SEC Number AS096-005555

File Number

PHILIPPINE NATIONAL BANK

AND SUBSIDIARIES
(Company’s Full Name)

Pres. Diosdado P. Macapagal Boulevard, Pasay City

(Company’s Full Name)

891-6040 to 70
(Telephone Number)

(Calendar Year Ended)

SEC FORM 17-A REPORT

Form Type

(Amendment Designation (if applicable)

December 31, 2005

Period Ended Date

LISTED
(Secondary License Type and File Number)

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 SECURITIES AND EXCHANGE COMMISSION
SEC FORM 17-A

ANNUAL REPORT PURSUANT TO SECTION 17 OF THE SECURITIES REGULATION

CODE AND SECTION 141 OF CORPORATION CODE OF THE PHILIPPINES

1. For the fiscal year ended December 31, 2005

2. SEC ID No. AS096-005555 3. BIR Tax Identification No. 000-188-209

4. Exact name of issuer as specified in its charter: Philippine National Bank

5. Philippines 6. (SEC Use Only)

Province, Country or other jurisdiction of Industry Classification Code:
Incorporation or organization

7. PNB Financial Center, Pres. Diosdado P. Macapagal Blvd, Pasay City 1300
Address of principal office Postal Code

8. (632)/891-60-40 up to 70 _
Issuer’s telephone number, including area code
9. N/A .
Former name, former address, and former fiscal year, if changed since last report

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

11. Are any or all of these securities listed on the Philippine Stock Exchange.
Yes [ √ ] No [ ]

If yes, state the name of such stock exchange and the classes of securities listed therein:
Philippine Stock Exchange Common Stock

12. Check whether the issuer:

(a) has filed all reports required to be filed by Section 17 of the SRC and SRC Rule 17.1
thereunder or Section 11 of the RSA and RSA Rule 11 (a) – 1 thereunder, and Sections 26
and 141 of The Corporation Code of the Philippines during the preceding twelve (12)
months (or for such shorter period that the registrant was required to file such reports):
Yes [ √ ] No [ ]

(b) has been subject to such filing requirements for the past ninety (90) days
Yes [√ ] No [ ]

13. Aggregate market value of the voting stock held by non-affiliates: P20,755,012,080 *

*518,875,302 common shares @ P40 par value

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 PART I - BUSINESS AND GENERAL INFORMATION

Item 1. Business

1. Business Development

The Philippine National Bank (PNB, the Parent Company) was established by the
Government of the Philippines on July 22, 1916 as an instrument of economic development.
In addition to engaging in the general commercial banking business, PNB also served as the
country’s de facto central bank until 1949 when the Central Bank of the Philippines was
created. Through the years, PNB has led the banking industry with its introduction of many
innovations such as the bank on wheels, computerized banking, ATM banking, mobile money
changing, and domestic traveler’s checks. To date, PNB boasts of the widest overseas
network as well as one of the most widespread domestic branch networks among banks
operating in the country.

Pursuant to its policy of rationalizing the Government’s involvement in corporate ventures

and privatization of GOCCs under Proclamation No. 50, the Government offered to the
Philippine public 30% of the outstanding shares of the Bank in June 1989. The Government
disposed of 13% and 7.2% of the outstanding shares in PNB to the Philippine public in March
1992 and December 1995, respectively.

PNB is on the fourth year of its 5-year rehabilitation plan approved by the Bangko Sentral ng
Pilipinas (BSP). The said rehabilitation plan which was signed in May 2002 stipulated the
following financial components/conditions: P7.8 billion of the P25 billion assistance
extended by the BSP and Philippine Deposit Insurance Corp. (PDIC) would be converted into
equity; PNB will partially settle P10 billion of its obligation by way of dacion en pago
through the assignment of government and government-related receivables; and PNB will
maintain P6.1 billion as a ten-year loan at an interest rate equivalent to the 91-day T-Bill rate
plus 1 percentage point to be re-priced quarterly.

Subsequently, PNB secured the consent of the Securities and Exchange Commission (SEC) in
July 2002 to undergo quasi-reorganization which reduced the par value of its shares from P60
to P40. This was done in order to accommodate the P7.8 billion debt-to-equity conversion of
the PDIC through the issuance of 195,175,444 preferred shares. The debt-to-equity
conversion allowed the government to have a direct hand in the governance and management
of the Bank until full divestment of its equity holdings. The said move resulted in the
government having control of 44.98% of the Bank while the Lucio Tan Group controls
44.98%.

In the third quarter of 2005, the Philippine Government and the Lucio Tan Group completed
the joint sale of their 67% stake in PNB. The Lucio Tan Group exercised its right to match
the share bid offered by the Union Bank consortium and purchased the shares owned by the
government. The Lucio Tan Group thus gained about 77% ownership of PNB.

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2. Business Description

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

a) Principal Products and Services

Lending Operations

PNB continues to offer a comprehensive selection of credit facilities which

include commercial and industrial loans, term loans, credit lines, trade-related
(import/export) financing facilities, bills purchased lines, consumer loans
(housing loans, motor vehicle loans, all-purpose credit facility), conduit financing,
loans to LGUs, loans covered under guarantee programs and credit card services.

PNB and its subsidiaries (the Group) maintained a diversified loan portfolio with
the extent of exposure shown as follows:

Industry Classification % to Total

Financial Intermediation 18.98%
Manufacturing 15.20%
Real Estate, Renting & Business Activities 12.11%
Wholesale & Retail Trade 9.27%
Electricity, Gas & Water 9.18%
Transportation, Storage & Communications 9.18%
Public Administration, Defense & Compulsary Soc. 9.14%
Agriculture, Hunting & Forestry 6.81%
Other Community, Social & Personal Services 3.42%
Construction 2.81%
Private Households 1.82%
Hotel & Restaurant 0.39%
Education 0.35%
Mining & Quarrying 0.30%
Health & Social Work 0.02%
Fishing 0.01%
Others 1.01%
Total 100.00%

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

Treasury Operations

The year 2005 was quite favorable to Treasury Operations. The volatility in the
interest and foreign exchange markets allowed for numerous, significant portfolio
positions to be established which turned favorable. Consolidated interest income
on investment securities amounted to P4.2 billion or 37.4% of total interest
income. Foreign exchange and trading and investment securities net gain reached
P1.1 billion and P940 million respectively, representing 31.4% of total other
income.

Treasury also initiated its regional distribution expansion through the opening of
sales desk in Cebu. The primary objective of the regional sales desks is to make
available better investment products to PNB’s regional clientele.

Deposit Generation

Consolidated deposits grew by P6.8 billion from P161.0 billion as of year-end

2004 to P167.8 billion as of year-end 2005. Demand and savings deposits
increased by 9.5% and 6.4%, respectively, while time deposits decreased by
8.2%.

To better serve its clients, PNB relocated 9 of its branches to more strategic
locations and renovated 17 others. Aside from its 324 domestic branches, PNB
also maintains a network of 315 ATMs which are likewise linked to other ATM
networks (Megalink, Bancnet and Exepressnet).

Remittance Services

PNB further strengthened its position as the country’s leader in OFW remittances
by generating remittances amounting to about US$2.4 billion for 2005. The Bank
expanded its overseas presence by opening 7 new offices (2 in the US, 1 in
Singapore, 1 in the Netherlands and 3 in Saudi Arabia) during the year, bringing
the total number of overseas offices to 102.

PNB’s extensive network of overseas branches, subsidiaries, representative

offices, foreign remittance centers and 672 correspondent banks worldwide
continue to provide convenient and safe remittance services to numerous OFWs
abroad.

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 Disposition of Acquired Assets

PNB continued to aggressively dispose of its acquired assets by conducting public

auctions throughout the country which resulted in the disposition of P1.3 billion
worth of assets in 2005. PNB also explored new promotional channels such as
billboards, creation of a website and direct response advertising. In addition, the
Bank continued contracting and accrediting real estate brokers in order to expand
its distribution channels for asset disposition.

Trust Services

PNB provides a wide array of personal and corporate trust and fiduciary services.
Personal trust services for customers include living trust accounts, custodianship,
educational trust, estate planning, guardianship, insurance trust, and investment
management. Corporate trust services include trusteeship, securitization,
investment portfolio management, administration of employee benefits, pension
and retirement plans, trust indenture, global custodial services and custodianship
services for local corporations. Trust agency services include acting as bond
registrar, collecting and paying agent, stock transfer agent, and receiving bank.

Total trust assets held reached P14.9 billion as of year-end of 2005. Gross revenue
for 2005 reached P202 million higher by 20.2% compared to P168 million last
year. The PNB Trust Banking Group attributes the sustained growth of its
business volume and profitability to competitive edge relative to special
government escrow transactions with POEA, trusteeship of bond floatation of
local government units and growth in Unit Investment Trust Funds (UITF).

b) Revenue derived from Foreign Operations

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

2005 2004 2003

Philippines 85% 83% 83%

Canada and USA 7% 8% 8%
Asia (excluding Philippines) 6% 7% 7%
United Kingdom & Other European
Union Countries 2% 2% 2%
Total 100% 100% 100%

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c) New Products and Services

PNB introduced the following new products and services in 2005:

Global Filipino Cash Card – a product which provides OFW beneficiaries access
to remittances without opening a deposit account with the Bank.

Budget Checking Account – a checking account with a low maintaining balance

which charges a fee for every check issued in excess of the three allotted checks
per month.

Advise & Pay Anywhere – a service which allows OFW beneficiaries to claim
their remittances at any domestic PNB branch or any accredited Pay-out Agents,
such as, SM (Shoe Mart), M. Lhullier, One Network Bank (largest rural bank in
the country).

Remittance Bills Payment – a remittance facility which allows OFWs to pay their
insurance premiums, real estate amortizations and other utilities in the Philippines
direct to the service providers.

