Annual Report for Year 2018

Annual Report for

Year 2018

TABLE OF CONTENTS

3 Corporate Background 4 President’s Report 7 Message from the CEO 8 Mission and Vision Statement 9 Our Business Model 10 Our Board of Directors 13 Our Management Team 16 Our Branches 17 Products and Services 18 Financial Highlights 19 Operational Highlights 20 Marketing Highlights 22 Corporate Social Responsibility 23 Stockholders and Organizational Structure 24 Risk Management 31 Corporate Governance 59 Statement of Management’s Responsibility for Financial Statements 60 Financial Statements and Auditor’s Opinion

CORPORATE BACKGROUND

Malayan Bank is a savings bank which was granted authority to operate by the Bangko Sentral ng Pilipinas in June 1996, pursuant to the Monetary Board Resolution No. 1201. It opened its doors on July 1,1996, offering a wide array of product lines and services that cater to the rising needs of the banking public.

The bank is a joint undertaking of some of the principal shareholders of GMA Network, Inc., LINQ Information Entertainment Quadrant Corp., Majalco Inc., Liberty Flourmills, and G.A. Yupangco among others.

Malayan Bank is proud of its impressive roster of shareholders. Bank clients are secure that their hard-earned money is held safe in Malayan Bank, a bank owned by media giants and highly respectable Filipino corporations.

Malayan Bank is committed to provide its customers with quality-banking services through a balanced and maximized offering of Service, Yield, Security, and Liquidity.

As a savings bank, it is the Bank’s goal to assist micro, small and medium enterprises by offering them flexible corporate and business loan packages. It is also the Bank’s dream to see all of its entrepreneurial clients reach greater heights in their respective businesses. Aside from assisting small enterprises and corporations, Malayan Bank makes financing easy for its retail clients. The Bank’s individual customers can easily avail of attractive and affordable loan offerings, such as auto loans, motorcycle loans, jewelry loans, or multi-purpose loans.

Today, Malayan Bank stands strong with twenty- one branches located in the key cities of Metro Manila and in the Visayas and Mindanao regions. Malayan Bank is happy to have a growing base of highly satisfied clientele.

Malayan Bank hopes to share with YOU a New Way of Banking as we promise excellent customer service, tailor-fit bank products and expert investment advice.

Experience Personalized Banking with Malayan Bank.

PRESIDENT’S REPORT

Surfing the Ebb and Flow of a Challenging Year

After peaking at close to 4% in 2017, global growth remained strong, at 3.8% in the first half of 2018, but dropped to 3.2 percent in the second half of the year. Following an upswing in cyclical growth that lasted nearly two years, the global economic expansion decelerated in the second half of 2018 amidst an increase in trade tensions and tariﬀ hikes between the United States and China. (Source: IMF)

In the local front, the Philippines had to face challenges of its own. To recall, inflation hit a 10- year high of 5.2 percent in 2018 peaking at 6.2 percent in the 3rd quarter. This is partly due to new or higher excise taxes on consumption, weakened peso, skyrocketing global oil prices, as well as food supply bottlenecks, especially of the Filipino staple rice. (Source: PSA)

While missing the target growth rate, the Philippines’ still ranked among the fastest-growing economies in Asia, i.e. next to India, Vietnam, and China. Gross Domestic Product (GDP) posted a 6.1 percent growth in the fourth quarter of 2018, resulting in the 6.2 percent full-year growth for 2018. The main drivers of growth for the quarter were Construction; Trade and Repair of Motor Vehicles, Motorcycles, Personal and Household Goods; and Other Services. (Source: PSA)

Financial Viability

In 2018, Malayan Bank continued to be a resilient player in the thrift banking industry. Prudent and selective lending continued throughout the period, particularly in the consumer, trade and transportation sectors. Intensified risk monitoring and purposeful liquidity management enabled the bank to register returns at par with the major industry players.

Foreshadowing the effects of spiraling inflation, the banking industry as a whole faced thinner spreads, in addition to bottom line pressures from continued loan loss provisioning. While Malayan Bank was not spared from the interest rate squeeze, the Bank was able to record a 30% increase in net interest income from Php244MM to Php316MM. The heftier net interest income was propelled by an over 30% jump in its loan portfolio from Php3.9billion to Php5.4billion.

In the past, the Bank has been weighed down by non-performing loans. The higher income afforded the Bank enough leeway to write-off legacy accounts, thereby reducing the NPL ratio from about 10% in 2017 to a little over 4% by end of 2018. The level is now almost at par with the industry.

The Bank regarded the spike in inflation and higher interest rate regime as an opportunity to find a niche in transport sector and higher yielding consumer loan products. This enabled the Account Management Department to continue its momentum in two diametrically opposed products - motorcycle financing and bus loans. The bigger ticket bus loans enabled the Bank to quickly build up a profitable loan portfolio, while the small ticket motorcycle loan allows the Bank to slowly build- up a high earning loan portfolio with a longer term outlook.

Gearing Up

The continued lending activity was of course guided by a delicate balance between risk and reward considerations. Cognizant of the general business conditions, the bank geared up for the challenges of stricter credit risk management by expanding the Bank’s Credit Cycle Department. The expansion is expected to provide the Bank the muscle to provide on time decision for loan approvals and debt collection, while enabling proper underwriting of credit risks. Likewise, the Bank set forth a more rigid credit review and portfolio quality review process under the Risk Management Department to identify areas of weaknesses and default attributes.

Strengthening our Anti-Money Laundering capabilities is also the focus of the Bank. The bank is beefing up its compliance Department by equipping it with AMLA automation system and increasing its manpower.

The Bank realizes that to sustain its financial viability and be at par with, if not better than competitors, it would require an infrastructure that can support the growth in business and enable an environment that fosters innovation. The Bank invested on network redundancy, upgraded its firewall and acquired a new anti-virus system. In 2018, the Bank initiated the Document Management System, which incorporates document capture, workflow, document storage and retrieval systems. The Bank’s technology and initiatives included the reinforcement of the Business Continuity Plan (BCP) and Disaster Recovery (DR) readiness. This was supported by conducting Call Tree Exercise, Remote Site Back-up Office Mobilization Drill and Disaster Recovery Exercise.

Investment in developing the skills of the employees continues to be a focus area for the Bank. Training programs pertaining to the customer service, AMLA and risk management were the key focus learning areas of the organization.

Growth Prospects

Malayan Bank is poised for renewed vigour and vitality. This entails letting go of old ideas, beliefs or ways of being and the institution of new but sometimes unfamiliar things that are necessary for change to take place.

The process that we’ve started in 2015 needs to be sustained to ensure that the entire organization is in pace towards our vision.

Most estimates suggest that the economy will maintain its growth of about 6 percent in 2019. The projection is based on continued focus on government’s Accelerated Infrastructure Build-up program partially offset by the delay in the approval of the national budget. There are several downside risks to Philippine growth - "escalating US China trade war, decelerating Chinese economy, natural disasters, and domestic political noise."

The interest rate squeeze which began in 2018 continued to be felt during the first half of 2019. However, the anticipated decrease in interest rates and the recent pronouncements regarding the easing of reserve requirements are expected to help the banking industry as a whole generate higher interest income margins.

Keeping the bank’s financial strength is therefore of utmost importance. We need to sufficiently immunize our balance sheet against macroeconomic shocks. We also need to maximize resources at hand. This means quick disposal of acquired assets and looking at a variety of investment and deployment alternatives to optimize our yields.

Focus on controls will be heightened in order to minimize, if not eliminate fraud incidence and losses. As we become bigger, the organization must also be geared towards a risk-conscious banking environment. Risk containment shall continue to be a cornerstone objective, which will require the strengthening of risk awareness and communication across the bank to cover all risk pillars. Corollary to this, and in line with the ever evolving regulatory environment, further enhancement of the compliance culture within the organization shall be pursued.

The Bank will deepen its bench of talents as it continues to attract, retain and equip people, and create a shared culture that is reflective of our vision, our strengths and our values. This endeavor not only fills in workforce gaps but more importantly ensures succession planning.

In closing, the management of Malayan Bank would like to express our gratitude to the Board of Directors for their wise counsel, to our Stockholders for their continued support, and to our clients for their complete trust

Reynold Y. Gerongay President and COO

MESSAGE FROM THE CEO

Dear Stakeholders,

In an impressively competitive landscape, Malayan Bank still emerged as one of the Top Fifteen Savings Banks based on Return on Equity in the year 2018. We believe that this is because of our ability to attract and retain our corporate and individual clients. Currently, clients choose to bank with firms which are innovative, effective, and still remain very human…that is Malayan Bank.

We are proud that more Filipinos now choose Malayan Bank to safekeep and grow their deposits and investments. We are happy to see that SMEs and individuals now select Malayan Bank for their financing needs. These are because Malayan Bank has assembled an experienced and diverse team of Bankers, who specialize in meeting the financial needs of the Philippine market.

Malayan Bank has demonstrated that it has the know-how to service clients whose needs are becoming more complex in nature. To achieve this, the Bank increased the number of loan products and deposit products in its array of product offerings.

We are proud of the Bank’s sound performance in the year 2018. We continue to boast of the Bank’s value proposition of offering competitive investment products, flexible loan packages, and affordable over-the-counter services for our customers. For the year 2019, Malayan Bank’s goal is to support every Filipino in meeting his financial needs.

We are positive that year 2019 will be a banner year for the Bank. We are confident that our team will exceed revenue and income targets, and increase operational and collection efficiency.

Finally, I would like to compliment the officers and staff of Malayan Bank for their unwavering commitment and dedication.

To our stakeholders and Board of Directors, thank you for your guidance and continued support.

Together, Everyone Achieves More.

George J. Martirez Vice Chairman and CEO

MISSION AND VISION

OUR VISION

Malayan Bank is the desired partner of Filipino Families and Business Enterprises every step of the way.

OUR MISSION

We shall keep a respected position as one of the country’s top savings banks in terms of stability and strength.

We will build long-term relationships with our customers and assist them in achieving the security and growth of their assets.

We will develop our employees to the point where they can exceed our customers’ standards and service expectations, and enhance their expertise to realize their potential as financial services professionals.

We will always ensure that we meet the aspirations and expectations of our stockholders and other stakeholders.

CORE VALUES

Quality Service

Professionalism

Teamwork

Efficiency

Customer Satisfaction

OUR BUSINESS MODEL

Anchor the Business Plan on Malayan Bank’s branch service areas

The Business Plan will focus on areas where a branch of Malayan Bank is present. Bolstering of the Bank’s presence in its service area.

Re-launch the Community based marketing approach  Localized Marketing – more cost efficient as the Bank does not need a national marketing campaign.  Each branch can tailor fit its participation or marketing efforts in a community it is servicing.  Establish Malayan Bank’s presence and active role in the community.  Brings the Bank closer to its clients.

Adding new consumer banking services

A Malayan Bank branch should be able to offer banking services similar to what the other savings banks are offering. The branch currently offers CASA accounts, Time Deposit, Back-to-Back Loans, Remittance, Bills Payment. Widen the product range being offered in the branches by offering other Bank products.  Auto Loans  Motorcycle Loans  Multi-Purpose / Personal Loans  Sale of Securities  Active Buying and Selling of FX  Enhance Remittance business

Target and provide banking services to Small and Medium Enterprises (SME) within the scope of the branch network.

Assign Corporate Banking Account Officers to handle financing needs of SME branch clients. Branch Head and the Corporate Banking Account Officer will work in together in data gathering and marketing.

To diversify Malayan Bank’s loan portfolio to include SMEs’ within a branch service network.  Diversification the loan portfolio mix will result into lesser concentration risk  Lending to SMEs will enhance the loan portfolio return  Other collateral businesses may be provided by the SME loan account (proximity of the branch area).

Strategy for Existing Loan Clients: Offer Deposit Products and Services

 Offer CASA accounts to existing loan accounts to improve deposit mix  Loan release for SME loans and Retail Loans is via credit to CASA account  Offer Bills Payment service and Personal Loans to employees of SME accounts  Offer short-term placements (3days - 14days) with competitive rates to SMEs  Cross-sell insurance products, payroll accounts, to SME and Corporate clients  For MB Account Officers: Add deposit target in AO scorecard and provide incentives  For MB Branch Managers: Add loan target in BM scorecard and provide incentives.

BOARD OF DIRECTORS

Atty. Jose Mario C. Buñag / Chairman & Independent Director

Atty. Buñag, 74, Filipino, is the Chairman of the Board of Directors since January 2016, and was first appointed to the Board as an independent director in 2008. He was previously the Commissioner of the Bureau of Internal Revenue from 2005 to 2007. Prior to this, he held the position of Deputy Commissioner from 2002 to 2005. Concurrently, he serves as Chairman for Becton Holding Corp., Director for Unicapital Inc., Majalco Finance, and Lacson & Lacson Insurance Brokers, Inc. He is also a Partner at the Buñag & Lotilla Law Offices, is President of Scanmar Maritime Services Inc., and is President of Skanfil Maritime Services Inc. He graduated cum laude of Bachelor of Arts from Ateneo de Manila University, and finished as Class Valedictorian and cum laude of Bachelor of Laws from the same institution. He received his Master of Comparative Jurisprudence in 1973 at the New York University School of Law, as a University Fellow. He also took a Graduate Course in Taxation from 1984-1985 in the same university.

George J. Martirez / Vice Chairman & CEO

George, 66, Filipino, is the Vice-Chairman of the Board of Directors, and was first appointed to the Board in 1996. Concurrently, he serves as the Chief Executive Officer of Malayan Bank, as Vice President of Majalco Inc., and Director of Unicapital Inc., Majalco Finance & Investment, Inc., and Chamber of Thrift Banks. He previously served as President of Malayan Bank from 1998 to 2015, and as its Treasurer from 1996 to 1998. He received his Bachelor of Science in Economics from De La Salle University, and his Master in Business Administration from University of the Philippines.

William Carlos Uy / Director

William, 76, Filipino, is a Director and Treasurer of Malayan Bank, and was first appointed to the Board in 1996. Concurrently, he serves as Chairman of Liberty Flour Mills, Inc., and UPCC Securities Corp. He also serves as President of Parity Values Inc., and Director for Unicapital Inc. He received his Bachelor of Science in Commerce from San Juan de Letran Colleges.

Reynold Y. Gerongay / President & COO

Rey, 63, Filipino, is the President and Chief Operating Officer of Malayan Bank, and was first appointed to the Board in 2015. He served as Chairman of the Board for Value Max Finance Corporation. He spent 15 years as President, CEO, and Director of Robinsons Bank, from 1999 to 2011 (as Robinsons Savings Bank) and from 2011 to 2014 (as Robinsons Bank Corporation). He also served as Vice-Chairman and Director of Legaspi Savings Bank from 2012 to 2014, and as President of Security Savings Bank, and Security Finance Corporation, from 1997 to 1998. Prior to this, he spent 20 years with United Coconut Planters Bank, with his last held position as Vice President and Division Head of the Consumer Finance Division, and as concurrent Acting President and Director of UCPB Savings Bank. He graduated with a Bachelor of Science in Accounting from Holy Cross College of Digos in Davao,

10 where he was a recipient of a Gold Medal for Academic Excellence, and received his Masters in Business Administration from De La Salle University. In addition to this, he completed the Advance Bank Management Program from Asian Institute of Management, where he received a Superior Academic Performance Award, and also received formal training from the Gemological Institute of America.

Manuel R. Chanco III / Director

Manuel, 61, Filipino, is a Director of Malayan Bank, and was first appointed to the Board in 2011 as an Independent Director. Concurrently, he is a Director of Corogn Ltd. Hongkong, Int’l Printing APFS Management Corp., and Matrix Resource Portfolio, and the President of Dag Express, and JCM Well Holdings. He is also Vice President of Sunvar Realty, Lexmedia Realty, and Inquirer Holdings, Inc., and is the CFO for Flax Ltd. Hongkong and for KUNI Ltd. Hongkong. Moreover, he is a Proprietor at MCS Tiangge. He graduated with a Bachelor of Science in Accounting from Far Eastern University, and received a post-graduate in General Accounting from International Correspondent School.

Emmanuel M. De Ocampo / Director

Bong, 55, Filipino, is a Director of Malayan Bank, and was first appointed to the Board in 2017. Concurrently, he is the President of Filremit Corporation, Safeserve Company Inc., and Mancarex Inc. He is also a stockholder of Filchoice Services Corporation. Previously, he was the President of Maxipack Inc. Bong graduated with a Bachelor of Arts in History major in Political Science from De La Salle University. He also took courses on Business Management Real Estate from the University of California, Los Angeles.

Joel Marcelo G. Jimenez / Director

Joel, 54, Filipino, is a Director of Malayan Bank, and was first appointed to the Board in 2011. Concurrently, he is a Director of Majalco Finance and Investments, Inc., Nuvoland Philippines, Inc., Majent Agro Industrial Corp., International Freeport Traders, Inc., and Unicapital Inc. He is also Director and Vice President of M.A. Jimenez and Ent., Inc., and Majent Mgmt. and Development Corporation. Joel also holds executive positions in Alta Prod. Group Inc., GMA Marketing and Productions Inc., QTV Channel 11, RGMA Network, Inc., GMA Network, Inc., GMA New Media, Television International Corp., Friends of Manila Zoo, and Kinder Zoo. Furthermore, he is currently the Chairman and CEO of Image One Multimedia Corp. He graduated International Marketing at Loyola Marymount University, and received his Masters in Management from Asian Institute of Management.

Jaime J. Martirez / Director

Jaime, 64, Filipino, is a Director of Malayan Bank, and was first appointed to the Board in 1996. Concurrently, he is Director for Basic Energy Corp., XCT Corp., Unicapital, Inc., Unicapital Securities, Inc., ACME Pawnshops, Basic Ecomarket Farms, and Des Eaux Utilities Co. Inc. He is also President of Majalco Finance and Investment, Inc., President of Unoventure, Inc., Vice President of Majalco Inc. and MJ Realty, and Treasurer of GJ Holdings. He was previously Director of HMR PTY LTD., SOS Philippines, and JMCM. He

11 graduated with a Bachelor of Science in Business Administration from De La Salle University, and complete MBA Units from Ateneo de Manila Graduate School.

James Gerard A. Ong / Director

James, 48, Filipino, is a Director of Malayan Bank, and was first appointed to the Board in 2012. Concurrently, he is President and Owner of Casa Europa, President and Owner of B+B Studio, and Vice President and Director of Coffee Bean and Tea Leaf. He graduated with a Bachelor of Science in Finance from Boston College, and received his Master in Entrepreneurship from the Asian Institute of Management.

Justice Josue N. Bellosillo / Independent Director

Justice Bellosillo, 85, Filipino, is an Independent Director of Malayan Bank, and was first appointed to the Board in 2015. Concurrently, he is Vice-Chairman and Director of Philtrust Bank, and an Independent Director of Datem, Inc. He was previously active as a judge for several courts in Iloilo, and also held several posts in the Supreme Court from 1991 to 2003, where he last held the position of Senior Associate Justice. Prior to joining Malayan Bank, he was the Chairman of the Construction Industry Arbitration Commission. He received his Bachelor of Laws from the University of the Philippines, and his Doctor of Laws from Pamantasan ng Lungsod ng Maynila and University of the East.

Harry G. Liu / Independent Director

Harry, 71, Filipino, is an Independent Director of Malayan Bank, and was first appointed to the Board in 2014. Concurrently, he is the Chairman and President of Summit Securities Inc. He is also the Chairman for Los Ricos Global Transport, Inc., and Los Ricos Compania Corp., and President of Automated Identification Technology, and Philippines Stock Exchange Foundation, Inc. He is also Director of Rockwell Leisure Club, and a Nominee of the Philippine Stock Exchange, Inc. He received his Bachelor of Science in Business Administration from De La Salle University.

Ismael R. Sandig / Independent Director

Ismael, 65, Filipino, is an Independent Director of Malayan Bank, and was first appointed to the Board in 2018. Concurrently, he is a consultant for Rizal Commercial Banking Corporation. He also served as Retail Banking Group Head of CTBC Bank (Phils.) and Rizal Commercial Banking Corporation. He was also Director for Bankard, RCBC-JPL Holding Company, Rizal Micro Finance Bank, AIMS Realty Development and Leasing Corporation, and Bancnet. He graduated with a Bachelor of Science in Commerce major in Accounting from Far Eastern University, and received his Masters in Business Administration from De La Salle University. He has also earned some units in Bachelor of Laws.

MANAGEMENT TEAM

George J. Martirez Reynold Y. Gerongay Philip S. Madrigal Vice Chairman President Executive Vice President Chief Executive Officer Chief Operating Officer Operations Segment Head

Dennis I. Paredes Anna Liza M. Siapno German Jeremy E. Pampolina III Senior Vice President Senior Vice President Senior Vice President Branch Banking Group Head Marketing Segment Head Treasury Head

Nathaniel P. Delos Reyes Rizalino Rhett Q. Holganza James D. Chua First Vice President First Vice President First Vice President Comptrollership Head Loans & Credit Group Head Risk Management Head

Raul B. Cirio Redentor S. Sirug Cherry Ann R. Cruz Vice President Vice President Vice President Audit Head Compliance Head Systems and Methods Head

John Walvine C. Rata Gerardo V. Malig Michael Gerard N. Martirez Vice President Assistant Vice President Assistant Vice President IT Group Head Chief Security Officer Special Asset Management Unit Head

Martha Cecilia M. Singson Atty. Maryrose O. Toledo Angela Diane Q. Alegarbes Senior Manager Manager Assistant Manager Human Resources Asset Recovery & Legal Corporate Planning Officer Department Head Department Head

BRANCHES

METRO MANILA Pasig M.H. Del Pilar St., Brgy. San Nicolas, Pasig City Makati Head Office 641-5098 / 916-8420 Majalco Bldg Trasierra cor. Benavidez Sts., Legaspi Village, Makati City Caloocan 814-0884 / 810-6072 Ong Sing Bldg., 440 Rizal Ave. Extension, Caloocan City Kalentong 365-1047 / 363-8819 The Market Place, Gen. Kalentong St., Mandaluyong City Malabon 533-3660 / 533-3659 El Domus Properties, 55 Unit A General Unit St., San Agustin, Malabon City Marikina 282-3676 / 282-3695 J.P. Rizal St., Concepcion Uno, Marikina City 948-1780 / 948-1790 Las Piñas M.J. Realty Bldg., Alabang Zapote Road, Almanza 1 GMA Service Unit Cor., Pilar Road, Las Piñas City Kapuso Bldg., GMA Complex Samar Ave., 805-5225 / 805-5218 Diliman Quezon City 948-1780 / 948-1790 Taguig #86 Bayani Rd., AFPOVAI Phase V, Fort Bonifacio, Taguig City 425-7307

PROVINCIAL

Sta. Rosa, Laguna Dasol, Pangasinan Akisada Commercial Center, Old National Don Marcelo A. Jimenez Blvd., Dasol, Pangasinan Highway, 546-6495 Macabling City of Sta. Rosa Baguio 542-9512 / (049) 302-0618 West Burnham Place Condominium Bldg., No. 16 Imus, Cavite Kisad Road cor., Chanum St., Baguio City JSS Bldg., Aguinaldo Highway, 542-1426 / (074) 420-9006 Bayan Luma IV, Imus, Cavite 529-8763 / (049) 471-6725 Cebu Lahug La Belle Bldg., Gorordo Ave., Rosario, Cavite Lahug, Cebu City Gate 1, Cavite Economic Zone, 584-4677 / (032) 505-6537 Tejero Rosario, Cavite 542-5471 / (046) 476-0765 Cebu Jones Harrison’s Place, Osmena Blvd., Meycauayan, Bulacan Cor. Urgello, Cebu City Mancon Bldg., McArthur Highway, Calvario, 584-4610 / (032) 505-6155 Meycauyan City, Bulacan 542-1409 / (044) 228-6021 Iloilo Parking Bldg., Robinsons Place Iloilo cor., De Leon & Angeles, Pampanga Quezon Sts., Iloilo City AYA Bldg., Sto. Rosario St. San Jose, 542-6613 / (033) 508-7503 Angeles City, Pampanga 542-4939 / (045) 322-5277 Davao M&M Marble Bldg., J.P. Laurel, Bajada, Davao City Dagupan, Pangasinan 584-4422 / (082) 222-3513 P&C Fernandez Bldg.,

Perez Blvd., Dagupan City 546-6807 / (075) 523-3140

PRODUCTS AND SERVICES

Deposits  ATM Savings Account  Passbook Savings Account  Checking Account  Checking Account with Automatic Transfer  Peso Time Deposit  USD Savings Account  USD Time Deposit

Treasury • Government Securities • Peso and Dollar Bonds • Foreign Exchange

Loans • Working Capital Loan • Term Loan for Capital Expenditure • Receivables Discounting • Revolving Credit Line • Import / Domestic Letter of Credit • Group Salary Loan • Bus Loan • Auto Loan • Motorcycle Loan • Jewelry Loan

Other Services • Over-the-Counter Bills Payment • Remittances • Deposit Pick-Up Arrangement • Check Warehousing • ATM Payroll • Safety Deposit Boxes

FINANCIAL HIGHLIGHTS

(in millions) 2018 2017 % Change Profitability Net Interest Income 315.8 243.8 22.80% Non-Interest Income 92.7 494.8 -433.76% Gross Operating Income 408.5 738.6 -80.81% Operating Expenses 365.5 331.1 9.41% Provision for Impairment Losses 92.5 -301.1 425.51% Net Profit 92.1 70.5 23.45%

Selected Balance Sheet Data Liquid Assets 2,184.49 2,318.50 -6.13% Loans and Other Receivables 5,355.42 3,930.10 26.61% Total Assets 8,688.27 7,966.10 8.31% Deposits 6,688.42 6,534.90 2.30% Total Equity 1,235.81 1,186.20 4.01%

Selected Ratios Return on Average Equity 7.54% 6.13% 18.75% Return on Average Assets 1.06% 0.93% 12.27% Tier 1 Capital Ratio 16.04% 16.34% -1.86% Capital Adequacy Ratio 16.31% 16.80% -3.00%

Others Headcount Officers 136 123 9.56% Staff 116 115 0.86%

OPERATIONAL HIGHLIGHTS

 Cost-Cutting Measures:  Launched the e-Learning System which lessens training cost for provincial branch personnel.  Promoted paperless payslips and HR forms by investing in myHR System.

 I.T. Projects Launched:  AMLA Phase 2 – February 2018  Instapay Receiving – June 2018  MyHR HRIS System – July 2018  AMLA Enhancements – September 2018  Instapay Sending Phase 1 – September 2018  Anti-virus upgrade – September 2018  Document Imaging System – October 2018

MARKETING HIGHLIGHTS

Below is the Bank’s industry standing and financial highlights for the year 2018:

 Out of 59 savings banks in the country, Malayan Bank is: #17 in terms of asset size #18 in terms of loan portfolio #17 in terms of capital #16 in terms of deposits

 Out of 50 stand-alone savings banks in the country, Malayan Bank is: #9 in terms of asset size #11 in terms of loan portfolio #9 in terms of capital #8 in terms of deposits

In terms of ROE, the Bank currently ranks #14. The Bank’s aim is to be among the Top 10 savings banks in the country (in terms of ROE and Asset Size) by the year 2020.

Currently, the Bank has 84% high cost deposit and 16% low cost deposit. The deposit mix in year 2018 is better than the deposit mix in the previous years, where almost 90% of the Bank’s deposit consisted of high cost placements. The aim is to improve the deposit mix to 75% high cost, 25% low cost for the year 2019.

Deposits Count ADB OB PESO CASA 26,827 965,269,300 998,451,963 2018 ADB PESO TD 2,752 5,424,113,813 5,343,657,356 FC SA FC SA 318 53,856,060 98,319,114 1% FC TD 376 263,391,529 247,994,898 FC TD 4% TOTAL 30,273 6,706,630,702 6,688,423,331

PESO CASA PESO TD 14% 81%

The chart below shows the year-end loan level of the Bank as of December 2018:

Loan Type Dec-18 Product Mix Corporate 927,066,173 22.34% YE 2018 Loan Portfolio Bus 1,400,941,035 33.76% Housing Motorcycle 253,718,066 6.11% Jewelry 8% Agri Jewelry 55,168,800 1.33% 1% Auto 5% Housing 306,751,376 7.39% Motorcycle 16% Auto 678,063,977 16.34% 6% SME 5% Agri 223,584,961 5.39% SME 200,377,034 4.83% CTS CTS 41,567,619 1.00% 1% Personal 62,092,511 1.50% Personal Corporate Total 4,149,331,551 100.00% Bus 2% 22% 34%

Below are the financial highlights for the year ending December 2018:

(in millions) YE 2014 YE 2015 YE 2016 YE 2017 YE 2018 Plan 2019 Total Resources 6,252.2 7,072.3 7,199.3 7,966.1 8,688.3 9,632.0 Total Capital Funds 980.4 995.6 1,113.8 1,186.2 1,235.8 1,352.6 Total Deposit 5,133.1 5,899.1 5,955.9 6,534.9 6,688.4 7,558.4 Loans and Other Receivables 3,787.7 3,716.1 3,816.8 3,930.2 5,355.4 5,738.6 Net Income 7.2 11.4 21.8 70.5 92.1 105.6

CORPORATE SOCIAL RESPONSIBILITY

Malayan Bank is committed to helping make better the lives of the Filipino community. We hope to set a good example to other savings banks by promoting corporate social responsibility.

Our employees make a difference in the community through volunteer work.

We have developed partnerships with orphanages such as House of Refuge, Hapag – Asa, Don Bosco Tuloy Foundation, and Tahan – Tahanan.

Each year, our employees spend several hours in these orphanages to serve meals to the children, donate food and toiletries, and play games with them.

Malayan Bank is able to mobilize its entire team to participate in all of its CSR activities. The Bank is proud of the strong spirit of volunteerism among Malayan Bankers.

In the year 2018, Malayan Bank distributed more than 1,000 canned goods, snacks, pre-loved clothing, and milk to 900 beneficiaries of San Bartolome Parish, Immaculate Diocese of Caloocan, Children’s Home, Living Stones Orphanage, Street Children of Almanza, and Army General Hospital, among others. Branch personnel of the Bank’s 21 branches plus Head Office Personnel all took part in the Bank’s CSR Program.

STOCKHOLDERS and

ORGANIZATIONAL STRUCTURE

MALAYAN BANK, SAVINGS AND MORTGAGE BANK

LIST OF STOCKHOLDERS AND THEIR STOCKHOLDINGS

AS OF DECEMBER 31, 2018 PERCENTAGE NAME OF STOCKHOLDERS CITIZENSHIP OF STOCKHOLDINGS VOTING

Majalco, Inc. Filipino 31.85% LINQ Information Entertainment Quadrant Corp. Filipino 26.94% Cesar T. Duque Filipino 14.31% Majent Management & Development Corp. Filipino 12.57% William Carlos Uy Filipino 10.73%

DAO Investment & Management Corp. Filipino 3.60%

Total Voting 100.00%

Non Voting Not Applicable GRAND TOTAL 100.00%

RISK MANAGEMENT

OVERALL RISK MANAGEMENT POLICY

The effective management of liquidity and risks is the essence of banking. The overall risk management policy is to ensure that risks taken are within the Bank’s risk appetite, which is annually evaluated considering earnings target, capital adequacy, regulatory standards, strategic initiatives and direction set by the Board of Directors (BOD). The bank’s risk management practices involve risk identification, measurement, monitoring and control through established processes, independent checks and balances, written policies and guidelines, formal authority limits, and quantitative modeling techniques.

The Bank recognizes that risk management is the responsibility of the entire organization. It is the goal of the Bank to create a strong culture of risk awareness supported by risk education as a continuing endeavor. All business units are mandated to manage risks relevant to their own operations. Accordingly, performance metrics of business units and individual employees are linked to risk.

RISK APPETITE AND STRATEGY

The risk appetite statement approved by the BOD is an expression of the amount of risks the Bank is willing to accept related to its capability and business strategy.

“The Malayan Bank Savings and Mortgage Bank (MBSMB) shall maintain its position as one of the country's top twenty (20) Savings Banks. In pursuit of this, it shall continue to provide financial support to its clients, especially consumer clients and micro, small, and medium enterprises, in need of financial assistance. It shall cultivate a work environment conducive to the growth and development of all its employees. It shall commit to protect the interest of all its stakeholders and ensure that expectations of its stockholders are met. MBSMB shall continue to operate within its area of core competencies while pursuing a balance among its business goals of Good Customer Service and Institutional Viability. MBSMB puts high premium on the critical role of good governance and improved risk management system in facilitating higher operational efficiencies and better financial performance in order for the Bank to achieve its institutional goals. Lastly, the Bank shall always operate within the bounds of both internal and external regulations and shall maintain zero tolerance for fraudulent activities by any of its officers and staff.”

