Company Current P=162,691 P=155,125 P=116,669 P=35,736 41,426 P=30,962 Final 396, , , , , ,832 Deferred (196,146) (55,602) 32,888 (204,064) (51,535) 27,524 P=363,066 P=480,611 P=475,479 P=206,376 P=345,769 P=363,318 Republic Act (RA) No. 9337, An Act Amending National Internal Revenue Code, provides that effective July 1, 2005, the RCIT shall be 35.00% until December 31, Starting January 1, 2009 the RCIT rate shall be 30.00%. In addition, the allowable interest expense shall be reduced by 42.00% of the interest income subject to final tax. RA No also provides for the change in GRT rate from 5.00% to 7.00%. However, such amendments have been subject to temporary restraining order by the Supreme Court. On October 28, 2005, the Supreme Court has ruled that RA No is constitutional effective on November 1, Prior to November 1, 2005, the RCIT was 32.00%. Interest allowed as deductible expense is reduced by an amount equivalent to 38.00% of interest income subjected to final tax. Under the regulations, FCDU offshore income (income from nonresidents) is tax-exempt while gross onshore income (income from residents) is subject to 10.00% income tax. In addition, interest income on deposit placements with other FCDUs and offshore banking units (OBUs) is taxed at 7.50%. RA No. 9294, which became effective in May 2004, exempts from income tax the income derived by the FCDU from foreign currency transactions with nonresidents, OBUs and local commercial banks including branches of foreign banks authorized by the BSP to transact business with FCDUs and other depository banks under the expanded foreign currency deposit system. Interest income on foreign currency loans by the FCDUs to residents other than OBUs or other depository banks under the expanded system is subject to 10.00% gross income tax. The Parent Company s foreign subsidiaries are subject to income and other taxes based on enacted laws of the countries where they operate. In addition, current tax regulations provide for the ceiling on the amount of EAR expense that can be claimed as a deduction against taxable income. Under the regulation, EAR expense allowed as a deductible expense for a service company like the Parent Company is limited to the actual EAR paid or incurred but not to exceed 1.00% of net revenue. EAR expenses of the Group amounted to P=79.77 million, P=57.18 million and P=46.28 million in December 31, 2007, 2006 and 2005 respectively, while that of the Parent amounted to P=69.50 million, P=54.13 million and P=45.61 million, in December 31, 2007, 2006 and 2005, respectively. EAR expenses are included under Miscellaneous expense in the statements of income (see Note 24). An MCIT of 2.00% on modified gross income is computed and compared with the RCIT. Any excess of the MCIT over the RCIT is deferred and can be used as a tax credit against future income tax liability for the next three years. In addition, NOLCO is allowed as a deduction from taxable income in the next three years from the date of inception.

113 The Parent Company s NOLCO is broken down as follows: Inception Year Amount Expired Balance Exp iry Year 2004 P=1,174,810 P=1,174,810 P= ,524,839 4,524, , , ,306,670 3,306, P=9,766,943 P=1,174,810 P=8,592,133 The Parent Company s MCIT carryforward (the excess of MCIT over the computed RCIT) as of December 31, 2006 and 2007 can be claimed as tax credits against regular income tax as follows: Inception Year Amount Expired Balance Expiry Year 2004 P=20,946 P=20,946 P= ,962 30, ,308 41, ,723 33, P=126,939 P=20,946 P=105,993 The components of net deferred tax liability included in Other liabilities follow: Consolidated Parent Company Deferred tax liability on: Excess of fair value over book value of investment properties upon initial measurement at fair value P=761,782 P=707,000 P=759,551 P=705,978 Revaluation increment on property and equipment 731, , , ,635 Positive fair value of derivatives 116,306 34, ,306 34,404 Leasing income differential between finance and operating lease method 7,618 7,618 Net retirement asset 441 1,009 Others 24,980 53,813 13,634 1,642,762 1,535,479 1,607,492 1,485,651 Deferred tax asset on: Allowance for impairment and credit losses 665, , , ,755 Unrealized loss on AFS investments 105,942 30, ,800 NOLCO 15,652 Negative fair value of derivatives 91,757 91,757 Unamortized past service costs 2,581 3,022 Accrued retirement liability 1,413 1, , , , ,755 Net deferred tax liability 759,881 1,081, ,398 1,129,896 Net deferred tax asset recognized by certain subsidiaries (Note 11) 42,959 48,791 Net deferred tax liability (Note 18) P=802,840 P=1,130,288 P=802,398 P=1,129,896