Pangarap Business Loan – a loan facility introduced to OFWs in Hongkong to

address their needs for financing in establishing small businesses in the
Philippines.

Following are the products that will be launched in the next twelve months:

Auto-Debit Arrangement – an e-Collect facility for corporate clients that will

allow Bank’s clients subscribers/agents to remit regular payments via automatic
deduction from their active CASA accounts on due dates.

PayWise Money Card – a facility that utilizes the features of the Global Filipino
Money Card as disbursement accounts.

@-550 – a fee-based ATM savings account facility that has a maintaining balance
requirement below market rates.

Kiddie Account - a savings account facility for kids and adolescents, ages 7-18,
with a special/combined savings/investment mechanism/features.

WM Neo – an investment deposit product facility with zero/low maintaining

balance but offered a limited run.

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 eCheck Depot Facility - a facility which provides safekeeping and monitoring of
clients’ postdated checks for automatic and faster credit to main depository
account upon maturity/value date.

eCheck Management Facility – an outsourced disbursement solution for clients’

payables; Electronic check preparation and check cutting facility released through
PNB’s branches.

d) Competition

For 2005, PNB’s ranking and market share in terms of key performance areas are
as follows:

Performance Area Market Share Rank

Total Assets 8.2% 4

Loans* 5.5% 6
Total Deposits 8.6% 4
Private Deposits 7.0% 5
Net Worth 7.6% 4
*Excluding Interbank Call Loans

In terms of total assets, deposits and net worth, PNB ranked 4th among local
private commercial banks, behind Metrobank, Bank of the Philippine Islands
(BPI) and Equitable-PCI Bank.

PNB remains competitive by virtue of its strong brand recall and extensive
domestic and overseas network. It sustains its market presence by aggressively
vying for interest rate-sensitive deposits and by prioritizing the generation of low
cost funds. It also constantly monitors the performance of its products and
services in order to maximize profits and customer satisfaction. It has likewise
taken aggressive measures to improve productivity and minimize costs.
Moreover, it continues to develop new and innovative products that will cater to
its diverse clientele.

e) Major Sales

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

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f) Related Party Transactions

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

g) Patents, Trademarks, Licenses, Franchises, Concessions and Royalty

Agreements

PNB’s operations are not dependent on any patents, trademarks, copyrights,

franchises, concessions, and royalty agreements.

PNB has licenses to the following IT softwares, and systems used in the its
operations:

• Kirchman Bankway International (April 1, 1999 to March 31, 2006) - provides

support to various bank operations such as deposits, loans and ATM. PNB is
currently in negotiations with KBI representatives on a 2 year renewal.

• Branch Delivery System – major delivery system for the branch to process
transactions. There is continuous renewal of maintenance service.

• Operations Processing Integrated Control System (August 27, 2003 up to next

10 years) – provides treasury support for foreign exchange money market,
securities and Reuters interface. There is continuous renewal of maintenance
service.

• Anti-Virus Software (September 1, 2005 effective for 2 years) - unless revoked

by PNB, the agreement shall automatically be renewed on a year to year basis.

• Trust Application Processing Management System (License term is perpetual

and scope of use is for one (1) Production Database, twenty (20) users and
twenty-five (25) Pro-IV Runtime Licenses) - provides support for Trust

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

h) Need for any government approval of principal products or services

PNB obtained license from Financial Monetary Authority of Austria for

establishment of remittance subsidiary in Austria .

i) Research and Development

There is no material amount spent for research and development.

j) Number of employees

PNB’s existing employees as of December 31, 2005 and the number of employees
it anticipates to have within the next twelve (12) months are as follows:

Projected
12/31/05 2006
Officers 1,812 1,812
Rank-and-file 3,934 3,934
Total 5,746 5,746

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

k) Risk Management

PNB has adopted the principle of “going beyond compliance” in its risk
management process. Its underlying principle in risk management is not to constrict
its risk-taking activities but to face risks with mitigating controls to meet its goals.
Enhancing its risk management system is not merely to meet the requirements of
Basel 2 as prescribed by the BSP but to address the evolving and diversified risks
the Bank is facing. Improving risk management process is a going concern issue of
PNB.

As in the previous years, the approval of the risk management process, framework,
policies, risk appetite and infrastructure is vested in the Risk Management
Committee (RMC), a board level committee in charge of the oversight functions of

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PNB’s risk management. The Risk Management Group (RMG) supports the RMC
in performing its task.

To address credit risk, the PNB has institutionalized its risk management process at
various levels (i.e. portfolio level, product level and standalone level). It has
enhanced its operational risk controls and service delivery to attune to its defined
risk policies and business strategy.

Balance Sheet Risk, Liquidity Risk and Market Risk are managed using a
framework of risk management policies and risk control procedures and limits.
These limits are reviewed annually by RMG and approved by the Bank’s Assets &
Liabilities Committee (ALCO), the RMC and the Board of Directors. The
monitoring of market risk limits (Earnings at Risk limit, Maximum Cumulative
Outflow (MCO) limit, Value at Risk (VAR) limit) as well as the reporting of any
limit excess are carried out independently by RMG.

Credit Risk

The NPL ratio of PNB significantly improved in 2005 as a result of its focused
remedial management and stringent credit risk management. The Bank provides
sufficient reserves for delinquent loans.

For new loans, PNB took a stricter credit evaluation and approval of loans by
strictly adhering to the approved RAACs and thorough analysis of borrower’s credit
worthiness. It has strengthened the credit screening ability of its account officers
through continuous training.

On credit standards, PNB has been implementing the internal Credit Rating System
for the corporate accounts with asset size of more than P 15 Million and credit
scoring for the retail lending. These systems dimension the quality of prospective
and existing individual credit exposures and shall serve as basis to determine the
profitability of default and exposure at default of the PNB’s loan porfolio.

Credit risks are also carefully managed through the regular pro-active portfolio
review primarily focused on credit risk concentration on large exposure, per
industry, unsecured loans, geographical region per product, per currency, DOSRI
loans, LGUs, SBL, contingent exposure, etc., PNB’s concentration risk with
potential impact on capital are immediately brought to the attention of Management
for appropriate action. Stress testing are conducted as the need arises to test the
effect of economic downturns and market events (e.g. oil price hike) on PNB’s loan
portfolio and Capital Adequacy Ratio (CAR). Risk-based CAR covering credit risk
stood at 11.9% (solo) and 17.2% (consolidated) as of December31, 2005.

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Market Risk

• Balance Sheet Risk Management

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

• Liquidity Risk Management

PNB’s liquidity management involves maintaining sufficient and diverse funding

capacity to accommodate fluctuations in asset and liability levels due to changes in
the Bank’s business operations or unanticipated events created by customer
behavior or capital market conditions. Liquidity is dimensioned on a daily basis and
under stressed situations.

Liquidity risk is monitored and controlled primarily by a gap analysis of maturities

of relevant assets and liabilities reflected in the MCO report, as well as an analysis
of liquid assets, which provides guidance as to the Bank’s ability to generate
sufficient liquidity. Further, an internal liquidity ratio has been set to determine
sufficiency of liquid assets over deposit liabilities.

• Market Risk Management

PNB is exposed to a potential loss in its trading portfolio because the values of its
trading positions are sensitive to changes in market prices and rates. Similarly, it is
also exposed to market risk in its investment portfolio. Market risk is dimensioned
and controlled in both the trading book and in the balance sheet. In the trading
book, market risk is controlled by a daily analysis of the Value-At-Risk (VAR) of
trading instruments under normal market conditions. The volatilities used for this
regular analysis are those for a rolling one-year period, updated quarterly. The risk
amounts computed are for 99% confidence level.

Below is a table showing the VAR of the PNB for the year ended December 31,
2005. (In Million Pesos)

Average VAR High VAR Low VAR

Interest Rate Risk 76.29 272.22 18.91
Foreign Exchange Risk 8.29 18.79 2.38
Total VAR 84.58 278.13 23.43
Note: The high and low of the total portfolio may not equal the sum of the individual components as
the high and lows of the individual portfolios may have occurred on different trading days.

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PNB also uses back testing to verify the results of the daily VAR calculation.
Likewise, it performs stress tests wherein the trading portfolios are valued under
extreme market scenarios not covered by the confidence interval of the Bank’s
VAR model. Stress tests determine the effects of potentially extreme market
developments on the value of our market risk sensitive exposures.

Complementary to the use of the VAR approach to control maximum exposure, the
PNB also employs dealer limits and loss control limits.

For regulatory purposes, PNB uses the standardized approach in the computation of
the risk-based capital adequacy ratio covering credit and market risks. Its combined
CAR stood at 11.1% (solo) and 15.8% (consolidated) as of December 31, 2005.

Operational Risk

Basically, operational risk is directly managed by the business units; thus, the Risk
Management Group’s role is to oversight and provide risk management tools and
monitor effectiveness of such tools.

In the area of identification, assessment, monitoring and management of operational

risk, PNB has adopted the following framework in addition to existing operating
guidelines, controls and procedures to improve operating efficiencies.

• Annual Operational Risk Assessment Process

This risk analysis framework is required to be undertaken annually by each business

unit of the Bank to identify, assess and monitor their operational risks and
accordingly develop and keep current appropriate plans to deal with these
operational risk exposures. The risk owners who are tasked to closely monitor
operational risk are clearly defined in this framework.

• Business Continuity Plan (BCP)

BCP is the business recovery and resumption plan in the event of significant
business disruption or disaster prepared by each business unit. Every year the BCP
is reviewed, updated and tested to ensure the Bank’s preparedness and continued
operations in case of emergency conditions.