Risk shall be managed to ensure an acceptable quality of risk asset portfolio that minimizes losses taking into consideration the goal of overall sustainability while maintaining a Capital Adequacy Ratio (CAR) benchmark of 12%. Capital shall be continuously and vigorously preserved by maintaining an acceptable average annual earnings large enough for stockholder’s return to be competitive with risk free investments. Corporate governance policies and practices shall be implemented and enforced through the establishment of effective monitoring mechanisms. Transaction processing shall continuously be improved for client satisfaction, efficiency of services and accuracy of results. New products, services and program shall only be implemented where the Bank possesses expertise, infrastructure and capability to facilitate effective and proactive risk management. Sufficiently skilled and experienced personnel shall be employed to continuously enhance capabilities and develop strategic and functional competencies.

The major risks inherent to the Bank’s operations are credit, market and operational. Other attendant risks include interest rate risk in the banking book and liquidity risks.

Credit Risk is the risk that a financial loss will be incurred if a counterparty to a transaction does not fulfil its financial obligations in a timely manner.

It is the Bank's objective to maximize the return on capital by maintaining a credit risk exposure within defined parameters including asset quality and portfolio mix, among others. In furtherance of this objective, the Bank observes the following:  Limits are set on the amount of credit risk that the Bank is willing to take for customers and counterparties, and exposures are monitored against such credit limits.  The Bank also observes related regulatory limits such as the single borrower’s limit (SBL) and directors, officers, stockholders and related interests (DOSRI) ceiling, among others.  For consumer loans, the Bank utilizes credit scoring models (CSM) to determine and analyze the level of exposure to credit risk of each loan applicant. The scorecards were internally developed based on existing risk acceptance criteria. The Bank regularly validates these models and enhances the scorecards using statistical analysis.  For non-consumer loan borrowers, the Bank has developed a borrower risk rating system (BRR) which involves the categorization of each borrower based on credit analysis into a series of graduated categories of increasing risk. The BRR utilizes both quantitative and qualitative attributes to determine the appropriate risk rating for each borrower. As in the CSM, the BRR is subjected to statistical validation and periodic calibration.  Past due and nonperforming loan (NPL) ratios are also used to measure and monitor the quality of the loan portfolio.  Implementation of enhanced account quality review (AQR) on commercial loans, and Portfolio Quality Review (PQR) on consumer loans to proactively monitor risk.

Market Risk is the risk to earnings or capital arising from changes in the value of a portfolio of financial assets. It is the exposure to the uncertain market value of a portfolio due to price fluctuations. This risk arises from buying and selling activities and position-taking in bonds and foreign exchange.

The Bank aims to identify, measure, and control market risk. The Bank sets market limits based on macro-economic conditions and business targets, among others. The limits are intended to prevent over-trading and curb limit financial loss arising from the Bank’s exposure to market risk. The BOD have approved Positions Limits, Loss Alert and Stop Loss Limits.

To monitor market risk, the Bank uses the following tools: a. Weighted Average Modified Duration. The value derived is an indicator of the portfolio’s sensitivity to changes in interest rates. b. Value-at-Risk. VaR is a measure of earnings volatility for marked-to-market portfolios. The VaR provides a statistical estimate of the potential loss of value of a marked-to-market portfolio due to price fluctuations in a specified period of time within a given probability of occurrence. The Bank uses the historical simulation method in estimating VaR.

Interest Rate Risk (Banking Book) is the risk posed by adverse movements in interest rates that cause a mismatch between the rates banks set on customer loans and on deposits. It is the current and prospective risk to earnings or capital arising from the movements in interest rates. The Bank’s lending activities, taking deposits with different maturities and interest rates and investing in a portfolio of fixed income securities expose it to interest rate risk.

The Bank utilizes Interest Rate Repricing Gap (IRRG) analysis as a tool to proactively measure, control and monitor likely earnings volatility on the banking book due to changes in interest rates. The analysis is created by stratifying the Bank’s assets and liabilities into time bands according to each instrument’s remaining term to next repricing.

Adjunct to the IRRG, the Earnings-at-Risk (E-a-R) is used a measure of earnings volatility for accrual portfolios. It is interpreted as the opportunity for profit or potential losses in net interest income due to adverse changes on interest rates. It measures the loss of Net Interest Income resulting from upward/downward interest rate movements over a particular time horizon. The use of the IRRG and E-a-R aids in enhancing the Bank’s risk management process and enables the Senior Management (SM) and the Board of Directors (BOD) to assess inherent interest rate risks present in the Bank’s daily activities on an ongoing basis

Liquidity Risk is the current and prospective loss arising from the Bank’s inability to meet its obligations when they come due without incurring unacceptable losses. It includes the inability to manage unplanned decreases or changes in funding sources. This usually occurs due to the inability to convert assets to cash quickly and with minimal loss in value.

The Bank uses maximum cumulative outflow (MCO) and liquidity ratios to identify, measure, and control liquidity risks inherent in its assets and liability profile. The analysis is created by stratifying the Bank’s assets and liabilities into time bands according to each instrument’s remaining term to maturity. In 2018, the bank started monitoring of the Minimum Liquidity Ratio (MLR) in compliance with BSP Circular 996.

To ensure proper identification of liquidity risk exposures, the Bank regularly monitors the liquidity risk, conducts the liquidity stress test and updates its contingency plan if necessary. The adequacy of its financial resources is then assessed and actions to be taken in the event of an unexpected situation are also identified.

Operational Risk and IT Risk

Operational Risk is defined as the risk of direct or indirect loss resulting from inadequate or failed internal processes, people and systems, or from external events. Information security and technology risk is any risk related to information technology. Technology is the great enabler, but it also presents pervasive, potentially high-impact risk in the form of data theft, compromised accounts, destroyed files, or disabled or degraded systems. Additionally, technology may become obsolete, disrupted or uncompetitive. To systematically identify causes of failures in the Bank’s day-to-day operations, assess the potential loss and implement appropriate action to avoid or minimize the impact of such loss, the Bank uses the Operational Risk Management (ORM) Framework which is supported by various tools and methodologies to identify, assess, control, mitigate and monitor the operational risks that affect the Bank. In 2018, the RCSA (Risk Control and Self-Assessment, KRI (Key Risk Indicators) and OLD (Operational Loss Database) were redesigned and implemented as tools to identify high risk areas, loss drivers and trends which could be the basis of priority for operational risk management in order to prevent material failures. Similarly, the Bank is also redesigned the ISRA (Information Security Risk Assessment) as a tool to determine value of information assets and assess the threats and vulnerabilities to information assets.

The Bank has a Business Continuity Plan (BCP) where the primary objective is to have the capability and assure the level of preparedness needed to restore business processes in the event of a major disruption. The program includes the development of appropriate recovery procedures, facilities, contingency measures, communication, and mobilization plans across the organization. A component of the program is the Business Impact Analysis (BIA) which is necessary to identify critical business process, mission critical systems and resource dependencies. To avert any possible future business disruptions brought about by IT systems breakdown due to any possible man-made or natural disasters, an IT Disaster Recovery drill is conducted to test the connectivity and readiness of the installed systems and hardware at the Back-up / Alternate site. Call Tree Exercise, Mobilization Drill and Disaster Recovery drills were conducted in 2018 and were evaluated against pre-determined success criteria.

The Senior Management and the BOD are regularly informed on all risk areas affecting the Bank to be able to make the appropriate decisions in terms of priority and focus. Likewise, breaches in limits are properly identified, reported to Senior Management and Board of Directors (BOD) on a timely basis, and preventive measures and/or corrective actions are taken.

THE RISK GOVERNANCE STRUCTURE

Risk Management is a responsibility that rests on every member of the organization and begins at the topmost echelon. The BOD draws up its Risk Oversight Charter and its Risk Appetite Statement and cascades the principles to the various units of the Bank through its Risk Oversight Committee (ROC).

The Bank employs a Top to Bottom Approach with the BOD as the highest oversight body and ultimately responsible for the effectiveness of risk management activities across the Bank. The Bank instituted three (3) lines of defense to effectively manage risk. The first line of defense is the conduct of risk management on a Transactional Level, wherein business and support units must understand their roles and responsibilities with regard to transaction processing, follow policies and processes and apply internal controls and other risk responses to treat the risks associated with those transactions. The second line of defense is on a Portfolio Level wherein audit, compliance and risk functions perform audit, risk analysis, control, management reporting and policy review. The third line of defense led is at a Strategic Level led by the BOD which involves oversight as well as risk policy formulation and approval.

Under the functional supervision of the ROC, the Risk Management Department (RMD) is headed by a Chief Risk Officer (CRO) who is primarily responsible for the promulgation and setting up, dissemination and implementation of risk management initiatives, as he spearheads the development and execution of risk management systems and processes.

THE RISK OVERSIGHT COMMITTEE (ROC)

The ROC is a Board – level committee composed of three (3) Board members who possess a range of expertise as well as adequate knowledge of the Bank’s risk exposures. The ROC conducts oversight on all matters pertaining to risk management, including the development of risk strategies, policies, guidelines and procedures to ensure that the Bank’s risk exposure is timely recognized and that risk mitigation measures are adequate and in place. It establishes, oversees and monitors the Bank’s Risk Appetite, through the (RMD), tolerance bandwidth and a system of authority limits delegated to Senior Management and immediately gives directives for appropriate corrective actions when limit breaches occur.

AML Governance and Culture / Money Laundering (ML) / Terrorist Financing (TF) Risk Management Framework

Malayan Bank has a robust compliance system focused on the enforcement of the Anti-Money Laundering Act (AMLA), Money Laundering and Terrorist Financing Prevention Program (MLPP), Compliance Manual, Corporate Governance Manual, Code of Conduct, and other regulatory requirements. The Bank has articulated in its MLPP the regulatory issuances such as guidelines and circulars on anti-money laundering (AML) and combating the financing of terrorism (CFT) [i.e. BSP Circular No. 706 Series of 2011] in order to effectively implement the provisions of Republic Act No. 9160, otherwise known as the "Anti-Money Laundering Act of 2001" (AMLA), as amended by R.A. Nos. 9194, 10167, 10365, and its Implementing Rules and Regulations (IRR) / Revised lmplementing Rules and Regulations (RIRR), as well as R.A. No. 10168 or The Terrorism Financing Prevention and Suppression Act of 2012, and its lmplementing Rules and Regulations (lRR).

The Bank’s Compliance Department is responsible for overseeing, coordinating, monitoring and ensuring compliance with existing laws, rules and regulations through the implementation of its compliance system in accordance with the requirements of the Bangko Sentral ng Pilipinas (BSP) and other regulatory agencies which include, among others, the identification and control of compliance risks, prudential reporting as well as compliance training.

The Bank adheres to, among others, the KYC rules and customer due diligence requirements of the law and regulations from the start of customer relationship until its termination. Furthermore, the Bank takes note of bulletins and watch lists of individuals and entities engaged in illegal activities or terrorist related activities. The Anti-Money Laundering Council (AMLC), and other international entities or organizations such as the Financial Action Task Force (FATF), Office of Foreign Assets Control (OFAC) of the U.S. Department of Treasury, and other agencies or organizations duly competent and recognized to create public watch lists.

The Bank’s Corporate Governance Committee (CGC) exercises oversight functions on the Bank’s adherence to rules and regulations especially those issued by the Bangko Sentral ng Pilipinas (BSP), Securities and Exchange Commission (SEC), Insurance Commission (IC), Philippine Deposit Insurance Corporation (PDIC), Anti-Money Laundering Council (AMLC), and other regulatory bodies and agencies. The CGC also conducts oversight functions over the Bank’s Anti-Money Laundering Management Committee (AMLMC) and the Anti-Money Laundering Evaluation Committee (AMLEC) through regular reporting of matters taken during its meetings. The AMLMC / AMLEC review and decide on the disposition of AML/CFT issues referred by branches/business units (BUs).

The Bank provides AML orientation to newly hired employees and formal training/ refresher courses to its existing officers and personnel. The Human Resources Development Department (HRDD) and Compliance Department in coordination with IT Department is in process of developing a Compliance and AML eLearning system with the aim of providing every officer and personnel easy intranet access to gauged his/her knowledge to further strengthen the Bank’s adherence to AMLA, applicable laws, rules and regulations and internal policies. Moreover, the Bank has acquired an AML System to improve its monitoring and reporting tools.

CORPORATE GOVERNANCE

Overall corporate governance structure and practices

Malayan Bank believes that the key to successful implementation of its Vision and Mission depends on having a good name and reputation in the business community. Thus, the Bank’s business and operations will be conducted in accordance with the aligned regulations and best practices that promote good corporate governance.

The Bank is guided by the Bangko Sentral ng Pilipinas’ Guidelines in Strengthening Corporate Governance in BSP Supervised Financial Institutions under BSP Circular No. 749, as amended by BSP Circulars Nos. 757 and 769 and relevant provisions of the Revised Code of Corporate Governance of the Securities and Exchange Commission (SEC). The provisions of aforementioned circulars and memoranda are articulated in the revised Corporate Governance Manual and through a cascade program, the Manual is being implemented in the entire organization of the Bank, not only for statutory and regulatory compliance but to institutionalize best practices.

Selection Process for the Board and Senior Management

The Corporate Governance Committee evaluates the suitability of individual board members and senior officers, taking into account the relevant qualifications of the candidate nominated for election, such as physical and mental fitness, educational and professional background, personal track record, diversity of related experience/training, commitment to contribute, willingness to serve, and interest to remain engaged and involved. For the reelection of incumbent directors, the Corporate Governance Committee also consider the results of the most recent self- assessment of the Board, the director’s attendance record in meetings, participation of in Board activities and overall contribution to the functioning of the Board.

The Board approves the appointment of senior officers and election of directors to fill-up any vacancy.

Board’s overall responsibility

The Board oversees the Bank’s overall governance framework, approves and oversees the implementation of strategies to achieve objectives, monitors managements’ performance against set targets and ensures appropriate controls and systems of checks and balances are in place and operating effectively. It leads in establishing the tone of good governance from the top and in setting corporate values, codes of conduct and other standards of appropriate behavior for itself, the senior management and other employees. It is primarily responsible for approving and overseeing the implementation of the Bank’s risk strategy, corporate governance and corporate values. The Board ensures expeditious resolution of compliance issues and consistent adoption of corporate governance policies and systems.

Description of the major role and contribution of the Chairman of the Board

Role

As Chairman of the Board, provide fresh and meaningful ideas to the Board discussions and decision making; provide leadership in the Board of Directors by ensuring effective functioning of the Board, including maintaining a relationship of trust with Board members; ensure that the Board takes an informed decision thru a sound decision making process, encourage and promote critical discussions, ensure dissenting views are expressed and fully considered; ensure that the meetings of the Board of Directors are held in accordance with the By-Laws of the Bank; oversee the preparation of the agenda of the meeting of the Board of Directors in coordination with the Corporate Secretary, taking into account the suggestions of the Directors, the Bank President, and other members of the Senior Management; and maintain effective lines of communication and information between the Board of Directors and Senior Management of the Bank.

Contribution

The Chairman presides all stockholders’ meeting; review and approve minutes of all its previous meetings prior to presentation to the stockholders for approval; manage the Board by: providing leadership to the board; preside all its meetings; review and approve minutes of its previous meetings prior to presentation to the Board for approval; manage the directors and Board performance; facilitate communication among Directors; develop a more effective Board by: working with the members of the Corporate Governance Committee, plan Board and committee composition, recruit directors and plan for succession; participate in the Board evaluation process and provide constructive feedback and advice; review and approve requests for continuing education of the Board to improve their skills and competencies; and work with Management through: support and influence strategy; with the assistance of the Corporate Governance Committee, lead the Board in evaluating the performance of the President; provide advice and counsel to the President.

Board Composition

The board of directors determines the appropriate number of its members commensurate to the size and complexity of the Bank's operations. The members of the board of directors shall be selected from a broad pool of qualified candidates. Details of board composition is shown below:

State No. No. of Shares Principal of Years Shares Held Held/Total Stockholder Served as (Direct/ Outstanding # Director's Name Type* Represented Director Indirect) Shares (%) 1 Jose Mario C. Buñag ID - 10 1 0.00% 2 George J. Martirez ED Majalco, Inc. 22 44 0.00% 3 William Carlos Uy ED - 22 1,087,980 10.73% 4 Reynold Y. Gerongay ED - 3 1 0.00% 5 Jaime J. Martirez ED Majalco, Inc 22 44 0.00%

Majent Joel Marcelo G. Management and 6 Jimenez ED Development Corp. 17 1 0.00% LINQ Information Emmanuel M. De Entertainment 7 Ocampo NED Quadrant 2 1 0.00% 8 Manuel R. Chanco NED LINQ 7 1 0.00% 9 James Gerard Ong NED - 6 1 0.00% 10 Harry G. Liu ID - 4 1 0.00% 11 Josue N. Bellosillo ID - 3 1 0.00% LINQ Information 0.00% Entertainment 12 Philip L. Yupangco NED Quadrant 0 1 13 Ismael R. Sandig ID - 0 1 0.00% *Executive (ED), Non-Executive (NED), Independent (ID)

Board Qualification

The minimum qualifications to be a Director of the Malayan Bank Savings and Mortgage Bank, Inc. shall be the following: 1. He shall be at least twenty-five (25) years of age at the time of his election or appointment. 2. He shall be at least a college graduate or have at least five (5) years experience in business. 3. He must have attended a special seminar on corporate governance for board directors conducted or by accredited by the Bangko Sentral: Provided, that incumbent directors as well as those elected after 17 September 2001 must attend said seminar on or before 30 June 2003 or within a period of six (6) months from date of election for those elected after 30 June 2003, as the case may be, Provided further that the following persons exempted from attending said seminar:  Foreign nationals who have attended corporate governance training covering core topics in the BSP-recommended syllabus and certified by the Corporate Secretary as having been made aware of the general responsibility and specific duties and responsibilities of the director;  Filipino citizens with recognized stature influence and reputation on the banking community and whose business practices stand as testimonies to good corporate governance;  Distinguished Filipino and foreign nationals who served as senior officials in central bank and/or financial regulatory agencies, including former Monetary Board members; or  Former Chief Justices of the Philippine Supreme Court.

(ref. under BSP Cir 840. Amendment to the Guidelines on the Qualifications of a Director)

4. He must be fit and proper for the position, and in this regard, the following shall be considered: integrity/probity, physical/mental fitness, competence, relevant education/financial literacy training, diligence and knowledge/experience. 5. He must have a practical understanding of the business of the Bank. 6. He must be a member of good standing in the relevant industry, business or professional organizations.

List of Board-Level Committees including Membership and Function

1. Executive Committee. This Committee acts on behalf of the Board as the main approving body for Bank exposures particularly approval/confirmation of credit proposals, investments, disposal of acquired assets and other matter(s) which would need immediate attention and approval of the Board.

Composition Attendance % George J. Martirez Reynold Y. Gerongay William Carlos Uy No Meeting Jaime J. Martirez Joel Marcelo G. Jimenez

2. Audit Committee. The Committee provides oversight on the Bank’s financial reporting policies, practices and control, and internal and external audit functions. It shall be responsible for the setting up of the Internal Audit Department IAD) and for the appointment of the Internal Auditor as well as the external auditor who shall both report directly to the Audit Committee. It shall monitor and evaluate the adequacy and effectiveness of the internal control system. The Audit Committee shall review and approve the audit scope and frequency. It shall receive key audit reports and ensure that Senior Management is taking necessary corrective actions in a timely manner to address the weaknesses, non-compliance with polices, laws and regulations and other issues identified by the auditors.

Composition Meeting % Attendance Jose Mario C. Buñag 8/8 100 Harry G. Liu 7/8 88 Ismael R. Sandig 3/3 100

3. Risk Oversight Committee. The Risk Oversight Committee is primarily responsible for:

1. Fulfilling statutory, fiduciary and regulatory responsibilities. 2. Assisting the Board of Directors in defining the Risk Appetite of the Bank. 3. Ensuring alignment of risk management objectives with the overall business strategies and performance goals.

4. Overseeing the development of the risk management programs of the Bank and its Trust Investment Unit which shall include the following: a. Oversight of management functions and approval of proposals regarding the Bank’s policies, procedures and best practices relative to credit, asset and liability management, market and business operational risks. b. Ensuring compliance to written policies and procedures relating to the management of risks throughout the Bank. 5. Developing a continuing education program to enhance its members’ understanding of relevant regulatory and banking industry issues.

Composition Meeting % Attendance Jose Mario C. Buñag 8/8 100 Harry G. Liu 7/8 88 James Gerard Ong 3/4 75 Manuel R. Chanco 3/4 75

4. Corporate Governance Committee

The Corporate Governance Committee (CGC) is primarily tasked to assist the Board in formulating the policies and oversee the implementation of the corporate governance practices of the Bank as well as its subsidiaries and affiliates (if there is any). The Committee provides oversight on the Bank’s Compliance Department’s activities relative to Compliance Function and Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) as well as other activities which need immediate attention/approval of the Board. The CGC shall serve as the primary source for the Board to study, evaluate and make recommendations about its structure, charter, policies and practices and committees and to address issues of corporate governance.

The Corporate Governance Committee shall be composed of at least three (3) members of the Board of Directors, two (2) of whom, shall be independent director, including the chairperson.

Composition Meeting % Attendance Jose Mario C. Buñag 5/5 100 William Carlos Uy 4/4 100 Harry G. Liu 7/8 88 James Gerard Ong 3/4 75

5. Related Party Transactions Committee

The Related Party Transactions Committee (RPTC) assists the Board in overseeing the conduct of all Related Party Transactions to protect the interests of the Bank and its stakeholders in accordance with regulatory requirements.

Composition Meeting % Attendance Jose Mario C. Buñag Josue N. Bellosillo No Meetings Manuel R. Chanco III

Directors' Attendance at Board Meetings:

The Board of Directors shall meet at least once every quarter and will hold additional meetings as may be necessary. Discussions and deliberations during Board meetings are open and independent views are given due respect and consideration. The Board held ten (10) meetings from January 2018 to December 2018.

Presented hereunder is a summary of Board of Directors attendance to its regular meeting for the calendar year January 1, 2018 to December 31, 2018:

Attendance to Board Name of Director Meetings Attendance % Jose Mario C. Buñag 8/10 80 George J. Martirez 10/10 100 William Carlos Uy 10/10 100 Reynold Y. Gerongay 10/10 100 Jaime J. Martirez 9/10 90 Joel Marcelo G. Jimenez 10/10 100 James Gerard A. Ong 9/10 90 Emmanuel M. De Ocampo 9/10 90 Manuel R. Chanco III 9/10 90 Josue N. Bellosillo 10/10 100 Harry G. Liu 9/10 90 Ismael R. Sandig 6/6 100 Philip L. Yupangco (Resigned) 2/2 100 Jose Mario C. Buñag 8/10 80

Changes in the Board of Directors

Presented below are the changes in the composition of the Board of Directors that happened during the period: January to December 2018

# Name Position Date of Cessation Reason 1 Lydia P. Samonte Non-Executive Director February 15, 2018 Resignation 2 Philip L. Yupangco Non-Executive Director May 24, 2018 Resignation

List of Executive Officers/Senior Management

George J. Martirez, 66, Filipino, Vice-Chairman of the Board of Directors and Chief Executive Officer since 1996. Concurrently, he serves as the Vice President of Majalco Inc., and Director of Unicapital Inc., Majalco Finance & Investment, Inc., and Chamber of Thrift Banks. He previously served as President of Malayan Bank from 1998 to 2015, and as its Treasurer from 1996 to 1998.

George received his Bachelor of Science in Economics from De La Salle University, and his Master in Business Administration from University of the Philippines.

Reynold Y. Gerongay, 63, Filipino, President and Chief Operating Officer since July 2015. He served as Chairman of the Board for Value Max Finance Corporation. He spent 15 years as President, CEO, and Director of Robinsons Bank, from 1999 to 2011 (as Robinsons Savings Bank) and from 2011 to 2014 (as Robinsons Bank Corporation). He also served as Vice-Chairman and Director of Legaspi Savings Bank from 2012 to 2014, and as President of Security Savings Bank, and Security Finance Corporation, from 1997 to 1998. Prior to this, he spent 20 years with United Coconut Planters Bank, with his last held position as Vice President and Division Head of the Consumer Finance Division, and as concurrent Acting President and Director of UCPB Savings Bank.

Rey graduated with a Bachelor of Science in Accounting from Holy Cross College of Digos in Davao, where he was a recipient of a Gold Medal for Academic Excellence, and received his Master in Business Administration from De La Salle University. In addition to this, he completed the Advance Bank Management Program from Asian Institute of Management, where he received a Superior Academic Performance Award, and also received formal training from the Gemological Institute of America.

Philip S. Madrigal, 62, Filipino, Executive Vice President and Operations Segment Head. He was hired on January 1998. He previously held various positions in the bank. He was former Branch Banking Group Head, Loan Operations Group Head, Treasury Head, and Compliance Head. Prior to this, he served as Senior Branch Manager of Philippine Bank of Communications from 1997 to 1999. He also served as Branch Manager of Prudential Bank from 1995 to 1997.

Philip graduated with a Bachelor of Science in Accounting from Luzon College, Dagupan, Pangasinan, and is a Certified Public Accountant.

Dennis I. Paredes, 63, Filipino, Senior Vice President and Branch Banking Group Head since July 2016. He was previously a Director of Bancnet and Legazpi Savings Bank. He was also a former Retail Banking Group Head of Robinsons Bank Corporation from 2008 to 2016. Prior to this, he served as Branch Manager of ABN AMRO, Great Pacific Savings Bank, BA Savings Bank, and UCPB Savings Bank. He was also a member of the Conversion Task Force of BA Finance Corporation.

Dennis graduated with a Bachelor of Arts in Economics from University of Santo Tomas. He received his post-graduate degree of Masters in Business Administration from Ateneo Graduate School of Business.

Anna Liza M. Siapno, 41, Filipino, Senior Vice President and Chief Marketing Officer. She was hired on April 2006. She was a former Brand Manager of the Fragrance Division of Luxasia Philippines wherein she handled branding, corporate communications, product promotions, and events. She also served as Affinity Marketing Manager of Ayala Aon Insurance Brokerage handling marketing. Before that, she was a Customer Service Officer of Citibank Philippines.

Anna graduated with a Bachelor of Science degree in Legal Management from Ateneo de Manila University. She received her post-graduate degree of Masters in Business Administration from Ateneo Graduate School of Business.

German Jeremy E. Pampolina III, 47, Filipino, Senior Vice President and Treasurer since January 2016. He was previously the Chief Dealer of Robinsons Bank Corporation wherein he handled FX, FCDU, and Foreign Exchange Desk. He was also the former FX Head of Sterling Bank and Treasury Marketing Head of Chinatrust Commercial Bank.

Jeremy graduated with a Bachelor of Arts in Psychology from University of Santo Tomas. Afterwards, he took Bachelor of Science in Business Management from Pamantasan ng Lungsod ng Maynila. He received his post-graduate degree of Masters in Business Administration also from Pamantasan ng Lungsod ng Maynila.

Nathaniel P. Delos Reyes, 50, Filipino, First Vice President and Comptroller since October 2016. He previously held various positions at Robinsons Bank Corporation. He was Loans and Discounts Group Head from 2015 to 2016, Deputy Comptroller from 2010 to 2012 and Accounting Head from 1997 to 2009. Prior to this, he served as Reconciliation Head of AsianBank.

Bong graduated with a Bachelor of Science in Commerce major in Accounting from University of Mindanao. He obtained his post-graduate degree of Masters in Business Administration from De La Salle University – Dasmariñas.

Rizalino Rhett Q. Holganza, 41, Filipino, First Vice President and Chief Credit Officer since June 2016. He was previously the Collection and Asset Recovery Unit Head of Robinsons Bank Corporation, the National Credit and Collections Manager of Unistar Credit and Finance, the Collections Recovery Manager of Banco De Oro, the Collections Remedial Manager of GE Money Bank, the Back-end Collections Leader of Banco De Oro, and the Recovery Officer of Citibank NA.

Rhett graduated with a Bachelor of Arts in Political Science from De La Salle University.

James D. Chua, 49, Filipino, First Vice President and Chief Risk Officer of the Bank. He was hired on February 2018. Prior to joining the Bank, he held various positions at Robinsons Bank

Corporation, where he worked for over 20 years. He was Operations Group Head from 2015 to 2018, Electronic Banking Group Head from 2006 to 2015, Corplan Officer from 1998 to 2006 and Marketing Service Support Officer from 1997 to 1998. He was concurrently appointed Officer-in- Charge of Loans and Discounts Group in 2017 and the Information Technology Group from 2004 to 2005 and in 2009. He also spent several years with China Bank and the Bank of the Philippine Islands as branch officer and account officer. Prior to joining the banking industry, he also worked as actuarial valuation assistant for Grepalife. He is a part-time lecturer-practitioner at San Sebastian College-Recoletos, where he handles banking and financial management subjects. He was formerly a part-time lecturer at the University of the East Graduate School where he taught management science for MBA students.

James graduated Magna Cum Laude from the University of Santo Tomas with a degree in Bachelor of Science in Mathematics Major in Actuarial Science. He obtained his post graduate degree in Master of Science in Commerce Major in Finance from the University of Santo Tomas, where he also earned the distinction Magna Cum Laude. He is a PhD Commerce candidate at the University of Santo Tomas, pending completion of his dissertation.

Raul B. Cirio, 59, Filipino, Vice President and Chief Internal Auditor since August 2017. He previously held various positions in the bank. He was the Chief Compliance Officer from 2015 to 2017, the Chief Risk Officer from 2014 to 2015, the Audit Head from 2013 to 2014, the Branch Banking Group – Operations Head from 2008 to 2012. Prior to joining the bank, he also served as Branch Manager and Audit Examiner of BPI and Prudential Bank.

Raul graduated with a Bachelor of Science in Commerce major in Accounting from Adamson University, Manila, and is a Certified Public Accountant.

Redentor S. Sirug, 44, Filipino, Vice President and Chief Compliance Officer since November 2017. He was the former Chief Compliance Officer of Northpoint Development Bank, Inc. and Assistant Compliance Officer in Bank of Makati. He was also a former regulator-central banker with over ten (10) years of experience in bank supervision and examination. He was also a former staff auditor in SGV & Co. CPAs. He once joined Holy Angel University and San Sebastian College-Recoletos, Manila as practitioner-lecturer and lecturer-instructor, respectively, where he handled higher accounting and review subjects.

Red holds a port-graduate degree of Masters in Business Administration from San Sebastian College-Recoletos (SSC-R), Manila and a Bachelor of Science in Accountancy degree from Polytechnic University of the Philippines. He is a CPA with 9th place in the CPA board examinations. He has also earned some units in Bachelor of Laws. He has attended numerous seminars/trainings related to central banking, compliance, anti-money laundering, corporate governance, risk management, accounting/auditing and leadership. He holds a special Certification Course in Strategic Compliance for the Banking Industry from De La Salle University (DLSU) and Association of Bank Compliance Officers in the Philippines (ABCOMP).

Cherry Ann R. Cruz, 60, Filipino, Vice President and Systems and Methods Head since February 2018. She previously held various positions at Land Bank of the Philippines. She was Head of Anti-Money Laundering Unit from 2012 to 2014, Head of Business Risk Management Department from 2003 to 2011, Branch Manager of various branches from 1993 to 2003, Bank Examiner / Audit Supervisor of Management and Operations Audit Department from 1980 to 1993 and Accountant / Head of Reconciliation from 1979 to 1980.

Cherry graduated with a Bachelor of Science in Commerce major in Accounting from University of Santo Tomas. She obtained her post-graduate degree of Masters in Business Administration from College of the Holy Spirit. She has also earned a Diploma in Business Development from Concordia International College in Vancouver, Canada. She is also a Certified Public Accountant and a Certified Business Continuity Professional.

John Walvine C. Rata, 40, Filipino, Senior Assistant Vice President and Information Technology Group Head since January 2016. He previously served as Deputy for Technology Driven Project under Project Management Office, Office of the President and CEO of East West Banking Corporation. He was also a former Offshore Project Manager for Finance work streams servicing London, US and Singapore business partners of Deutsche Knowledge Services of Deutsche Bank. Prior to this, he was a former IT Project Manager for Lending and Corporate services business line of Chinatrust Commercial Bank and IT Project Manager and System Analyst for Loans, Inter-Office and Cash Management business line of Asia United Bank.

Walvine graduated with a degree in Bachelor of Science in Computer Science with Specialization in Software Technology from De La Salle University.

Michael Gerard N. Martirez, 39, Filipino, Assistant Vice President and Special Asset Management Unit Head. He was hired on January 2012. Prior to joining the banking industry, he spent 6 years with Ayala Land – Alveo as Sales Team Leader. He also served as Senior Research Analyst of Thompson Reuters Financial.

Mike graduated with a degree in Bachelor of Science in Entrepreneurial Management from University of Asia and the Pacific. He obtained his post-graduate degree of Masters in Business Administration from Asian Institute of Management.

Gerardo V. Malig, 60, Filipino, Assistant Vice President and Chief Security Officer since August 2017. He served as Chief Security Officer and Administration Head for the following banks, Robinsons Bank Corporation, Legazpi Savings Bank, GE Money Bank, Export and Industry Bank, Banco De Oro, Dao Heng Bank and United Coconut Planters Bank. Prior to this, he was the former Administration Head / Accountant of SAE Company.