114 The Parent Company did not recognize deferred tax assets on the following: NOLCO P=8,592,133 P=6,460,273 Allowance for impairment and credit losses 442,695 4,534,602 Accrued retirement benefits 321, ,072 Accumulated depreciation - investment properties 275, ,682 MCIT 105,993 93,216 Others 391, ,454 The Parent Company believes that it is highly probable that these temporary differences will not be realized in the future. A reconciliation of the applicable statutory income tax to the effective income tax rate of the Parent Company follows: Statutory income tax rate 35.00% 35.00% Tax effects of: Unrecognized deferred tax asset 8.27 (26.34) Nondeductible expenses FCDU income before tax (22.08) (16.13) Tax-exempt income and tax-paid income (64.12) (10.65) Others - net Effective income tax rate 13.57% 19.48% 26. Trust Operations Securities and other properties (other than deposits) held by the Parent Company in fiduciary or agency capacity for its customers are not included in the statement of condition since these are not assets of the Parent Company. Government securities with face value of P= million (included under AFS investments and HTM investments amounting to P= million and P=35.00 million, respectively) and P=90.00 million (of which P=85.00 million is included under AFS investments and P=5.00 million is included under HTM investments, see Note 6) as of December 31, 2007 and 2006, respectively, are deposited with the BSP in compliance with the current banking regulations relative to the Parent Company s trust functions. For the past years, 10.00% of the Parent Company s profit from trust business is set aside as surplus reserve to absorb any losses that may arise from its trust functions. This appropria tion is required until the surplus reserve for trust business reaches 20.00% of the Parent Company s authorized capital stock. As of December 31, 2007 and 2006, the required 20.00% is already satisfied thus no reclassification to reserve was made since 2005.

115 Segment Information The Group s operating businesses are organized and managed separately according to the nature of services provided and the different markets served with segment representing a strategic business unit. The Group s business segments are as follows:? Consumer Banking - principally handling individual customers deposits, and providing consumer type loans, overdrafts, credit cards facilities and fund transfer facilities;? Corporate Banking - principally handling loans and other credit facilities and deposit and current account for corporate and institutional customers; and? Treasury - principally providing money market, trading and treasury services, as well as the management of the Parent Company s funding operations by use of treasury bills, government securities and placements and acceptances with other banks, through treasury and wholesale banking. 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. Interest is charged or credited to business segments based on actual income generated by the business segments. Income is attributed to geographic areas based on the location of the assets producing the revenues. Management is still evaluating which transfer pricing method will provide the most reasonable basis of allocating income and costs into the different business segments. Business Segments The following tables present revenue and income information and certain assets and liabilities information regarding business segments for the years ended December 31, 2007, 2006 and 2005: Year Ended December 31, 2007 (amounts in thousands) Consumer Banking Corporate Banking Treasury Other Total Net interest income P=817,734 P=2,879,174 P=1,646,915 P=523,478 P=5,867,301 Other income 3,096,651 Unallocated costs (6,719,961) Profit from operations 2,243,991 Provision for income tax (363,066) Minority interest in net income of subsidiaries (197,018) Net income for the year attributable to equity holders of the Parent Company P=1,683,907 Other Information Segment assets P=14,399,583 P=45,534,314 P=67,113,341 P=20,721,756 P=147,768,994 Unallocated assets Total assets P=147,768,994 Segment liabilities P=11,565,277 P=32,687,420 P=70,974,919 P=15,213,379 P=130,440,995 Other Segment Information Capital expenditure P=712,540 P=712,540 Depreciation and amortization (Notes 9 and 10) P=381,331 P=381,331