PNB’s BCP framework includes:

- emergency action plans

- dedicated technical recovery facilities
- calling chain for crisis communication
- internal and third party backup operating site and seating arrangement
- formal emergency response/crisis management team structure and
procedures

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 • Product Manuals

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

• Product Managers

Product managers are designated to monitor the implementation of the Bank

products. They are responsible for the annual review of the product to address
issues such as customer appropriateness, profitability, compliance with regulatory
requirements, performance against targets, limits, business goals, etc.

As preparation for the eventual implementation of Basel 2, PNB has started the
establishment of database of losses and findings of BSP and internal auditors as
initial input in the determination of capital charge for operational risk.

As part of its risk awareness program, the Bank has conducted risk fora and lectures
to operating units.

3. Business Development/Description of Significant Subsidiaries

PNB, through its subsidiaries, engages in a number of diversified financial and

related businesses such as merchant banking, remittance servicing, non-life
insurance, stock brokerage, foreign exchange trading, leasing, and other related
services. PNB through its associates is also engaged in other services such as
financing of small-and medium-sized industries, life insurance and financial
advisory services.

Following are the Bank’s significant subsidiaries:

Domestic Subsidiaries:

• PNB Capital and Investment Corporation (PNB Capital), a wholly-owned

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

14
 rest was due to interest income and trading income. This is expected to grow in the
coming year, as the market prospects improve, and deals built in the pipeline in
2005 close.

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

• PNB Forex, Inc. (PFI), a wholly-owned subsidiary of PNB, was incorporated on

October 13, 1994 as a trading company, engaged in the buying and selling of
foreign currencies of all kinds and nature for its own account and or behalf of others.
Its licensed traders directly market the buying and selling of foreign currencies to
clients. The company is among the several registered foreign exchange dealers in
the Philippines. It is under the direct supervision of the Bangko Sentral ng Pilipinas
as a foreign exchange dealer.

On September 13, 2005, PFI’s Board of Directors (BOD) approved the temporary
cessation of its operation. Effective January 2006, its operation was placed in
dormant status. Its BOD approved on November 25, 2005 the reduction of its
capital to P50 million. Likewise, the SEC approved the return of capital.

• PNB Holdings Corporation (PHC), is formerly Philippine Exchange Co., Inc.,

which was established on May 20, 1920. Its primary function is to direct, manage
and take care of companies whose properties were foreclosed by PNB. It also
engages in real estate leasing and non-life insurance business. PHC is a wholly-
owned subsidiary of PNB. It has an authorized capital of P500 million or 5 million
shares at P100 par value per share with a total paid up capital of P255.1 million.

PHC is the parent company of PNB General Insurers Co., Inc. (PNB Gen)
incorporated on February 13, 1991 as a non-life insurance company that offers fire,
marine, motor car, surety, casualty, aviation, engineering, accident insurance and
other specialized lines. It maintains 18 service offices located in major cities in the
country. There are 93 domestic non-life insurance companies and 2 professional
reinsurers in the Philippines. After only 14 years of operations, PNB
Gen is already considered as one of the fastest growing and highly competitive

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 insurance companies in the country. It started operations with an initial paid-up
capital of P13 million. To date, PNB Gen’s paid-up capital stands P312.6 million,
one of highest in the industry, assuring clients of steel-clad protection. Its networth
has increased to P862.7 million as of December 31, 2005 with premium production
of P580 million, so far the highest level attained by PNB Gen in years. Breaking the
P500 million production classifies PNB Gen as large insurance company. PNB Gen
is also one of the most profitable companies in the industry with an average ROE of
16%, more than double the industry norm. All principal products being offered by
PNB Gen have been approved by the Insurance Commission.

PNB Gen is compliant with environmental laws. A compliance program can be

evaluated by analyzing two dimensions: effort and outcome. Effort is the time,
money, resources, and commitment that the company put into building and
improving a compliance program. Outcomes are the impact that our efforts have on
our level of compliance. As the compliance program matures, the principal
measures of effectiveness moves from effort to outcomes.

PNB Gen’s compliance risk involves the risk of legal and regulatory sanctions,
financial loss, and damage to the reputation of the company as a result of failure to
comply with all applicable laws, regulations, codes of conduct and standards of
good practice are the major risks involved in the business. PNB Gen developed its
own compliance program in recognition of its duty to adhere to relevant regulations
based on a culture of accountability and transparency. PNB Gen are committed to
put in place the appropriate processes to ensure a common understanding of and
compliance with insurance laws, rules and regulations, through a continuing
training and education program, and enhance monitoring and enforcement.

• PNB Securities, Inc. (PNBSI), a wholly-owned subsidiary of PNB, was

incorporated on January 18, 1991 engaged in buying and selling all kinds of
securities for its own and on behalf of others. The company derives 95% of its
revenues from commission income.

In 2005, the company ranked 11th among 130 active members in the Philippine
Stock Exchange in terms of value turnover. PNB SI acted as transacting broker on
behalf of the Lucio Tan Group and the National Government wherein the former
acquired the latter’s 32.45% shareholdings in the Philippine National Bank, the
parent firm of the company. At present, PNB SI has an existing complement of five
(5) employees.

• Japan-PNB Leasing and Finance Corporation (J-PNB) is the former PF leasing

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

16
 Corporation and the joint venture company commenced operations as such in
February 1998. J-PNB operates as a financing company under RA 8556 (the
amended Finance Company Act). Its major activities are financial leasing, secured
direct lending, and receivables discounting. All the leasing and lending activities of
the company are in the domestic market. At present, J-PNB has a total of 25
employees.

• Opal Portfolio Investments (SPV-AMC) Inc., is a wholly owned subsidiary of

PNB and was incorporated on September 16, 2004 under R.A. No. 9182 or the
Special Purpose Vehicle (SPV) Act of 2002. It’s primary purpose is to invest in, or
acquire Non-Performing Assets (“NPA”) of Financial Institutions (“FIs”)
consisting of Non-Performing Loans (“NPL”) and, subject to compliance with the
requirements under the laws of the Philippines for the acquisition of land, Real and
Other Properties Owned and Acquired (“ROPOA”). BSP approved the
establishment of the company on September 18, 2004.

• Tau Portfolio Investments (SPV-AMC) Inc., is a wholly owned subsidiary of

PNB and was incorporated on September 16, 2004 under R.A. No. 9182 or the
Special Purpose Vehicle (SPV) Act of 2002. It’s primary purpose is to invest in, or
acquire Non-Performing Assets (“NPA”) of Financial Institutions (“FIs”)
consisting of Non-Performing Loans (“NPL”) and, subject to compliance with the
requirements under the laws of the Philippines for the acquisition of land, Real and
Other Properties Owned and Acquired (“ROPOA”). BSP approved the
establishment of the company on September 18, 2004.

• Omicron Asset Portfolio (SPV-AMC) Inc., is a wholly owned subsidiary of PNB

and was incorporated on September 16, 2004 under R.A. No. 9182 or the Special
Purpose Vehicle (SPV) Act of 2002. It’s primary purpose is to invest in, or acquire
Non-Performing Assets (“NPA”) of Financial Institutions (“FIs”) consisting of
Non-Performing Loans (“NPL”) and, subject to compliance with the requirements
under the laws of the Philippines for the acquisition of land, Real and Other
Properties Owned and Acquired (“ROPOA”). BSP approved the establishment of
the company on September 18, 2004.

• Tanzanite Investments (SPV-AMC) Inc., is a wholly owned subsidiary of PNB

and was incorporated on September 16, 2004 under R.A. No. 9182 or the Special
Purpose Vehicle (SPV) Act of 2002. It’s primary purpose is to invest in, or acquire
Non-Performing Assets (“NPA”) of Financial Institutions (“FIs”) consisting of
Non-Performing Loans (“NPL”) and, subject to compliance with the requirements
under the laws of the Philippines for the acquisition of land, Real and Other
Properties Owned and Acquired (“ROPOA”). BSP approved the establishment of
the company on September 18, 2004.

17
Foreign Subsidiaries:

• PNB International Investment Corporation (PNB-IIC), a wholly-owned

subsidiary of PNB and established as a US holding company in 1983 specifically
to own and hold Century Bank, a California State Chartered Bank. CHC changed
its name to PNB International Investments Corporation in 1999 after it sold
Century Bank. In 1990, PNB IIC established PNB Remittance Centers,
Incorporated (PNB-RCI) as its subsidiary to engage in money transfer services
from the U.S. to the Philippines. As of end-2005, PNB-RCI has 39 remittance
centers.

In 1999, in order to establish a money transfer operations in Canada, PNB-RCI

established PNB-RCI Holdings Corporation under the California Corporation Law,
as a direct owner of PNB Remittance Centers Canada (PNB-RCC) which was
established and authorized to engage a money transfer company in Canada in
2000. As of December 31, 2005, PNB-RCC has 8 branches in Canada.

PNB-RCI’s major competitors in the US are LBC, RCBC, Express Remittance,

BPI, EPCI/Atlas Express Padala and Banco De Oro-Forex Express. PNBRCC’s
competitors are all private companies and these include Western Union, LBC,
Manila Cargo, I-Remit and Mabini Express.

To further enhance the competitiveness of PNB’s remittance business, it has

started installing the Integrated Remittance System (IRS) in our US and other
Overseas Remittance Subsidiaries. The IRS is a user-friendly Window-based
application that covers frontline (database creation/management, remittance
processing, etc.,) as well as backroom functions (system security administration,
communication configuration) and it puts together in one (1) system PNB’s two
existing remittance systems i.e.: the Rapid Remit and Electronic Remittance
Processing System (ERPS).

• PNB Remittance Center Limited (PNB RCL), a wholly-owned subsidiary of

PNB incorporated on April 24, 1994 and is engaged in remittance services in
Hong Kong. As of December 31, 2005, the company operates eight (8) offices in
Hong Kong. PNB RCL also services Indonesian overseas workers in Hongkong
through a remittance tie-up with Bank Mandiri. Its major competitors are
Metrobank, EPCI, I-Remit/LBC, RCBC and BPI.