Gerry graduated with a degree in Bachelor of Science in Commerce major in Accounting from Polytechnic University of the Philippines.

Martha Cecilia M. Singson, 26, Filipino, Manager and Head of Human Resources Development Department & concurrent Head of Employee Development, Training, and Retention of the Bank. She joined the Bank in February 2016. Prior to this, she was connected with Robinsons Bank Corporation, where she started as a Learning and Development Specialist in 2013, and was promoted to the Human Resource Management Officer in 2014.

Mai graduated from De La Salle University as Summa Cum Laude, with a degree of Bachelor of Arts major in Psychology. She is presently a full scholar pursuing a post-graduate degree in Master of Science in Clinical Psychology at De La Salle University.

Atty. Maryrose O. Toledo, 28, Filipino, Assistant Manager and Legal Department Head of the Bank since July 2017. She served as Asset Recovery and Litigation Officer of the Bank from February to June 2017.

Atty. Mia graduated with a degree in Bachelor of Arts Political Science from University of the Philippines, Manila. She received her Bachelor of Laws from Arellano University School of Law.

Angela Diane Q. Alegarbes, 25, Filipino, Assistant Manager and Corporate Planning Officer of Corporate Planning Unit of the Bank. She joined the Bank in October 2016. Prior to joining the Bank, she served as Corporate Planning Analyst of Robinsons Bank Corporation from 2013 to 2016.

Angela graduated Cum Laude from Far Eastern University with a degree in Bachelor of Science in Business Administration major in Financial Management.

Performance Assessment Program

Malayan Bank implements a self-rating system that can measure the performance of the Board of Directors (BOD), Board-level committees, individual directors, and senior management in accordance with the criteria defined in the Corporate Governance Manual. The objective of this assessment is to ensure that directors are aware of the level of their performance of respective roles, functions and responsibilities as individual members and as part of the collegial Board. It assists them in determining their strengths and weaknesses and enable them to formulate ways to resolve concerns, if there is any.

The Compliance Department presents the duly accomplished Board of Directors Evaluation Forms and Director Evaluation Forms to the Corporate Governance Committee (CGC), which in turn, endorses the same for approval of the Board. The self-evaluation lets the members of the Board to assess themselves as a collegial body and individually. The said form contains varying statements based on the role, functions and responsibilities of the Board which are defined in the Bank’s Corporate Governance Manual.

The CGC oversees the conduct of self-evaluation of the Board, its Board-level committees, senior management and individual director, which is conducted annually with the results discussed by the CGC prior to its submission to the Board.

Orientation and Education Program

All new directors joining the Board are required to undergo an orientation program. This is intended to familiarize the new directors on their statutory/fiduciary roles and responsibilities in the Board and Committees. The Corporate Governance Committee makes recommendations to the Board regarding the continuing education of directors.

In-house and external courses attended by Directors and Senior Management for the past three (3) years:

For the Board of Directors: 1. Corporate Governance Training Program conducted by ICD 2. Orientation Course on Corporate Governance conducted by ICD 3. Seminar on Anti-Money Laundering Law conducted by BSP and BAIPHIL 4. BSP Circular 706, as amended by BSP Circular 950, AMLA Law and AML Risk Rating System for Board of Directors conducted by BAIPHIL 5. Briefing on Pawnshop Regulations conducted by Bangko Sentral ng Pilipinas

For Senior Management: 1. BSP Circular 706, as amended by BSP Circular 950, AMLA Law and AML Risk Rating System for Board of Directors conducted by BAIPHIL 2. Counterfeit Detection on Peso and Dollar seminar conducted by Bangko Sentral Ng Pilipinas 3. Credit Analysis Seminar conducted by Ateneo De Manila University 4. CAMELS Rating Seminar (in-house) 5. Jewelry Appraisal Workshop (in-house) 6. Negotiable Instruments seminar (in-house) 7. Disaster Preparedness/Bank Security Seminar (in-house) 8. Training on Deposit Products (in-house) 9. Signature Verification and Fraud Detection Seminar (in-house) 10. Risk Awareness Seminar (in-house) 11. Bank Security Seminar (in-house) 12. Compliance Seminar (in-house) 13. Anti-Money Laundering Seminar (in-house) 14. Data Privacy Seminar (in-house) 15. Information Security Seminar (in-house) 16. Financial Consumer Protection (in-house) 17. First Business Continuity Management Summit conducted by Business Continuity Managers Association of the Philippines 18. The Quality Assurance and Improvement Program of the Internal Audit Activity (in- house) 19. International Professional Practices Framework and Code of Conduct (in-house) 20. Training Workshop on QAIP Self-assessment and Validation Tools, Requirements and Reporting (in-house) 21. Security Professional Trainers conducted by Commander Security Training, Inc.

22. Global Training: Code of Conduct 2018 conducted by Citi Learning 23. Global Markets and Securities Services Competition Law Compliance Policy conducted by Citi Learning 24. Global Initiative: 2018 Global Compliance Risk Management Framework conducted by Citi Learning 25. Global FXLM - Types of Information conducted by Citi Learning 26. APCMP - 2018 Overview of Philippine Laws and Regulations conducted by Citi Learning 27. Global Initiative: 20018 Fraud Awareness conducted by Citi Learning 28. 2018 Anti-Money Laundering Country Course conducted by Citi Learning 29. 2018 Philippines AML, Sanctions and Anti-Bribery Training conducted by Citi Learning 30. Updated Guidelines on Sound Credit Risk Management 31. RA 10173: Data Privacy Act – Aligning Information Security Compliance to ISO 27001:2013 32. ABCOMP General Assembly Meeting: BSP Financial Report Portal; Administrative Liabilities and Proceedings

Retirement and Succession Policy

Elected members of the Board serve for one-year term and until their successors are elected. An independent director of the Bank may only serve as such for a maximum cumulative term of nine (9) years. After which, the independent director shall be perpetually barred from serving as independent director of the Bank, but may continue to serve as regular director. The nine (9) year maximum cumulative term for independent directors shall be reckoned from 2012. The Board, in coordination with the Corporate Governance Committee, ensure that the Bank has in place an appropriate and updated succession planning for key executives to address emergency in the event of extraordinary circumstances and ensure continuity of operations.

The retirement age for Malayan Bank Senior Officers is sixty (60) years old. However, if the Senior Officer is still deemed fit to work, and the Board of Directors approve of his extended employment, the Senior Officer will still be allowed to serve Malayan Bank on a full-time basis, with the same benefits. Extension of Tenure is according to Board Approval, and upon the discretion of the company.

The Bank does not have a retirement age for Directors. However, the Board of Directors will decide if a Director is no longer fit to serve the Bank as a Director.

Remuneration Policy

The levels of remuneration of the Bank shall be sufficient to attract and retain experienced and professional directors and officers needed to run the Bank successfully. A portion of executive directors’ remuneration may be structured so as to link rewards to corporate and individual performance.

The Bank may establish a formal and transparent procedure for developing a policy on executive remuneration and for fixing the remuneration packages of individual directors and officers. However, no director shall be involved in deciding his or her own remuneration.

The Bank’s annual reports and information statements shall include a clear, concise and understandable disclosure of all fixed and variable compensation that may be paid, directly or indirectly, to its directors and top four (4) management officers during the preceding fiscal year.

Policies and Procedures on Related Party Transactions

Malayan Bank Savings and Mortgage Bank, Inc. (MBSMB), in compliance with legal and regulatory requirements, must ensure that related party transactions (RPTs) are conducted in a manner that is fair and at arm’s length standards consistent with the best interests of the Bank and its stakeholders. These transactions are made and entered into substantially on the same terms and conditions as transactions with other individuals and businesses of comparable risks. The Bank’s Related Party Transaction Policy, which was approved by the Board of Directors, sets forth the initiation, processing, review, approval, reporting and disclosure of transactions entered into by the Bank with Related Parties.

A. Definition of Related Parties

For purposes of this policy, the following definition of Related Parties shall apply:

a. SUBSIDIARIES AND AFFILIATES

Related parties shall cover the Bank’s subsidiaries as well as affiliates and any party (including their subsidiaries, affiliates and special purpose entities) that the Bank exerts direct/ indirect control1 over or that exerts direct/ indirect control over the Bank.

Corporation, association or firm in which the lending bank and/or its parent/subsidiary holds or owns at least twenty percent (20%) of the subscribed capital of such corporation, or in the equity of such association or firm.

b. DOSRI

1. Directors shall refer to the Bank directors as defined in Subsec. X141.1.² 2. Officers shall refer to the Bank officers as defined in Subsec. X142.1.³

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¹Control of an enterprise exists when there is: a. Power over more than one-half of the voting rights by virtue of an agreement with other stockholders; or

b. Power to govern the financial and operating policies of the enterprise under a statute or an agreement; or c. Power to appoint or remove the majority of the members of the board of directors or equivalent governing body; or d. Power to cast the majority votes at meetings of the board of directors or equivalent governing body; or e. Any other arrangement similar to any of the above.

Control is presumed to exist if there is ownership or holding, whether direct or indirect, of 20 percent or more of a class of voting shares of a company. should the Fl choose to disclaim or rebut the presumption, it should provide facts sufficient to show that there is indeed no control. Further, the Fl shall submit a written commitment that:

1) shares owned or held are exclusively for investment purposes; 2) the Fl-stockholder will not serve on the board of directors and will not nominate any candidate to serve on the board or otherwise seek board representation; 3) the Fl-stockholder will have only limited contacts with bank management that are customary for interested shareholders; 4) the Fl-stockholder will engage only in normal and customary transactions with the enterprise; and 5) the Fl will not pledge the shares acquired to secure a loan with any institution.

² Directors shall include: (1) directors who are named as such in the Articles of Incorporation; (2) directors duly elected in subsequent meetings of the stockholders; and (3) those elected to fill vacancies in the Board of Directors. ³ Officers shall include the President, Executive Vice President, Senior Vice President, Vice President, General Manager, Treasurer, Secretary, Trust Officer and others mentioned as officers of the Bank, or those whose duties as such are defined in the By-Laws, or are generally known to be the officers of the bank (or any of its branches and offices other than the head office) either through announcement, representation, publication or any kind of communication made by the bank: Provided, That a person holding the position of Chairman or Vice Chairman of the Board or another position in the board shall not be considered as an officer unless the duties of his position in the board include functions of management such as those ordinarily performed by regular officers: Provided, further, That members of a group or committee, including sub-groups or sub- committees, whose duties include functions of management such as those ordinarily performed by regular officers, and are not purely recommendatory or advisory, shall likewise be considered as officers. (As amended by Circular No. 562 dated 13 March 2007)

3. Stockholder shall refer to any stockholder of record in the books of the bank, acting personally, or through an attorney-in-fact; or any other person duly authorized by him or through a trustee designated pursuant to a proxy or voting trust or other similar contracts, whose stockholdings in the lending bank, individual and/or collectively with the stockholdings of:

i. his spouse and/or relative within the first degree by consanguinity or affinity or legal adoption; ii. a partnership in which the stockholder and/or the spouse and/or any of the aforementioned relatives is a general partner; and iii. corporation, association or firm of which the stockholder and/or his spouse and/or the aforementioned relatives own more than fifty percent (50%) of the total subscribed capital stock of such corporation, association or firm, amount to one percent (1%) or more of the total subscribed capital stock of the bank. (As amended under Circular 464 dated 1/4/05).

4. Related interest shall refer to any of the following:

i. Spouse or relative within the first degree of consanguinity or affinity, or relative by legal adoption, of a director, officer or stockholder of the bank; ii. Partnership of which a director, officer, or stockholder of a bank or his spouse or relative within the first degree of consanguinity or affinity, or relative by legal adoption, is a general partner; iii. Co-owner with the director, officer, stockholder or his spouse or relative within the first degree of consanguinity or affinity, or relative by legal adoption, of the property or interest or right mortgaged, pledged or assigned to secure the loans or other credit accommodations, except when the mortgage, pledge or assignment covers only said co-owner's undivided interest; iv. Corporation, association, or firm of which a director or officer of the bank, or his spouse is also a director or officer of such corporation, association or firm, except:

a) where the securities of such corporation, association or firm are listed and traded in the big board or commercial and industrial board of domestic stock exchanges and less than fifty percent (50%) of the voting stock thereof is owned by any one (1) person or by persons related to each other within the first degree of consanguinity or affinity; or b) where the director, officer or stockholder of the bank sits as a representative of the bank in the board of directors of such corporation: Provided, That the bank representative shall not have any equity interest in the borrower corporation except for the minimum shares required by law, rules and regulations, or by the by-laws of the corporation, or c) where the corporation is at least ninety-nine percent (99%)- owned by a non-stock corporation as defined in Section 87 of the Corporation Code of the Philippines: Provided, That the purpose of the loan is to finance hospitals and other medical services: Provided, further, That the loan is fully secured: Provided, furthermore, That in the case of Items (a), (b) and (c) above, the borrowing corporation is not among those mentioned in items e(5), e(6), e(7) and e(8) of this Section;

v. Corporation, association or firm of which any or a group of directors, officers, stockholders of the lending bank and/or their spouses or relatives within the first degree of consanguinity or affinity, or relative by legal adoption, hold or own at least twenty

percent (20%) of the subscribed capital of such corporation, or of the equity of such association or firm; vi. Corporation, association or firm wholly or majority-owned or controlled by any related entity or a group of related entities mentioned in Items e(2), e(4) and e(5) of this Section; vii. Corporation, association or firm which owns or controls directly or indirectly whether singly or as part of a group of related interest at least twenty percent (20%) of the subscribed capital of a substantial stockholder of the lending bank or which controls majority interest of the bank pursuant to Subsec. X303.1; viii. Corporation, association or firm which has an existing management contract or any similar arrangement with the parent of the lending bank; and ix. Non-governmental organizations (NGOs)/foundations that are engaged in retail microfinance operations which are incorporated by any of the stockholders and/or directors and/or officers or related banks. c. OTHER RELATED PARTIES

1. Close family members are persons related to the Bank’s directors, officers and stockholders (DOS) within second degree of consanguinity or affinity, legitimate or common-law. These shall include the spouse, parent, child, brother, sister, grandparent, grandchild, parent-in-law, son-/daughter-in-law, brother-/sister-in-law, grandparent-in-law, and grandchild-in-law of the FI’s DOS. 2. Corresponding persons in affiliated companies are the DOS of the affiliated companies and their close family members. 3. Corporations, associations or firms of which any or a group of Directors, Officers, Stockholders of the lending bank and/or their spouses or relatives within the first degree of consanguinity or affinity, or relative by legal adoption, hold or own at least ten percent of the subscribed capital of such corporation, or of the equity of such association or firm; 4. Corporation, association or firm which owns or controls directly or indirectly whether singly or as part of a group of related interest at least ten percent (10%) of the subscribed capital of a substantial stockholder of the lending bank or which controls majority interest of the bank; and 5. Corporation, association or firm in which the lending bank and/or its parent/subsidiary holds or owns at least ten percent (10%) of the subscribed capital of such corporation, or in the equity of such association or firm.

B. Coverage of RPT Policy

Related Party Transactions are transactions or dealings with related parties of the Bank, including its trust department, regardless of whether or not a price is charged.

For purposes of this policy, the following criteria apply to a Related Party Transaction:

a. Nature Any of the following transactions entered into by the Bank with a Related Party which includes:

1. On- and off-balance sheet credit exposures and claims and write-offs; 2. Investments and/or subscriptions for debt/ equity issuances; 3. Consulting, professional, agency and other service arrangements/ contracts; 4. Purchases and sales of assets, including transfer of technology and intangible items (e.g, research and development, trademarks and license agreements); 5. Construction arrangements/ contracts; 6. Lease arrangements/ contracts; 7. Trading and derivative transactions; 8. Borrowings, commitments, fund transfers and guarantees; 9. Sale, purchase or supply of any goods or materials; and 10. Establishment of joint venture entities.

RPTs shall be interpreted broadly to include not only transactions that are entered into with related parties but also outstanding transactions that were entered into with an unrelated party that subsequently becomes a related party.

C. Review and Approval of Related Party Transactions/ Guidelines in Ensuring Arm’s Length Terms 1. All credit and non-credit Related Party Transactions go through the normal approval processes of the Bank given the delegated discretion after due consideration to existing DOSRI regulations and SB limits. 2. Upon approval, all Php10million and above Related Party Transactions including transactions falling under the Ordinary Course of Business with deviations are referred to the Related Party Transactions Committee. The Committee reviews and ratifies these Related Party Transactions and endorses to the Board for approval. 3. The Committee will consider the following factors to the extent relevant to the Related Party Transaction in conducting an independent review: i. the identities of the parties involved in the transaction or relationship; ii. the terms of the transactions are fair and on arm’s length basis to the Bank; iii. the impact on Director’s or Senior Officer’s independence; and iv. whether the Related Party Transaction would present an improper conflict of interest for any Director, Stockholder or Senior Officer of the Bank. v. The Board of Directors approves and confirms all Related Party Transactions endorsed by the Related Party Transactions Committee. vi. Any member of the Board or Related Party Transactions Committee who has interest in the transaction must abstain from participation in the review and approval of any Related Party Transaction.

D. Conflict of Interest

The Conflict of Interest Policy cover the identification and prevention or management of potential or actual conflicts of interest which may arise. The members of the board, stockholders, and management shall disclose to the board whether they directly, indirectly or

on behalf of third parties, have a financial interest in any transaction or matter affecting the Bank.

Directors and employees should act in a manner that will serve the best interest of Malayan Bank and its shareholders. This requires that all business decisions and actions must be aligned to the principles and values of Malayan Bank and should not be driven by personal motivations or influenced by personal relationships which may interfere in the exercise of objective and independent judgment. Any financial and personal interest or benefit in any transaction involving Malayan Bank must be disclosed.

When presented with a situation involving a potential conflict of interest, it is necessary to disclose the possible conflict in writing to the Supervising Officer, in case of officer or employee, or to the Board of Directors, in case of Director. Disclosures against possible or perceived conflict of interest, may include, but need not be limited to the following:

1. Interest in Businesses Any financial interest or management participation of an immediate family member in the business of a supplier, competitor, or customers, whether publicly- listed or privately held, should be disclosed. 2. Employment or Engagement of Services Engagement by a supplier, contractor, or customer's business as a director, adviser, officer, employee or consultant needs to be disclosed and requires approval of Malayan Bank. Similar engagement of an immediate family member (parent, brother, sister, spouse, child) shall likewise need to be disclosed. 3. Employment in Another Entity or in Political Office This includes disclosure on engagement in another occupation or holding concurrent position in a government, or political office or agency. 4. Political Activity Active involvement in any political party or participating/engaging in a political campaign should be disclosed and requires permission from Malayan Bank. 5. Relatives/ Next of Kin Disclosure should be made when a director or employee has a relative employed in Malayan Bank. Management discretion shall be exercised to ensure that there will be no superior-subordinate relationship between employed relatives or in a control function exercised over the business unit of a relative.

Next-of-kin relationship should also be disclosed when it begins to exist with another employee where one exercises superior-subordinate relationship or control relationship with the employee. Directors and employees are responsible for identifying, assessing and managing conflicts of interest whether actual or potential that arises in their day-today work. Full disclosure of any conflict of interest should be made on an annual basis or as necessary, through the annual submission of the Conflict of Interest Disclosure Form (Annex A) to Human Resources Development Department (HRDD). Any disclosed potential conflict of interest shall be forwarded by HRDD to Compliance Department for evaluation. In case of doubt about the propriety of any course of action or find that their own interests are or may be in conflict with those of the institution, they must disclose and seek advice from HRDD.

E. Materiality Thresholds and Excluded Transactions

a. Materiality threshold Any financial transaction, arrangement or relationship amounting to Php10 Million and above is considered significant where a Related Party has or will have direct or indirect material interest.

b. Excluded Transactions / Exceptions to the Related Party Transaction Rule

Any of the following types of transaction even if the aggregate amount exceeds the materiality threshold shall not require review and approval by the Related Party Transactions Committee and the Board, respectively:

1. Ordinary Course of Business i. Financial services provided to all related parties such as deposits (CASA, Time Deposits), regular trade transactions involving purchases and sales of debt securities traded in an active market (Investment funds), brokerage, insurance and cash management services provided that the transaction has no policy deviations and the services are on substantially the same terms as those prevailing at the time for comparable services provided to unrelated parties; and ii. A transaction where the rates or charges involved in the transaction are determined by competitive bids or fixed by law or regulated by a governmental authority.

2. Employee Benefits Banking services such as remittances, safe deposit boxes, credit cards, if any, etc. at preferential rates or waivers given to all employees (including senior officers) as part of employee’s incentives or benefits.

F. Internal Limits for Individual and Aggregate Exposures

The members of the board, stockholders, and management are expected to comply with the requirements of this RPT policy relative to internal limits or sub-limits for individual and aggregate exposures to a related party and for aggregate exposures to all related parties that are consistent with the Bank's risk appetite, risk profile, and capital strength.

RULES FOR DOSRI CREDIT ACCOMMODATIONS

All loans, other credit accommodations and guarantee to clients classified under DOSRI shall be subject to the provisions of Section X326 to X338 of MORB as amended by BSP Circular 423 issue dated March 15, 2004 and any subsequent amendment thereto:

1. Dealings of the Bank with any of its DOSRI should be in the regular course of business and not less favorable to the Bank than those offered to others.

2. The Bank's DOSRI are the Director/s (D), Officer/s (O), Stockholder/s (S), and their Related Interest as defined in BSP MORB as amended by BSP Circular 423, 464 and 695. 3. Loans, advances and other credit accommodations to DOSRI shall be subject to the provisions stated therein: a. Any advance by means of incidental or temporary overdraft, cash item, “vale”, etc. b. Any advance of unearned salary or other unearned compensation for periods in excess of thirty (30) days. c. Any advance by means of DAUDs d. Outstanding availments under an established credit line e. Drawings against an existing letter of credit f. The acquisition of any note, draft, bill of exchange or other evidence of indebtedness upon which the bank's DOSRI may be liable as makers, drawers, acceptors, endorsers, guarantors of sureties g. Indirect lending such as loans or other credit accommodations granted by another financial intermediary to said DOSRI from funds of the bank invested in the other institution's trust or other department when there is a clear relationship between the transactions. h. The increase of an existing indebtedness, as well as additional availments under a credit line or additional drawings against a letter of credit. i. The sale of assets, such as shares of stock, on credit. j. Any other transactions as a result of which the bank's DOSRI become obligated or may become obligated to the lending bank, by any means whatsoever to pay money or its equivalent. 4. Transactions enumerated in Section X328 (Transactions Not Covered) of BSP MORB as amended by BSP Circular 423 shall not be subject to the provisions stated therein. 5. The loans, other credit accommodations or guarantee shall be subject to the following ceilings: a) Individual Ceiling i. Each of the bank's directors, officers, stockholders and related interest shall be limited to an amount equivalent to their respective unencumbered deposits and book value of their paid-in capital contribution in the bank. ii. Unsecured loans, other credit accommodations and guarantees of each of the bank's directors, officers, stockholders and related interests shall not exceed thirty percent (30%) of their respective total loans, other credit accommodations and guarantees. iii. The following loans, other credit accommodations and guarantees shall be excluded from individual ceiling: iv. Loans, other credit accommodations and guarantees secured by assets considered as non-risk by the Monetary Board: 1. Cash 2. Debt securities issued by the BSP or the Philippine government 3. Deposits maintained in the lending bank and held in the Philippines 4. Debt securities issued by the US Government

5. Debt securities issued by central governments, central banks of foreign countries and multilateral financial institutions such as International Finance Corporation, Asian Development Bank and World Bank, with the highest credit quality given by any two internationally accepted rating agencies. v. Loans, other credit accommodations and advances to officers in the form of fringe benefits granted in accordance with existing regulations. vi. Loans, other credit accommodations and guarantees extended by a cooperative bank to its cooperative shareholders. b) Aggregate Ceiling 1. Except with the prior approval of the Monetary Board, the total outstanding loans, other credit accommodations and guarantees to directors, officers, stockholders and their related interests shall not exceed fifteen percent (15%) of the total loan portfolio of the bank or one hundred percent (100%) of net worth, whichever is lower. 2. Total unsecured loans, other credit accommodations and guarantees to said directors, officers, stockholders or their related interests shall not exceed thirty percent (30%) of the aggregate ceiling or the outstanding loans, other credit accommodations and guarantees, whichever is lower. 3. The following loans, other credit accommodations and guarantees shall be excluded in determining compliance with aggregate ceiling: a. Credit accommodations or portions thereof to the extent secured by assets considered as non-risk by the Monetary Board. b. Credit accommodations to a corporate stockholder which meets all the following conditions: 1) The corporation is a non-financial institution 2) Its shares are listed and traded in the domestic stock exchanges 3) No person or group of persons related within the first degree of consanguinity or affinity holds / owns more than twenty percent (20%) of the subscribed capital of the corporation. c. Credit accommodations to government-owned or controlled corporations, in cases where the director, officer or stockholder of the lending bank is a representative of the government in the borrowing corporation and does not hold any proprietary interest in such corporation: Provided, that other rules on loans to DOSRI, such as procedural and reportorial requirements under Sections X334 and X335 of this Circular are followed. d. Exclusions from individual ceiling mentioned under items (b) and (c) of Subsection X330. 4. No loans, other credit accommodations or guarantee shall be granted to DOSRI clients, except with prior written approval of the majority of the directors, excluding the director concerned. 5. A copy of the Board of Director's approval document shall be submitted to the appropriate supervising and examining department of the BSP within twenty (20) banking days from the date of approval.

6. Any violation / non-compliance of the herein prescribed provisions shall be subject to sanctions enumerated in Section X336 of BSP MORB as amended by BSP Circular 423. The concerned Account Officer (AO) / Relationship Manager (RM) / Marketing Officer (MO) shall adhere to the Know Your Client (KYC) Policy of the bank in establishing the identity and determination of the client's classification as DOSRI. To facilitate proper monitoring of DOSRI transactions, tagging of client's account with the appropriate DOSRI code by the handling AO / RM shall be performed in the CIF level via Function in the appropriate system: i. Director ii. Officer iii. Stockholder iv. Related Interest

G. Whistle Blowing Mechanisms

The Whistle Blowing Policy include effective whistleblowing mechanisms consistent with the corporate values and code of conduct set by the Board of Directors. The policy shall encourage employees to communicate, confidentially and without the risk of reprisal, legitimate concerns about illegal, unethical or questionable RPTs. It shall include guidance on how and by whom legitimate material concerns should be reported, investigated and addressed by an objective independent internal or external body, senior management and/or the board itself.

H. Restitution of Losses and Other Remedies for Abusive RPTs

The members of the board, stockholders, management and employees are expected to comply with the requirements of this RPT policy and act in a manner that will serve the best interests of the Bank and its stakeholders. Failure to comply with the requirements of this RPT policy may lead to disciplinary measures commensurate to the violations. The Bank will use principles of fair accountability and due process in investigating and making decisions on all matters pertaining to failure to abide by the RPT Policy such as RPTs that are not engaged on arm's length terms.

Malayan Bank reserves the right to impose corresponding sanctions and/or penalties for violation of this RPT policy, which includes dismissal from service or from the Board of Directors, as the case may be, without prejudice to further legal, administrative or criminal charges depending on the offense.

Material Related Party Transactions

The table below shows the Bank’s significant related party transactions for the year 2018. Full disclosures of these transactions were made through reports with the appropriate regulatory agency. These related party transactions are confirmed by a majority of the Bank’s stockholders during the annual meeting of stockholders.

No. Counterparty Nature of Original Outstanding Aggregate Transaction Balance Balance Balance

1 Vienovo Omnibus Line P10,000,000.00 P10,000,000.00 N/A Philippines Inc. (Back-to- back); Term: Interest monthly, principal upon maturity Self-Assessment Function i. The structure of the internal audit and compliance functions including its role, mandate/authority, and reporting process Internal Audit Function

The internal audit function focuses on identifying and evaluating internal controls which are needed to protect against financial risk. It does through both financial and operational audits and will cover the controls in place to fulfill regulatory requirements. The audits will result in several recommendations which the internal audit function will then follow up with management of the business over time.

The Bank’s Internal Audit Department (IAD) is under the direct supervision of the Audit Committee. IAD is tasked to provide independent assessment of the adequacy and effectiveness of the Bank’s system of internal controls, risk management and governance processes of all units of the Bank. It has implemented the risk-based approach in auditing major areas of operations and prioritized their work based on assessment of risk exposures. It is manned by individuals with relevant qualifications and has unfettered access to the Audit Committee, Board and Senior Management. The Internal Audit Department Head reports directly to the Audit Committee which is responsible for the appointment and removal of the Internal Auditor.

Compliance Function

Compliance Functions is an independent function that identifies, assesses, advises on, monitors and reports on the Bank’s compliance risk, that is, the risk of legal or regulatory sanctions, material financial losses, or loss to reputation a bank may suffer as a result of its failure to comply with all applicable laws, regulations, codes of conduct and standards of good practice.

The Compliance Department coordinates with regulators on their examinations and reports significant compliance issues and regulatory findings to Senior Management, Corporate Governance Committee, and the Board. The department is headed by a Chief Compliance Officer (CCO) who was appointed by the Board and approved by BSP/ Monetary Board. The CCO reports directly to the Corporate Governance Committee. ii. The review process adopted by the Board to ensure effectiveness and adequacy of the internal control system The Board of Directors’ evaluation of the Bank’s internal control system found that these are generally effective and adequate across the Malayan Bank. The review process adopted by the Board include the following:

1. Review of Reports The Board’s assessments are based on the information obtained from various reports submitted to members of the Board/ Audit Committee/ Risk Oversight Committee, as follows:

a. Internal Audit Department’s report on the results of regular or special examinations of branches /business units (BUs). b. Risk Management Department’s report on the assessments of the Bank’s operational risk (i.e. proper setting of limits; information security policies; IT operations activities; and business continuity management activities). c. External Auditor’s assessment of the Bank’s internal control system as stated in its 20__ Audited Financial Statements.

2. Board of Directors Evaluation Form The Board’s assessment of Control Units: Audit Committee, Corporate Governance Committee and Risk Oversight Committee, using the Board of Directors Evaluation Form to rate the oversight on the Bank’s risk management and system of internal control.

Dividend Policy

Under the Bank’s Corporate Governance policy, shareholders shall have the right to receive dividends subject to the discretion of the Board. Dividends shall be declared from the surplus or undivided profits of the Bank including stock dividends from paid-in surplus and at such amount and time that the Board may determine and in no case shall dividends reduce the paid-in surplus of the Bank. Declaration of dividends shall also be subject to the pertinent rules and regulations prescribed by BSP.

Consumer Protection Practices

The Bank is aware of the nature of its business that is filled with public interest, trust and confidence and which imposes a more challenging adherence to the basic principles and ethical business practices that govern the conduct of the Bank when dealing with financial consumers. It has in place Financial Consumer Protection Manual which sets the minimum standards of consumer protection in the areas of disclosure and transparency, protection of client information,

fair treatment, effective recourse and financial education. These policies underscore that financial consumer protection is a fundamental part of the Bank’s corporate governance and culture. The Bank’s consumer protection policy provides assurance that consumer protection practices are embedded in the Bank’s business operations which address and prevent identified risks to the Bank and associated risk of financial harm or loss to its customers.

Consumer Protection Risk Management System (CPRMS)

Malayan Bank’s CPRMS is a means by which the Bank can identify, measure, monitor, and control consumer protection risks inherent in its operations. It provides the foundation for ensuring the Bank’s adherence to consumer protection standards of conduct and compliance with consumer protection laws, rules and regulations, thus ensuring that the Bank’s consumer protection practices address and prevent identified risks to the Bank and associated risk or financial harm of loss to consumers.

IDENTIFY Consumer Protection Standards of Conduct Inherent Risk

 Disclosure & Transparency  Protection of Client Information  Effective Recourse  Financial Education & Awareness

Evaluate Risk Management CONTROL

CPRMS MEASURE Identified Inherent Risk  Board and Senior Management FRAMEWORK Oversight thru CPRMS Guidelines  Policies, Procedures and Limits

 Compliance and Program  Internal Audit Function

MONITOR Bank’s compliance with the consumer protection policies

and procedure

1. IDENTIFY – The starting point of the CPRMS Framework is to develop an understanding of the institution, taking into account the external environment (e.g., economic trends, regulatory

landscape, and completion) and within an organization’s internal environment (e.g., people, process, and infrastructure). The factors to be considered are the inherent risk on the core principles of consumer protection program, which includes disclosure and transparency, protection of client information, fair treatment, effective recourse and financial education and awareness.

Business and service units, as first line of defense take ownership of the risk by identifying, assessing and managing the risks form the new activities, processes, products and systems they do and use. Business and service units assign a representative for the purpose of assisting with the coordination of the Bank’s risk programs, promoting Risk and Information Security Awareness and acquiring and/or providing accurate information to RMD for an effective bank-wide risk assessment.