116 Year Ended December 31, 2006 Consumer Corporate (amounts in thousands) Banking Banking Treasury Other Total Net interest income P=380,167 P=2,453,762 P=2,336,264 P=217,788 P=5,387,981 Other income 3,159,596 Unallocated costs (6,246,843) Profit from operations 2,300,734 Provision for income tax (480,611) Minority interest in net income of subsidiaries (206,351) Net income for the year attributable to equity holders of the Parent Company P=1,613,772 Other Information Segment assets P=6,831,291 P=48,158,707 P=90,820,260 P=8,175,733 P=153,985,991 Unallocated assets 1,009,612 Total assets P=154,995,603 Segment liabilities P=6,478,620 P=42,487,179 P=85,990,348 P=3,347,555 P=138,303,702 Other Segment Information Capital expenditure P=717,264 P=717,264 Depreciation and amortization (Notes 9 and 10) P=339,535 P=339,535 Year Ended December 31, 2005 (amounts in thousands) Consumer Banking Corporate Banking Treasury Other Total Net interest income (expense) (P=1,521,464) P=2,961,461 P=3,718,777 P=25,358 P=5,184,132 Other income 1,997,141 Unallocated costs (5,209,175) Profit from operations 1,972,098 Provision for income tax (475,479) Minority interest in net income of subsidiaries (134,233) Net income for the year attributable to equity holders of the Parent Company P=1,362,386 Other Information Segment assets P=5,850,290 P=49,851,092 P=64,804,554 P=5,916,594 P=126,422,530 Unallocated assets 20,348,792 Total assets P=146,771,322 Segment liabilities P=55,632,951 P=26,461,858 P=37,216,262 P=12,445,103 P=131,756,174 Other Segment Information Capital expenditure P= P= P= P=465,078 P=465,078 Depreciation and amortization (Notes 9 and 10) P= P= P= P=327,573 P=327,573 Geographical Segments The following tables present income and expenditure and certain assets and liabilities information regarding geographical segments for the year ended December 31, 2007, 2006 and 2005: 2007 Philippines Asia United States United Kingdom Total Results of Operations Net interest income P=5,236,933 P=255,578 P=338,285 P=36,505 P=5,867,301 Noninterest income 2,888, ,087 16,256 42,866 3,096,651 Income - net of interest expense 8,125, , ,541 79,371 8,963,952 Noninterest expense 6,286, , ,536 57,339 6,719,961 Income before income tax 1,839, , ,005 22,032 2,243,991 Provision for income tax (246,485) (36,653) (73,106) (6,822) (363,066) Minority interest in net income of subsidiaries (197,018) (197,018) Net income P=1,395,724 P=138,074 P=134,899 P=15,210 P=1,683,907 Financial Position Total assets P=124,783,199 P=14,838,108 P=7,390,028 P=757,659 P=147,768,994 Total liabilities P=113,120,135 P=10,898,775 P=6,205,870 P=216,215 P=130,440,995

117 Philippines Asia United States United Kingdom Total Results of Operations Net interest income P=4,541,539 P=436,659 P=379,472 P=30,311 P=5,387,981 Noninterest income 2,875, ,254 22,776 40,684 3,159,596 Income - net of interest expense 7,417, , ,248 70,995 8,547,577 Noninterest expense 5,674, , ,968 65,658 6,246,843 Income before income tax 1,742, , ,280 5,337 2,300,734 Provision for income tax (369,336) (26,546) (83,923) (806) (480,611) Minority interest in net income of subsidiaries (206,351) (206,351) Net income P=1,166,964 P=306,920 P=135,357 P=4,531 P=1,613,772 Financial Position Total assets P=128,216,877 17,596,665 P=8,438,594 P=743,467 P=154,995,603 Total liabilities P=118,285,937 P=12,724,197 P=7,126,306 P=167,262 P=138,303, Philippines Asia United States United Kingdom Total Results of Operations Net interest income P=4,493,351 P=325,825 P=338,443 P=26,513 P=5,184,132 Noninterest income 1,849,494 89,368 20,602 37,677 1,997,141 Income - net of interest expense 6,342, , ,045 64,190 7,181,273 Noninterest expense 4,709, , ,077 65,885 5,209,175 Income (loss) before income tax 1,633, , ,968 (1,695) 1,972,098 Provision for (benefit from) income tax (386,472) (12,132) (77,174) 299 (475,479) Minority interest in net income of subsidiaries (134,233) (134,233) Net income P=1,113,117 P=141,871 P=108,794 (P=1,396) P=1,362,386 Financial Position Total assets P=120,803,810 P=16,343,686 P=8,676,446 P=947,380 P=146,771,322 Total liabilities P=111,921,071 P=12,175,122 P=7,446,244 P=213,737 P=131,756, Related Party Transactions Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operating decisions. Parties are also considered to be related if they are subjected to common control or common significant influence. Related parties may be individuals or corporate entities. Transactions between related parties are based on terms similar to those offered to non-related parties. In the ordinary course of business, the Group has loan transactions, credit accommodations and guarantees with other associates, and with certain directors, officers, stockholders and related interests (DOSRI) transactions. Under the existing policies of the Group, these DOSRI transactions are made substantially on the same terms as loans to other individuals and businesses of comparable risks. The amount of DOSRI transactions to individual DOSRI, of which 70.00% must be secured, should not exceed the amount of their respective unencumbered deposits and