• PNB International Finance, Ltd. (PNB-IFL), a wholly-owned subsidiary of

PNB and registered with the Registrar of Companies in Hong Kong on July 20,
1976. It was a deposit-taking-company and also engaged in loan syndication,
money market operations, remittance of funds and import / export financing. Its
deposit-taking license was surrendered in 2001 and was granted a money lenders’
license in 2002. It is principally engaged in granting retail loans to Filipino
workers and professionals.

18
 • PNB Europe PLC, started as a PNB Representative office in 1968 until it was
converted into PNB London Branch in 1976. In 1997, PNB was authorized to
incorporate a new subsidiary bank – PNB (Europe) Plc and started its operations
on the same year.

PNB Europe PLC holds a full banking license and offers deposit services
including savings deposits, personal and business loans, letters of credit,
equipment leasing, traveler’s cheques and foreign exchange remittance services.
It has an extension office at Notting Hill Gate to primarily handle remittances. Its
major competitors in remittance services are RCBC, Peso Express, CBN Group, I-
Remit, Phil-Rem, Metrobank and Allied Bank.

• PNB Corporation, Guam (PCG), a wholly-owned subsidiary of PNB

incorporated in May 1990. PCG is organized to engage in money transfer business
particularly as “PNB Foreign Exchange”. PCG also operates offices in Guam and
Saipan. The following are PCG’smajor competitors: Metrobank, Rustan’s Delivery,
Allied Bank, LBC Express, Pinoy Express, Micronesia, Apex, Limco, Money
Express and Amparo.

• PNB Italy, SpA, a wholly-owned subsidiary of PNB and was incorporated in 1994.
It was established to service the remittance requirements of Filipinos in Italy and
operates (3) offices in Italy: Rome, Milan and Florence. PNB Italy is also the
parent company of PNB Netherlands B.V., a remittance company operating in
Amsterdam, whose operations started in April 2004. In August 15, 2005, PNB
Netherlands B.V. opened its Rotterdam Extension Office basically to service the
remittance requirements of Filipino seamen entering the ports of Rotterdam. PNB
Italy’s major competitors are Equitable-PCI Express Padala, BPI Remittance
Europe, Metro Remittance Italy, RCBC Telemoney Europe, LBP Finance Services
and FILITAL.

Item 2.Properties

PNB’s corporate headquarters, the PNB Financial Center, is housed in a

sprawling modern eleven-storey building complete with all amenities, located at a
well-developed reclaimed 99,999 square meters of land on the southwest side of
Roxas Boulevard, Pasay City, Metro Manila, bounded on the west side by the
Pres. Diosdado P. Macapagal Boulevard and on the north side by the World Trade
Center building.

19
 The PNB Financial Center is located in vicinity where bustling cultural, financial
and tourism activities are converged. It also houses PNB’s domestic subsidiaries.
Some office spaces are presently leased to various companies.

PNB also leases the premises occupied by some of its branches (about 41.59% of
the branch sites are Parent Company-owned). Some of its subsidiaries also lease
the premises occupied by their Head Offices and most of their branches. The
lease contracts are for periods ranging from 1 to 25 years and are renewable at the
Group’s option under certain terms and conditions. Various lease contracts
include escalation clauses, most of which bear an annual rent increase of 10.00%.

Certain land and buildings of the Bank are pledged as collaterals to secure the
Bank’s borrowings from PDIC.

Item 3.Legal Proceedings

The Bank is a party to various legal proceedings which arise in the ordinary course
of its operations. None of such legal proceedings, either individually or in the
aggregate, are expected to have a material adverse effect on the Bank or its financial
condition.

Item 4.Submission of Matters to a Vote of Security Holders

No matter was submitted during the fourth quarter of the fiscal year covered by this
report to a vote of security holders.

20
 PART II – OPERATIONAL AND FINANCIAL INFORMATION

Item 5. Market for Common Equity and Related Stockholder Matters

A. Market Price of and Dividends on Common Equity and Related Stockholders Matter

1) Market Information

All PNB common shares are listed and traded at the Philippine Stock Exchange,
Inc. The high and low sales prices of PNB shares for the last two fiscal years are:
2005 2004
High Low High Low
1st Qtr. P 41.50 P 22.00 P 25.50 P 23.00
2nd Qtr. 45.50 29.00 24.25 23.00
3rd Qtr. 49.50 32.00 24.00 22.25
4th Qtr. 36.00 29.00 23.25 21.50

The trading price of each PNB common share was P31.50 as of December 29,
2005. (P34.00 as of March 31, 2006)

2) Holders
There are 33,089 PNB shareholders as of December 31, 2005 (33,018 as of
March 31, 2006). The top twenty (20) holders of common shares, the number of
shares held and the percentage of total shares outstanding held by each are as
follows:

Stockholder No. of Shares % to Total Share

1. Leadway Holdings, Inc. 46,495,880 8.11%
2. Uttermost Success, Ltd. 36,523,715 6.37%
3. Donfar Management, Ltd. 34,138,651 5.96%
4. Mavelstone Int’l. Ltd. 34,055,186 5.94%
5. Fragile Touch Investment, Ltd. 31,157,859 5.44%
6. Fast Return Enterprise, Ltd. 27,926,481 4.87%
7. Pioneer Holdings Equities, Inc. 23,183,068 4.04%
8. Multiple Star Holding Corp. 21,925,853 3.82%
9. Republic of the Philippines 17,454,140 3.04%
10. Allmark Holdings Corporation 14,754,256 2.57%
11. Profound Holdings, Inc. 12,987,043 2.27%
12. Kentwood Development Corp. 12,271,396 2.14%
13. Fil-Care Holdings Inc. 11,119,076 1.94%
14. Dunmore Development Corp. (X-496) 10,779,000 1.88%
15. Kenrock Holdings Corporation 10,522,961 1.84%
16. Kentron Holdings & Equities Corporation 10,343,270 1.80%
17. Fairlink Holdings Corporation 9,945,960 1.74%
18. Purple Crystal Holdings, Inc. 9,374,238 1.64%
19. Ivory Holdings, Inc. 8,780,714 1.53%
20. Safeway Holdings & Equities, Inc. 8,577,826 1.50%

21
 3) Dividends

The company has not declared any cash dividends on its common equity for the
fiscal years 2004 and 2005.

The company’s ability to pay dividend is contingent on the successful

implementation of its rehabilitation plan and the capability to set aside
unrestricted retained earnings for dividend distribution.

4) Recent Sales of Unregistered Securities or Exempt Securities

There are no securities of the company sold by it within the past three (3) years
which were not registered under the Code.

B. Description of Registrant’s Securities

As of December 31, 2005, the Bank’s authorized capital stock amounted to

P50,000,000,040.00 divided into 1,054,825,557 common shares and 195,175,444
preferred shares, both classes of shares having a par value of P40.00 per share. The
Bank has a total of P22,929,836,640.00 subscribed capital.

The preferred shares have the following features:

• Non-voting, non-cumulative, fully participating in dividends with the common

shares;

• Convertible, at any time at the option of the holder who is qualified to own
and hold common shares, to common shares on a one (1) preferred share for
one (1) common share basis;

• With mandatory and automatic conversion into common shares upon the sale
of such preferred shares to any person other than the National Government or
any other government agency or government owned or controlled corporation;
and

• With rights to subscribe to additional new preferred shares with all of the
features as herein provided, in the event that the Bank shall hereafter offer
new common shares for subscription, in such number corresponding to the
number of shares being offered.

22
Item 6. Management’s Discussion and Analysis

1) Management’s Discussion and Analysis

Following are the discussions of the consolidated financial condition and results of
operations of PNB and its Subsidiaries based on the audited financial statements as
of and for the years ended December 31, 2005 and December 31, 2004. The
comparative figures for 2004 were restated to reflect the adjustments resulting from
adoption of new and revised accounting standards, except Philippine Accounting
Standards (PAS) 32, Financial Instruments: Disclosure and Presentation and PAS 39,
Financial Instruments: Recognition and Measurement, for which the Philippine SEC
has allowed to be applied from January 1, 2005.

A. Financial Condition

• Consolidated resources as of December 31, 2005 was P223.1 billion, higher by

P3.4 billion from P219.7 billion as of December 31, 2004. Significant changes
were registered in the following asset accounts:

- Cash and Other Cash Items (COCI) was P 6.1 billion or P 2.8 billion higher
from P 3.3 billion. The 2005 balance includes foreign currency notes and
coins on hand, foreign and miscellaneous COCI on hand, which were
presented under Other Resources in 2004.

- Due from Other Banks decreased by P1.4 billion from P7.1 billion to P5.7
billion on account of foreign transactions.

- Interbank Loans Receivable dropped by P 2.0 billion from P 18.9 billion to

P 16.9 billion due to lower lending to foreign banks.

- Securities Held Under Agreements to Resell was higher by P 8.3 billion

from P 4.0 billion to P 12.3 billion due to increase in lending to BSP.

- Financial Assets at Fair Value Through Profit or Loss was P 538 million,
P 217 million lower from P 755 million. This account is presented under
Trading Account Securities in 2004.

- Available for Sale and Held to Maturity Investments which were presented
under Investment Securities in 2004 went down by P 17.5 billion from P
63.0 billion to P 45.5 billion mainly due to the reclassification of P 19.9
billion unquoted securities from Investment Securities to Loans and
Receivables.

23
 - Loans and Receivables went up by P23.5 billion from P56.2 billion to P79.7
billion. The increase was mainly attributed to the reclassifications of P 19.9
billion unquoted securities from Investment Securities and P 7.9 billion
other receivables (net of allowance for impairment losses) from Other
Resources, partly offset by the P 4.3 billion loans sold through SPV in 2005.