The Business Units participate in the conduct of risk management programs and responsible for completion and accomplishment of the Bank’s risk management tools for its bank-wide assessment such as, but not limited to:

a. Risk and Control Self-Assessment (RCSA) serves both as identification and assessment tool of the Bank’s inherent operational risks and relevant controls. The RCSA template is expanded to facilitate the identification of and to acknowledge the risks related to financial consumer protection, anchored on the customer protection standards of conduct for BSFIs. b. Key Risk Indicators (KRI) serves as a tool to identify and mitigate the Bank’s increasing operational risk profile based on pre-defined risk indicators and thresholds. KRIs related to consumer protection are monitored on a regular basis to ensure that risks are maintained within the set appetite and actions are being taken to address heightened risks. Escalation protocols are established and implemented based in the resulting trigger levels. c. Information Security Risk Assessment (ISRA) are part of the Bank’s Information Security Risk Management Framework, which assess and mitigate the risks identified from its information assets that could be sorted according to the degree of sensitivity and criticality of information assets and the type of data classification (i.e. Strictly Confidential, Confidential, Internal, and Public). It is a customized tool of the Bank to perform security risk assessment to establish and understand risks involve on confidentiality, integrity and availability of information and IT systems.

2. MEASURE – The next step is to measure the identified inherent risk.

The RCSA and KRI tools should result in the qualitative and quantitative evaluations of the probability and impact of customer protection-related risks to the organization. The overall results of the assessment may be plotted to a Risk Heat Map – a visual and graphical presentation tool being used so that the Management will be easily able to see the risk level of a particular KRI or Business Unit.

3. MONITOR – The Bank uses several monitoring tools to monitor the risks related to consumer protection and to assess the Bank’s compliance with consumer protection policies and practices. a. The KRIs are monitored on a monthly basis. On the other hand, other tools such as RCSA and ISRA are conducted once a year or as needed; results and recommendations and/or plan of actions are reported to the Risk Oversight Committee (ROC). b. The Operational Risk Report, which includes reporting of customer complaints and resolution are presented to the ROC on a monthly basis. c. User and least privilege’s Access Review is a security administration and monitoring function of the Management and- it is conducted on a quarterly basis. BSP Circular 808 and the Bank’s User Access Management Manual state that access rights to the system resources and least privilege principle throughout the IT operations should be regularly reviewed to ensure that proper segregation of duties are in place and access to system resources and data are granted only to authorize personnel. d. An annual evaluation is conducted on outsourced service providers of the Bank to review their performance and adherence to the Bank’s rules and regulations.

4. CONTROL – Once the Bank’s inherent risks are identified and the impact of non-compliance to customer protection program is measured, the next step is to evaluate the adequacy of its management systems to effectively monitor and control these risks within the Bank’s business activities. This includes, but is not limited to the following: a. Establishment, review and updating of policies, procedures and systems; b. Delegation of approving authorities; c. Setting-up exception management policies; d. Conduct of risk awareness programs and consumer protection training; and e. Regular reporting to Management Committees, Risk Management Committees, Corporate Governance Committee and Board of Directors.

Role of the Board of Directors in the development of the Bank’s Consumer Protection strategy:

The Board of Directors helped develop the consumer protection strategy of the Bank. Furthermore, all consumer complaints are reported to the Board of Directors in a detailed manner. Discussion on the Bank’s consumer protection strategy and consumer complaints are reflected in the minutes of the Board Meeting.

Malayan Bank’s Consumer Assistance Management System (CAMS):

The Bank has an effective CAMS in place. Clients can get in touch with the Bank via phone call, email, fax, or branch visit. Branches are equipped with CAMS forms, where complaints are recorded and signed by the customer. The completed CAMS form is immediately sent to the Head of the Consumer Protection Group. All complaints are acknowledged within forty-eight hours. Simple complaints are resolved within seven days, and communicated to the client within nine days. Complex complaints are resolved within forty-five days, and communicated to the client within forty-seven days. CAMS posters are seen in the Bank’s twenty-one branches, and are also posted in the Bank’s website.

STATEMENT OF MANAGEMENT’S

RESPONSIBILITY FOR FINANCIAL STATEMENTS

The management of Malayan Bank Savings and Mortgage Bank, Inc. (the Bank) is responsible for the preparation and fair presentation of the financial statements including the schedules attached therein, for the years ended December 31, 2018 and 2017, in accordance with the prescribed financial reporting framework indicated therein, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, management is responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so.

The Board of Directors is responsible for overseeing the Company’s financial reporting process.

The Board of Directors reviews and approves the financial statements including the schedules attached therein, and submits the same to the stockholders or members.

BDO Roxas Cruz Tagle and Co., the independent auditor appointed by the stockholders, has audited the financial statements of the company in accordance with Philippine Standards on Auditing, and in its report to the stockholders or members, has expressed its opinion on the fairness of presentation upon completion of such audit.

Atty. Jose Mario C. Buñag Chairman of the Board

Reynold Y. Gerongay President and COO

William Carlos Uy Treasurer

FINANCIAL STATEMENTS

MALAYAN BANK SAVINGS AND MORTGAGE BANK, INC.

STATEMENTS OF FINANCIAL POSITION DECEMBER 31, 2018 AND 2017

Note 2018 2017

ASSETS Cash and other cash items 5 P=137,854,417 P=83,499,767 Due from Bangko Sentral ng Pilipinas (BSP) 6 623,882,607 597,966,253 Due from other banks 7 587,732,415 370,534,529 Interbank call loans receivable 8 180,000,000 686,947,106 Investments at Fair Value Through Profit or Loss (FVTPL) 9 138,298,275 - Fair Value Through Other Comprehensive Income (FVOCI) 10 516,745,383 - Available-for-sale (AFS) investments 10 - 579,750,623 Loans and other receivables, net 11 5,355,420,665 3,930,168,105 Investment in associate 12 14,972,417 13,430,875 Bank premises, furniture, fixtures and equipment, net 13 92,216,986 77,318,206 Assets held for sale 14 339,917,857 493,202,167 Investment properties, net 15 548,610,797 937,967,796 Deferred tax assets, net 24 15,057,529 48,474,720 Other assets 17 137,564,176 146,855,670 Total Assets P=8,688,273,524 P=7,966,115,817

LIABILITIES AND EQUITY

Liabilities Deposit liabilities 18 P=6,688,423,330 P=6,534,949,531 Interbank call loans payable 8 207,400,000 - Accrued interest, taxes and other expenses 19 88,752,648 78,070,181 Retirement liability 25 46,281,300 7,345,981 Other liabilities 20 421,603,575 159,549,476 Total Liabilities 7,452,460,853 6,779,915,169

Equity 21 1,235,812,671 1,186,200,648 P=8,688,273,524 P=7,966,115,817

See Notes to the Financial Statements.

MALAYAN BANK SAVINGS AND MORTGAGE BANK, INC.

STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017

Notes 2018 2017 INTEREST INCOME Loans and other receivables 11 P=463,718,020 P=373,143,774 Deposit with BSP and other banks 6, 7, 8 12,324,807 18,175,793 Investments 9, 10 22,753,999 16,755,302 498,796,826 408,074,869 INTEREST EXPENSE Deposit liabilities 18 180,259,911 164,250,659 Interbank call loans payable 8 2,711,017 4,939 182,970,928 164,250,659 NET INTEREST INCOME 315,825,898 243,819,271 Reversal (Provision) for impairment losses 16 92,579,465 (301,116,466) NET INTEREST INCOME (LOSS) AFTER REVERSAL (PROVISION FOR IMPAIRMENT LOSSES) 408,405,363 (57,297,195) Other operating income, net 22 92,692,409 494,858,871 Other operating expenses 23 (365,596,788) (331,193,357) INCOME BEFORE INCOME TAX 135,500,984 106,368,319 PROVISION FOR INCOME TAX 24 Current 9,392,749 3,523,109 Deferred 33,977,359 32,314,924 43,370,108 35,838,033 NET INCOME FOR THE YEAR 92,130,876 70,530,286

OTHER COMPREHENSIVE INCOME (LOSS), NET Items that may be subsequently reclassified to profit or loss Change in cumulative translation adjustment 193,790 (63,661) Change in net unrealized loss on investments at FVOCI 10 (41,405,585) - Change in net unrealized loss on AFS investments - 2,698,142 Item that will not be reclassified to profit or loss Change in remeasurement losses on retirement plan 25 (4,936,941) (782,177) (46,148,736) 1,852,304 TOTAL COMPREHENSIVE INCOME P=45,982,140 P=72,382,590

See Notes to the Financial Statements.

MALAYAN BANK SAVINGS AND MORTGAGE BANK, INC.

STATEMENTS OF CHANGES IN EQUITY FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017

Change in net Remeasurement unrealized loss on Cumulative Share losses on investments at translation Note Share Capital Premium retirement plan FVOCI/AFS investments adjustment Surplus Total equity As at January 1, 2017 P=921,990,100 P=48,171,600 P=1,604,546 (P=9,115,131) P=65,743 P=151,101,200 P=1,113,818,058 Net income for the year - - - - - 70,530,286 70,530,286 Change in remeasurement losses on retirement plan 25 - - (782,177) - - - (782,177) Change in net unrealized loss on AFS investments 10 - - - 2,698,142 - - 2,698,142 Change in cumulative translation adjustment - - - - (63,661) - (63,661) As at December 31, 2017 921,990,100 48,171,600 822,369 (6,416,989) 2,082 221,631,486 1,186,200,648 Effect of adoption of Philippine Financial Reporting Standards (PFRS) 9, Financial Instruments 2 - - - - - 3,629,883 3,629,883 As at January 1, 2018 921,990,100 48,171,600 822,369 (6,416,989) 2,082 225 ,261,369 1,189,830,531 Net income for the year - - - - - 92,130,876 92,130,876 Change in remeasurement losses on retirement plan 25 - - (4,936,941) - - - (4,936,941) Change in net unrealized loss on investments at FVOCI 10 - - - (41,405,585) - - (41,405,585) Change in cumulative translation adjustment - - - - 193,790 - 193,790 As at December 31, 2018 P=921,990,100 =48,171,600 P (P=4,114,572) (P=47,822,574) P=195,872 =317,392,245 P =1,235,812,671 P

See Notes to the Financial Statements.

MALAYAN BANK SAVINGS AND MORTGAGE BANK, INC.

STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017

Notes 2018 2017 CASH FLOWS FROM OPERATING ACTIVITIES Income before income tax P=135,500,984 P=106,368,319 Adjustments for: Depreciation and amortization 13, 15, 17, 23 30,567,500 25,515,406 Loss on disposal of assets held for sale 14 20,061,772 843,068 Loss on fair value adjustment on investments at FVTPL 9 4,956,634 - Retirement benefit cost 23, 25 4,622,860 3,328,252 Amortization of premium on investments at FVOCI 10 789,656 - Accretion of discount on AFS investments 10 - (1,063,022) Gain on disposal of furniture, fixtures and transportation equipment 13, 22 - (154,861) Unrealized foreign exchange loss (gains), net (1,323,089) 9,501,907 Income from investment in associate 12, 22 (1,541,542) (1,934,124) Gain on disposal of investments at FVOCI 10, 22 (2,983,636) - Gain on disposal of AFS investments 10, 22 - (1,786,895) Gain on initial recognition of investment properties acquired through foreclosure 15, 22 (6,127,417) (433,506,333) Gain on disposal of assets acquired through foreclosure 15, 22 (38,760,179) (5,169,727) Provision (Reversal) of allowance for impairment 16 (92,579,465) 301,116,466 Operating income before changes in operating assets and liabilities 53,184,078 3,058,456 Changes in operating assets and liabilities (Increase) Decrease in: Loans and other receivables (1,330,348,309) (677,069,965) Investments at FVTPL (143,254,909) - Investment properties 430,562,047 (69,964,614) Assets held for sale 133,222,538 - Other assets 1,003,750 (42,914,115) Increase in: Deposit liabilities 153,473,799 573,926,074 Accrued interest, taxes and other expenses 8,383,594 39,822,508 Other liabilities 262,054,099 76,209,170 Cash used in operations (431,719,313) (96,932,486) Retirement benefits directly paid from bank reserve (5,592,375) - Proceeds from withdrawal of retirement fund 25 32,852,061 - Income taxes paid 24 (4,599,338) (8,485,899) Net cash used in operating activities (409,058,965) (105,418,385)

- 2 –

Notes 2018 2017 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from disposal of investments at FVOCI 10, 22 57,251,326 - Acquisition of bank premises, furniture, fixtures and equipment 13 (33,129,765) (19,095,955) Acquisition of investments at FVOCI 10 (30,828,389) - Acquisition of AFS investments 10 - (519,227,467) Proceeds from disposal of AFS investments - 275,870,308 Proceeds from disposal of furniture, fixtures and transportation equipment - 566,006 Net cash used in investing activities (6,706,828) (261,887,108)

CASH FLOWS FROM FINANCING ACTIVITY Proceeds from interbank call loan payable 207,400,000 - EFFECT OF EXCHANGE RATE DIFFERENCES ON CASH AND CASH EQUIVALENTS (1,112,423) (4,329,352) NET DECREASE IN CASH AND CASH EQUIVALENTS (209,478,216) (371,634,845) CASH AND CASH EQUIVALENTS 5 January 1 1,738,947,655 2,110,582,500 December 31 P=1,529,469,439 P=1,738,947,655 CASH AND CASH EQUIVALENTS CONSISTS OF: Cash and other cash items P=137,854,417 P=83,499,767 Due from BSP 623,882,607 597,966,253 Due from other banks 587,732,415 370,534,529 Interbank call loans receivable 180,000,000 686,947,106 P=1,529,469,439 P=1,738,947,655

OPERATIONAL CASH FLOWS FROM INTEREST Interest received P=477,066,178 P=395,922,800 Interest paid 171,993,450 143,493,307

See Notes to the Financial Statements.

MALAYAN BANK SAVINGS AND MORTGAGE BANK, INC.

NOTES TO THE FINANCIAL STATEMENTS AS AT AND FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017

1. Reporting Entity

Malayan Bank Savings and Mortgage Bank, Inc. (the "Bank") was registered with the Securities and Exchange Commission (SEC) on January 12, 1996 per SEC Registration No. AS096-00349. It is a thrift bank organized primarily to engage in and carry on the general business of savings and mortgage banking. It was granted authority to operate by the Bangko Sentral ng Pilipinas (BSP) in June 1996, pursuant to Monetary Board Resolution No. 1201 dated October 18, 1995. The Bank started its commercial operations on July 1, 1996. In April 1999, the Bank received its Foreign Currency Deposit Unit (FCDU) license and launched its FCDU operations in July of the same year. In March 2001, the Bank received its government securities dealership license from the SEC.

The Bank's head office is located at the 2nd Floor Majalco Building, 104 Benavidez corner Trasierra Streets, Legaspi Village, Makati City. As at December 31, 2018, the Bank has a total of 21 existing branches situated in various areas in Luzon, Visayas and Mindanao.

The accompanying financial statements were approved and authorized for issuance by the Bank’s Audit Committee on April 30, 2019, and that Atty. Jose Mario C. Bunag, the Audit Committee Chairman, was authorized to sign and sign and cause the issuance of the financial statements on its behalf.

2. Basis of Preparation

Statement of Compliance The financial statements of the Bank have been prepared in accordance with Philippine Financial Reporting Standards (PFRS). The term PFRSs in general includes all applicable PFRS, Philippine Accounting Standards (PAS) and interpretations of the Philippine Interpretations Committee (PIC), Philippine Interpretations - Standing Interpretations Committee (SIC) and Philippine Interpretations - International Financial Reporting Interpretations Committee (IFRIC), which have been approved by the Philippine Financial Reporting Standards Council (PFRSC) and adopted by the SEC.

Basis of Measurement The financial statements of the Bank have been prepared on historical a cost basis, except for certain investments which are measured at fair value.

Functional and Presentation Currency The financial statements of the Bank include the accounts maintained in the Regular Banking Unit (RBU) and Foreign Currency Deposit Unit (FCDU). The functional currency of RBU and FCDU is Philippine Peso and United States Dollar, respectively. For financial reporting purposes, FCDU accounts and foreign currency-denominated accounts in the RBU are translated into their equivalents in Philippine Peso. The financial statements of these units are combined after eliminating inter-unit accounts.

3. Significant Accounting Policies

Adoption of New and Amended PFRS The accounting policies adopted are consistent with those of the previous financial year, except for the adoption of the following new and amended PFRS which the Bank adopted effective for annual periods beginning on or after January 1, 2018:

 PFRS 9, Financial Instruments – This standard replaces PAS 39, Financial Instruments: Recognition and Measurement (and all the previous versions of PFRS 9). It provides requirements for the classification and measurement of financial assets and liabilities, impairment, hedge accounting, recognition, and derecognition.

o PFRS 9 requires all recognized financial assets to be subsequently measured at amortized cost or fair value (through profit or loss or through other comprehensive income), depending on their classification by reference to the business model within which these are held and its contractual cash flow characteristics.

o For financial liabilities, the most significant effect of PFRS 9 relates to cases where the fair value option is taken: the amount of change in fair value of a financial liability designated as at fair value through profit or loss that is attributable to changes in the credit risk of that liability is recognized in other comprehensive income (rather than in profit or loss), unless this creates an accounting mismatch.

o For the impairment of financial assets, PFRS 9 introduces an expected credit loss (ECL) model based on the concept of providing for expected losses at inception of a contract; recognition of a credit loss should no longer wait for there to be objective evidence of impairment.

o For hedge accounting, PFRS 9 introduces a substantial overhaul allowing financial statements to better reflect how risk management activities are undertaken when hedging financial and non-financial risk exposures.

o The derecognition provisions are carried over almost unchanged from PAS 39.

Based on the Bank’s analysis of its business model and the contractual cash flow characteristics of its financial assets and liabilities as at December 31, 2018, the Bank has concluded that all of its financial assets and liabilities shall be classified under the new classification categories of PFRS 9.

66 The following table shows the original classification categories under PAS 39 and the new classification categories under PFRS 9 for each class of the Bank’s financial assets as at January 1, 2018:

Classification Classification Carrying Amount Carrying Amount under PAS 39 under PFRS 9 under PAS 39 under PFRS 9

Cash and other cash Loans and Financial assets at items receivables amortized cost P=83,499,767 P=83,499,767 Loans and Financial assets at Due from BSP receivables amortized cost 597,966,253 597,966,253 Loans and Financial assets at Due from other banks receivables amortized cost 370,534,529 370,534,529 Interbank call loans Loans and Financial assets at receivable receivables amortized cost 686,947,106 686,947,106 Investment in shares AFS investments Financial assets at of stocks FVOCI 12,945,700 12,945,700 Corporate and AFS investments Financial assets at government bonds FVOCI 566,804,923 566,804,923 Loans and other Loans and Financial assets at receivables receivables amortized cost 3,930,168,105 3,930,168,105 Other assets Loans and Financial assets at receivables amortized cost 146,855,670 146,855,670

The Bank has assessed the impact of the adoption of PFRS 9 on determining impairment loss using a forward-looking expected credit loss model and simplified approach) as at January 1, 2018 follows:

2018 Allowance for impairment, as previously reported under PAS 39 P=549,682,540 Adjustments (5,185,547) Allowance for impairment, as restated for the effects of adoption of PFRS 9 P=544,496,993

Moreover, the following table shows the adjustments made in the amounts recognized in retained earnings as at January 1:

2018 Retained earnings, as previously reported using PAS 39 P=1,186,200,648 Effect of adoption of PFRS 9 – net of tax 3,629,883 Retained earnings, as restated for the effects of adoption of PFRS 9 P=1,189,830,531

 PFRS 15, Revenue from Contracts with Customers – The new standard replaces PAS 11, Construction Contracts, PAS 18, Revenue, and their related interpretations. It establishes a single comprehensive framework for revenue recognition to apply consistently across transactions, industries and capital markets, with a core principle (based on a five-step model to be applied to all contracts with customers), enhanced disclosures, and new or improved guidance (e.g. the point at which revenue is recognized, accounting for variable considerations, costs of fulfilling and obtaining a contract, etc.).

Based on the Bank’s assessment, apart from providing more extensive disclosures on the Bank’s revenue recognition and transactions, the Bank does not anticipate a significant impact on the financial statements since majority of the revenue of the Bank comes from interest income from loans which is covered by PFRS 9.

67  Amendments to PFRS 15, Revenue from Contract with Customers - Clarification to PFRS 15 – The amendments provide clarifications on the following topics: (a) identifying performance obligations; (b) principal versus agent considerations; and (c) licensing. The amendments also provide some transition relief for modified contracts and completed contracts.

 Amendment to PFRS 1, First-time Adoption of Philippine Financial Reporting Standards - Deletion of Short-term Exemptions for First-time Adopters – The amendment is part of the Annual Improvements to PFRS 2014-2016 Cycle and deleted the short-term exemptions in paragraph E3-E37 of PFRS 1, because it has now served its intended purpose.

 Amendments to PAS 28, Investments in Associates and Joint Ventures - Measuring an Associate or Joint Venture at Fair Value – The amendments are part of the Annual Improvements to PFRS 2014-2016 Cycle and clarify that the election to measure at fair value through profit or loss an investment in an associate or a joint venture that is held by an entity that is a venture capital organization, mutual fund, unit trust or other qualifying entity, is available for each investment in an associate or joint venture on an investment-by-investment basis, upon initial recognition.

 Amendments to PAS 40, Investment Property - Transfers of Investment Property – The amendments clarify that transfers to, or from, investment property (including assets under construction and development) should be made when, and only when, there is evidence that a change in use of a property has occurred.

 Philippine Interpretation IFRIC 22, Foreign Currency Transactions and Advance Consideration – The interpretation provides guidance clarifying that the exchange rate to use in transactions that involve advance consideration paid or received in a foreign currency is the one at the date of initial recognition of the non-monetary prepayment asset or deferred income liability.

The adoption of the foregoing new and amended PFRS did not have any material effect on the financial statements except for PFRS 9. Additional disclosures have been included in the notes to financial statements, as applicable.

New and Amended PFRS Issued but Not Yet Effective Relevant new and amended PFRS which are not yet effective for the year ended December 31, 2018 and have not been applied in preparing the financial statements are summarized below.

Effective for annual periods beginning on or after January 1, 2019:

 PFRS 16, Leases – This standard will replace PAS 17, Leases and its related interpretations. The most significant change introduced by the new standard is that almost all leases will be brought onto lessees’ statement of financial position under a single model (except leases of less than 12 months and leases of low-value assets), eliminating the distinction between operating and finance leases. Lessor accounting, however, remains largely unchanged and the distinction between operating and finance lease is retained.

 For the Bank’s non-cancellable operating lease commitments as at December 31, 2018, a preliminary assessment indicates that these arrangements will continue to meet the definition of a lease under PFRS 16. Thus, the Bank will have to recognize a right-of-use asset and a corresponding liability in respect of all these leases - unless these qualify for low value or short-term leases upon the application of PFRS 16 – which might have a significant impact on the amounts recognized in the Bank’s financial statements. However, it is not practicable to provide a reasonable estimate of that effect until the Bank complete the review.

68  Philippine Interpretation IFRIC 23, Uncertainty Over Income Tax Treatments – The interpretation provides guidance on how to reflect the effects of uncertainty in accounting for income taxes under PAS 12, Income Taxes, in particular (i) whether uncertain tax treatments should be considered separately, (ii) assumptions for taxation authorities’ examinations, (iii) determination of taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates, and (iv) effect of changes in facts and circumstances.

 Amendments to PFRS 9, Financial Instruments - Prepayment Features with Negative Compensation – The amendments allow entities to measure particular prepayable financial assets with negative compensation at amortized cost or at fair value through other comprehensive income (instead of at fair value through profit or loss) if a specified condition is met. It also clarifies the requirements in PFRS 9, Financial Instruments for adjusting the amortized cost of a financial liability when a modification or exchange does not result in its derecognition (as opposed to adjusting the effective interest rate).

 Amendments to PAS 28, Investments in Associates and Joint Ventures - Long-term Interests in Associates and Joint Ventures – The amendments clarify that long-term interests in an associate or joint venture that, in substance, form part of the entity’s net investment but to which the equity method is not applied, are accounted for using PFRS 9, Financial Instruments.

 Amendments to PAS 19, Employee Benefits - Plan Amendment, Curtailment or Settlement – The amendments specify how companies remeasure a defined benefit plan when a change - an amendment, curtailment or settlement - to a plan takes place during a reporting period. It requires entities to use the updated assumptions from this remeasurement to determine current service cost and net interest cost for the remainder of the reporting period after the change to the plan.

 Amendments to PFRS 3, Business Combinations and PFRS 11, Joint Arrangements - Previously Held Interest in a Joint Operation – The amendments are part of the Annual Improvements to PFRS 2015-2017 Cycle. The amendment to PFRS 3, Business Combinations clarifies that when an entity obtains control of a business that is a joint operation, the acquirer applies the requirements for a business combination achieved in stages, including remeasuring previously held interests in the joint operation at its acquisition-date fair value. The amendment to PFRS 11, Joint Arrangements clarifies that when an entity obtains joint control of a business that is a joint operation, the previously held interests in that business are not remeasured.

 Amendments to PAS 12, Income Taxes - Income Tax Consequences of Payments on Financial Instruments Classified as Equity – The amendments are part of the Annual Improvements to PFRS 2015-2017 Cycle and clarify that income tax consequences of dividends are linked more directly to past transactions or events that generated distributable profits than to distribution to owners and thus, should be recognized in profit or loss, other comprehensive income or equity according to where the entity originally recognized those past transactions or events.

 Amendments to PAS 23, Borrowing Costs - Borrowing Costs Eligible for Capitalization – The amendments are part of the Annual Improvements to PFRS 2015-2017 and clarify that in calculating the capitalization rate on general borrowings, if any specific borrowing remains outstanding after the related qualifying asset is ready for its intended use or sale, that borrowing becomes part of the funds that an entity borrows generally.

Effective for annual periods beginning on or after January 1, 2021:

 PFRS 17, Insurance Contracts – This standard will replace PFRS 4, Insurance Contracts. It requires insurance liabilities to be measured at current fulfillment value and provides a more uniform measurement and presentation approach to achieve consistent, principle-based accounting for all insurance contracts. It also requires similar principles to be applied to reinsurance contracts held and investment contracts with discretionary participation features issued.

69 Deferred effectivity -

 Amendments to PFRS 10, Consolidated Financial Statements and PAS 28, Investments in Associates and Joint Ventures - Sale or Contribution of Assets Between an Investor and its Associate or Joint Venture – The amendments address a current conflict between the two standards and clarify that a gain or loss should be recognized fully when the transaction involves a business, and partially if it involves assets that do not constitute a business. The effective date of the amendments, initially set for annual periods beginning on or after January 1, 2016, was deferred indefinitely in December 2015 but earlier application is still permitted.

Under prevailing circumstances, the adoption of the foregoing new and amended PFRS is not expected to have any material effect on the financial statements of the Bank except for PFRS 16.

Current versus Noncurrent Classification The Bank presents assets and liabilities in the statements of financial position based on current and noncurrent classification. An asset is current when it is: (a) expected to be realized or intended to be sold or consumed in the normal operating cycle; (b) held primarily for the purpose of trading; (c) expected to be realized within 12 months after the reporting period; or (d) cash or cash equivalent unless restricted from being exchanged or used to settle a liability for at least 12 months after the reporting period.

A liability is current when it is: (a) expected to be settled in the normal operating cycle; (b) held primarily for trading; (c) due to be settled within 12 months after the reporting period; or (d) there is no unconditional right to defer the settlement of the liability for at least 12 months after the reporting period.

The Bank classifies all other assets and liabilities as noncurrent. Deferred tax assets and liabilities are classified as noncurrent.

Financial Assets and Financial Liabilities

Date of Recognition. The Bank recognizes a financial asset or a financial liability in the statements of financial position when it becomes a party to the contractual provisions of a financial instrument. In the case of a regular way purchase or sale of financial assets, recognition and derecognition, as applicable, is done using settlement date accounting.

Initial Recognition and Measurement. Financial instruments are recognized initially at fair value, which is the fair value of the consideration given (in case of an asset) or received (in case of a liability). The initial measurement of financial instruments, except for those designated at fair value through profit and loss (FVPL), includes transaction cost.

“Day 1” Difference. Where the transaction in a non-active market is different from the fair value of other observable current market transactions in the same instrument or based on a valuation technique whose variables include only data from observable market, the Bank recognizes the difference between the transaction price and fair value (a “Day 1” difference) in profit or loss. In cases where there is no observable data on inception, the Bank deems the transaction price as the best estimate of fair value and recognizes “Day 1” difference in profit or loss when the inputs become observable or when the instrument is derecognized. For each transaction, the Bank determines the appropriate method of recognizing the “Day 1” difference.

Classification. The Bank classifies its financial assets at initial recognition under the following categories: (a) financial assets at FVPL, (b) financial assets at amortized cost and (c) financial assets at fair value through other comprehensive income (FVOCI). Financial liabilities, on the other hand, are classified as either financial liabilities at FVPL or financial liabilities at amortized cost. The classification of a financial instrument largely depends on the Bank’s business model and its contractual cash flow characteristics.

70 Financial Assets and Liabilities at FVPL. Financial assets and liabilities at FVPL are either classified as held for trading or designated at FVPL. A financial instrument is classified as held for trading if it meets either of the following conditions:

 it is acquired or incurred principally for the purpose of selling or repurchasing it in the near term;

• on initial recognition, it is part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking; or

• it is a derivative (except for a derivative that is a financial guarantee contract or a designated and effective hedging instrument).

This category includes equity instruments which the Bank had not irrevocably elected to classify at FVOCI at initial recognition. This category includes debt instruments whose cash flows are not “solely for payment of principal and interest” assessed at initial recognition of the assets, or which are not held within a business model whose objective is either to collect contractual cash flows, or to both collect contractual cash flows and sell.

The Bank may, at initial recognition, designate a financial asset or financial liability meeting the criteria to be classified at amortized cost or at FVOCI, as a financial asset or financial liability at FVPL, if doing so eliminates or significantly reduces accounting mismatch that would arise from measuring these assets or liabilities.

After initial recognition, financial assets at FVPL and held for trading financial liabilities are subsequently measured at fair value. Unrealized gains or losses arising from the fair valuation of financial assets at FVPL and held for trading financial liabilities are recognized in profit or loss.

For financial liabilities designated at FVPL under the fair value option, the amount of change in fair value that is attributable to changes in the credit risk of that liability is recognized in other comprehensive income (rather than in profit or loss), unless this creates an accounting mismatch. Amounts presented in other comprehensive income are not subsequently transferred to profit or loss.

The Bank’s investment in government securities are included under this category (see Note 9)

Financial Assets at Amortized Cost. Financial assets shall be measured at amortized cost if both of the following conditions are met:

 the financial asset is held within a business model whose objective is to hold financial assets in order to collect contractual cash flows; and

 the contractual terms of the financial asset give rise, on specified dates, to cash flows that are solely payments of principal and interest on the principal amount outstanding.

After initial recognition, financial assets at amortized cost are subsequently measured at amortized cost using the effective interest method, less allowance for impairment, if any. 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. Gains and losses are recognized in profit or loss when the financial assets are derecognized and through amortization process. Financial assets at amortized cost are included under current assets if realizability or collectability is within 12 months after the reporting period. Otherwise, these are classified as noncurrent assets.

Accounts falling under this category are cash and other cash items, due from BSP and other banks, interbank call loans receivable, loans and other receivables and other assets which include security deposits and petty cash fund.

71 Financial Assets at FVOCI. For debt instruments that meet the contractual cash flow characteristic and are not designated at FVPL under the fair value option, the financial assets shall be measured at FVOCI if both of the following conditions are met:

 the financial asset is held within a business model whose objective is to hold financial assets in order to collect contractual cash flows and selling the financial assets; and

 the contractual terms of the financial asset give rise, on specified dates, to cash flows that are solely payments of principal and interest on the principal amount outstanding.

For equity instruments, the Bank may irrevocably designate the financial asset to be measured at FVOCI in case the above conditions are not met.

Financial assets at FVOCI are initially measured at fair value plus transaction costs. After initial recognition, interest income (calculated using the effective interest rate method), foreign currency gains or losses and impairment losses of debt instruments measured at FVOCI are recognized directly in profit or loss. When the financial asset is derecognized, the cumulative gains or losses previously recognized other comprehensive income (OCI) are reclassified from equity to profit or loss as a reclassification adjustment.

Dividends from equity instruments held at FVOCI are recognized in profit or loss when the right to receive payment is established, unless the dividend clearly represents a recovery of part of the cost of the investment. Foreign currency gains or losses and unrealized gains or losses from equity instruments are recognized in OCI and presented in the equity section of the statements of financial position. These fair value changes are recognized in equity and are not reclassified to profit or loss in subsequent periods.

The Bank’s investments in government and corporate bonds and shares of stock bonds are classified under this category (see Note 10).