118 book value of their investments in the Parent Company and/or any of its subsidiaries, subject to the same regulations. In the aggregate, DOSRI transactions exclusive of nonrisk accounts should not exceed the loans of the total capital funds or 15.00% of the total loan portfolio of the Parent Company and/or any of its subsidiaries subject to the same regulations; provided that the total unsecured DOSRI transactions shall not exceed the lower of 30.00% of aggregate ceiling or outstanding DOSRI transactions. Other transactions with associates consist of purchase of insurance premiums, purchase and sale of investment securities, lease of office premises, and use of certain facilities. The following table shows information relating to the Parent Company s loan, other credit accommodations and guarantees classified as DOSRI transactions as of December 31, 2007 and 2006: Total outstanding nonrisk DOSRI transactions P=12.81 billion P=8.59 billion Percent of outstanding DOSRI transactions subject to aggregate ceiling test 5.21% 5.74% Total outstanding unsecured DOSRI transactions P= P=0.61 million Percent of outstanding unsecured DOSRI transactions to 15.00% of total loan portfolio 0.00% 9.22% On January 31, 2007, BSP Circular No. 560 was issued providing the rules and regulations that govern loans, other credit accommodations and guarantees granted to subsidiaries and affiliates of banks and quasi-banks. Under the said circular, the total outstanding exposures to each of the bank's subsidiaries and affiliates shall not exceed 10.00% of bank's net worth, the unsecured portion of which shall not exceed 5.00% of such net worth. Further, the total outstanding exposures to subsidiaries and affiliates shall not exceed 20.00% of the net worth of the lending bank. BSP Circular No. 560 is effective February 15, As of December 31, 2007 and 2006, DOSRI loans amounting to P=6.41 billion and P=2.61 billion, respectively, are secured by hold-out on deposits and government securities, and therefore, considered nonrisk assets. Nonrisk DOSRI loans are not covered by the ceiling on DOSRI prescribed by the BSP. The significant intercompany transactions and outstanding balances of the Group were eliminated in consolidation.

119 The following table shows the significant DOSRI transactions included in the Group financial statements: Elements of Transactions Statement of Condition Amount Statement of Income Amount Related Party Relationship Fortune Tobacco Corporation Related Interest P=4,845,449 P=4,955,000 P=339,738 P=382,852 Asia Brewery, Inc. - do - 2,134,984 2,125, , ,366 Philippine Airlines, Inc. - do - 1,372,549 1,729,580 25,548 94,769 Air Philippines Corporation - do - 1,456,000 1,456, , ,692 Foremost Farms, Inc. - do - 500, ,000 34,199 44,625 Himmel Industries, Inc. - do - 450, ,000 29,896 39,615 Progressive Farms - do - 240, ,000 16,659 23,199 Tanduay Distillers - do - 199, ,523 19,610 15,713 Deposit liabilities to associates and other related parties amounted to P=7.07 billion and P=13.02 billion as of December 31, 2007 and 2006, respectively. Interest expense amounted to P= million and P= million in December 31, 2007 and 2006, respectively. The remuneration of directors and other members of key management personnel are as follows: Consolidated Parent Company Short-term employee benefits P=133,617 P=142,980 P=103,257 P=107,448 Post-employment benefits 36,926 12,616 36,926 10,623 P=170,543 P=155,596 P=140,183 P=118, Margin of Solvency Under the Insurance Code, a life insurance company doing business in the Philippines shall maintain at all times a margin of solvency equal to P=0.50 million or P=2.00 per thousand of the total amount of insurance in force as of the preceding calendar year in all policies (except term insurance), whichever is higher. The margin of solvency shall be the excess of the value of its admitted assets as defined under the same Code, exclusive of the minimum paid-up capital, over the amount of its liabilities, unearned premiums, and reinsurance reserves. The final amounts of the margin of solvency can be determined only after the accounts of NYLIP have been examined by the IC specifically as to admitted and non-admitted assets as defined in the Insurance Code.