- Investment in subsidiaries and associates increased by P40 million from

P644 million to P684 million attributed to share in net earnings of an
associate.

- Other Resources decreased by P9.0 billion from P18.7 billion to P9.7 billion
on account of other receivables (e.g. sales contract receivable, accounts
receivable, accrued interest receivable) presented under Loans and
Receivables in 2005.

• Consolidated liabilities as of year-end 2005 totaled P200.2 billion, higher by

P6.0 billion compared to P194.2 billion as of year-end 2004.

- Deposit Liabilities grew by P6.8 billion from P161.2 billion to P167.8

billion. By deposit mix, both savings and demand deposits increased by
P 7.7 billion and P1.3 billion, respectively, partly offset by decrease in time
deposits by P2.2 billion.

- Due to Bangko Sentral ng Pilipinas was higher by P13 million from P103
million to P116 million.

- Margin Deposits and Cash Letters of Credit dropped by P68 million, from
P138 million to P70 million.

- Accrued Taxes, Interest and Other Expenses dropped by P1.2 billion, from
P6.1 billion to P4.9 billion due to lower interest on deposit liabilities.

- Other Liabilities increased by P914 million from P9.8 billion to P10.7 billion.

• Consolidated capital funds stood at P22.9 billion as of December 31, 2005,

lower by P2.7 billion compared to P25.6 billion as restated as of December 31,
2004. The decrease was mainly due to the P2.1 billion adjustment on
cumulative effect of change in accounting for financial instruments – PAS 39
and P 1.9 billion valuation loss on SPV subordinated notes and P279 million
translation adjustment, partly offset by P 931 million net unrealized gain on
available for sale investments and P 628 million net income for the year.

24
B. Results of Operations

• Sustaining its strong profitability momentum, PNB and its Subsidiaries

reported P 628 million net income for 2005, a surge of 75% from its net
income last year attributed to growth in net interest margin.

• Net interest margin substantially improved by 62% to P5.2 billion from P3.2
billion. This came from higher interest income on loans and investments as
well as collections on NPL accounts as a result of focused restructuring
initiatives. Interest expense was effectively kept down at P5.8 billion.

• Fee-based and other income amounted to P6.4 billion, slightly lower by P227
million from P6.7 billion.

• Administrative and other operating expenses slightly increased by P689

million from P7.9 billion to P8.6 billion as a result of continuing effort to keep
a tight watch on the administrative and overhead expenses.

• Provision for impairment losses amounted to P504 million and P 964 million
for the years ended 2005 and 2004, respectively.

• Provision for income tax amounted to P1.89 billion and P618 million for 2005
and 2004, respectively. Higher provision for 2005 was due to write-off of
P 1.1 billion deferred taxes.

C. Key Performance Indicators

Following are the top five (5) key performance indicators of the Group:

1. Capital adequacy

Capital adequacy ratio covering credit risks (consolidated basis) computed

based on BSP regulations as of December 31, 2005 and 2004 were 17.2% and
16.2%, respectively.

2. Asset quality

Non-performing loans (NPL) were substantially reduced by P9.8 billion from

P37.7 billion to P27.9 billion. NPL coverage ratio stood at 69.5% and 41.6%
as of year-end 2005 and 2004, respectively.

25
 3. Profitability
12/31/05 12/31/04
1/
Return on equity 2.59% 1.41%
Return on assets 2/ 0.28% 0.17%
3/
Net interest margin 3.66% 2.63%
1/ Net income divided by average total capital funds for the period indicated.
2/ Net income divided by average total assets for the period indicated.
3/
Net interest income divided by average interest-earning assets for the period
indicated.

4. Liquidity

The ratio of liquid assets to total assets were 38.3% to 19.2% as of December
31, 2005 and 2004, respectively,

The Bank is in compliance with liquidity and legal reserve requirements for
deposit liabilities and deposit substitutes.

5. Cost efficiency

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

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

• There are no known trends, demands, commitments, events or uncertainties

that might affect Bank’s liquidity.

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

E. Events that will trigger direct or contingent financial obligation

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

26
 letters of credit, pending litigations including litigations involving redemption of
foreclosed properties already sold to third parties and contested tax assessments.
Several suits and claims remain unsettled. However, no specific disclosures on
such unsettled assets and claims because any such specific disclosures would
prejudice the Group’s position with the other parties with whom it is in dispute.
The Group and its legal counsel believe that any losses arising from these
contingencies which are not specifically provided for will not have a material
adverse effect in the financial statements.

F. Material off-balance sheet transactions, arrangement or obligation

The following is a summary of various commitments and contingent liabilities as

of December 31, 2005 and 2004 at their equivalent peso contractual amounts:

12/31/05 12/31/04
(In Thousand Pesos)
Trust department accounts =
P14,938,781 =
P14,561,817
Deficiency claims receivable 9,929,287 -
Inward bills for collection 8,585,697 10,535,492
Unused commercial letters of credit 5,229,104 12,422,322
Confirmed export letters of credit 2,968,974 3,673,416
Outward bills for collection 218,009 133,462
Outstanding guarantees issued 172,683 -
Items held as collateral 1,760 -
Other contingent accounts 47,900 -

G. Capital Expenditures

PNB has commitments for capital expenditures. Among these are investments on
IT-related projects, relocation and renovation of branch buildings, acquisition and
major repairs of furniture, fixtures and equipment needed to bring the Bank at par
with competitors. Expected sources of funds for the projects will come from sale
of acquired assets.

H. Significant Elements of Income or Loss

Significant elements of net income of the Bank for 2005 came from its continuing
operations.

I. Seasonal Aspects

There was no seasonal aspect that had a material effect on the Bank’s financial
condition or results of operations.

27
Item 7. Financial Statements

The Audited Financial Statements of PNB and its Subsidiaries as of December 31,
2005 & 2004 (as restated) and for the years ended December 31, 2005 & 2004 (as
restated) and the Notes to Financial Statements, the Report of Independent
Auditor and the Statement of Management’s Responsibility are filed as part of
this Form SEC 17-A.

Item 8. Information on Independent Accountant and Other Related Matters

PNB engaged the services of SyCip Gorres Velayo and Co. (SGV) for the audit
of the Group’s statement of condition as of December 31, 2005 and 2004, and the
related statements of income, changes in capital funds and cash flows for the
years then ended.

A. External Audit Fees and Services

1. External Audit Fees

Audit and Audit Related Fees

• P3.150 million engagement fee (exclusive of VAT and out of pocket
expenses) for each year 2005 and 2004 audit of the Bank.

Tax Fees
• P500 thousand engagement fee (exclusive of VAT and out of pocket
expenses) for the specific procedures to establish the validity of the
Bank’s claim pursuant to CTA Circular No. 1-95, as amended by CTA
Circular No. 10-97.

Other Fees
• P3.50 million engagement fee (exclusive of VAT and out of pocket
expenses) for the specific procedures performed in connection with the
Bank’s Offering Circular on the issuance of Subordinated Notes in 2004.

• P2.750 million engagement fee (exclusive of VAT and out of pocket

expenses) to provide training on identification of embedded derivatives
and provide review comments and recommendations on the results of
contracts review; evaluate the Bank’s existing risk management strategies
and activities and review of: (1) detailed procedures for identification of
embedded derivatives, (2) hedging and accounting policies, (3) hedge
documentation templates, (4) hedge effectiveness testing approach and (5)
IAS 39 implications on non-derivative financial assets and liabilities.

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

28
2. Changes in accounting policies

On January 1, 2005, the following new accounting standards became effective and
were adopted by the Group:

• PAS 19, Employee Benefits, provides for the accounting for long-term and other
employee benefits. The adoption of this standard resulted in the recognition of a
net transition liability of P
=17.9 million as a charge against deficit as of January 1,
2004. Net income in 2004 increased by = P30.9 million. The change in accounting
policy also resulted in the inclusion of additional disclosures in the accompanying
financial statements.

• PAS 21, The Effects of Changes in Foreign Exchange Rates, prohibits the
capitalization of foreign exchange losses. The standard also requires the entities in
the Group to determine their functional currency. The adoption of this standard has
no material impact on the financial statements.

• PAS 30, Disclosures in the Financial Statements of Banks and Similar Financial
Institutions, provides for the required disclosure and presentation in respect of the
accounts of banks and similar financial institutions. It also provides that any
provision for general banking risks is treated as an appropriation of surplus and
should not be included in the determination of net income for the period. The
effect of adopting this standard resulted in the reallocation of the general loan loss
reserves as of January 1, 2005 amounting to P =342.3 million to cover the additional
specific reserves required upon the adoption of PAS 39. The standard requires
more comprehensive disclosure about the Group’s financial instruments, whether
recognized or unrecognized in the financial statements. The required new
disclosures are reflected in the financial statements, where applicable.

• PAS 32, Financial Instruments: Disclosure and Presentation, covers the disclosure
and presentation of all financial instruments. The standard requires more
comprehensive disclosures about the Group’s financial instruments. New
disclosure requirements include terms and conditions of financial instruments used
by the Group, types of risks associated with financial instruments (market risk,
foreign exchange risk, price risk, credit risk, liquidity risk and cash flow risk), fair
value information of financial assets and financial liabilities, and the Group’s
financial risk management policies and objectives. The standard also requires
financial instruments to be classified as debt or equity in accordance with their
substance and not their legal form.

The standard also requires presentation of financial assets and financial liabilities
on a net basis when, and only when, an entity: (a) currently has a legally
enforceable right to set off the recognized amounts; and (b) intends either to settle
on a net basis, or to realize the asset and settle the liability simultaneously.