Financial Liabilities at Amortized Cost. Financial liabilities are categorized as financial liabilities at amortized cost when the substance of the contractual arrangement results in the Bank having an obligation either to deliver cash or another financial asset to the holder, or to settle the obligation other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of its own equity instruments.

These financial liabilities are initially recognized at fair value less any directly attributable transaction costs. After initial recognition, these financial liabilities are subsequently measured at amortized cost using the effective interest method. Amortized cost is calculated by taking into account any discount or premium on the issue and fees that are an integral part of the effective interest rate. Gains and losses are recognized in profit or loss when the liabilities are derecognized or through the amortization process.

The Bank’s deposit liabilities, accrued interest and other expenses and other liabilities, excluding statutory liabilities, are included under this category (see Notes 18, 19 and 20).

Reclassification The Bank reclassifies its financial assets when, and only when, it changes its business model for managing those financial assets. The reclassification is applied prospectively from the first day of the first reporting period following the change in the business model (reclassification date).

For a financial asset reclassified out of the financial assets at amortized cost category to financial assets at FVPL, any gain or loss arising from the difference between the previous amortized cost of the financial asset and fair value is recognized in profit or loss.

For a financial asset reclassified out of the financial assets at amortized cost category to financial assets at FVOCI, any gain or loss arising from a difference between the previous amortized cost of the financial asset and fair value is recognized in OCI.

72 For a financial asset reclassified out of the financial assets at FVPL category to financial assets at amortized cost, its fair value at the reclassification date becomes its new gross carrying amount.

For a financial asset reclassified out of the financial assets at FVOCI category to financial assets at amortized cost, any gain or loss previously recognized in OCI, and any difference between the new amortized cost and maturity amount, are amortized to profit or loss over the remaining life of the investment using the effective interest method. If the financial asset is subsequently impaired, any gain or loss that has been recognized in OCI is reclassified from equity to profit or loss.

In the case of a financial asset that does not have a fixed maturity, the gain or loss shall be recognized in profit or loss when the financial asset is sold or disposed. If the financial asset is subsequently impaired, any previous gain or loss that has been recognized in OCI is reclassified from equity to profit or loss.

For a financial asset reclassified out of the financial assets at FVPL category to financial assets at FVOCI, its fair value at the reclassification date becomes its new gross carrying amount. Meanwhile, for a financial asset reclassified out of the financial assets at FVOCI category to financial assets at FVPL, the cumulative gain or loss previously recognized in other comprehensive income is reclassified from equity to profit or loss as a reclassification adjustment at the reclassification date.

Impairment of Financial Assets

Policies applicable beginning January 1, 2018

The adoption of PFRS 9 has changed the Bank’s loss impairment method on financial assets by replacing PAS 39’s incurred loss approach with a forward-looking ECL approach which covers all loans and other debt financial assets not held at FVTPL.

Overview of the ECL principles The ECL allowance is based on the credit losses expected to arise on a 12-month duration if there has been no significant increase in credit risk of the financial asset since origination. Otherwise if a significant increase in credit risk is observed, then the ECL estimation is extended until the end of the life of the financial asset. The 12-month ECL represents the losses that result from default events on a financial asset which may happen within 12 months after the reporting date. The Lifetime ECL on the other hand represents the losses that result from default events on a financial asset which may happen over its life. Both Lifetime ECLs and 12-month ECLs are calculated on either an individual basis or a collective basis, depending on the nature of the underlying portfolio of financial instruments.

The major portfolios of financial assets identified upon initial analysis of the Bank’s credit exposure are loan receivables, treasury accounts, and other receivables. Loan receivables may be availed by specific individuals, corporations or organizations. Hence, these portfolios can be further segmented to commercial and consumer portfolios. After segmentation, financial assets are grouped into Stage 1, Stage 2, and Stage 3 as described below.

Definition of “default” and “cure” The Bank defines a financial instrument as in default, which is fully aligned with the definition of credit impaired, in all cases when the borrower becomes 31 days past due on its contractual payments. As a part of a qualitative assessment of whether a customer is in default, the Bank also considers a variety of instances that may indicate unlikeliness to pay. When such events occur, the Bank carefully considers whether the event should result in treating the customer as defaulted. An instrument is considered to be no longer in default (i.e. to have cured) when it no longer meets any of the default criteria and has exhibited a satisfactory track record.

Treasury exposures are considered in default upon occurrence of a credit event such as but not limited to bankruptcy of counterparty, restructuring, failure to pay on agreed settlement date, or request for moratorium. Significant increase in credit risk

73 In order to determine whether an instrument is subject to 12-month or Lifetime ECL, the Bank assesses whether there has been a significant increase in credit risk since initial recognition. The criteria for determining whether credit risk has increased significantly vary by portfolio and include quantitative changes in probabilities of default and qualitative factors, including a backstop based on delinquency. The credit risk of a particular exposure is deemed to have increased significantly since initial recognition if, based on the Bank’s internal credit assessment, the borrower or counterparty is determined to have well-defined credit weaknesses. These may include adverse trends or developments of financial, managerial, economic or political nature, or a significant weakness in collateral. Credit weakness may be manifested by unfavorable record or unsatisfactory characteristics or may only be potential that deserves management’s close attention and may lead to significant losses or may result in collection or liquidation of the outstanding loan amount to be highly improbable. For exposures without internal credit grades, if contractual payments are more than a specified days past due threshold, the credit risk is deemed to have increased significantly since initial recognition. Days past due are determined by counting the number of days since the earliest elapsed due date in respect of which full payment has not been received. In subsequent reporting periods, if the credit risk of the financial asset improves such that there is no longer an significant increase in credit risks since initial recognition, the Bank shall revert to recognizing a 12-month ECL.

Staging assessment For non-credit-impaired financial assets:

 Stage 1 is comprised of all non-impaired financial assets which have not experienced a significant increase in credit risk since initial recognition. The Bank recognizes a 12-month ECL for Stage 1 financial assets.

 Stage 2 is comprised of all non-impaired financial assets which have experienced a significant increase in credit risk since initial recognition. The Bank recognizes a lifetime ECL for Stage 2 financial assets.

For credit-impaired financial assets:

Financial assets are classified as Stage 3 when there is objective evidence of impairment as a result of one or more loss events that have occurred after initial recognition with a negative impact on the estimated future cash flows of a financial asset or a portfolio of financial assets. The ECL model requires a lifetime ECL for impaired financial assets.

Financial assets that are credit-impaired on initial recognition are classified as purchased or originated credit-impaired assets. These are recorded at fair value at original recognition and interest income is subsequently recognized based on a credit-adjusted EIR. ECL is only recognized or released to the extent that there is a subsequent change in the ECLs.

Assessment of ECL on a collective basis The Bank calculates ECL either on an individual or a collective basis. The Bank performs collective impairment by grouping exposures into smaller homogenous portfolios based on a combination of borrower and account characteristics. Accounts with similar risk attributes (i.e. facility, security, credit rating, and collateral type, etc.) are pooled together for calculating provisions based on the ECL models.

ECL parameters and methodologies ECL is a function of the probability of default (PD), exposure-at-default (EAD), and loss-given default (LGD), with the timing of the loss also considered, and is estimated by incorporating forward-looking economic information and through the use of experienced credit judgement.

The PD represents the likelihood that a credit exposure will not be repaid and will go into default in either a 12-month horizon for Stage 1 or lifetime horizon for Stage 2. The PD for each individual financial asset is modelled based on historical data and is estimated based on current market conditions and reasonable and supportable information about future economic conditions. The Bank segmented its credit exposures based on homogenous risk characteristics and developed a

74 corresponding PD methodology for each portfolio. The PD methodology for each relevant portfolio is determined based on the underlying nature or characteristic of the portfolio, behavior of the accounts and materiality of the segment as compared to the total portfolio.

EAD consists of the amortized cost and any accrued interest receivable. For off-balance sheet and undrawn committed amounts, EAD includes a credit conversion factor which is an estimate of any further amount to be drawn at the time of default.

LGD is the amount that may not be recovered in the event of default and is modelled based on historical cash flow recovery and reasonable and supportable information about future economic conditions, where appropriate. LGD takes into consideration the amount and quality of any collateral held. The Bank applies a simplified ECL approach for its accounts receivables wherein the Bank uses a provisioning matrix that considers historical changes in the behavior of the portfolio to predict conditions over the span of a given observation period.

Forward-looking information The Bank incorporates forward-looking information into both its assessment of whether the credit risk of a financial asset has increased significantly since its initial recognition and its measurement of ECL. A broad range of forward-looking information are considered as economic inputs, such as growth of the gross domestic product, inflation rates, unemployment rates, interest rates and BSP statistical indicators. The inputs and models used for calculating ECL may not always capture all characteristics of the market at the date of the financial statements. To reflect this, qualitative adjustments or overlays are occasionally made as temporary adjustments when such differences are significantly material.

Debt investment securities measured at FVOCI The ECL for debt securities at FVOCI do not reduce the carrying amount of these financial assets in the statement of financial position, which remains at fair value. Instead, an amount equal to the allowance that would arise if the assets were measured at amortized cost is recognized in OCI as an accumulated impairment amount, with a corresponding charge to profit or loss. The accumulated loss recognized in OCI is recycled to profit or loss upon derecognition of these financial assets.

Policies applicable prior to January 1, 2018

Assessment of impairment

The Bank assesses at each financial reporting date whether a financial asset or group of financial assets is impaired. It assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, or collectively for financial assets that are not individually significant. If it is determined that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, the asset is included in a group of financial assets with similar credit risk characteristics and that group of financial assets is collectively assessed for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognized are not included in a collective assessment of impairment.

For the purpose of a collective evaluation of impairment, financial assets are grouped on the basis of such credit risk characteristics as payment history, 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. The methodology and assumptions used for estimating future cash flows are reviewed regularly by the Bank to reduce any difference between loss estimates and actual loss experience.

The determination of impairment losses for financial assets is inherently subjective because it requires material estimates, including the amount and timing of expected recoverable future cash

75 flows. These estimates may change significantly from time to time, depending on available information.

Evidence of impairment

Objective evidence that financial assets are impaired can include default or delinquency by a borrower, restructuring of a loan or advance by the Bank on terms that it would not otherwise consider, indications that a borrower or issuer will enter bankruptcy, the disappearance of an active market for a security, or other observable data relating to a group of assets such as adverse changes in the payment status of borrowers or issuers in the group, or economic conditions that correlate with defaults.

Impairment on assets carried at amortized cost

If there is objective evidence that an impairment loss on financial assets carried at amortized cost has been incurred, the amount of loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses) discounted at the financial asset’s original EIR (i.e., the EIR computed at initial recognition). The carrying amount of the asset shall be reduced either directly or through the use of an allowance account. The amount of loss shall be recognized in profit or loss.

Impairment on assets carried at cost

If there is objective evidence that an impairment loss has been incurred on an asset carried at cost, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the current market rate of return for a similar financial asset.

Impairment on AFS financial assets

For AFS financial assets, the Bank assesses at each financial reporting date whether there is objective evidence that a financial asset or group of financial assets is impaired.

In the case of equity securities classified as AFS financial assets, indicators of impairment would include a significant or prolonged decline in the fair value of the securities below 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 the equity securities previously recognized in profit or loss, is removed from equity and recognized in profit or loss for the period.

In the case of debt instruments classified as AFS financial assets, impairment is assessed based on the same criteria as financial assets carried at amortized cost. Future interest income is based on the reduced carrying amount and is accrued based on the rate of interest used to discount future cash flows for the purpose of measuring impairment loss. Such accrual is recognized in profit or loss as part of interest income.

Reversal of impairment loss

If, in a subsequent period, the amount of the impairment loss decreases or the fair value of a debt instrument increases and the said decrease or increase can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed. Any subsequent reversal of an impairment loss is recognized in profit or loss, to the extent that the carrying amount of the asset does not exceed its cost or amortized cost at the reversal date.

Impairment losses on equity securities are not reversed to profit or loss but are recognized directly in equity as part of OCI.

76 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 similar financial assets) is derecognized when:

 the right to receive cash flows from the asset has expired;

 the Bank retains the right to receive cash flows from the financial 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 Bank has transferred its right to receive cash flows from the financial asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

When the Bank has transferred its right to receive cash flows from a financial asset or has entered into a pass-through arrangement, and has neither transferred nor retained substantially all the risks and rewards of ownership of the financial asset nor transferred control of the financial asset, the financial asset is recognized to the extent of the Bank’s continuing involvement in the financial asset. Continuing involvement that takes the form of a guarantee over the transferred financial asset is measured at the lower of the original carrying amount of the financial asset and the maximum amount of consideration that the Bank could be required to repay.

Financial Liabilities. A financial liability is derecognized when the obligation under the liability is discharged, cancelled or has expired. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognized in the statements of comprehensive income. A modification is considered substantial if the present value of the cash flows under the new terms, including net fees paid or received and discounted using the original effective interest rate, is different by at least 10% from the discounted present value of remaining cash flows of the original liability.

The fair value of the modified financial liability is determined based on its expected cash flows, discounted using the interest rate at which the Bank could raise debt with similar terms and conditions in the market. The difference between the carrying value of the original liability and fair value of the new liability is recognized in the statements of comprehensive income.

On the other hand, if the difference does not meet the 10% threshold, the original debt is not extinguished but merely modified. In such case, the carrying amount is adjusted by the costs or fees paid or received in the restructuring.

Offsetting of Financial Assets and Liabilities Financial assets and financial liabilities are offset and the net amount reported in the statements of financial position if, and only if, there is a currently enforceable legal right to offset the recognized amounts and there is 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 statements of financial position.

Classification of Financial Instrument between Liability and Equity A financial instrument is classified as liability if it provides for a contractual obligation to:

 Deliver cash or another financial asset to another entity;

 Exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavorable to the Bank; or

 Satisfy the obligation other than by the exchange of a fixed amount of cash or another

77 financial asset for a fixed number of own equity shares.

If the Bank does not have an unconditional right to avoid delivering cash or another financial asset to settle its contractual obligation, the obligation meets the definition of a financial liability.

Cash and Cash Equivalents

\For purposes of reporting cash flows, cash and cash equivalents include cash and other cash items, unrestricted and pre-terminable balances held with the BSP and other banks, interbank call loans receivable and highly liquid financial instruments, if any, with original maturities of three months or less from the dates of placement and which are subject to an insignificant risk of changes in value.

Cash on hand refers to the total amount of cash in the Bank’s vault in the form of notes and coins under the custody of the cashier/cash custodian or treasurer, including notes in the possession of tellers and those kept in automated teller machines (ATM).

Investment in Associate An associate is an enterprise over which the investor has significant influence. There is a rebuttable presumption that the Bank has significant influence in case the Bank owns between 20% to 50% of the investee’s outstanding voting stock. The Bank’s equity investment in Uniguarantee Insurance Brokerage, Inc. represents 40% of the latter’s share capital (see Note 12). Accordingly, the Bank’s equity investment is treated as an investment in associate accounted for under the equity method of accounting. Under the equity method, the investment is initially recorded at cost and is subsequently adjusted to reflect the investor’s share of the net profit or loss of the associate. Distributions received from the investee reduce the carrying amount of the investment.

After the application of the equity method, the Bank determines whether it is necessary to recognize impairment loss on its investment in associate. The Bank determines at each financial reporting date whether there is any objective evidence that the investment in associate is impaired. If this is the case, the Bank calculates the amount of impairment as the difference between the recoverable amount of the investment and its carrying value and recognizes the impairment loss in profit or loss.

Upon loss of significant influence over the associate, the Bank measures and recognizes any remaining investment at its fair value. Any difference between the carrying amount of the associate upon loss of significant influence and the fair value of the remaining investment and proceeds from disposal is recognized in profit or loss.

The financial reporting period of the Bank’s investment in associate is on a calendar year basis. Its accounting policies conform to those used by the Bank for like transactions and events in similar circumstances.

Investments in Shares of Stock of Subsidiaries The Bank’s investments in shares of stock of subsidiaries are accounted for under the cost method as provided for under PAS 27, Financial Statements. The investments are carried in the statements of financial position at cost less any impairment in value. The Bank recognizes dividend from a subsidiary in the statements of comprehensive income when its right to receive the dividend is established.

A subsidiary is an entity controlled by the Bank. The Bank controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity.

78 Investment Properties Investment properties refer to real and other properties acquired (ROPA), other than those used for banking purposes, acquired by the Bank in settlement of loans through foreclosure or dation in payment and/or for other reasons, whose carrying amount will be recovered principally through a sale transaction.

Investment properties consist of property held to earn rentals and/or for capital appreciation but are not significantly occupied by the Bank. Investment properties, which consist of land and building, are measured initially at cost, including transaction costs. Subsequent to initial recognition, investment properties, except for land, are stated at cost less accumulated depreciation and impairment losses, if any. Land is stated at cost less any impairment in value. Depreciation of building classified as investment property is calculated on a straight-line basis over its estimated useful life from the date of acquisition.

An investment property acquired through an exchange transaction is measured at fair value of the asset acquired unless the fair value of such asset cannot be measured in which case the investment property acquired is measured at the carrying amount of asset given up. Foreclosed properties are classified under “Investment properties” upon (a) entry of judgment in case of judicial foreclosure; (b) execution of Sheriff’s Certificate of Sale in case of extra-judicial foreclosure; or (c) notarization of the Deed of Dacion in case of dation in payment (dacion en pago).

Depreciation of buildings and vehicles, which commences when the assets are available for their intended use, is computed using the straight-line method over the estimated useful life of 3 to 10 years.

The useful lives and depreciation method are reviewed and adjusted, if appropriate, at each reporting date.

Investment property is derecognized either when it has been disposed of or when it is permanently withdrawn from use and no future economic benefit is expected from its disposal.

Transfers to, and from, investment property are made when, and only when, there is a change in use, evidenced by:

(a) Commencement of owner-occupation, for a transfer from investment property to owner-occupied property; (b) Commencement of development with a view of sale, for a transfer from investment property to real properties held-for-sale and development; (c) End of owner occupation, for a transfer from owner-occupied property to investment property; or (d) Commencement of an operating lease to another party, for a transfer from real properties held-for-sale and development to investment property.

Transfers to and from investment property do not result in gain or loss.

Investment properties are derecognized when they have either been disposed of or when the investment property is permanently withdrawn from use and no future benefit is expected from its disposal. Any resulting gain or loss from the retirement or disposal of an investment property is included in profit or loss in the period of retirement or disposal.

Chattel Mortgage Properties Chattel mortgage properties comprise of repossessed vehicles. Chattel mortgage properties are stated at cost less accumulated depreciation and impairment in value. Depreciation is calculated on a straight-line basis using the remaining useful lives from the time of acquisition of the vehicles. The useful lives of chattel mortgage properties are estimated to be five years.

79 Bank Premises, Furniture, Fixtures and Equipment Bank premises, furniture, fixtures and equipment are stated at cost less accumulated depreciation and any accumulated impairment in value. Such cost includes the cost of replacing part of the bank premises, furniture, fixtures and equipment t at the time the cost is incurred, if the recognition criteria are met, and excludes the costs of day-to-day servicing. Land is stated at cost less any impairment loss.

The initial cost of property and equipment comprises its construction cost or purchase price, including import duties, taxes and any directly attributable costs in bringing the asset to its working condition and location for its intended use. Expenditures incurred after the asset has been put into operation, such as repairs, maintenance and overhaul costs, are normally recognized as expense in the period the costs are incurred. Major repairs are capitalized as part of bank premises, furniture, fixtures and equipment only when it is probable that future economic benefits associated with the items will flow to the Bank and the cost of the items can be measured reliably.

Depreciation, which commences when the assets are available for their intended use, is computed using the straight-line method over the following estimated useful lives of the assets. Leasehold improvements are amortized over the shorter of the lease term and the estimated useful life of the improvements of 5 years.

Estimated useful life Building 20 Furniture, fixtures and equipment 5 Transportation equipment 5

The remaining useful lives and depreciation method are reviewed and adjusted periodically, if appropriate, to ensure that such periods and method of depreciation are consistent with the expected pattern of economic benefits from the items of property and equipment.

The carrying amounts of property and equipment are reviewed for impairment when events or changes in circumstances indicate that the carrying amounts may not be recoverable.

Fully depreciated assets are retained in the accounts until they are no longer in use.

An item of property and equipment is derecognized when either it has been disposed of or when it is permanently withdrawn from use and no future economic benefits are expected from its use or disposal. Any gain or loss arising from the retirement and disposal of an item of property and equipment (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is recognized in the statements of income in the period of retirement and disposal.

Software costs The Bank’s software costs, classified under “Other assets” account, primarily include costs incurred for the development of the Bank’s software and are amortized on a straight-line basis over 5 to 10 years. Software costs are carried at cost less accumulated amortization and any impairment in value.

80 Impairment of Non-Financial Assets The carrying amounts of investments (excluding AFS financial assets), property and equipment and investment properties are reviewed for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable. Trademarks and other intangible assets with indefinite useful lives are tested for impairment annually either individually or at the cash- generating unit level. If any such indication exists, and if the carrying amount exceeds the estimated recoverable amount, the assets or cash-generating units are written down to their recoverable amounts. The recoverable amount of the asset is the greater of fair value less costs to sell and value in use. The fair value less costs to sell is the amount obtainable from the sale of an asset in an arm’s length transaction between knowledgeable, willing parties, less costs of disposal. Value in use is the present value of estimated future cash flows expected to arise from the continuing use of an asset and from its disposal at the end of its useful life.

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. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset belongs. Impairment losses are recognized in the statements of income in those expense categories consistent with the function of the impaired asset.

An assessment is made at each reporting date as to whether there is any indication that previously recognized impairment losses may no longer exist or may have decreased. If such indication exists, the recoverable amount is estimated. A previously recognized impairment loss is reversed only if there has been a change in the estimates used to determine the 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 statements of income. After such a reversal, the depreciation charge is adjusted in future periods to allocate the asset’s revised carrying amount, less any residual value, on a systematic basis over its remaining useful life.

Prepayments Prepayments represent expenses not yet incurred but already paid in cash. Prepayments are initially recorded as assets and measured at the amount of cash paid. Subsequently, these are charged to profit or loss as they are consumed in operations or expire with the passage of time.

Fair Value Measurements The Bank measures a number of financial and non-financial assets and liabilities at fair value at each reporting date.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either: (a) in the principal market for the asset or liability; or (b) in the absence of a principal market, in the most advantageous market for the asset or liability. The principal or most advantageous market must be accessible to the Bank.

The fair value of an asset or liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their best economic interest.

The Bank uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs.

81 All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorized within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole:

. Level 1: quoted prices (unadjusted) in active market for identical assets or liabilities;

. Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and

. Level 3: inputs for the asset or liability that are not based on observable market data.

For assets and liabilities that are recognized in the financial statements on a recurring basis, the Bank determines whether transfers have occurred between levels in the hierarchy by re-assessing the categorization at the end of each reporting period.

For the purpose of fair value disclosures, the Bank has determined classes of assets and liabilities on the basis of the nature, characteristics and risks of the asset or liability and the level of the fair value hierarchy.

Provisions Provisions are recognized when: (a) the Bank has a present obligation (legal or constructive) as a result of past events; (b) it is probable (i.e., more likely than not) that an outflow of resources embodying economic benefits will be required to settle the obligation; and (c) a reliable estimate of the amount of the obligation can be made. Where some or all of the expenditure required to settle a provision is expected to be reimbursed by another party, the reimbursement is recognized as a separate asset only when it is virtually certain that reimbursement will be received. The amount recognized for the reimbursement shall not exceed the amount of the provision. Provisions are reviewed at each reporting date and adjusted to reflect the current best estimate.

If the effect of the time value of money is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessment of the time value of money and the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognized as interest expense.

Equity Share capital consists of common shares classified as equity and is determined using the nominal value of shares that have been issued. Incremental costs directly attributable to the issuance of common shares are recognized as a deduction from equity, net of any tax effects. The amount presented is net of subscriptions receivable.

Share premium includes any premiums or consideration received in excess of par value on the issuance of share capital.

Surplus includes all current and prior period results of operations as disclosed in the statement of comprehensive income and statement of changes in equity, free of any restriction, after deducting distributions to shareholders and transfers to share capital.

Retained earnings represent the accumulated net income or losses, net of any dividend distributions and other capital adjustments. Appropriated retained earnings represent that portion which is restricted and therefore not available for any dividend declaration.

Own equity instruments which are reacquired are carried at cost and deducted from equity. No gain or loss is recognized on the purchase, sale, reissuance or cancellation of the Bank’s own equity instruments. When the shares are retired, the capital stock account is reduced by its par value and the excess of cost over par value upon retirement is debited to additional paid-in capital to the extent of the specific or average additional paid-in capital when the shares were issued and to retained earnings for the remaining balance.

82 Other comprehensive income (loss) comprises items of income and expense, including items previously presented under the statements of changes in equity, that are not recognized in profit or loss for the year. Other comprehensive income (loss) of the Bank pertains to gain (loss) on change in fair values of financial assets at FVOCI and AFS financial assets and change in remeasurement losses on retirement plan.

Revenue Recognition Revenue from contract with customers is recognized when the performance obligation in the contract has been satisfied, either at a point in time or over time. Revenue is recognized over time if one of the following criteria is met: (a) the customer simultaneously receives and consumes the benefits as the Bank perform its obligations; (b) the Bank’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced; or (c) the Bank’s performance does not create an asset with an alternative use to the Bank and the Bank has an enforceable right to payment for performance completed to date. Otherwise, revenue is recognized at a point in time.

Revenue is recognized to the extent that it is probable that economic benefits will flow to the Bank and the amount of revenue can be reliably measured.

The Bank assesses its revenue arrangements against the following criteria to determine whether they are acting as a principal or an agent:

• whether the Bank has primary responsibility for providing the services; • whether the Bank has discretion in establishing prices; and • whether the Bank bears the credit risk.

The Bank determined that it is acting as principal in its revenue arrangements except for fiduciary activities where the Bank acts in a fiduciary capacity such as nominee, trustee or agent.

The following additional specific recognition criteria for each type of revenue must also be met before income is recognized:

Interest income. For all financial instruments measured at amortized cost and interest-bearing financial instruments classified as financial assets at FVPL and AFS investments, interest income is recognized using the effective interest method. The EIR of a financial instrument is the rate that exactly discounts the estimated future cash receipts and payments through the expected life of the financial asset or financial liability or a shorter period, where appropriate, to the net carrying amount of the financial asset or financial liability. When calculating the EIR, the Bank estimates the future cash flows considering all contractual terms of the financial instrument, but not future credit losses. The calculation of the EIR includes all fees, transaction costs, and all other discounts and premiums that are an integral part of the EIR. Transaction costs are incremental costs that are directly attributable to the acquisition or disposal of a financial asset or financial liability.

Once the recorded value of a financial asset or group of similar financial assets has been reduced due to an impairment loss, interest income continues to be recognized using the original EIR used to discount future cash flows.

For past due loans, the Bank does not accrue income in compliance with the BSP regulations.

Interest income on investment securities includes those arising from investments in debt securities classified as financial assets at FVPL and AFS investments.

Income (Loss) from investments. The income (loss) from investments represent results arising from buying, selling and exchange of debt and equity investments (realized gains or losses) and from changes in fair value of financial assets and financial liabilities at FVPL (unrealized gains or losses).

Gains (Losses) on sale of investment properties. Gains (Losses) are recognized in profit or loss as it arises on the disposal of investment properties.

Service fees and commissions. Fees earned for the provision of services over a period of time are accrued over the period. These fees include investment fund fees, custodian fees, fiduciary fees, portfolio and other management fees. Fees and commission income that are integral to the EIR on financial asset or financial liability are included in the measurement of the EIR. Fees and commission income are recognized to the extent that an inflow of economic benefits is probable and that the amount of income can be reliably measured. If the fees are received upfront for services to be rendered, these are generally amortized over the term that the service is rendered. Commitment fees for facilities where a drawdown is not generally expected must be recognized over the facility period.

Income from penalties on loans. Income is recognized in profit or loss when payments are received from defaulted borrowers.

Trust income. Revenue is recognized in profit or loss at gross amount by the Bank from its fiduciary and related services.

Income from investment in associate. Income is recognized in profit or loss as it arises on share in net income of the investee (associate) accounted for under the equity method.

Rent income. Payments received under operating lease arrangements are recognized in profit or loss on a straight-line basis over the term of the lease.

Dividend income. Revenue is recognized in profit or loss when the Bank’s right to receive the dividends is established, which, in the case of the quoted securities, is the ex-dividend date.

Other income. Revenue is recognized when there is an incidental economic benefit, other than from the usual business operations, that will flow to the Bank through an increase in asset or reduction in liability that can be reliably measured.

The Bank also assesses its revenue arrangements to determine if it is acting as a principal or as an agent. The Bank has assessed that it acts as a principal in all of its revenue sources.

Interest Expense Interest expense is recognized in profit or loss when incurred. It is calculated using the effective interest method and credited to the depositors’ accounts regularly.

Costs and Expenses Costs and expenses are decreases in economic benefits during the accounting period in the form of outflows or decrease of assets or incurrence of liabilities that result in decreases in equity, other than those relating to distributions to equity participants. They are recognized (a) on the basis of a direct association between the costs incurred and the earning of specific items of income; (b) on the basis of systematic and rational allocation procedures when economic benefits are expected to arise over several accounting periods and the association with income can only be broadly or indirectly determined; or (c) immediately when an expenditure produces no future economic benefits or when, and to the extent that, future economic benefits do not qualify, or cease to qualify, for recognition in the statement of financial position as an asset. Other operating expenses are costs attributable to the administrative and other business activities of the Bank.

Employee Benefits Short-term benefits. The Bank recognizes a liability, net of amounts already paid and an expense for services rendered by employees during the period. Unpaid benefits at the end of the financial reporting period are recognized as accrued expense while benefits paid in advance are recognized as prepayment to the extent that these will lead to a reduction in future payments. Short-term benefits given by the Bank to its employees include salaries and wages, social security contributions, short-term compensated absences, bonuses and non-monetary benefits.

Retirement benefits. The Bank has a funded, non-contributory defined benefit plan covering all regular and full-time permanent employees. Benefits are based on the employee’s years of service and final plan salary. The fund is administered by a trustee bank. The actuarial present value of

84 the retirement benefit obligation under the plan is measured in terms of actuarial assumptions of mortality, investment yield and salary increase rates. Actuarial valuations are conducted with sufficient regularity, with option to accelerate when significant changes to underlying assumptions occur.

The retirement liability recognized in the statement of financial position is the present value of the Bank’s defined benefit obligation (DBO) at the end of the financial reporting period less the fair value of plan assets. The retirement asset is adjusted for any effect of limiting it to the asset ceiling, which is the present value of any economic benefits available in the form of refunds from the plan or reductions in future contributions to the plan.

The DBO is calculated by an independent actuary 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 year. The present value of the DBO is determined by discounting the estimated future cash outflows using interest rate on government bonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating to the terms of the related retirement obligation.

Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are charged or credited to equity in OCI in the period in which they arise.

Past service costs are recognized immediately in profit or loss.

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 the 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 an extension is granted, unless the term of the renewal or extension was initially included in the lease term;

(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 gives rise to the reassessment for scenarios (a), (c) or (d), and at the date of renewal or extension period for scenario (b) above.

Operating Lease Bank as Lessee. Leases which do not transfer to the Bank substantially all the risks and rewards of ownership of the asset are classified as operating leases. Operating lease payments are recognized as an expense in the statements of income on a straight-line basis over the lease term. Associated costs such as maintenance and insurance are expensed as incurred.

Bank as Lessor. Leases where the Bank does not transfer substantially all the risks and rewards of ownership of the assets are classified as operating leases. Rent income from operating leases is recognized as income on a straight-line basis over the lease term. Initial direct costs incurred in negotiating an operating lease are added to the carrying amount of the leased asset and recognized as an expense over the lease term on the same basis as rent income. Contingent rents are recognized as income in the period in which they are earned.

85 Foreign Currency Translations Transactions in foreign currencies are translated to the functional currency of the Bank at exchange rates at the dates of the transactions. Monetary assets and monetary liabilities denominated in foreign currencies are retranslated at the functional currency rate of exchange ruling at the reporting date. The foreign currency gain or loss on monetary items is the difference between amortized cost in the functional currency at the beginning of the year, adjusted for effective interest and payments during the year, and the amortized cost in foreign currency translated at the exchange rate at the reporting date.

Nonmonetary assets and nonmonetary liabilities denominated in foreign currencies that are measured at fair value are translated to the functional currency at the exchange rate at the date the fair value was determined. Nonmonetary items in foreign currencies that are measured in terms of historical cost are translated using the exchange rate at the date of the transaction.

Foreign currency differences arising on translation are recognized in the statements of income, except for differences arising on the translation of AFS financial assets, a financial liability designated as an effective hedge of the net investment in a foreign operation or qualifying cash flow hedges, which are recognized in other comprehensive income.

Taxes Current Tax. Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years.

Current tax relating to items recognized directly in equity is recognized in equity and not in the statements of income. The Bank periodically evaluates positions taken in the tax returns with respect to situations in which applicable tax regulations are subject to interpretations and establishes provisions where appropriate.