120 The estimated amounts of non-admitted assets as of December 31, 2007 included in the statements of condition, which are subject to final determination by the IC, are as follows: Loans and receivables P=3,244,030 Prepayments 11,342,379 Property and equipment, net 7,553,892 Other assets 1,478,583 Market revaluation 167,925,293 P=191,544, Commitments and Contingent Liabilities In the normal course of business, the Group has various commitments and contingent liabilities that are not presented in the accompanying Group financial statements. The Group does not anticipate any material losses as a result of these commitments and contingent liabilities. The following is a summary of the Parent Company and certain subsidiaries commitments and contingent liabilities at their equivalent peso contractual amounts: Consolidated Parent Company Trust department accounts (Note 26) P=14,403,014 P=8,171,813 P=14,403,014 P=8,171,813 Deficiency claims receivable 4,699,022 4,399,526 4,699,022 4,399,410 Unused commercial letters of credit 2,773,680 2,199,247 2,348,236 1,878,171 Inward bills for collection 2,318,829 2,487,712 2,295,040 2,478,810 Late deposits/payment received 652, , , ,013 Outstanding guarantees issued 589, , , ,886 Outward bills for collection 477, , ,164 Confirmed export letters of credit 6,573 3,677 3,096 3,677 Others 1,961,703 2,027,592 1,203, ,646 There are pending cases for and against the Parent Company and certain subsidiaries arising from normal business activities. Management believes that these actions are without merit or that the ultimate liability, if any, resulting from these cases will not adversely affect the financial position or results of operation of the Parent Company.

121 Earnings Per Share The basis of calculation for earnings per share attributable to equity holders of the Parent Company follows: (In Thousands, except number of shares and EPS) Net income attributable to equity holders of the Parent Company P=1,683,907 P=1,613,772 P=1,362,386 Less dividends to preferred shares 7,500 7,500 7,500 a. Net income applicable to common shares 1,676,407 1,606,272 1,354,886 Add dividends to preferred shares 7,500 7,500 7,500 b. Net income applicable to common and potential common shares P=1,683,907 P=1,613,772 P=1,362,386 c. Weighted average number of outstanding common shares 445, , ,295 Add weighted average number of potential common shares (pertaining to convertible preferred shares) (Note 20) 1,746 1,895 2,211 d. Weighted average number of outstanding and potential common shares 447, , ,506 Basic EPS (a/c) P=3, P=3, P=3, The assumed conversion of preferred shares as a result of dividing b and d is anti-dilutive. Thus, diluted EPS is not presented. 32. Financial Performance The following basic ratios measure the financial performance of the Parent Company: Where average equity and average asset include revaluation increment Return on average equity (ROE) 10.52% 12.82% Return on average assets (ROA) Net interest margin (NIM) Where average equity and average asset exclude revaluation increment ROE 11.80% 15.80% ROA NIM Foreign Subsidiaries The financial statements of ABUK, ACB, ABCHKL and OHBVI as of and for the years ended December 31, 2007 and 2006, which are consolidated in the Group financial statements and reflected in the Parent Company s financial statements under the cost method of accounting, were audited by other external auditors whose reports have been furnished to us.

122 Below are the financial highlights lifted from the audited financial statements of the above mentioned subsidiaries: Statements of Condition 2007 Statements of Income Total Assets Total Liabilities Gross Income Expenses Net Income External Auditors ABUK P=757,659 P=216,215 P=79,463 P=64,253 P=15,210 BDO Stoy Hayward LLP ACB 4,471,584 2,128, , , ,434 China Audit Certified Public Accountant (CACPA) ABCHKL 10,366,524 8,770, , ,660 (9,360) Deloitte Touche Tohmatsu (DTT) OHBVI 7,390,028 6,205, , , ,899 Vavrinek, Trine, Day & Co., LLP (VTD Total P=22,985,795 P=17,320,859 P=1,774,044 P=1,485,861 P=288, Statements of Condition Statements of Income Total Assets Total Liabilities Gross Income Expenses Net Income External Auditors ABUK P=743,468 P=127,262 P=71,196 P=66,664 P=4,532 BDO Stoy Hayward LLP ACB 5,085,305 2,459, , , ,607 China Audit Certified Public Accountant (CACPA) ABCHKL 12,240,499 10,313, , , ,185 Deloitte Touche Tohmatsu (DTT) OHBVI 8,203,356 6,940, , , ,096 Vavrinek, Trine, Day & Co., LLP (VTDC) Total P=26,272,628 P=19,839,674 P=1,893,837 P=1,475,417 P=418, Reclassification Certain accounts in the 2006 financial statements were classified to conform with the 2007 presentation which takes into account the fundamental nature and significance of the transactions as well as general financial statement presentation. The table below shows the details of accounts reclassified: From Reclassified to Amount Statement of Condition Accounts receivable Other assets P=32,958 Accrued taxes, interest and other expenses Other liabilities 320,337 Statement of Income Miscellaneous expense Taxes and licenses 185,746

123 Approval of the Release of the Financial Statements The accompanying comparative financial statements of the Group and of the Parent Company were authorized and approved for issue by the BOD in accordance with its resolution on March 26, 2008.