• PAS 39, Financial Instruments: Recognition and Measurement, establishes the

accounting and reporting standards for recognizing and measuring the Group’s
financial assets and financial liabilities. It also covers the accounting for derivative
instruments.

29
 The effect of adopting this standard did not result in the restatement of prior year
financial statements as allowed by the SEC under its Memorandum Circular 19
Series of 2004. The total cumulative effect of adopting the standard amounting to
= 2.1 billion, however, was charged against deficit as of January 1, 2005. The
P
disclosures required by PAS 32 are reflected in the financial statements, where
applicable.

The adoption of the provision of PAS 39 on the classification and related

measurement, other than impairment, of financial assets and liabilities on the
Group financial statements resulted in an increase in deficit as of January 1, 2005
amounting to =
P80.9 million.

Prior to January 1, 2005, the adequacy of allowance for impairment losses on loans
and other receivables and risk assets was determined based on management criteria
and BSP requirements. The effect of adopting PAS 39 provisions on impairment
of financial resources as of January 1, 2005 amounted to P =8.2 billion, net of the
general reserves reallocated to specific reserves. However, allowance for
impairment losses charged to deficit as of
January 1, 2005 amounted to P =1.9 billion, net of the P
=1.9 billion loss on the zero-
coupon notes received in 2004 as consideration of the non-performing loans (NPL)
sold to special purpose vehicle (SPV) companies which was separately charged to
deficit on January 1, 2005. As of December 31, 2004, this loss on the zero-coupon
notes was not recognized in the financial statements.

In 2005, the Parent Company sold certain NPL to an SPV company at a loss of = P
4.4 billion. The Parent Company availed of the incentives under Republic Act (RA)
No. 9182 on the deferral of losses incurred from the sale of NPL to SPV companies.
Accordingly, as of January 1, 2005, no allowance for impairment losses on these
NPLs was set up in the financial statements.

The Group adopted the fair valuation method for all its derivative transactions. The
effect of adopting fair valuation method resulted in an increase in deficit as of
January 1, 2005 amounting to =P74.2 million.

ƒ PAS 40, Investment Property, prescribes the accounting treatment for investment
property and related disclosure requirements. The Group adopted the cost model in
accounting for its investment property. The effect of adopting the cost model in
accounting for ROPOA qualified as investment property resulted in a net decrease
in deficit as of December 31, 2003 by =P3.2 billion. Net income decreased by P
=32.2
million in 2004. Previously, ROPOA were carried at the lower of total outstanding
exposure at the time of foreclosure or bid price, less allowance for impairment
losses (i.e. net realizable value).

ƒ PFRS 4, Insurance Contract, specifies the financial reporting for all insurance
contracts (including reinsurance contracts) that an entity issues and to reinsurance
contracts that it holds.

• PFRS 5, Non-current Assets Held for Sale and Discontinued Operations, specifies
the accounting for assets held for sale and the presentation and disclosure of
discontinued operations. As of December 31, 2005, the Group had no assets that
qualify as noncurrent assets held for sale and discontinued operations.

30
 The Group also adopted in 2005 the following revised standards:

• PAS 1, Presentation of Financial Statements, provides a framework within which

an entity assesses how to present fairly the effects of transactions and other events;
provides the base criteria for classifying liabilities as current or noncurrent;
prohibits the presentation of income from operating activities and extraordinary
items as separate line items in the statements of income; and specifies the
disclosures about key sources of estimation uncertainty and judgments that
management has made in the process of applying the entity’s accounting policies.
It also requires changes in the presentation of minority interest in the statements of
condition and statements of income.

• PAS 8, Accounting Policies, Changes in Accounting Estimates and Errors,

removes the concept of fundamental error and the allowed alternative to
retrospective application of voluntary changes in accounting policies and
retrospective restatement to correct prior period errors. It defines material omission
or misstatements, and describes how to apply the concept of materiality when
applying accounting policies and correcting errors.

• PAS 10, Events after the Balance Sheet Date, provides a limited clarification of the
accounting for dividends declared after the statement of condition date.

• PAS 16, Property, Plant and Equipment, provides additional guidance and
clarification on the recognition and measurement of items of property, plant and
equipment. It also provides that each part of an item of property, plant and
equipment with a cost that is significant in relation to the total cost of the item shall
be depreciated separately.

• PAS 17, Leases, provides a limited revision to clarify the classification of a lease of
land and buildings and prohibits expensing of initial direct costs in the financial
statements of lessors.

• PAS 24, Related Party Disclosures, provides additional guidance and clarity in the
scope of the standard, the definitions and the disclosures for related parties. It also
requires disclosure of the total compensation of key management personnel by
benefit type.

• PAS 27, Consolidated and Separate Financial Statements, reduces alternatives in

accounting for subsidiaries in the consolidated financial statements and in
accounting for investments in the separate financial statements of a parent company,
venturer or investor. The adoption of this standard in the Parent Company
financial statements resulted in the increase in deficit amounting to =
P501.2 million
as of December 31, 2003. However, accumulated equity income reversed to
deficit represents the income received after the quasi-reorganization. Other
downward adjustments to capital funds representing the Parent Company’s share in
revaluation increment, net unrealized loss on available-for-sale investments (AFS)
and equity translation adjustment of the subsidiaries as of January 1, 2004
amounted to
=438.5 million. The accumulated translation adjustment reversed excludes those
P

31
 that have been closed to deficit on restructuring date. Net income of the Parent
Company decreased by = P282.6 million in 2004.

• PAS 28, Investments in Associates, reduces alternatives in accounting for

associates in the consolidated financial statements and in accounting for
investments in the separate financial statements of an investor. The effect of
adopting this standard in the Parent Company financial statements resulted in an
increase in deficit as of December 31, 2003 amounting to
=91.8 million. Net income of the Parent Company in 2004 decreased by =
P P30.2
million.

• PAS 33, Earnings per Share, prescribes principles for the determination and
presentation of earnings per share for entities with publicly traded shares, entities in
the process of issuing ordinary shares to the public, and any entities that calculate
and disclose earnings per share.

• PAS 36, Impairment of Assets, establishes the frequency of impairment testing for
certain intangibles and provides additional guidance on the measurement of an
asset’s value in use.

• PAS 38, Intangible Assets, provides additional clarification on the definition and
recognition of certain intangibles.

3. Disagreements with Accountants

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

32
 PART III - CONTROL AND COMPENSATION INFORMATION

Item 9. Directors and Executive Officers

A. Names, ages and dates of assumptions of Directors and Executive Officers

Date of
Position Name Age Assumption
Board of Directors 1/
Chairman of the Board Florencia G. Tariela 2/ 59 05/24/05
Vice Chairman, President & Omar Byron T. Mier 59 05/24/05
Chief Executive Officer
Director Virgilio R. Angelo 58 05/24/05
Director Domingo T. Chua 64 05/24/05
Director Feliciano L. Miranda, Jr. 2/ 76 05/24/05
Director Vicente S. Perez 47 05/24/05
Director Eric O. Recto 42 05/24/05
Director Washington Z. Sycip 2/ 84 05/24/05
Director Lucio C. Tan 71 05/24/05
Director Ricardo M. Tan 69 05/24/05
Director Macario U. Te 76 05/24/05
Corporate Secretary Renato J. Fernandez 69 05/24/05
Executive Officers:
Executive Vice President Anthony Q. Chua 54 08/01/02
Executive Vice President Asterio L. Favis, Jr. 53 11/05/02
Executive Vice President Carmen G. Huang 55 08/16/02
First Senior Vice President Cris S. Cabalatungan 55 03/03/03
First Senior Vice President Renato A. Castillo 52 09/01/05
First Senior Vice President Sylvia Chan Lim 56 01/21/00
First Senior Vice President Cynthia V. Javier 53 03/01/04
First Senior Vice President Michael O. de Jesus 47 08/01/02
First Senior Vice President Ramon L. Lim 54 11/05/02
First Senior Vice President Isabelita T. Manalastas
Watanabe 52 12/23/02
First Senior Vice President Edgardo T. Nallas 48 01/02/06
First Senior Vice President Ma. Elena S. Sarmiento 52 01/06/03
First Senior Vice President Pacita P. Henson 38 02/01/06
Senior Vice President Rafael Z. Sison, Jr. 50 01/09/06
1/
The directors (under Section 5.3 of the PNB By-Laws) are elected by the stockholders entitled to
vote during the annual meeting of stockholders and shall hold office for one (1) year and until
their successors are elected and qualified.
2/
independent directors

33
 There are eleven (11) members of the Bank’s Board of Directors, two of whom are
independent directors. All incumbent directors were elected during the annual
meeting of stockholders held on May 24, 2005 and shall hold office until their
successors have been duly elected.

The Corporate Governance Committee (acting as the bank’s Nomination

Committee) pre-screens and shortlists all candidates nominated to become members
of the Board of Directors according to prescribed qualifications and
disqualifications.

B. Profile of Directors and Executive Officers together with their business

experience covering at least the past five (5) years

Board of Directors

FLORENCIA G. TARRIELA, 59, Filipino, was elected as Chairman of the

Board of Directors of the Bank on May 24, 2005. She is Chairman of the
Corporate Governance Committee, PNB Capital and Investment Corporation and
PNB Italy SpA. She obtained her Bachelor of Science in Business Administration
Major in Economics at the University of the Philippines and her Masters in
Economics from the University of California at Los Angeles (UCLA) where she
topped the Masters Comprehensive Exams. Ms. Tarriela is currently a columnist
for “Business Options” of Manila Bulletin. She is a Trustee of Finex Foundation,
a Director of Tulay Sa Pagunlad, Inc. (TSPI), Kilosbayan, Philippine Bible
Society, Makati Garden Club and Summer Institute of Linguistics (SIL). She is
also a Director of PNB Remittance Center, Ltd., and Bulawan Mining
Corporation. She was formerly President of the Bank Administration Institute of
the Philippines (BAIPHIL), a member of the Financial Executive Institute
(“Finex”) and Independent Director of the Philippine Depository & Trust
Corporation, Philippine Dealing & Exchange Corporation and the Philippine
Dealing System Holding Corporation. Ms. Tarriela served the Philippine
Government as Undersecretary of Finance, alternate member of the Monetary
Board of the Bangko Sentral ng Pilipinas and alternate board member of the Land
Bank of the Philippines and the Philippine Deposit Insurance Corporation. She
was formerly Deputy Country Head and Managing Partner and the first Filipino
lady Vice President of Citibank N. A. She is co-author of the books “
Coincidence or Miracle?” and “Oops - Don’t Throw Those Weeds Away!”