Deferred Tax. Deferred tax is recognized using the liability method in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes.

Deferred tax liabilities are recognized using the liability method for all taxable temporary differences, except:

. where the deferred tax liability arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and

. with respect to taxable temporary differences associated with investments in shares of stock of subsidiaries, where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.

Deferred tax assets are recognized for all deductible temporary differences, carryforward benefits of unused tax credits - Minimum Corporate Income Tax (MCIT) and unused tax losses - Net Operating Loss Carry Over (NOLCO), to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carryforward benefits of MCIT and NOLCO can be utilized, except:

. where the deferred tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and

86 . with respect to deductible temporary differences associated with investments in shares of stock of subsidiaries, deferred tax assets are recognized only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilized.

The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient 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 reporting 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.

The measurement of deferred tax reflects the tax consequences that would follow the manner in which the Bank expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the reporting date.

Current tax and deferred tax are recognized in the statements of income, except to the extent that it relates to a business combination, or items recognized directly in equity or in other comprehensive 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 the deferred taxes relate to the same taxable entity and the same taxation authority.

Value-added Tax (VAT). Revenues, expenses and assets are recognized net of the amount of VAT, except:

. where the tax incurred on a purchase of assets or services is not recoverable from the taxation authority, in which case the tax is recognized as part of the cost of acquisition of the asset or as part of the expense item as applicable; and

. receivables and payables that are stated with the amount of tax included.

The net amount of tax recoverable from, or payable to, the taxation authority is included as part of “Prepaid expenses and other current assets” or “Accounts payable and other current liabilities” accounts in the statements of financial position.

Related Parties A related party is an entity or person that directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common or joint control with, the Bank in governing the financial and operating policies, or that has an interest in the Bank that gives it significant influence over the Bank in making financial and operating decisions. It also includes members of the key management personnel of the Bank or close members of their family and others, who have the ability to control, jointly control or significantly influenced by or for which significant voting power in the Bank resides with, directly or indirectly, any such individual. This includes parents, subsidiaries, fellow subsidiaries, associates, joint ventures and post- employment benefit plans, if any. In considering each possible related party relationship, attention is directed to the substance of the relationship, and not merely the legal form.

Contingencies Contingent liabilities are not recognized in the financial statements. They are disclosed in the notes to the financial statements unless the possibility of an outflow of resources embodying economic benefits is remote. Contingent assets are not recognized in the financial statements but are disclosed in the notes to the financial statements when an inflow of economic benefits is probable.

87 Events After the Reporting Date Post year-end events that provide additional information about the Bank’s financial position at the reporting date (adjusting events) are reflected in the financial statements. Post year-end events that are not adjusting events are disclosed in the notes to the financial statements when material.

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 Bank acts in a fiduciary capacity such as nominee, trustee or agent.

4. Use of Judgments, Estimates and Assumptions

The preparation of the financial statements in accordance with PFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the amounts of assets, liabilities, income and expenses reported in the financial statements at the reporting date. However, uncertainty about these judgments, estimates and assumptions could result in an outcome that could require a material adjustment to the carrying amount of the affected asset or liability in the future.

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. Revisions are recognized in the period in which the judgments and estimates are revised and in any future period affected.

Judgments In the process of applying the accounting policies, the Bank has made the following judgments, apart from those involving estimations, which have an effect on the amounts recognized in the financial statements:

Classification of financial assets. Starting January 1, 2018, the Bank classifies its financial assets depending on the business model for managing those financial assets and whether the contractual terms of the financial asset are SPPI on the principal amount outstanding.

The Bank performs the business model assessment based on observable factors such as:

(a) Performance of the business model and the financial assets held within that business model are evaluated and reported to the Bank’s key management personnel (b) Risks that affect the performance of the business model (and the financial assets held within that business model) and, in particular, the way those risks are managed (c) Compensation of business units whether based on the fair value of the assets managed or on the contractual cash flows collected (d) Expected frequency, value and timing of sales

In performing the SPPI test, the Bank applies judgment and considers relevant factors such as the currency in which the financial asset is denominated, the period for which the interest rate is set, contingent events that would change the amount and timing of cash flows, leverage features, prepayment and extension terms and other features that may modify the consideration for the time value of money.

Determining fair value of financial instruments. The Bank 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.

88 Where the fair values of financial assets and financial liabilities recorded in the statement of financial position cannot be derived from active markets, they are determined using a variety of valuation techniques that include the use of mathematical models. The input to these models is taken from observable markets where possible, but where this is not feasible, a degree of judgment is required in establishing fair values. The judgment includes considerations of liquidity and model inputs.

Determining fair value of acquired assets classified as either investment properties or assets held for sale. The Bank determines the fair value of the acquired properties through internally- or externally-generated appraisal. The appraised value is determined based on the current economic and market conditions as well as the physical condition of the properties.

The fair values of assets held for sale and investment properties are disclosed in Note 14.

Determining classification of acquired properties. The Bank classifies its acquired properties as bank premises, furniture, fixtures and equipment if used in operations, as assets held for sale if expected that the properties will be recovered through sale rather than use, as investment properties if intended to be held for capital appreciation.

Classifying between operating and finance leases. Judgment was exercised by management to distinguish the agreement as either an operating or a finance lease by looking at the transfer or retention of significant risks and rewards of ownership of the property covered by the agreement. Failure to make the right judgment will result in either overstatement or understatement of assets and liabilities. Lease entered into by the Bank where management has determined that the risks and rewards of ownership of the leased item are retained with the lessor is accounted for as an operating lease.

The Bank has entered into property leases both as a lessee and a lessor. It has determined that the lessors retained all the significant risks and rewards of ownership over the properties, hence, classifying the lease arrangements as operating leases (see Note 27). The Bank considers retention of ownership title to the leased property and period of lease contract relative to the estimated useful economic life of the leased property in determining whether or not there is an indication of operating lease arrangement.

Determining functional currency. Management exercises its judgment in determining the Bank’s functional currency, specifically Philippine Peso for RBU and US Dollar for FCDU. In assessing its functional currency, the Bank considers the following: i. the currency that mainly influences the economic value of its financial instruments and services; ii. the currency in which funds from financing activities are generated; and iii. the currency in which receipts from operating activities are usually retained.

Recognizing contingent liabilities. The Bank is currently involved in various legal proceedings. The estimate of probable costs for the resolution of these claims has been developed in consultation with outside counsel handling the Bank’s defense in these matters and is based upon an analysis of potential result. The Bank currently does not believe that these proceedings will have a material adverse effect on its financial condition (see Note 27). As at December 31, 2018 and 2017, the Bank does not have any contingent legal or constructive obligation that requires provision. 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.

Estimates and Assumptions The key estimates and assumptions used in the financial statements are based upon the Bank’s evaluation of relevant facts and circumstances as at the date of the financial statements. Actual results could differ from such estimates.

Fair Value Measurements. A number of the Bank’s accounting policies and disclosures require the measurement of fair values for both financial and non-financial assets and liabilities.

89 The Bank has an established control framework with respect to the measurement of fair values. This includes a valuation team that has the overall responsibility for overseeing all significant fair value measurements, including Level 3 fair values. The valuation team regularly reviews significant unobservable inputs and valuation adjustments. If third party information is used to measure fair values, then the valuation team assesses the evidence obtained to support the conclusion that such valuations meet the requirements of PFRS, including the level in the fair value hierarchy in which such valuations should be classified.

The Bank uses market observable data when measuring the fair value of an asset or liability. Fair values are categorized into different levels in a fair value hierarchy based on the inputs used in the valuation techniques (Note 18).

If the inputs used to measure the fair value of an asset or a liability can be categorized in different levels of the fair value hierarchy, then the fair value measurement is categorized in its entirety in the same level of the fair value hierarchy based on the lowest level input that is significant to the entire measurement.

The Bank recognizes transfers between levels of the fair value hierarchy at the end of the reporting period during which the change has occurred.

The methods and assumptions used to estimate the fair values for both financial and non-financial assets and liabilities are discussed in Notes 28

Credit losses on financial assets. The Bank reviews its debt financial assets subject to credit losses periodically with updating provisions made during the intervals as necessary based on the continuing analysis and monitoring of individual accounts by credit officers. The measurement of credit losses both under PFRS 9 and PAS 39 across all categories of such financial assets requires judgment, in particular, the estimation of the amount and timing of future cash flows and collateral values when determining credit losses and the assessment of a significant increase in credit risk. These estimates are driven by a number of factors, changes in which can result in different levels of allowances.

Beginning January 1, 2018 The Bank’s ECL calculations are outputs of complex models with a number of underlying assumptions regarding the choice of variable inputs and their interdependencies. Elements of the ECL models that are considered accounting judgments and estimates include, among others:

 Segmentation of the portfolio, where the appropriate model or ECL approach is used  Criteria for assessing if there has been a significant increase in credit risk and so allowances for debt financial assets should be measured on a lifetime ECL basis and the qualitative assessment  Segmentation of debt financial assets when their ECL is assessed on a collective basis  Development of ECL models, including the various formulas and the choice of inputs  Determination of associations between macroeconomic scenarios and economic inputs, such as unemployment levels and collateral values, and the effect on PDs, EADs and LGDs  Selection of forward-looking macroeconomics scenarios and their probability weightings, to derive the economic inputs into the ECL models

The gross carrying amounts of financial assets subject to ECL as of December 31, 2018 are disclosed in Note 11, while the related ECL allowances for credit losses are disclosed in Note 16.

90 Prior to January 1, 2018

The Bank reviews its loans and other receivables at each financial reporting date to assess whether an impairment loss should be recognized in profit or loss or loans and other receivables balance should be written off. In particular, judgment by management is required in the estimation of the amount and timing of future cash flows when determining the level of allowance for impairment required. Such estimate is based on assumption about a number of factors and actual results may differ resulting in future changes to the allowance for impairment.

Allowance for impairment, which consists of both specific and general loan loss provision, represents management’s estimate for impairment losses inherent in the loan portfolio after consideration of prevailing and anticipated economic conditions, prior loss experience and evaluations made by the BSP.

The Bank provides allowance for impairment on loans and receivables equivalent to the estimated losses that may be incurred in the collection of all of its outstanding loans. The losses are estimated after taking into consideration the account’s historical collection experience, the collateral position of the Bank, credit documentation, subsequent collections and other factors that may affect the collectability of these accounts.

The adequacy of the allowance for impairment is determined periodically on the basis of qualitative appraisal of loan accounts individually which is grouped according to the exposure to credit risk.

In addition to specific allowance against individually significant loans and other receivables, the Bank also makes a collective impairment allowance against exposures which, although not specifically identified as requiring a specific allowance, have a greater risk of default than when originally granted. This collective allowance is based on any deterioration in the internal rating of the loan since it was granted. This collective allowance is based on changes in factors that are indicative of incurred losses, such as deterioration in payment status and underlying property prices, among others.

Where possible, the Bank seeks to restructure loans rather than to take possession of the collateral. This may involve extending the payment arrangements and the agreement of new loan conditions. Once the terms have been renegotiated, the loan is no longer considered past due. Management continuously reviews restructured loans to ensure that all criteria are met and that future payments are likely to occur. The loans continue to be subject to an individual or collective impairment assessment, calculated using the loan’s original EIR. The difference between the recorded value of the original loan and the present value of the restructured cash flows, discounted at the original EIR, is recognized in profit or loss.

The allowance for impairment is established through provision for impairment losses charged to current operations. Loans are written off against the allowance for impairment when management believes that the collectibility of the principal is unlikely. Allowance for impairment amounted P=129,109,199 and P=493,145,649 as at December 31, 2018 and 2017, respectively (see Note 16). The net carrying value of loans and other receivables amounted to P=5,355,420,665 and P=3,930,168,105 as at December 31, 2018 and 2017, respectively (see Note 11).

Estimated Useful Lives of Bank Premises, Furniture, Fixtures and Equipment, Investment Properties, and Software Costs. The Bank estimates the useful lives of depreciable bank premises, furniture, fixtures and equipment, investment properties and software costs for the purposes of computing depreciation and amortization based on the period over which the assets are expected to be available for use. Their estimated useful lives are reviewed periodically and are updated if expectations differ from previous estimates due to physical wear and tear, technical or commercial obsolescence, and legal or other limits on the use of the assets. The collective assessment of industry practice, internal technical evaluation and experience with similar assets is also considered in the estimation.

91 It is possible, however, that future results of operations could be materially affected by changes in estimates brought about by changes in factors mentioned. The amounts and timing of recorded expenses for any period would be affected by changes in these factors and circumstances. A reduction in the estimated useful lives of bank premises, furniture, fixtures and equipment, investment properties and software costs would increase recorded other operating expenses and decrease assets.

The net carrying value of bank premises, furniture, fixtures and equipment as at December 31, 2018 and 2017 amounted to P=92,216,986 and P=77,318,206,respectively (see Note 13). For investment properties, the net carrying value as at December 31, 2018 and 2017 amounted to P=548,610,797 and P=937,967,796, respectively (see Note 15). Software costs amounted to P=11,182,469 and P=6,266,035 as at December 31, 2018 and 2017, respectively (see Note 17).

Impairment of Non-Financial Assets. PFRS requires that an impairment review be performed on investments (excluding financial assets at FVOCI/AFS financial assets), bank premises, furniture, fixtures and equipment, and investment properties when events or changes in circumstances indicate that the carrying amount may not be recoverable. Determining the recoverable amounts of these assets requires the estimation of cash flows expected to be generated from the continued use and ultimate disposition of such assets. While it is believed that the assumptions used in the estimation of fair values reflected in the financial statements are appropriate and reasonable, significant changes in these assumptions may materially affect the assessment of recoverable amounts and any resulting impairment loss could have a material adverse impact on the financial performance.

The Bank assessed that its investment properties amounting to P=548,610,797 and P=937,967,796 as at December 31, 2018 and 2017 are not impaired (Note 15).

Allowance for impairment on investment properties amounted to P=38,935,423 and P=56,431,129 as at December 31, 2018 and 2017, respectively (see Notes 15 and 16). The net carrying value of investment properties amounted to P=548,610,797 and P=937,967,796 as at December 31, 2018 and 2017, respectively (see Note 15).

There are no indications of impairment on bank premises, furniture, fixtures and equipment. Thus, no provision for impairment losses is recognized by the Bank on these assets for the years ended December 31, 2018 and 2017. The net carrying value of bank premises, furniture, fixtures and equipment amounted to P=92,216,986 and P=77,318,206 as at December 31, 2018 and 2017, respectively (see Note 13).

Realizability of Deferred Tax Assets. The Bank reviews its deferred tax assets at each reporting date and reduces the carrying amount to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax assets to be utilized. The Bank’s assessment on the recognition of deferred tax assets on deductible temporary differences and carryforward benefits of MCIT and NOLCO is based on the projected taxable income in the following periods.

Estimates of future taxable income indicate that the temporary differences will be realized in the future. The Bank recognized net deferred tax assets of P=15,057,529 and P=48,474,720 as at December 31, 2018 and 2017, respectively (see Note 24).

Present value of retirement liability. The present value of the DBO depends on a number of factors that are determined on an actuarial basis using a number of assumptions. The assumptions used in determining the net cost for retirement include among others, the discount rate and salary increase rate. Any changes in the assumptions will impact the carrying amount of the retirement obligation.

92 The Bank determines the appropriate discount rate at the end of each financial reporting period. This is the interest rate that is used to determine the present value of estimated future cash outflows expected to be required to settle the retirement obligation. In determining the appropriate discount rate, the Bank considers the interest rate on government bonds that are denominated in the currency in which the benefits will be paid and that have terms to maturity approximating to the terms of the related retirement obligation.

Other key assumptions for retirement obligation are based in part on current market conditions. Additional information is disclosed in Note 25.

While the Bank believes that the assumptions are reasonable and appropriate, significant differences between actual experiences and assumptions may materially affect the cost of retirement benefits and related obligations.

Retirement benefit cost recognized in profit or loss in 2018 and 2017 amounted to P=4,622,860 and P=3,328,252, respectively (see Notes 23 and 25).

As at December 31, 2018 and 2017, the retirement liability of the Bank amounted to P=46,281,300 and P=7,345,981, respectively (see Note 25).

5. Cash and other Cash Items

This account consists of:

2018 2017 Cash on hand P=100,203,169 P=74,107,312 Checks and other cash items 37,651,248 9,392,455 P=137,854,417 P=83,499,767

6. Due from BSP

This account consists of local currency deposits maintained with the BSP to meet legal reserve requirements that are not available for use in the Bank's day-to-day operations. This also serves as a clearing account for interbank claims.

2018 2017 Demand deposit P=623,882,607 P=485,966,253 Overnight deposit facility - 112,000,000 P=623,882,607 P=597,966,253

With reference to Circular No. 913 Series of 2016, Resolution No. 961 dated June 2, 2016, the interest rate corridor implementation involved the changes in BSP monetary operations: modification of the reverse repurchase facility into a purely overnight facility, introduction of the term deposit facility and conversion of special deposit account to overnight deposit facility.

Annual interest rates on deposit accounts other than demand deposit are 2.50% to 4.35% in 2018 and 2.50% to 3.50% in 2017, respectively.

Interest income on overnight lending with the BSP amounted to P=1,295,511 in 2018 and P=3,298,000 in 2017.

Interest income from term deposit facility amounted to P=900,847 in 2018 and P=1,925,316 in 2017.

93 7. Due from Other Banks

The account pertains to funds and other deposits in local currency maintained with other local and foreign banks, primarily to facilitate checks or drafts or other similar payment order collections and other banking services.

This account consists of:

2018 2017 Demand deposits P=35,214,492 P=39,800,039 Savings deposits 552,517,923 175,659,839 Time deposits - 155,074,651 P=587,732,415 P=370,534,529

Demand and savings deposit accounts are unrestricted and pre-terminable. These deposits earn interest at the prevailing bank deposit rates.

Time deposits with other banks usually have fixed rates and maturity dates. These deposits carry interest rates ranging from nil and 1.75% to 2.75% in 2018 and 2017, respectively.

Interest earned amounted to P=1,188,976 in 2018 and P=5,428,619 in 2017.

8. Interbank Call Loans Receivable/Payable

Interbank call loans receivable consists of:

2018 2017

Interbank call loans P=- P=150,000,000 Reverse repurchase with BSP 180,000,000 536,947,106 P=180,000,000 P=686,947,106

Interbank call loans refer to loans granted among banks primarily for the purpose of covering overnight liquidity requirements. Interest rates for interbank call loans ranging from 2.53% to 4.97% in 2018 and 2.53% in 2017 while interest earned by the Bank amounts to P=1,108,628 in 2018 and P=1,129,500 in 2017.

Reverse repurchase is an agreement where BSP acts as a seller of government securities with a commitment to buy it back at a specified future date at a predetermined rate. At present, BSP enters into reverse repo agreements for a minimum of one day and maximum of 364 days at 3% to 4.75%. Interest earned from reverse repo amounted to P=7,830,845 in 2018 and P=6,394,358 in 2017.

Interbank call loans payable consists short term borrowings with local banks amounted to P=207,400,000 and nil at December 31, 2018 and 2017, respectively. Interest rates for interbank call loans ranging from 6.50% to 6.75% in 2018 and 2.56% to 2.53% in 2017 while interest earned by the Bank amounts to P=2,711,017 in 2018 and P=4,939 in 2017.

94 9. Financial Assets at FVTPL

The movements in financial assets at FVTPL are as follows:

Note 2018 2017 Balance at January 1 P=- P=- Additions 143,254,909 48,095,513 Disposals - (48,095,513) Loss on fair value adjustment 22 (4,956,634) - Balance at December 31 P=138,298,275 P=-

The account consists of government securities held for trading.

Interest income earned on these investments in government securities amounted to P=2,863,472 in 2018 and P=4,028 in 2017.

Gain on disposal of investments amounted to nil in 2018 and P=142,419 in 2017.

10. Investments at FVOCI/AFS Investments

This account consists of:

Note 2018 2017 Government bonds P=419,472,434 P=488,154,255 Corporate bonds 84,327,249 78,650,668 Investment in shares of stock 26 12,945,700 12,945,700 Balance at end of year P=516,745,383 P=579,750,623

The Bank purchased bonds with a total face amount of P=30,781,500 and P=523,930,000 and yield- to-maturity rates of 4.91% to 7.15% and 2.56% to 6.95% in 2018 and 2017, respectively. The bonds have market value of P=503,799,683 and P=566,804,923 as at December 31, 2018 and 2017, respectively.

The investment in shares of stock represents the Bank's 2.49% ownership of Unicapital Incorporated.

The movements in financial assets at FVOCI/AFS Investments are as follows:

2018 2017 Balance at January 1 P=579,750,623 P=330,713,331 Additions 30,828,389 519,227,467 Disposals (54,267,690) (274,083,413) Exchange differences 2,629,302 132,074 Accretion of discount (Amortization of premium) (789,656) 1,063,022 Fair value adjustment (41,405,585) 2,698,142 Balance at December 31 P=516,745,383 P=579,750,623

Interest income on financial assets at FVOCI/AFS investments amounted to P=19,890,527 in 2018 and =16,751,274P in 2017.

Gain on disposal of financial assets at FVOCI/AFS investments amounted to P=2,983,636 in 2018 and =1,786,895P in 2017 (see Note 22).

95 The movements in fair value loss on financial assets at FVOCI/AFS Investments are as follows:

Note 2018 2017 Balance at January 1 P=6,416,989 P=9,115,131 Unrealized losses (gains) recognized in OCI 38,421,949 (911,247) Realized gains (loss) transferred to profit or loss 22 2,983,636 (1,786,895) Balance at December 31 P=47,822,574 P=6,416,989

11. Loans and Other Receivables, Net

This account consists of:

Note 2018 2017 Loans and advances to customers Commercial P=2,417,754,545 P=2,405,782,190 Consumer 1,140,395,189 740,640,004 Real estate 423,209,556 526,211,163 Agricultural 223,584,961 230,543,313 Education and medical 71,954,895 87,434,659 4,276,899,146 3,990,611,329 Sales contract receivable 754,572,280 299,668,196 Accounts receivable 371,552,256 75,362,828 Accrued interest receivable 90,689,054 68,958,406 Others 897,945 897,945 5,494,610,681 4,435,498,704 Unearned discount (10,080,817) (12,184,950) Allowance for impairment 16 (129,109,199) (493,145,649) P=5,355,420,665 P=3,930,168,105

Loans and advances to customers earn annual interest rates ranging from 2.97% to 52% in 2018 and 0.75% to 115.5% in 2017. Interest earned on loans and advances to customers amounted to P=443,198,051 in 2018 and P=362,117,836 in 2017.

Sales contract receivable refers to assets acquired in settlement of loans through foreclosure or dation in payment and subsequently sold on installment basis whereby the titles to the said properties are transferred to the buyers only upon full payment of the agreed selling price. Interest earned on sales contract receivable amounted to P=20,519,969 and P=11,025,938 for the years ended December 31, 2018 and 2017, respectively.

Accounts receivable includes various legal expenses advanced by the Bank but are for the account of the borrowers whose loan accounts are under litigation. It also includes various advances to employees which are usually non-interest bearing and payable within the next 12 months. The balance includes receivable from Bancnet for the ATM settlement transactions amounting to P=15,782,112 and P=9,918,684 as at December 31, 2018 and 2017, respectively.

96 BSP reporting

The major classification of loans and advances to customers at December 31 follows:

(a) As to security

2018 2017 Secured Chattel mortgage P=2,272,719,596 P=2,129,004,048 Real estate mortgage 706,500,680 682,665,083 Deposit hold-out 36,395,250 19,214,038 Others 287,374,800 345,582,075 3,302,990,326 3,176,465,244 Unsecured 973,908,820 814,146,085 P=4,276,899,146 P=3,990,611,329

The amount and type of collateral required depend on the assessment of the credit risk of the Bank. Certain requirements regarding the acceptability of types of collateral and valuation are implemented by the Bank. It monitors the market value of collateral every two (2) years.

Secured loans, which are collateralized by real property mortgage, have terms ranging from less than one year to twenty years and from less than one year to five years with annual interest rates ranging from 6.25% to 26% and 4% to 26% in 2018 and 2017, respectively.

Unsecured loans are guaranteed by co-makers, who in the event of default will assume the loan balance. These loans have terms of less than one year to a maximum of ten years and less than one year to a maximum of one year with annual interest rates ranging from 2.97% and 52% and 0.75% to 71.29% in 2018 and 2017, respectively.

Other securities include trust receipts, stock certificates and guaranty from Home Guaranty Corporation.

(b) As to concentration of credit

Concentration indicates the relative sensitivity of the Bank’s performance to developments affecting a particular industry or geographic location. The BSP considers that concentration of credit exists when the total loan exposure to a particular industry or economic sector exceeds 30% of the total loan portfolio. As at December 31, 2018 and 2017, the Bank has credit concentration in the transportation sector.

97 The concentration of gross loans and advances to customers to industry as at December 31 follows:

2018 2017 Amount % Amount % Transportation, storage and communication P=1,448,453,297 33.87% P=1,486,762,644 37.26% Consumers 1,140,395,189 26.66% 740,640,004 18.56% Real estate, renting and business activities 423,209,556 9.90% 526,211,163 13.19% Manufacturing 348,707,222 8.15% 393,438,663 9.86% Wholesale and retail trade 333,099,993 7.79% 292,661,478 7.33% Financial intermediaries 287,103,882 6.71% 7,863,345 0.20% Health and social work 49,906,281 1.17% 51,258,670 1.28% Mining and quarrying 35,081,555 0.82% 70,000,000 1.75% Agriculture, hunting and forestry 27,668,836 0.65% 230,543,313 5.78% Construction 23,984,118 0.56% 387,148 0.01% Electricity, gas and water 14,219,011 0.33% 7,578,065 0.19% Hotels and restaurants - 0.00% 219,675 0.01% Others 145,070,206 3.39% 183,047,161 4.58% P=4,276,899,146 100% P=3,990,611,329 100%

The Bank analyzes the credit risk concentration to an individual borrower, related group of accounts, industry, geographic, currency, term and security. To mitigate risk concentration, the Bank constantly checks for breaches in regulatory and internal limits.

Existing banking regulations allow banks with no unbooked valuation reserves and capital adjustments to exclude from non-performing classification those loans and advances classified as “Loss” in the latest examination of the BSP which are fully covered by allowance for impairment losses, provided, that the interest on said loans shall not be accrued.

Under banking regulations in 2016, Non-performing loans shall, as a general rule, refer to loan accounts whose principal and/or interest is unpaid for thirty (30) days or more from due date, or after they have become past due in accordance with existing rules and regulations. This shall apply to loans payable in lump sum and loans payable in quarterly, semi-annual, or annual installments, in which case, the total outstanding balance thereof shall be considered non- performing. In the case of loans that are payable in monthly installments, the total outstanding balance thereof shall be considered non-performing when three (3) or more installments are in arrears. In the case of loans that are payable in daily, weekly, or semi-monthly installments, the total outstanding balance thereof shall be considered non-performing at the same time that they become past due in accordance with the existing BSP regulations, i.e., the entire outstanding balance of the loan shall be considered as past due when the total amount of arrearages reaches 10% of the total loan balance. Restructured loans which do not meet the requirements to be treated as performing loans shall also be considered as NPLs.

On January 5, 2017, the Monetary Board in its resolution No. 39 as per Circular No. 941 approved the revised definition of NPLs. Under the new Circular, loans, investments, receivables, or any financial asset shall be considered non-performing, even without any missed contractual payments, when it is considered impaired under existing accounting standards, classified as doubtful or loss, in litigation, and/or there is evidence that full repayment of principal and interest is unlikely without foreclosure of collateral, if any. All other loans, even if not considered impaired, shall be considered non-performing if any principal and/or interest are unpaid for more than ninety (90) days from contractual due date, or accrued interests for more than ninety (90) days have been capitalized, refinanced, or delayed by agreement. However, if prior to restructuring, the loans were categorized as performing, such classification shall be retained. NPLs, investments, receivables, or any financial asset (and/or any replacement loan) shall remain

98 classified as such until (a) there is sufficient evidence to support that full collection of principal and interests is probable and payments of interest and/or principal are received for at least six (6) months; or (b) written-off.

Restructured receivables by contractual maturity dates are analyzed as follows:

2018 2017 Due within 1 year P=1,295,876 P=8,092,265 Due beyond 1 year but not beyond 5 years - 633,408 Due beyond 5 years 19,653,452 10,386,291 P=20,949,328 P=19,111,964

Restructured receivables earn annual interest rates ranging from 6% and 24% and 10% to 55% in 2018 and 2017, respectively.

The NPLs of the Bank as at December 31 are as follows:

2018 2017 Total NPLs P=232,404,024 P=382,510,295 Less: NPLs fully covered by allowance for impairment 102,586,209 382,510,295 P=129,817,815 P=-

See Note 28 for the disclosure on maturity profile of loans and other receivables as at December 31, 2018 and 2017.

The non-cash activities of the Bank in relation to loans follow:

2018 2017 Increase in sales contract receivable from sale of investment properties P=100,496,769 P=64,030,332

Additions to investment properties in

settlement of loans 57,766,702 337,226,044 Additions to chattel mortgage in settlement of loans 22,248,636 1,800,955

12. Investment in Associate

Investment in associate represents the Bank's 40% ownership of Uniguarantee Insurance Brokerage, Inc. (UIB) (see Note 26).

The details of and movements in the Bank's equity investment in UIB follow:

Notes 2018 2017 Acquisition cost P=8,000,000 P=8,000,000 Accumulated share in net income: Balance at January 1 5,430,875 3,496,751 Share in net income for the year 22, 26 1,541,542 1,934,124 Balance at December 31 6,972,417 5,430,875

P=14,972,417 P=13,430,875

99 A summary of the financial information of UIB follows:

2018 2017 Total assets P=125,455,159 P=106,876,406 Total liabilities 89,509,027 73,365,369 Total equity 35,946,132 33,511,037 Total revenue 21,653,932 17,235,841 Net income 3,853,856 4,835,309 Total comprehensive income 3,853,856 4,835,309

13. Bank Premises, Furniture, Fixtures and Equipment, Net

The composition of and movements in the account follow:

Leasehold Furniture, rights and fixtures and Transportation Note Land Building improvements equipment equipment Total Cost

At January 1, 2017 P=5,885,014 P=8,439,689 P=78,817,747 P=79,609,513 P=26,911,244 P=199,663,207 Additions - - 2,778,517 9,573,388 6,744,050 19,095,955 Disposals - - - (36,745) (3,384,778) (3,421,523) Reclassifications from investment properties 15 12,500,000 - - - 2,081,582 14,581,582 Adjustments - - (24,826,483) - - (24,826,483) At December 31, 2017 18,385,014 8,439,689 56,769,781 89,146,156 32,352,098 205,092,738 Additions 2,250,000 14,983,224 13,753,924 2,142,617 33,129,765 At December 31, P= 2018 P=18,385,014 10,689,689 P=71,753,005 P=102,900,080 P=34,494,715 P=238,222,503

Accumulated Depreciation

At January 1, 2017 - 5,694,224 53,726,821 63,661,596 15,943,389 139,026,030 Additions - 499,548 4,842,560 6,893,481 4,322,338 16,557,927 Disposals - - - (28,133) (2,982,245) (3,010,378) Reclassifications from investment properties 15 - - - - 27,436 27,436 Adjustments - - (24,826,483) - - (24,826,483) At December 31, 2017 - 6,193,772 33,742,898 70,526,944 17,310,918 127,774,532 Additions - 542,673 5,670,793 7,294,110 4,723,409 18,230,985 At December 31, 2018 P=- P=6,736,445 P=39,413,691 P=77,821,054 P=22,034,327 P=146,005,517 Net book value At December 31, 2018 P=18,385,014 P=3,953,244 P=32,339,314 P=25,079,026 P=12,460,388 P=92,216,986 At December 31, 2017 P=18,385,014 P=2,245,917 P=23,026,883 P=18,619,212 P=15,041,180 P=77,318,206

In 2017, the Bank sold transportation and office equipment with net book value of P=411,145 for P=566,007 resulting in a gain of P=154,862 (see Note 22).

100 The Bank assesses at each financial reporting date whether there is an indication that an item of bank premises, furniture, fixtures and equipment may be impaired and believes that there is no such indication as at December 31, 2018 and 2017.

Under the BSP rules, investment in bank premises, furniture, fixtures and equipment should not exceed 50% of the Bank’s unimpaired capital. As at December 31, 2018 and 2017, the Bank has satisfactorily complied with this BSP requirement.

14. Assets Held for Sale

Assets held for sale consist of lots and buildings which management believes can be sold within 12 months after the financial reporting date, or with interested or potential buyers.

The movements in assets held for sale are as follows:

Note Land Building Total At January 1, 2017 P=47,843,068 P=- P=47,843,068 Reclassification to investment 17 - 493,202,167 493,202,167 Disposals properties (47,843,068) - (47,843,068) At December 31, 2017 - 493,202,167 493,202,167 Additions - 1,697,404 1,697,404 Reclassifications from investment properties 15 319,998,474 19,919,383 339,917,857 Disposals - (494,899,571) (494,899,571) At December 31, 2018 P=319,998,474 P=19,919,383 P=339,917,857

The fair value of assets held for sale amounted to P=474,047,883 and P=986,356,000 as at December 31, 2018 and 2017, respectively. The fair values of the Bank’s assets held for sale have been determined by in-house appraisers on the basis of recent sales of similar property in the same area where the assets held for sale are located, which have been adjusted for differences in key attributes such as property size, zoning, accessibility, etc., and taking into account the economic conditions prevailing at the time the valuations are made, and are therefore within Level 3 of the fair value hierarchy.

In compliance with the pertinent BSP rules, the appraisal of an individual real estate property with a carrying amount of loan of more than P5 million is conducted by an independent appraiser acceptable to the BSP. As at December 31, 2018 and 2017, the Bank is in compliance with this BSP requirement.

The Bank sold assets held-for-sale with net book value of P=494,899,571 for P=474,837,799 in 2018 and P=47,843,068 for P=47,000,000 in 2017. Total loss recognized on the sale amounted to P=20,061,772 in 2018 and P=843,068 (see Note 22).

101 15. Investment Properties, Net

The movements in investment properties are as follows:

2018 Note Land Building Total Cost At January 1, 2018 P=956,248,355 P=61,242,931 P=1,017,491,286 Additions 30,001,975 4,021,449 34,023,424 Disposals (80,280,615) (3,026,275) (83,306,890) Reclassification to assets held for sale 14 (331,938,873) (35,022,598) (366,961,471) At December 31, 2018 574,030,842 27,215,507 601,246,349

Accumulated depreciation At January 1, 2018 - 23,092,361 23,092,361 Depreciation 23 - 6,274,937 6,274,937 Disposals - (1,098,468) (1,098,468) Reclassification to assets held for sale 14 - (14,568,731) (14,568,731) At December 31, 2018 - 13,700,099 13,700,099

Allowance for impairment At January 1, 2018 54,245,808 2,185,321 56,431,129 Disposals (637,878) (343,193) (981,071) Reversals (3,524,002) (515,721) (4,039,723) Reclassification to assets held for sale 14 (11,940,399) (534,483) (12,474,882) At December 31, 2018 38,143,529 791,924 38,935,453

Net book value P=535,887,313 P=12,723,484 P=548,610,797

2017 (As reclassified) Note Land Building Total Cost

At January 1, 2017 P=652,646,614 P=65,701,881 P=718,348,495 Additions 344,489,212 499,123,830 843,613,042 Disposals (27,753,695) (10,380,613) (38,134,308) Reclassification to bank premises, furniture, fixtures and equipment (13,133,776) - (13,133,776) Reclassification to assets held for sale 14 - (493,202,167) (493,202,167) At December 31, 2017 956,248,355 61,242,931 1,017,491,286

forward

102 2017 (As reclassified) Note Land Building Total Accumulated depreciation At January 1, 2017 P=- P=20,275,513 P=20,275,513 Depreciation - 6,576,212 6,576,212 Disposals (3,759,364) (3,759,364) At December 31, 2017 - 23,092,361 23,092,361

Allowance for impairment At January 1, 2017 55,601,480 3,000,483 58,601,963 Disposals (721,896) (306,453) (1,028,349) Reversals - (402,947) (402,947) Reclassifications to bank premises, furniture, fixtures and equipment (633,776) - (633,776) Reclassification from building to others - (105,762) (105,762) At December 31, 2017 54,245,808 2,185,321 56,431,129

Net book value P=902,002,547 P=35,965,249 P=937,967,796

The unrealized gain on initial recognition of investment properties included in other operating income account amounted to P=6,127,417 and P=433,506,333 for the years ended December 31, 2018 and 2017, respectively (see Note 22).

The Bank realized a gain of P=38,760,179 and P=5,169,727 from disposal of investment properties for the years ended December 31, 2018 and 2017, respectively (see Note 22).

The aggregate fair value of investment properties of the Bank amounted to P=1,247,396,635 and P=1,354,628,216 as at December 31, 2018 and 2017, respectively. The fair values of the Bank’s investment properties have been determined by the BSP-accredited or in-house appraisers on the basis of recent sales of similar property in the same area where the investment property is located, which have been adjusted for differences in key attributes such as property size, zoning, accessibility, etc., taking into account the economic conditions prevailing at the time the valuations were made, and are therefore within Level 3 of the fair value hierarchy.

16. Allowance for Impairment

A reconciliation of the allowance for impairment on loans and other receivables, investment properties and chattel mortgage are as follows:

2018 Chattel Loans and other Investment mortgage receivables properties properties (Note 11) (Note 15) (Note 17) Total Balance at January 1 P=493,145,649 P=56,431,129 P=105,762 P=549,682,540 Adjustment on opening balance (5,185,547) - - (5,185,547) Provision (Reversal) (89,193,965) (4,039,723) 654,223 (92,579,465) Reclassifications (13,812,214) (12,474,882) - (26,287,096) Disposal (5,145,405) (981,071) (53,936) (6,180,412) Exchange differences 2,585 - - 2,585 Write-off (250,701,904) - - (250,701,904) Balance at December 31 P=129,109,199 P=38,935,453 P=706,049 P=168,750,701

2017

103 Chattel Loans and other Investment mortgage receivables properties properties (Note 11) (Note 15) (Note 17) Total Balance at January 1 P=193,033,252 P=58,601,963 P=17,807 P=251,653,022 Provision (Reversal) 301,534,507 (402,947) (15,094) 301,116,466 Reclassifications (1,422,799) (739,538) 103,049 (2,059,288) Disposal - (1,028,349) - (1,028,349) Exchange differences 689 - - 689 Balance at December 31 P=493,145,649 P=56,431,129 P=105,762 P=549,682,540

Allowance for impairment on loans and other receivables is comprised of the following:

Specific loan loss 2018 2017 Loans to individuals for consumption purposes P=91,150,136 P=388,287,564 Accounts receivable 20,556,223 34,918,225 Other receivables 11,156,936 19,335,746 Sales contract receivable - 15,285,270 122,863,295 457,826,805 General loan loss 6,245,904 35,318,844 P=129,109,199 P=493,145,649

The gross amount of loans individually determined to be impaired follows:

2018 2017 Commercial P=53,094,410 P=158,419,178 Real estate 142,712,173 41,645,996 Consumer 36,597,441 9,753,825 P=232,404,024 P=209,818,999

With the foregoing level of allowance for impairment, management believes that the Bank has sufficient allowance to manage any risk from non-collection or non-collateralization of the Bank’s loans and other receivables.

17. Other Assets

This account consists of:

2017 Note 2018 (As reclassified) Prepayments P=45,219,097 P=111,296,069 Advances 27,532,779 1,205,940 Chattel mortgage properties, net 20,524,498 5,588,406 Sundry debits 17,675,791 1,299,379 Software costs, net 11,182,469 6,266,035 Security deposits 8,211,818 7,960,631 Documentary stamps 4,458,535 5,241,205 Stationery and supplies on hand 2,376,082 3,754,715 Petty cash fund 67,300 67,500 Shortages 100 10,445 Prepaid income taxes 24 - 2,494,538 Miscellaneous assets 315,707 1,670,807 P=137,564,176 P=146,855,670

104 Prepayments represent prepaid commissions of accredited agents and dealers of car, bus, and motorcycle loans, advance payment of real property taxes and various prepaid insurance premiums.

Chattel mortgage properties

The movements in chattel mortgage properties are as follows:

Note 2018 2017 Cost At January 1 P=6,316,221 P=1,313,743 Additions 32,900,399 10,590,627 Disposals (15,167,029) (3,398,199) Reclassifications - (2,189,950) At December 31 24,049,591 6,316,221

Accumulated amortization At January 1 622,053 207,734 Depreciation 23 3,730,397 860,841 Disposal (1,533,406) (313,431) Reclassifications - (133,091) At December 31 2,819,044 622,053

Allowance for impairment At January 1 105,762 17,807 Disposals (53,936) - Provision (Reversals) 654,223 (15,094) Reclassifications 15 - 103,049 At December 31 706,049 105,762 Net book value P=20,524,498 P=5,588,406

Software costs

The movements in software costs are as follows:

Note 2018 2017 Cost At January 1 P=54,918,850 P=52,252,390 Additions 7,247,615 2,666,460 At December 31 62,166,465 54,918,850

Accumulated amortization At January 1 48,652,815 47,132,389 Amortization 23 2,331,181 1,520,426 At December 31 50,983,996 48,652,815 Net book value P=11,182,469 P=6,266,035

105 18. Deposit Liabilities

The account consists of:

2018 2017

Demand P=232,334,244 P=171,212,848

Savings 864,436,833 843,584,978 Time 5,591,652,253 5,520,151,705

P=6,688,423,330 P=6,534,949,531

Annual interest rate for savings deposits remains unchanged from last year at 0.25% to 1.50% in 2017. Time deposits bear annual interest rates ranging from 0.50% to 6.55% in 2018 and 0.25%to 5.75% in 2017. Demand deposits are non-interest bearing.

In March 2012, the BSP approved a unification of the statutory, legal and liquidity reserve requirements and reduction in the unified reserve requirement ratios per BSP Circular No. 753. Effective April 6, 2012, the rate of required reserves against demand, savings and time deposits for thrift bank is at 6%.

On May 27, 2014, the BSP issued Circular No. 832, which amends the reserve requirements from 6% to 8% effective on the reserve week starting on May 30, 2014. The reserve requirement remains unchanged.

The required and available reserves as reported to the BSP follow:

2018 2017 Available reserve Due from BSP P=623,882,607 P=485,966,253

Required reserve P=508,152,509 P=440,128,768

BSP Circular No. 753 dated March 29, 2012 provides that the required reserves shall be kept in the form of deposits placed in bank’s demand deposit accounts with the BSP. Based on the Circular, the Bank’s cash in vault shall no longer be allowed.

The Bank is in compliance with such regulations as at December 31, 2018 and 2017.

106 See Note 28 for the maturity profile of deposit liabilities as at December 31, 2018 and 2017.

Interest expense consists of:

2018 2017

Demand P=237,210 P=297,336 Savings 2,067,410 1,897,112 Time 177,955,291 162,056,211

P=180,259,911 P=164,250,659

19. Accrued Interest, Taxes and Other Expenses

The account consists of:

2018 2017

Accrued interest payable Time deposits P=55,508,416 P=44,863,297 Savings deposits 195,195 209,617 Interbank call loan 346,781 - Accrued expenses payable 30,368,997 32,976,117 Income tax payable 2,298,873 - Accrued fringe benefit taxes 34,386 21,150 P=88,752,648 P=78,070,181

Accrued expenses payable includes accruals for penalties, compensation, security and janitorial, rent, management professional fees, utilities, litigations, repairs and maintenance and various expenses attributable to the Bank’s operations.

20. Other Liabilities

The account consists of:

2018 2017 Accounts payable P=379,737,095 P=84,520,402 Manager’s checks 34,777,504 67,727,148 Withholding taxes payable 3,609,473 4,189,849 SSS loan payable 760,213 569,912 Sundry and other credits 34,882 31,920 Miscellaneous 2,684,408 2,510,245

P=421,603,575 P=159,549,476

Accounts payable consists mainly of insurance premiums for collaterals on loans collected by the Bank in advance through deduction from the loan proceeds at drawdown and spot transactions. These are non-interest bearing and repayable within the next 12 months.

107 21. Equity

The details of the Bank’s equity at December 31 follow:

2018 2017 Share capital P=921,990,100 P=921,990,100 Share premium 48,171,600 48,171,600 Surplus 317,392,245 221,631,486 Accumulated other comprehensive loss, net (51,741,274) (5,592,538) P= 1,235,812,671 P=1,186,200,648

2018 2017 No. of No. of Amount shares Amount shares Authorized Common shares at P100 par value per share P=2,000,000,000 20,000,000 P=2,000,000,000 20,000,000

Paid-up capital Subscribed shares Balance at January 1 P=1,013,488,800 10,134,888 P=1,013,488,800 10,134,888 Subscriptions receivable (91,498,700) - (91,498,700) -

Balance at December 31 P=921,990,100 10,134,888 P=921,990,100 10,134,888

Out of the Bank’s 10,134,888 subscribed shares or P=1,013,488,800 as at December 31, 2018, a total of 9,219,901 shares or P=921,990,100 has already been issued.

As discussed in Note 28 to the financial statements, under existing BSP regulations, the determination of the Bank’s compliance with regulatory requirements and ratios is based on the amount of the Bank’s “unimpaired capital” as reported to the BSP, which is determined on the basis of regulatory accounting policies that differ from PFRSs in some respects. The minimum capital required for thrift banks with head office in Metro Manila is P=1 billion. The details of the Bank’s qualifying capital as reported to the BSP are shown in Note 28.

108 22. Other Operating Income, Net

This account consists of:

Note 2018 2017 Service charges and fees P=50,694,228 P=37,855,278 Gain on disposal of investment properties 15 38,760,179 5,169,727 Unrealized gain on initial recognition of investment properties 15 6,127,417 433,506,333 Bank commissions 5,851,276 1,517,592 Gain on disposal of financial assets at FVOCI and AFS investments 10 2,983,636 1,786,895 Penalties 1,963,845 5,288,970 Income from investment in associate 12 1,541,542 1,934,124 Rental income 1,176,096 888,878 Income from trust operations - 1,591,883 Gain on disposal of furniture, fixtures and transportation equipment 13 - 154,861 Gain on disposal of financial assets at FVTPL 9 - 142,419 Loss on fair value adjustment 9 (4,956,634) - Loss from disposal of assets held for sale 14 (20,061,772) (843,068) Miscellaneous 8,612,596 5,864,979 P=92,692,409 P=494,858,871

23. Other Operating Expenses

This account consists of:

2018 2017 Compensation and fringe benefits P=128,786,249 P=120,995,955 Occupancy and equipment-related 104,110,563 89,827,551 Taxes and licenses 31,924,655 27,533,122 Documentary stamps 21,579,611 10,794,081 Representation and entertainment 19,138,558 20,766,135 Insurance 18,487,698 13,521,994 Postage, telephone and telegraph 7,032,907 6,253,210 Stationery and supplies 5,765,822 4,444,955 Transportation and travel 2,844,137 3,379,334 Management and professional fees 2,034,906 2,522,959 Fuel and lubricants 1,655,257 1,417,887 Miscellaneous 22,236,425 29,736,174 P=365,596,788 P=331,193,357

Compensation and fringe benefits

Note 2018 2017 Salaries, wages and other benefits P=120,794,762 P=116,291,232 Retirement benefit cost 25 4,622,860 3,328,252 Directors’ fees 3,368,627 1,376,471 P=128,786,249 P=120,995,955

109 Salaries, wages and other benefits include salaries and wages, medical, dental and hospitalization, SSS, Medicare and Pag-ibig fund contributions, and other fringe benefits.

Occupancy and equipment-related

Notes 2018 2017 Rent P=34,707,129 P=32,897,709 Depreciation and amortization 13, 15, 17 30,567,500 25,515,406 Security and janitorial services 31,853,278 21,618,349 Power, light and water 2,887,458 6,585,341 Repairs and maintenance 4,095,198 3,210,746 P=104,110,563 P=89,827,551

Miscellaneous expense

Note 2018 2017 Litigation costs P=6,155,462 P=7,765,884 Information and technology 2,672,661 2,275,355 Medical and dental 2,482,509 2,423,024 Supervision fees 2,259,269 2,012,643 Advertising 1,790,494 851,660 Freight fees 1,524,964 871,174 Finance charges 1,156,644 1,318,919 Membership fees and association dues 272,357 630,117 Fines and penalties 131,318 8,290,146 Periodical and magazine 71,397 73,630 Donations and charitable contributions 12,500 16,000 Others 3,706,850 3,207,622 P=22,236,425 P=29,736,174

24. Income Taxes

Under Philippine tax laws, the RBU of the Bank is subject to percentage and other taxes as well as income taxes. Percentage and other taxes paid consist principally of gross receipts tax and documentary stamp taxes (DST). These are recorded as part of taxes and licenses account (see Note 23). Income taxes include regular corporate income tax (RCIT) and 20% final taxes paid, which is a final withholding tax on gross interest income from government securities and other deposit substitutes. The RCIT rate is reduced from 35% to 30% effective January 1, 2009 pursuant to Republic Act (RA) No. 9337, An Act Amending the National Internal Revenue Code.

Effective July 2008, RA No. 9504 was approved giving corporate taxpayers an option to claim itemized deduction or optional standard deduction equivalent to 40% of gross income. Once the option is made, it shall be irrevocable for the taxable year for which the option was made. The Bank opted to continue claiming itemized deduction for the years ended December 31, 2018 and 2017.

110 Current tax regulations also provide for the ceiling on the amount of Entertainment, Amusement and Recreation (EAR) expense that can be claimed as a deduction against taxable income. Under the regulations, EAR expense allowed as a deductible expense for a service company like the Bank is limited to the actual EAR paid or incurred but not to exceed 1% of net revenue. EAR expense amounted to P=19,138,558 and P=20,766,135 for the years ended December 31, 2018 and 2017, respectively (see Note 23). The regulations also provide for MCIT of 2% on modified gross income and allow a NOLCO. MCIT is recognized when it is higher than the RCIT. The MCIT and NOLCO may be applied against the Bank’s income tax liability and taxable income, respectively, for the three immediately succeeding taxable years.

FCDU

RA No. 9294, An Act Restoring the Tax Exemption of Offshore Banking Units (OBUs) and FCDUs, the existing applicable tax regulation governing the taxation of FCDU provides, among others, the following:

 Offshore income or the income derived by FCDUs from foreign currency transactions with non- residents, OBUs in the Philippines, local commercial banks including branches of foreign banks that may be authorized by the BSP to transact business with FCDUs and other depository banks under the foreign currency deposit system shall be exempt from all taxes, except net income from such transactions as may be specified by the Secretary of Finance, upon recommendation by the Monetary Board to be subject to the regular income tax payable by banks;

 Gross onshore income or interest income from foreign currency loans granted by FCDUs to residents through offshore units in the Philippines or other depository banks under the expanded system shall be subject to a final tax at a rate of 10%; and

 Interest income derived by the resident individual or corporation on deposits with FCDUs and OBUs are subject to 7.5% final tax.

The components of income tax expense are shown below:

2018 2017 Current RBU P=9,392,749 P=3,377,092 FCDU - 146,017 9,392,749 3,523,109 Deferred 33,977,359 32,314,924 P=43,370,108 P=35,838,033

The current provision for corporate income tax in 2018 and 2017 represents regular corporate income tax.

111 The reconciliation between the statutory income tax rate on income before income tax and the Bank’s effective income tax rate is as follows:

2018 2017 Income before income tax P=135,500,984 P=106,368,319

Statutory income tax rate 40,650,295 31,910,496 Add (Deduct) tax effects of: Non-deductible expenses 11,770,434 11,740,703 Expired excess MCIT over RCIT 3,195,184 2,351,733 FCDU income 498,332 (292,035) Reversal of allowance for impairment loss - 926,084 Tax-paid and tax-exempt income (12,744,137) (10,798,948) Effective income tax rates P=43,370,108 P=35,838,033

The details of the Bank’s NOLCO which can be claimed as a tax deduction against future taxable income are as follows:

Year incurred Amount Applied Expired Unrecognized Balance Expiry 2017 P=11,770,208 P=- P=- P=- P=11,770,208 2020 2018 13,302,266 P=- P=- P=- 13,302,266 2021 P=25,072,474 P=- P=- P=- P=25,072,474

Details of the Bank’s excess MCIT over RCIT follow:

Year Excess MCIT incurred RCIT MCIT over RCIT Applied Expired Balance Expiry 2015 P=- P=3,195,184 P=3,195,184 P=- (P=3,195,184) P=- 2018 2016 - 3,874,205 3,874,205 - - 3,874,205 2019 2017 - 3,377,092 3,377,092 - - 3,377,092 2020 2018 - 9,392,749 9,392,749 - - 9,392,749 2021 P=- P=19,839,230 P=19,839,230 P=- (=P3,195,184) P=16,644,046

112 Details of and movements in net deferred tax assets are recognized as follows:

2017 2018 Credited Charged Credited (Charged) to to OCI (Charged) to Charged to profit or loss during the profit or loss OCI during 2016 during the year year 2017 during the year the year 2018 Deferred tax assets Allowance for impairment P=75,495,906 P=89,408,855 P=- P=164,904,761 (P=110,537,087) =P- P=54,367,674 Provision for retirement 1,557,762 998,476 - 2,556,238 1,386,858 - 3,943,096 Unamortized excess of contribution over current service 3,578,811 (820,540) - 2,758,271 (820,540) - 1,937,731 MCIT 9,421,122 1,025,359 - 10,446,481 6,197,565 - 16,644,046 NOLCO - 3,531,062 - 3,531,062 3,990,680 - 7,521,742 Unrealized foreign exchange losses, net - 2,868,065 - 2,868,065 (2,868,065) - - Effect of PAS 17 adjustment 109,517 172,867 - 282,384 330,327 - 612,711 Actuarial loss on retirement liability - - - - - 1,763,389 1,763,389 Unrealized fair value gain from financial asset at FVPL - - - - 1,486,990 - 1,486,990 90,163,118 97,184,144 - 187,347,262 (100,833,272) 1,763,389 88,277,379

Deferred tax liabilities Actuarial gain on retirement liability (687,662) - 335,219 (352,443) - 352,443 - Unrealized gain on initial recognition of investment properties (8,468,199) (130,051,900) - (138,520,099) 65,732,089 - (72,788,010) Unrealized foreign exchange losses (gains), net (552,832) 552,832 - - (431,840) - (431,840) (9,708,693) (129,499,068) 335,219 (138,872,542) 65,300,249 352,443 (73,219,850) P=80,454,425 (P=32,314,924) P=335,219 P=48,474,720 (P=35,533,023) P=2,115,832 P=15,057,529

113 The movements of deferred tax assets and liabilities are accounted for as follows:

2018 2017 Balance at beginning of year P=48,474,720 P=80,454,425 Adjustment on opening balance (1,555,664) - Amounts recognized in profit or loss (33,977,359) (32,314,924) Amounts recognized in other comprehensive income 2,115,832 335,219 P=15,057,529 P=48,474,720

Movements in income tax payable (overpayment) follow:

2018 RBU FCDU Total Balance at January 1 (P=2,640,555) P=146,017 (P=2,494,538) Charged to profit or loss 9,392,749 - 9,392,749 Income tax paid (4,453,321) (146,017) (4,599,338) Income tax payable P=2,298,873 P=- P=2,298,873

2017 RBU FCDU Total Balance at January 1 P=2,403,608 P=64,644 P=2,468,252 Charged to profit or loss 3,377,092 146,017 3,523,109 Income tax paid (8,421,255) (64,644) (8,485,899) Income tax payable (Prepaid income taxes) (P=2,640,555) P=146,017 (P=2,494,538)

25. Retirement Benefits

The Bank has a funded, non-contributory defined benefit plan covering all of its regular and full- time employees. Benefits are based on the employee’s year of service. The fund is administered by a retirement plan trustee. The retirement plan meets the minimum retirement benefit specified under RA No. 7641. The actuarial present value of the retirement liability under the plan is measured in terms of actuarial assumptions of mortality, investment yield and salary increase rates.

The retirement benefit is ranging from one hundred percent (100%) to one hundred fifty percent (150%) of plan salary for every year of credited service. Benefits are paid in lump sum upon retirement or separation in accordance with the terms of the plan.

The Bank has engaged the services of an independent actuarial consulting firm to perform the actuarial valuation of the Bank’s retirement liability as of December 31, 2018 and 2017. The valuation results were computed using the projected unit credit method as prescribed by the accounting standards.

The Bank has a funded defined benefit plan covering all regular employees. The latest actuarial valuation is as at December 31, 2018.

114 The components of retirement benefits charged to operations are as follows (see Note 23):

2018 2017 Current service cost P=3,256,289 P=3,071,363 Interest cost on DBO 2,525,332 2,336,562 Interest income on plan assets (1,158,761) (2,079,673) P=4,622,860 P=3,328,252

The cumulative remeasurement losses (gains) recognized in other comprehensive income as at December 31 follows:

2018 Accumulated Remeasurement (Loss) Gain Deferred Tax Net Balance at beginning of year (P=1,174,812) (P=352,443) (P=822,369) Actuarial loss - DBO 6,014,998 1,804,499 4,210,499 Remeasurement loss 1,037,775 311,333 726,442 Balance at end of year P=5,877,961 P=1,763,389 P=4,114,572

2017 Accumulated Remeasurement (Loss) Gain Deferred Tax Net Balance at beginning of year (P=2,292,208) (P=687,662) (P=1,604,545) Actuarial gain – DBO (785,261) (235,578) (549,683) Remeasurement loss 1,902,657 570,798 1,331,859 Balance at end of year (P=1,174,812) (P=352,442) (P=822,369)

The components of retirement liability recognized in the statement of financial position are as follows:

2018 2017 Present value of retirement liability P=50,102,472 P=44,304,067 Fair value of plan asset (3,821,172) (36,958,086) Balance at end of year P=46,281,300 P=7,345,981

The changes in the present value of the retirement liability are as follows:

2018 2017 Balance at beginning of year P=44,304,067 P=43,430,513 Current service cost 3,256,289 3,071,363 Remeasurement loss (gain) 6,014,998 (785,261) Interest cost 2,525,332 2,336,562 Benefits paid from plan asset (5,998,214) (3,749,110) Balance at end of year P=50,102,472 P=44,304,067

115 The changes in fair value of plan asset are as follows:

2018 2017 Balance at beginning of year P=36,958,086 P=40,530,180 Benefits paid (405,839) (3,749,110) Interest income 1,158,761 2,079,673 Remeasurement gain (1,037,775) (1,902,657) Withdrawal (32,852,061) - Balance at end of year P=3,821,172 P=36,958,086

The assumptions used to determine retirement liability are as follows:

2018 2017 Discount rate 7.53% 5.70% Salary increase rate 5.00% 4.00%

The sensitivity analyses based on reasonably possible changes of the assumptions are as follows:

2018 2017 Decrease in DBO if discount rate increased by 100 basis points (bps) (P=1,240,299) (2.50%) (P=1,286,815) (2.90%) Increase in DBO if discount rate decreased by 100 bps 1,358,689 2.70% 1,404,604 3.20% Increase in DBO if salary rate increased by 100 bps 1,379,235 2.80% 1,009,554 2.30% Decrease in DBO if salary rate decreased by 100 bps (1,280,506) (2.60%) (933,259) (2.10%) Increase in DBO if no attrition rates 6,816,430 13.60% 8,937,231 20.20%

The foregoing sensitivity analyses have been determined based on a method that extrapolates the impact on net defined benefit obligation as a result of reasonable changes in key assumptions occurring at the end of the reporting year.

26. Related-Party Disclosures

In the ordinary course of business, the Bank has loans and other transactions with its affiliates and certain Directors, Officers, Stockholders and their Related Interests (DOSRI) within limits prescribed by the BSP.

Significant related party transactions and balances are summarized below:

(a) DOSRI loans

Under the Bank’s policy, the transactions with its DOSRI, which are comprised of loans and other transactions, are made substantially on the same terms as loans to other individuals and businesses of comparable risks. Under the Banks DOSRI policy and current BSP regulations, the amount of individual accommodations to DOSRI, of which 70% must be secured, should not exceed the amount of their respective deposits and book values of their respective investment in the Bank. Such limit does not apply to loans secured by assets considered as non-risk as defined in the regulations. In the aggregate, loans to DOSRI should not exceed the Bank’s total regulatory capital or 15% of its total loan portfolio, whichever is lower. As at December 31, 2018 and 2017, the Bank is in compliance with the said regulatory requirements.

116 Information on loans to DOSRI is as follows:

2018 2017 Total outstanding DOSRI loans P=31,417,390 P=15,812,504

% of DOSRI loans to total loans 0.73% 0.40% % of unsecured DOSRI loans to total DOSRI loans 10.59% 15.88% % of past due DOSRI loans to total DOSRI loans 0.24% 0.07% % of non-performing DOSRI loans to total DOSRI loans - 0.07%

Interest income 1,962,010 429,448 Provision for impairment losses 39,233 22,989 Allowance for impairment 39,233 22,989

The year-end balances of DOSRI-related deposits and interest expense included in the Bank’s financial statements follow:

2018 2017 Deposit liabilities P=404,239,872 P=391,937,840 Interest expense 7,936,394 7,685,458

(b) Details of transactions and balances with related parties follow:

Nature of the Related consideration Amount Name of related party Nature of to be provided party relationship transaction Notes in settlement 2018 2017

(a) Unicapital Under Investment in 10 Cash P=12,945,700 P=12,945,700 Incorporated common shares of control stock (b) Uniguarantee Under Investment in 12 Cash 14,972,417 13,430,875 Insurance common associate Brokerage, control Inc. Share in net 12, 22 Cash 1,541,542 1,934,124 income of an associate

The terms of the lease of office premises with Majalco, Inc. are the same as those of the other lease arrangements of the Bank. The lease is payable in cash monthly. No guarantees were given or received by the Bank.

Key management personnel are persons having authority and responsibility for planning, directing and controlling the activities of the Bank, directly or indirectly, including any of its directors (whether executive or otherwise).

Short-term employee benefits received by key management personnel include all benefits constituting all forms of consideration paid, payable or provided by the Bank, or on its behalf, in exchange for services rendered to the Bank.

117 Details of key management compensation and directors’ remuneration follow:

2018 2017

Short-term employee benefits (including directors’ remuneration) P=47,195,169 P=41,951,468 Long-term employee benefits 4,725,000 -

27. Commitments and Contingencies

In the normal course of the Bank’s operations, there are various outstanding commitments and contingent liabilities which are not reflected in these financial statements. The Bank does not anticipate losses that will materially affect its assets and liabilities as a result of these transactions.

The following is a summary of contingencies and commitments arising from off-books items:

2018 2017 Late deposits/payments received P=181,689 P=505,508 Items held for safekeeping 43,110 14,769 Items held as collateral 6,055 13,269 Trust management accounts - 425,201,628 Spot foreign exchange contract - 29,746,422 P=230,854 P=455,481,596

There are also pending cases filed by and against the Bank arising from normal business operations. In the opinion of management, liabilities arising from these claims, if any, will not have any material effect on the financial statements of the Bank.

Leases

The Bank as lessee

The Bank leases several office premises of its head office and branches with various maturities that are renewable under certain terms and conditions. Rent expense for the years ended December 31, 2018 and 2017 amounted to P=34,707,129 and P=32,897,709, respectively (see Note 23). Rent expense paid to a related party in 2018 and 2017 amounted to P=12,771,871 each year (see Note 26).

The future minimum lease payments under non-cancellable operating leases are as follows:

2018 2017 Not later than one year P=19,909,270 P=15,170,977 Later than one year but not later than five years 51,003,457 40,409,883 Later than five years 6,016,905 4,735,917 P=76,929,632 P=60,316,777

The Bank as lessor

The Bank leased out several properties with various maturities that are renewable under certain terms and conditions. Rent income amounted to P=1,176,096 and P=888,878 of which P=44,550 and P=15,200 pertain to rent income from the lease of safety deposit boxes for the years ended December 31, 2018 and 2017, respectively (see Note 22).

118 The future minimum lease payments receivable under non-cancellable operating leases are as follows:

2018 2017 Not later than one year P=650,496 P=650,496 Later than one year but not later than five years 2,005,696 2,005,696 P=2,656,192 P=2,656,192

28. Financial Risk and Objectives and Policies

Objectives and Policies The Bank has significant exposure to the following financial risks primarily from its use of financial instruments:

. Foreign Currency Risk . Liquidity Risk . Credit Risk

This note presents information about the exposure to each of the foregoing risks, the objectives, policies and processes for measuring and managing these risks, and for management of capital.

Risk management framework

The BOD has the overall responsibility over the risk management system of the Bank. The BOD has created the Risk Management Committee (RMC) to have direct oversight over updating and implementing the Bank’s risk management policies and procedures. The RMC handles the day-today risk management functions through the Risk Management Department, which is directly responsible for the following:

 Managing credit, market, liquidity, operational, business and reputational risks in a coordinated manner at all relevant levels within the organization;  Ensuring that the business activities conducted within each division are consistent with risk limits that the RMC has set;  Formulating and implementing risk management policies, procedures and methodologies that are appropriate to the business activities within each division;  Approving transactional credit risk, market risk and liquidity risk limits;  Conducting periodic portfolio reviews to ensure that the portfolio of risks is within acceptable parameters; and  Developing and implementing risk and capital management infrastructures and systems that are appropriate for each division.

Foreign Currency Risk The functional currency is the Philippine peso, which is the denomination of the bulk of the Bank’s transactions. The exposure to foreign currency risk results from significant movements in foreign exchange rates that adversely affect the foreign currency-denominated transactions of the Bank. The risk management objective with respect to foreign currency risk is to reduce or eliminate earnings volatility and any adverse impact on equity.