OMAR BYRON T. MIER, 59, Filipino, is Vice Chairman of the Board,

President and CEO of the Bank. He obtained his Bachelor of Science in Business
Administration Major in Accounting and his Bachelor of Arts in Economics from
the University of the Philippines in 1967 and 1968, respectively. A certified
public accountant, he took his M.A. in Economics in 1970 at the same university.
Mr. Mier is currently the Chairman of Victorias Milling Co., Inc., and Japan-PNB
Leasing and Finance Corporation and Chairman & President of PNB Holdings

34
Corporation. He is also Director of PNB International Investment Corporation,
PNB Remittance Center, Inc., PNB Remittance Center, Ltd., PNB Europe Plc.,
PNB General Insurers Company, Inc., PNB Capital and Investment Corporation,
PNB Forex, Inc., PNB Securities, Inc. and Beneficial-PNB Life Insurance
Company, Inc. He served as Executive Vice President of the Bank from August
16, 2002 to April 10, 2005. He worked with Citibank N.A. (Manila and
Malaysia) for 24 years where he held the positions of Country Risk
Manager/Senior Credit Officer and Head of Risk Management Group and World
Corporation Group Head. Prior to his appointment in 2002 at PNB, he served as
Deputy General Manager & Corporate Banking Department Head of Deutsche
Bank, Manila from 1995 to 2001.

VIRGILIO R. ANGELO, 58, Filipino, was elected Director of the Bank on May
24, 2005. He is Chairman of Non-Performing Assets Committee and Trust
Committee of the Bank. He obtained his Bachelor of Science in Business
Administration Major in Economics (Magna Cum Laude) from the University of
the East and his Masters in Business Administration (Sans Thesis) from the
Ateneo Graduate School of Business. He is currently the Chairman of PNB Forex,
Inc., and a Director of PNB International Finance, Ltd., PNB Remittance Center,
Inc. and PNB General Insurers Company, Inc. He is also Vice Chairman,
President and Chief Executive Officer of the Trade and Investment Development
Corporation of the Philippines also known as the Philippine Export-Import Credit
Agency (PhilEXIM). He was President and Chief Executive Officer and Director
of the Philippine Postal Savings Bank (PPSB). He served as Administrator and
Vice Chairman of the Board of the Overseas Workers Welfare Administrator
(OWWA). He also served as General Manager and Vice Chairman of the Board
of the Philippine Charity Sweepstakes Office (PCSO). He was President and
Director of BPI Securities Corporation. He was Division Head-Corporate Banking
Group of the Bank of Philippine Islands. He was the Group Head for Corporate
Relationship Management Group of the Citytrust Banking Corporation. He was
also the Marketing Officer and Portfolio Manager of First Metro Investment
Corporation (Metrobank Group) and Research Head and Assistant Trust Officer
of the Philippine Banking Corporation.

DOMINGO TEE CHUA, 64, Filipino, has been serving as Director of the Bank
since April 27, 2001. He obtained his Bachelor of Science in Chemical
Engineering from the Mapua Institute of Technology. Mr. Chua is currently the
Chairman of PNB Securities, Inc., PNB Remittance Center, Inc. (U.S.A.),
Dynamic Holdings Ltd. (a listed company in Hongkong) and Air Philippines
Corporation. He is also a Director of PNB Corporation, Guam., PNB General
Insurers Company., Inc., PNB Investments Ltd., PNB Remittance Center, Ltd.,
and PNB (Europe) PLC. He is currently the President of Manufacturing Services,
Allied Leasing & Finance Corporation and Lucky Travel Corporation, and the
General Manager of Himmel Industries, Incorporated. He is also currently serving
in the Board of Directors of various corporations, including Asia Brewery, Inc.,

35
Maranao Hotel & Resort Corporation, Oceanic Bank (SFO, USA), Xiamen
Commercial Bank (China), Allied Bank Corporation (Hongkong) Ltd., Allied
Bankers Insurance Corporation, Foremost Forms, Inc., Grandspan Development
Corporation, Dominican Realty & Development Corporation, and Eurotiles
Industrial Corporation.

FELICIANO L. MIRANDA, JR., 76, Filipino, was President and CEO of the
Bank from January 2000 to April 2002. He was re-elected as a Director on May
24, 2005. He obtained his Bachelor of Science in Commerce Major in
Accounting from Far Eastern University and finished all curricular requirements
and Comprehensive Examinations for his Master of Arts Degree in Economics
from Georgetown University in Washington D. C. USA. Mr. Miranda is currently
the Chairman of PNB International Finance, Ltd. and Bulawan Mining
Corporation. He is a Director of PNB Capital & Investment Corporation, Japan-
PNB Leasing & Finance Corporation, PNB Holdings Corporation, PNB
Remittance Center, Ltd., PNB Italy SpA, Beneficial-PNB Life Insurance
Company, PNB RCI Holding Co., Ltd., Sun Life of Canada – Bond Equity Fund
and Sun Life of Canada – Money Market Fund. Mr. Miranda was former Deputy
Governor, Supervision and Examination Sector of the Bangko Sentral ng Pilipinas
(BSP) and worked for the BSP for forty one (41) years. After his retirement from
the BSP in 1994, he served as Consultant to the Monetary Board and various
domestic banks and local units of foreign banks namely: Asiatrust Bank, Bank of
Commerce, Deutsche Bank, International Bank of China, ISLA Bank, Prudential
Bank, Rizal Commercial Banking Corporation, State Investment Trust, Inc.,
World Bank and the Asian Development Bank. He was also a director of the Bank
of Commerce, Sumigin Investment Co., and LBP Leasing Corporation.

VINCENT S. PEREZ, 47, Filipino, was elected Director of the Bank on May 24,
2005. He obtained his Bachelor’s Degree in Business Economics from the
University of the Philippines and his MBA from the Wharton Business School of
the University of the Philippines in 1983. Mr. Perez is currently the Chairman of
the Executive Committee of the Bank and PNB International Investment
Corporation and Director of PNB Capital and Investment Corporation, PNB
Forex Inc., PNB Remittance Center, Ltd., and Bulawan Mining Corporation. He
is also the Chairman of Chikka Holdings, Kadluan Management Corporation,
Malampaya Foundation, Merritt Partners, and Veritas Mobile Solutions. He is an
Independent Director of SM Investments Corporation. Mr. Perez’s career ranged
from credit analyst, international banker, debt trader, investment bank partner,
private equity investors to cabinet minister. He was the youngest and longest
serving Philippine Energy Secretary from June 2001 to March 2005. He boosted
energy self-sufficiency, renewed oil exploration, aggressively promoted clean
indigenous energy, crafted and ambitious renewable energy policy, relaunched
energy conservation, and accelerated rural electrification. He served briefly in
early 2001 as Undersecretary for Industry and Investments at the Department of
Trade and Industry and as Managing Head of the Board of Investments, and let IT
Investment missions to Europe and USA. Prior to joining the cabinet in 2001. Mr.

36
Perez had 17 years experience in debt restructuring, capital markets and private
equity in emerging markets. After internship with Far East Bank, New Jersey
National Bank and Citibank, he joined Mellon Bank in Pittsburgh in 1983. He
became a Latin American credit analyst and Mexico desk officer in the Latin
American debt restructuring group. In 1987, Mr. Perez joined Lazard Brothers
debt trading team in London. The following year he moved to Lazard Freres &
Co. in New York and pioneered its emerging markets team, arranging numerous
debt and equity financing in Latin America, India, Philippines and Turkey. At 35,
he became the first Asian General Partner at Lazard Freres. In 1995, he became
Managing Director of Lazard Asia in Singapore until 1996. Mr. Perez founded
Next Century Partners in 1997, as private equity firm that invested in mobile
communications, semi-conductor assembly and canned foods. His team launched
successful various start-ups in mobile services and established an environmental
investment company.

ERIC O. RECTO, 42, Filipino, was elected Director of the Bank on May 24,
2005. He obtained his Bachelor of Science in Industrial Engineering from the
University of the Philippines and his Masters in Business Administration from
Cornell University, Johnson Graduate School of Management in Ithaca, New
York. He is the Chairman of the Risk Management Committee of the Bank. He is
currently President of Philweb Corporation and ISM Communications
Corporation. He is also President and CEO of Eastern Telecommunication
Philippines, Inc. (ETPI) and Connectivity Unlimited Resource Enterprise, Inc.
(CURE). He is the Chairman of PNB Europe PLC as well as a Director of PNB
International Finance Ltd., PNB Holdings Corporation, PNB Securities, Inc., and
Bulawan Mining Corporation. He was the Undersecretary of the Department of
Finance, Republic of the Philippines (ROP) for International Finance and for
Privatization (Concurrent). He served as alternate Director vice the Secretary of
Finance of the Philippine Deposit Insurance Corporation and the Philippine
Export Credit Agency. He was also a Member of the Board of Directors of the
Central Bank Board of Liquidators. He was Senior Vice President and Chief
Financial Officer of Alaska Milk and Belle Corporation prior to joining the
Government. He was a member of the Board of Directors of Philippine Global
Communications, Inc., Tagaytay Highlands International Golf Club, Inc., Legend
International Resorts Ltd. and Maginet Corporation. He was the Executive Vice
President, Chief Financial Officer and a member of the Board of Directors of the
APC Group Inc., Vice President–Finance, Chief Financial Officer and a member
of the Board of Directors of Sinophil Corporation. He was Vice President –
Corporate Finance (Manila) and Vice President – Asset Finance Group
(Hongkong) of the Bankers Trust Company. He also served as Senior Consultant
– Project Development Services Division of the SGV & Company.