119 Information on the Bank’s foreign currency-denominated monetary assets and their Philippine peso equivalents as at December 31 are as follows:

2018 2017 In Philippine In Philippine US Dollar Peso US Dollar Peso

Assets Cash on hand $599,627 P=31,528,388 $188,112 P=9,392,455 Due from other banks 4,977,245 261,703,529 5,477,238 273,478,494 Financial assets at FVOCI/ AFS investments 1,048,342 55,121,832 1,575,219 78,650,668 Loans and other receivables 7,916 416,219 310,169 15,486,716

6,633,130 348,769,968 7,550,738 377,008,333 Liabilities Deposit liabilities 6,586,421 346,200,958 6,821,294 340,587,203 Accrued expenses 85,272 4,483,611 29,982 1,497,024 Other liabilities 4 186 155 7,731 6,671,697 350,684,755 6,851,431 342,091,958 Net currency risk exposure ($38,567) (P=1,914,787) $699,307 P=34,916,375

Foreign currency-denominated deposits are generally used to fund the Bank’s foreign currency- denominated loan and investment portfolios in the FCDU. Banks are required by the BSP to match the foreign currency assets with the foreign currency liabilities held by the FCDU. Outside the FCDU, the Bank has additional foreign currency assets and liabilities in the RBU books.

The Bank manages its exposure to the effects of fluctuations in foreign currency exchange rates by complying with the existing regulatory guidelines on the RBU and FCDU, and by limiting such exposure within the limits that management believes to be relatively conservative for the size of the Bank.

The foreign exchange rates as at December 31, 2018 and 2017 are P=52.58 to US$1.00 and P=49.93 to US$1.00, respectively.

The management of foreign currency risk is also supplemented by monitoring the sensitivity of the Bank’s financial instruments to various foreign currency exchange rate scenarios.

120 The following tables demonstrate the sensitivity to a reasonably possible change in the US dollar exchange rate, with all other variables held constant, of the Bank’s income before tax (due to changes in the fair value of monetary assets and monetary liabilities) and equity (due to translation of results and financial position of foreign operations) as at December 31, 2018 and 2017.

2018 P=1 Decrease in the US Dollar P=1 Increase in the US Dollar Exchange Rate Exchange Rate Effect on Effect on Effect on Income before Equity Income before Effect on Equity Income Tax (Net of Tax) Income Tax (Net of Tax) Assets Cash on hand (P=599,627) (P=419,739) P=599,627 P=419,739 Due from other banks (4,977,245) (3,484,072) 4,977,245 3,484,072 Financial assets at FVOCI (1,048,342) (733,839) 1,048,342 733,839 Loans and other receivables (7,916) (5,541) 7,916 5,541

Liabilities Deposit liabilities 6,586,421 4,610,495 (6,586,421) (4,610,495) Accrued expenses 85,272 59,690 (85,272) (59,690) Other liabilities 4 3 (4) (3) P=38,567 P=26,997 (P=38,567) (P=26,997)

2017 P=1 Decrease in the US Dollar P=1 Increase in the US Dollar Exchange Rate Exchange Rate Effect on Effect on Income before Effect on Equity Income before Effect on Equity Income Tax (Net of Tax) Income Tax (Net of Tax) Assets Cash on hand (P=188,112) (P=131,678) P=188,112 P=131,678 Due from other banks (5,477,238) (3,834,067) 5,477,238 3,834,067 AFS investments (1,575,219) (1,102,653) 1,575,219 1,102,653 Loans and other receivables (310,169) (217,118) 310,169 217,118

Liabilities Deposit liabilities 6,821,294 4,774,906 (6,821,294) (4,774,906) Accrued expenses 29,982 20,987 (29,982) (20,987) Other liabilities 155 109 (155) (109) (P=699,307) (P=489,514) P=699,307 P=489,514

Exposures to foreign exchange rates vary during the year depending on the volume of overseas transactions. Nonetheless, the analysis above is considered to be representative of the Bank’s foreign currency risk.

Liquidity Risk Liquidity risk pertains to the risk that the Bank will encounter difficulty to meet payment obligations when they fall due under normal and stress circumstances.

The Bank’s objectives to manage its liquidity risk are as follows: (a) to ensure that adequate funding is available at all times; (b) to meet commitments as they arise without incurring unnecessary costs; (c) to be able to access funding when needed at the least possible cost; and (d) to maintain an adequate time spread of refinancing maturities.

121 The Bank constantly monitors and manages its liquidity position, liquidity gaps and surplus on a daily basis. A committed stand-by credit facility from several local banks is also available to ensure availability of funds when necessary.

The table below summarizes the maturity profile of the Bank’s financial assets and financial liabilities based on contractual undiscounted receipts and payments used for liquidity management.

Less than Over 2018 Carrying Amount On Demand 1 Year 1-5 Years 5 Years Financial assets Cash and other cash items P=137,854,417 P=137,854,417 P=- P=- P=- Due from BSP 623,882,607 623,882,607 - - - Due from other banks 587,732,415 35,214,492 552,517,923 - - Interbank call loans receivable 180,000,000 - 180,000,000 - - Financial assets at FVTPL 138,298,275 - 138,298,275 - - Financial assets at FVOCI 516,745,383 12,945,700 - 264,807,245 238,992,438 Loans and other receivables 4,276,899,146 - 4,276,899,146 - - Other assets* 8,279,118 8,279,118 - - - 6,469,691,361 818,176,334 5,147,715,344 264,807,245 238,992,438

Financial liabilities Deposit liabilities 6,688,423,330 1,128,819,357 5,302,930,154 241,666,707 15,007,112 Accrued interest and other expenses 56,050,393 9,302,643 28,385,613 16,368,271 1,993,866 Other liabilities 415,851,792 - 415,851,792 - - 7,160,325,515 1,138,122,000 5,747,167,559 258,034,978 17,000,978 Net assets (liabilities) (P=690,634,154) (=P319,945,666) (=P599,452,215) P=6,772,267 P=221,991,460

Less than Over 2017 Carrying Amount On demand 1 Year 1-5 Years 5 Years

Financial assets Cash and other cash items P=83,499,767 P=83,499,767 P=- P=- P=- Due from BSP 597,966,253 485,966,253 112,000,000 - - Due from other banks 370,534,529 39,800,039 330,734,490 - - Interbank call loans receivable 686,947,106 - 686,947,106 - - AFS investments 579,750,623 12,945,700 3,990,206 275,067,957 287,746,760 Loans and other receivables 4,435,498,704 263,410,993 1,082,795,456 2,493,201,409 596,090,846 Other assets* 8,028,131 8,028,131 - - - 6,762,225,113 893,650,883 2,216,467,258 2,768,269,366 883,837,606

Financial liabilities Deposit liabilities 6,534,949,531 1,022,168,627 5,140,190,034 344,773,399 27,817,471 Accrued interest and other expenses 45,072,914 18,750,474 15,558,450 8,063,760 2,700,230 Other liabilities 154,789,715 - 154,789,715 - - 6,734,812,160 1,040,919,101 5,310,538,199 352,837,159 30,517,701 Net assets (liabilities) P=27,412,953 (P=147,268,218) (P=3,094,070,941) P=2,415,432,207 P=853,319,905 *only includes petty cash fund and security deposits

122 Credit Risk Credit risk is the risk of financial loss to the Bank if a counterparty to a financial instrument fails to meet its contractual obligations. The Bank manages and controls credit risk by setting limits on the amount of risk it is willing to accept for individual counterparties, related groups of borrowers, for market segmentation, and industry concentrations, and by monitoring exposures in relation to such limits, among others. The same is true for treasury-related activities. Each business unit is responsible for the quality of its credit portfolio and for monitoring and controlling all credit risks in its portfolio. Regular reviews and audits of business units and credit processes are undertaken by Internal Audit Group.

Management of credit risk The Bank faces potential credit risks every time it extends funds to borrowers, commits funds to counterparties, guarantees the paying performance of its clients, invests funds to issuers (e.g., investment securities issued by either sovereign or corporate entities) or enter into either market- traded or over-the-counter derivatives, either through implied or actual contractual agreements (i.e., on- or off-balance sheet exposures). The Bank manages its credit risk at various levels (i.e., strategic level, portfolio level down to individual obligor or transaction) by adopting a credit risk management environment that has the following components:

 Formulating credit policies in consultation with business units, covering collateral requirements, credit/financial assessment, risk grading and reporting and compliance with regulatory requirements;  Establishment of authorization limits for the approval and renewal of credit facilities;  Limiting concentrations of exposure to counterparties and industries (for loans), and by issuer (for investment securities);  Utilizing an internal risk grading system in order to categorize exposures according to the risk profile. The risk grading system is used for determining impairment provisions against specific credit exposures. The current risk grading framework consists of ten grades reflecting varying degrees of risk of default and the availability of collateral or other credit risk mitigation; and  Monitoring compliance with approved exposure limits.

Credit risk at initial recognition The Bank uses internal credit assessment and approvals at various levels to determine the credit risk of exposures at initial recognition. Assessment can be quantitative or qualitative and depends on the materiality of the facility or the complexity of the portfolio to be assessed.

Modification In certain circumstances, the Bank modifies the original terms and conditions of a credit exposure to form a new loan agreement or payment schedule. The modifications can be given depending on the borrower’s or counterparty’s current or expected financial difficulty. The modifications may include, but are not limited to, change in interest rate and terms, principal amount, maturity date, date and amount of periodic payments and accrual of interest and charges

Financial information on the Bank’s maximum exposure to credit risk without considering the effects of collaterals and other risk mitigation techniques, is presented below.

2018 2017 Loans and receivables/Financial assets at amortized cost Due from BSP P=623,882,607 P=597,966,253 Due from other banks 587,732,415 370,534,529 Interbank call loans receivable 180,000,000 686,947,106 Loans and other receivables 5,494,610,681 4,435,498,704 Security deposits 8,211,818 7,960,631 Investments at FVOCI/AFS Investments 516,745,383 579,750,623 P=7,411,182,904 P=6,678,657,846

Collateral on loans and receivables includes real estate and chattel mortgages, guarantees, and other registered securities over assets. Generally, collateral is not held over loans and advances

123 to banks except for reverse repurchase agreements and certain due from other banks. Collateral usually is not held against investment securities, and no such collateral was held as of December 31, 2018 and 2017. Estimates of fair values of the collateral are based on the value of collateral assessed at the time of borrowing and are regularly updated according to internal lending policies and regulatory guidelines. The Bank is not permitted to sell or repledge the collateral in the absence of default by the counterparty.

Excessive risk concentration Credit risk concentrations can arise whenever a significant number of borrowers have similar characteristics and are affected similarly by changes in economic or other conditions. The Parent Company analyzes the credit risk concentration to an individual borrower, related group of accounts, industry, internal rating buckets, and security. For risk concentration monitoring purposes, the financial assets are broadly categorized into (1) loans and receivables and (2) trading and financial investment securities. To mitigate risk concentration, the Parent Company constantly checks for breaches in regulatory and internal limits.

124

Concentration of risk of financial assets with credit risk exposure

The analyses of concentrations of credit risk by industry at the financial reporting date based on the carrying amount (gross of allowance for impairment and unearned discount) are shown below:

2018 Due from BSP Interbank call and other loans Investments at Loans and other Security banks receivable FVOCI receivables deposits* Total Government P=623,882,607 P=180,000,000 P=448,677,850 P=- P=- P=1,252,560,457 Transportation, storage, and communication - - - 1,494,585,024 - 1,494,585,024 Consumption - - - 750,941,083 - 750,941,083 Real estate, renting, and business activities - - 34,685,879 552,770,997 5,111,238 592,568,114 Financial intermediaries 587,732,415 - 12,945,700 7,900,307 - 608,578,422 Manufacturing - - - 399,693,516 - 399,693,516 Wholesale and retail trade - - - 299,186,340 - 299,186,340 Agriculture, hunting, and forestry - - - 232,521,397 - 232,521,397 Mining and quarrying - - - 70,051,613 - 70,051,613 Health and social work - - - 52,363,341 - 52,363,341 Electricity, gas, and water - - 20,435,954 7,590,480 3,100,580 31,127,013 Construction - - - 408,629 - 408,629 Hotels and restaurants - - - 229,017 - 229,017 Other community, social, and personal service activities - - - 1,626,368,937 - 1,626,368,937

P=1,211,615,022 P=180,000,000 P=516,745,383 P=5,494,610,681 P=8,211,818 P=7,411,182,904

* included under other assets

125

2017 Due from BSP Interbank call AFS Loans and other Security and other banks loans receivable investments receivables deposits* Total Government P=597,966,253 P=536,947,106 P=488,154,255 P=- P=- P1,623,067,614 Transportation, storage, and communication - - - 1,494,585,024 - 1,494,585,024 Consumption - - - 750,941,083 - 750,941,083 Real estate, renting, and business activities - - 58,214,715 552,770,997 4,860,051 615,845,763 Financial intermediaries 370,534,529 150,000,000 12,945,700 7,900,307 - 541,380,536 Manufacturing - - - 399,693,516 - 399,693,516 Wholesale and retail trade - - - 299,186,340 - 299,186,340 Agriculture, hunting, and forestry - - - 232,521,397 - 232,521,397 Mining and quarrying - - - 70,051,613 - 70,051,613 Health and social work - - - 52,363,341 - 52,363,341 Electricity, gas, and water - - 20,435,953 7,590,480 3,100,580 31,127,013 Construction - - - 408,629 - 408,629 Hotels and restaurants - - - 229,017 - 229,017 Other community, social, and personal service activities - - - 567,256,960 - 567,256,960

P=968,500,782 P=686,947,106 P=579,750,623 P=4,435,498,704 P=7,960,631 P=6,678,657,846

126 The aging analyses of financial assets (gross of allowance for impairment and unearned discount) are as follows:

2018 Neither past due Past due but not impaired Total nor impaired 30 days 31-90 days 91-180 days > 180 days Impaired Due from BSP P=623,882,607 P=623,882,607 P=- P=- P=- P=- P=- Due from other banks 587,732,415 587,732,415 - - - - - Interbank call loans receivable 180,000,000 180,000,000 - - - - - Investments at FVOCI 516,745,383 516,745,383 - - - - - Loans and other receivables 5,494,610,681 3,967,982,899 21,867,628 14,822,669 53,017,984 1,187,721,683 249,197,818 Security deposits* 8,279,118 8,211,818 - - - - - P=7,549,104,621 P=5,884,555,122 P=21,867,628 P=14,822,669 P=53,017,984 P=1,187,721,683 P=249,197,818

2017 Neither past due Past due but not impaired Total nor impaired 30 days 31-90 days 91-180 days > 180 days Impaired Due from BSP P=597,966,253 P=597,966,253 P=- P=- P=- P=- P=- Due from other banks 370,534,529 370,534,529 - - - - - Interbank call loans receivables 686,947,106 686,947,106 - - - - - AFS investments 579,750,623 579,750,623 - - - - - Loans and other receivables 4,435,498,704 3,967,982,899 21,867,628 14,822,669 53,017,984 128,609,706 249,197,818 Security deposits* 7,960,631 7,960,631 - - - - - P=6,678,657,846 P=6,211,142,041 P=21,867,628 P=14,822,669 P=53,017,984 P=128,609,706 P=249,197,818

* included under other assets

127 Credit quality per class of financial assets

The credit grades used by the Bank in evaluating the credit quality of its financial assets which are consistent with the BSP guidelines for unclassified loans are defined as follows:

(a) High grade and low-risk loans are neither past due nor impaired loans which are fully secured by collateral and with good loan collection status. This category includes credit grades 1-3. High grade loans are those which have no default history and, thus, have a high probability of collection, as evidenced by counterparties having the ability to readily discharge their obligations.

(b) Standard grade and medium-risk loans are neither past due nor impaired loans and with partially secured loan status. This category includes credit grades 4-5. The standard grade category includes loans for which collections are probable due to the reputation and the financial stability of the counterparty but have been outstanding for a considerable length of time. There could be certain instances of default in the past but have been regularized already. Any collateral securing the loan is readily enforceable.

(c) Substandard grade and high-risk grade loans include neither past due nor impaired loans which have recurring loan collection default issues. Substandard grade loans are those where the counterparties are, most likely, not capable of honoring their financial obligations.

The Bank holds collateral against certain loans and receivables in the form of mortgage interest over property, other registered securities and guarantees. Estimates of fair value are based on the value of collateral assessed at the time of borrowing and are updated regularly.

Fair values of these collaterals are determined by the Bank’s internal appraisers or by accredited external appraisers. Normally, there are three approaches available to the Bank in arriving at their value of collateral (i.e., real estate and chattel). These are the (1) Cost Approach; (2) Market Data Approach; and (3) Income Approach.

The Cost Approach takes into consideration the current cost of reproducing a property less depreciation from all sources (i.e., deterioration, functional and economic obsolescence). On the other hand, the Market Data Approach takes into consideration the value indicated by the recent sales of comparable properties in the market. Lastly, the Income Approach takes into consideration the value which the property’s net earning power will support based upon capitalization of net income.

In most cases, the Bank utilizes all three approaches. However, the Bank believes that the appraisal values determined through the Market Data Approach have been proven to be more significant than those determined from the other two approaches, yet it will use all three as a check against each other, and to test its own judgment.

128 The tables below show the credit quality by class of financial assets (gross of allowance for impairment and unearned discount) as at December 31:

2018 Neither past due nor impaired High Standard Substandard grade grade grade Total

Loans and receivables Due from BSP P=623,882,607 P=- P=- P=623,882,607 Due from other banks 587,732,415 - - 587,732,415 Interbank call loans receivable 180,000,000 - - 180,000,000 Loans and other receivables 3,413,301,504 463,312,377 91,369,018 3,967,982,899 Security deposits* 8,211,818 - - 8,211,818 Investments at FVOCI 516,745,383 - - 516,745,383

P=5,329,873,727 P=463,312,377 P=91,369,018 P=5,884,555,122

2017 Neither past due nor impaired High Standard Substandard grade grade grade Total

Loans and receivables Due from BSP P=597,966,253 P=- P=- P=597,966,253 Due from other banks 370,534,529 - - 370,534,529 Interbank call loans receivable 686,947,106 - - 686,947,106 Loans and other receivables 3,413,301,504 463,312,377 91,369,018 3,967,982,899 Security deposits* 7,960,631 - - 7,960,631 AFS investments 579,750,623 - - 579,750,623 P=5,656,460,646 P=463,312,377 P=91,369,018 P=6,211,142,041

129 Other Market Price Risk The Bank’s market price risk arises from its investments carried at fair value (Financial assets at FVOCI). The Bank manages its risk arising from changes in market price by monitoring the changes in the market price of the investments.

Capital Management

The primary objectives of the Bank’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 Bank manages its capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of its activities. No changes were made in the Bank’s objectives, policies and processes from the previous year.

Regulatory qualifying capital

Under existing BSP regulations, the determination of the Bank’s compliance with regulatory requirements and ratios is based on the amount of the Bank’s “unimpaired capital” (regulatory net worth) for reporting to the BSP, which is determined on the basis of regulatory accounting policies which differ from PFRSs in some respects.

The BSP sets and monitors compliance with minimum capital requirements by banks. In implementing current capital requirements, the BSP has issued Circular No. 538 which implemented the Revised Risk-Based Capital Adequacy Framework under Basel II effective on July 1, 2007. It requires the Bank to maintain a prescribed risk-based capital adequacy ratio (expressed as a percentage of qualifying capital to risk weighted assets) of not less than 10%.

The details of the Bank’s capital-to-risk assets ratio (CAR) as reported to the BSP follow (in thousands except for percentages):

Note 2018 2017

Tier 1 (Core) capital Common shares (Note 23) 21 P=921,990 P=921,990 Share premium (Note 23) 21 48,172 48,172 Surplus free 323,566 221,394 Cumulative foreign currency translation 196 2 Less: Deferred tax assets 38,764 51,927 Unsecured credit accommodations to DOSRI 3,288 2,501 Total Tier 1 capital 1,251,872 1,137,130 Tier 2 (Supplementary) capital General loan loss provision 16 39,607 35,319 Total qualifying capital P=1,291,478 P=1,172,449 Risk-weighted assets P=7,918,508 P=6,981,318 CAR 16.31% 16.79%

The Bank has exceeded the minimum risk-based capital adequacy ratio, expressed as a percentage of qualifying capital to risk-weighted assets, of not less than 10% as required by the BSP; its CAR being 16.12% and 16.79% as of December 31, 2018 and 2017, respectively.

130 The details of the Bank’s CAR as at December 31, 2018 based on the audited financial statements follow (in thousands except for percentage):

Tier 1 (Core) capital Common shares 21 P=921,990 Share premium 21 48,172 Surplus free 317,392 Cumulative foreign currency translation 196 Less: Deferred tax assets 15,058 Unsecured credit accommodations to DOSRI 3,288 Total Tier 1 capital 1,269,404 Tier 2 (Supplementary) capital General loan loss provision 16 6,246 Total qualifying capital P=1,275,650 Risk-weighted assets P=7,913,332 CAR 16.12%

Qualifying capital consists of Tier 1 and Tier 2 capital elements, net of required deductions from capital. Tier 1 capital includes paid-up capital, retained earnings and current year profit. Deferred income tax and total outstanding unsecured credit accommodations, both direct and indirect, to DOSRI are considered as deductions from the Tier 1 capital. On the other hand, Tier 2 capital is comprised of general loan loss provision which is limited to 1% of credit risk-weighted assets.

Furthermore, the BSP, in its Circular No. 854 dated October 29, 2014 and effective on November 13, 2014, increased the minimum capital requirement for all bank categories to ensure that banks stand on a strong capital base to support a threshold scale of operations to operate viably and service effectively the needs of clients. As provided by this circular, banks shall be allowed five (5) years from the effectivity to meet the required minimum capital requirements. Banks which are not meeting the minimum capital must submit to the BSP an acceptable capital build-up program for this purpose within one (1) year from the effectivity of this circular. The new minimum capital requirement for the Bank is P=1 billion.

Failure to comply with the new minimum capital requirement by November 19, 2019 may subject the Bank to appropriate actions and/or may be imposed with sanctions by the BSP.

Based on the information above, the Bank’s capital as at December 31, 2016 is below the new minimum capital requirement of P=1 billion. On November 3, 2015, the Bank submitted a capital build-up program to the BSP which details the business plan of the Bank for the years 2015 to 2019 in order to generate enough income that will be sufficient to cover the capital deficiency.

In 2017, the Bank has certified with BSP that it has complied with the capital build-up program approved by the monetary board in its Resolution No. 1049 date June 23, 2017.

The Bank has exceeded the minimum capitalization requirement for thrift banks, with Head Office in National Capital Region and having 11 to 50 branches, of not less than P=1 billion adjusted capital as required by BSP; its adjusted capital being P=1,217,467,142 as at December 31, 2018.

131 The details of the Bank’s adjusted capital computed in accordance with the provisions of Sec XII of MORB as at December 31, 2018 based on the audited financial statements follow:

Total Capital P=1,235,812,671 Less: a. Unbooked valuation reserves and other capital adjustments by BSP - b. Unsecured credit accommodations, to DOSRI 3,288,000 c. Unsecured loans to subsidiaries and affiliates - d. Deferred tax 15,057,529 e. Revaluation reserve of bank assets - f. Equity investment of a bank in another bank or enterprise with reciprocal investment to the bank - Adjusted Capital P=1,217,467,142

Capital allocation

The allocation of capital between specific operations and activities is, to a large extent, driven by optimization of the return achieved on the capital allocated. The amount of capital allocated to each operation or activity is based primarily upon the regulatory capital, but in some cases the regulatory requirements do not reflect fully the varying degrees of risk associated with different activities. In such cases, the capital requirements may be flexed to reflect differing risk profiles, subject to the overall level of capital to support a particular operation or activity not falling below the minimum required for regulatory purposes. The process of allocating capital to specific operations and activities is undertaken by Capital and Risk Committee, which is independent of the business and operational units.

Although the maximization of the return on risk-adjusted capital is the principal basis used in determining how capital is allocated within the Bank to particular operations or activities, it is not the sole basis used for decision making. Potential synergies with other operations and activities, the availability of management and other resources, and the fit of the activity with the Bank’s longer term strategic objectives are also taken into consideration. The Bank’s policies in respect of capital management and allocation are reviewed regularly by the BOD.

29. Financial Assets and Financial Liabilities

The table below presents a comparison by category of carrying amounts and fair values of the Bank’s financial instruments as at December 31, 2018 and 2017:

2018 2017 Carrying Amount Fair Value Carrying Amount Fair Value Financial assets at amortized cost Cash and other cash items P=137,854,417 P=137,854,417 P=83,499,767 P=83,499,767 Due from BSP 623,882,607 623,882,607 597,966,253 597,966,253 Due from other banks 587,732,415 587,732,415 370,534,529 370,534,529 Interbank call loans receivable 180,000,000 180,000,000 686,947,106 686,947,106 Loans and other receivables, net 5,355,420,665 5,355,420,665 3,930,168,105 3,930,168,105 Other assets 8,279,118 8,279,118 8,028,131 8,028,131 Investments at FVTPL 138,298,275 138,298,275 - - Investments at FVOCI/AFS investments 516,745,383 516,745,383 579,750,623 579,750,623 P=7,548,212,880 P=7,548,212,880 P=6,256,894,514 P=6,256,894,514

Financial liabilities at amortized cost Deposit liabilities P=6,688,423,330 P=6,688,423,330 P=6,534,949,531 P=6,534,949,531 Accrued interest and other expenses 55,508,416 55,508,416 45,072,914 45,072,914 Other liabilities 415,851,792 415,851,792 154,789,715 154,789,715 P=7,159,783,538 P=7,159,783,538 P=6,734,812,160 P=6,734,812,160

132 The following methods and assumptions are used to estimate the fair value of each class of financial instruments:

Cash and Cash Equivalents and Receivables. The carrying amounts of cash and cash equivalents, and receivables approximate fair values primarily due to the relatively short-term maturities of these financial instruments.

Financial assets at FVOCI. The fair values of publicly traded instruments and similar investments are based on quoted market prices in an active market. Unquoted equity securities are carried at cost less impairment.

Accrued Interest and Other Expenses and Other Liabilities The carrying amount of accounts payable and other current liabilities approximates fair value due to the relatively short-term maturity of this financial instrument.

Fair Value Hierarchy Financial assets and financial liabilities measured at fair value in the statements of financial position are categorized in accordance with the fair value hierarchy. This hierarchy groups financial assets and financial liabilities into three levels based on the significance of inputs used in measuring the fair value of the financial assets and financial liabilities.

The table below analyzes financial instruments carried at fair value by valuation method:

2018 Level 1 Level 2 Level 3 Total Financial Assets Financial assets at FVOCI P=516,745,383 P=- P=- P=516,745,383 Financial assets at FVTPL P=138,298,275 - - P=138,298,275

2017 Level 1 Level 2 Level 3 Total Financial Assets AFS investments P=579,750,623 P=- P=- P=579,750,623

The Bank has no financial instruments valued based on Level 2 and 3 as at December 31, 2018 and 2017.

In 2018 and 2017, there were no transfers between Level 1 and Level 2 fair value measurements, and no transfers into and out of Level 3 fair value measurement.

133 30. Other Matters

(a) Contingencies The Bank is a party to certain lawsuits or claims filed by third parties which are either pending decision by the courts or are subject to settlement agreements. The outcome of these lawsuits or claims cannot be presently determined. In the opinion of management and its legal counsel, the eventual liability from these lawsuits or claims, if any, will not have a material effect on the financial statements of the Bank.

(b) Commitments There were no outstanding purchase commitments as at December 31, 2018 and 2017.

(c) Foreign Exchange Rates The foreign exchange rates used in translating the US dollar monetary assets and liabilities to Philippine peso were closing rates of P=52.58 and P=49.93 in 2018 and 2017, respectively, for statements of financial position accounts; and average rates of P=50.40 and P=47.48 in 2018 and 2017, respectively, for income and expense accounts.

(d) Certain accounts in prior year have been reclassified for consistency with the current period presentation. These reclassifications had no effect on the reported financial performance for any period.

31. Reclassifications of Prior Year’s Financial Statements

The following reconciliation shows the effect of the reclassification of account balances as at December 31, 2017 in conformity with the presentation of balances as at December 31, 2018.

As previously Effect of Financial statement line item reported reclassification As reclassified Investment properties, net P=943,556,202 (P=5,588,406) P=937,967,796 Other assets 141,267,264 5,588,406 146,855,670

32. Events After the Financial Reporting Date

The Board of Directors of the Bank approved the recommendation of the Executive Committee for the closure of Trust and Investment Department and the winding down of existing Trust accounts over a period of six (6) months during its Board Meeting dated October 11, 2017. BSP has been notified about this closure with reference to the letter sent by the Bank on October 12, 2017 and received by the former on October 18, 2017.

The closure was brought about by the Bank’s shift in business strategy to focus on retail accounts after a thorough assessment of the current and prospective market situation and economic trends.

On February 14, 2019, the Monetary Board approved the surrender of Malayan Bank Savings and Mortgage Bank, Inc.’s trust license and revoked its authority to conduct trust and other fiduciary business.

134 33. Supplementary Information Required by the BIR

A. In compliance with the requirements of RR No. 15-2010 issued on November 25, 2010, hereunder are the information on taxes, duties and license fees paid or accrued during the period the taxable year ended December 31, 2018:

(a) Withholding taxes

Withholding taxes on compensation and benefits P=14,367,057 Final withholding taxes on interest on deposits 25,040,158 Expanded withholding taxes 3,196,120 Fringe benefit taxes 89,270 P=42,692,605

(b) Documentary stamp taxes

On loan and deposits instruments P=21,579,611

Gross receipts tax P=27,470,975 Real property tax 109,275 License and permit fees 38,080 Registration fees 22,313 Others 4,284,012 P=31,924,655

(d) Deficiency tax assessments and tax cases

As of December 31, 2018, the Bank has no pending tax court cases and has not received any tax assessment notices from the BIR.

B. RR No. 19-2011 issued on December 9, 2011 requires the disclosure of the schedules of taxable revenues, cost of sales/services, non-operating and taxable other income, itemized deductions, taxes and licenses and other significant tax information in the notes to financial statements.

Following are the required schedules on compliance with the said revenue issuances:

(a) Revenue

Exempt Special Regular Total Sale of services P=34,088,289 P=4,729,232 P=459,979,306 P=498,796,827

(b) Cost of services

Exempt Special Regular Total Direct charges – Salaries, wages and benefits P=6,938,622 P=133,832 P=109,410,493 P=116,482,947 Direct charges – Others 13,903,254 3,716,065 180,677,914 198,297,233 P=20,841,876 P=3,849,897 P=290,088,407 P=314,780,180

135 (c) Other taxable income not subjected to final tax

Exempt Special Regular Total Gain on disposal of assets acquired P=- P=- P=230,954,746 P=230,954,746 Service charges and fees 15,750 49,282,768 49,298,518 Miscellaneous 1,541,542 271,274 19,509,020 21,321,836 P=1,541,542 P=287,024 P=299,746,534 P=301,575,100

(d) Ordinary allowable itemized deductions

Exempt Special Regular Total Bad debts P=- P=- P=250,701,904 P=250,701,904 Rental 14,441 45,753 33,545,846 33,606,040 Taxes and licenses 445,509 572,860 30,906,286 31,924,655 Depreciation 744,753 - 21,820,773 22,565,526 Janitorial and messengerial services 163,623 43,922 19,848,059 20,055,604 Representation and entertainment 13,268,937 - 5,869,621 19,138,558 Security services - - 11,797,675 11,797,675 Communication, light and water 594,275 25,464 9,300,626 9,920,365 Office supplies 341,883 - 5,423,939 5,765,822 Amortization – leasehold rights and improvements - - 5,670,793 5,670,793 Insurance - - 5,420,663 5,420,663 Other services 305,675 - 4,849,495 5,155,170 SSS, GSIS, Philhealth, HDMF and other contributions 258,160 10,492 4,043,162 4,311,814 Repairs and maintenance 242,824 - 3,852,374 4,095,198 Directors’ fees 199,742 - 3,168,885 3,368,627 Transportation and travel 171,621 12,535 2,659,981 2,844,137 Amortization of past service cost - - 2,735,134 2,735,134 Amortization of software cost - - 2,331,181 2,331,181 Professional fees 120,659 - 1,914,247 2,034,906 Advertising and promotions 106,167 - 1,684,327 1,790,494 Fuel and oil 98,148 - 1,557,109 1,655,257 Commissions 144,899 321,171 690,573 1,156,643 Fringe benefits 5,549 - 88,036 93,585 Charitable contributions 741 - 11,759 12,500 Miscellaneous 334,744 2,625,821 25,312,178 28,272,743 Others: Documentary stamps - - 21,579,611 21,579,611 Litigation costs - - 6,155,462 6,155,462 P=17,562,350 P=3,658,018 P=482,939,699 P=504,160,067

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