WASHINGTON Z. SYCIP, 84, American, is one of the Bank’s independent

directors. He has been serving as director of the Bank since May 30, 2000. He
obtained his Bachelor of Science in Commerce from the University of Santo
Tomas and his Master of Science in Commerce from Columbia University. Mr.

37
SyCip is currently the Chairman of Macro Asia Corporation, Lufthansa Technik
Philippines, Inc., Cityland Development Corporation, State Investment Trust, Inc.
and Steag State Power, Inc. He is currently a director of various corporations,
including Aboitiz Transport Systems, Inc., Belle Corporation, Stateland Group,
Manila Electric Company, the PHINMA Group, Inc., Philippine Airlines, Inc.,
Benpres Holdings Corporation, First Philippine Holdings Inc., Philippine
Hotelier, Inc. and Philam Life.

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

38
Excellence in 1999, the highest award given by the Pontifical and Royal
University of Santo Tomas. Aside from being named Most Distinguished
Bicolano Business Icon in 2005. Dr. Tan was also conferred the following
awards: “2003 Most Outstanding Member Award” by the Philippine Chamber of
Commerce and Industry (PCCI) in recognition of his altruism and philanthropy,
business acumen; hard work and perseverance in his numerous business ventures;
Award of Distinction by the Cebu Chamber of Commerce and Industry (June 21,
2004); and the Award for Exemplary Civilian Service of the Philippine Medical
Association (June 5, 2004). The latest in Dr. Tan’s string of achievements was his
designation as Honorary Mayor and adopted son of Bacolod City last February 4,
2006.

RICARDO M. TAN, 69, Filipino, was elected Director of the Bank on May 24,
2005. He obtained his Bachelor of Science in Economics (Money & Banking)
from the University of San Francisco, California and his Master of Science in
Economics (Money & Banking/Central Banking in Developing Countries) from
the London School of Economics and Political Science, University of London.
Mr. Tan is currently the President & CEO of the Philippine Deposit Insurance
Corporation (“PDIC”) and Vice Chairman of the PDIC Board of Directors. He
was also the Consultant of PDIC from August 2001 to February 2003 and
Executive Vice President and Head, Insurance and Risk Management Sector,
PDIC from 1997 to 2001. He was Deputy Director, Programs Department
(Region West) of Asian Development Bank. He was former Vice President,
Trust Department and concurrently Vice President and Treasurer, Treasury
Department and subsequently Vice President of the Credit, Loans and Discounts
Department of Rizal Commercial Banking Corporation. He was Central Bank
Financial Attache at the Embassy of the Philippines in London, U. K. He worked
as Presidential Staff Assistant, In-Charge of Office of Economic Affairs, Office of
the President of the Philippines, Malacañang and Senior Economist, Economic
Research Department, Central Bank of the Philippines.

MACARIO U. TE, 76, Filipino, has been serving as Director of the Bank since
December 8, 1999. He obtained his Bachelor of Science in Commerce at the Far
Eastern University. Mr. Te is currently Director of PNB General Insurers
Company, Inc., PNB Capital & Investment Corporation, Bulawan Mining
Corporation, PNB Securities, Inc., PNB Holdings Corporation, PNB Remittance
Center, Ltd., PNB Italy SPA and PNB International Finance Ltd. He is owner and
Chairman of M.T. Holdings. He is also a Director of Beneficial-PNB Life and
Insurance Co., Inc., Baguio Gold Holdings, Balabac Resources and Holdings,
Nissan North EDSA and Oriental Petroleum and Minerals Corporaiton. He was a
former Director of the Traders Royal Bank, Traders Hotel, Pacific Rim Oil
Resources Corporation, Link World Construction Development Corporation,
Suricon Resources Corporation and Palawan Consolidated Mining Corporation.
He was Chairman of Autobus Industries Corporation from 1984 to 1995.

39
RENATO J. FERNANDEZ, 69, Filipino, has been serving as Corporate
Secretary of the Bank since July 16, 2002. He obtained his Bachelor of Science in
Literature and Bachelor of Laws from the Ateneo de Manila (now Ateneo de
Manila University). He is a member of the Philippine Bar. Mr. Fernandez is also
the Assistant Corporate Secretary of PNB International Finance Ltd., PNB
Remittance Center Ltd. and PNB Italy SPA. He was engaged in active law
practice as a member of the Law Firm of Sen. Estanislao A. Fernandez and the
Caparas, Ilagan and Masakayan Law Offices. He was Country Personnel and
Industrial Relations Manager of Firestone Tire and Rubber Co., of the Philippines,
Personnel Director then Head of Legal Affairs of Citibank N.A., Vice President
and Group Head of Human Resource Management (seconded) of CityTrust
Banking Corporation and Internal Legal Counsel of Citibank, N.A. from 1984 to
1996. Thereafter, he worked as Consultant on Legal Affairs for Citibank, N.A.
and the Philippine Banking Corporation. In November 1996, he became General
Counsel and Corporate Secretary of The Philippine Banking Corporation and later
for the merged Philippine Banking Corporation, Global Business Bank and Asian
Banking Corporation. He was formerly a Director and Past President of the
following organizations – Personnel Management Association of the Philippines,
Society of Fellows in Personnel Management, Legal Management Council of the
Philippines and the Association of Bank Lawyers of the Philippines.

The following are the Executive Officers of the Bank

ANTHONY Q. CHUA, 54, Filipino, is Executive Vice President and Head of the
Global Operations Sector of the Bank. He finished his Bachelor of Arts and
Bachelor of Science Major in Accounting (Cum Laude) at the De la Salle
University, Manila and his MBA and Doctorate in Finance from the Michigan
State University. A certified public accountant, he started his banking career with
Citibank in 1981 where he held the positions of Relationship Manager for the
Institutional Banking Group, Risk Manager and Product Development Unit Head
for the Investment Banking Group, Transaction Banking Head, and later Global
Asset Management Head until 1995. He was President of the Philippine Bank of
Communications from 1997 to 1998. In 1999, he joined SGV Manila as Project
Consultant and later became a Partner of the Business Consulting Group in 2000
and the Risk Consulting Group in 2001.

ASTERIO L. FAVIS, JR., 53, Filipino, is Executive Vice President and Head of
the Treasury Group. He obtained his B. S. in Management Engineering (Cum
Laude) from the Ateneo de Manila University in 1976. Prior to PNB, he was
Vice President for Foreign Exchange and Treasury of the Philippine Commercial
and International Bank from 1982 to 1988 and later assigned to the Office of the
President until 1990. He was also Senior Vice President/Director of AsianBank
Corporation from 1990 to 2000 and Senior Vice President/Director of AB Capital
and Investment Corporation from 2000 to 2002. He is presently a
stockholder/director of Favis Management & Development Corporation,
Aspirations International, Inc. and Carnivorous Delights, Inc.

40
CARMEN G. HUANG, 55, Filipino, is Executive Vice President, Chief
Financial Officer and Chief of Staff of the President of the Bank. She obtained her
Bachelor of Arts Major in Mathematics and her Bachelor of Science in Commerce
Major in Accounting (Cum Laude) from St. Scholastica’s College in 1974. She is
a CPA and she completed the academic requirements for her MBA at the Ateneo
de Manila University. She worked with Land Bank of the Philippines for 16 years
where she held the position of Senior Vice President. She was also EVP of UBIX
Corporation, EVP/CFO of Crown Equities, Inc. and SVP & Chief of Staff to the
President of Equitable PCIB before joining PNB in August 2002. She was a
director of Ecology Savings Bank, Inc., Jardine Land, Inc. PCIB Properties, Inc.,
Strategic Property Holdings and Equitable PCI Life Insurance Corporation.

CRIS S. CABALATUNGAN, 55, Filipino, is First Senior Vice President and

Chief Audit Executive of the Bank. He obtained his Bachelor of Science in
Commerce Major in Accounting (Cum Laude) from De La Salle College, Bacolod
and is a certified public accountant. He previously worked for Citibank/Citigroup
for 21 years (including a 3-year posting in the Singapore Regional Office as
International Staff) where, among others, he held the positions of Vice President
and Head of Consumer Banking Resident Auditor Program and Risk Management
Division Head of the Consumer Bank’s Credit Cycle Group. He joined Global
Bank in 2001 as Group Head and First Vice President of the Internal Audit Group
until the Metrobank Group of Companies absorbed it. He was appointed in 2002
as Internal Audit Group Head and First Vice President of the Philippine Savings
Bank, a subsidiary of Metrobank.

SYLVIA CHAN-LIM, 56, Filipino, is First Senior Vice President and Treasurer
of the Bank. She obtained her Bachelor of Science in Biochemistry from the
University of Santo Tomas. She started her banking career at Allied Banking
Corporation in 1977 as a Manager in the Treasury Department and rose to become
a Senior Vice President. She also held positions as Director of Allied Forex
Corporation and Allied Savings Bank, and Assistant Treasurer of Bonifacio
Heritage Memorial Inc. In 2000, she was tapped to head the Treasury Group of
PNB. Presently, she is the Group Head of the Budget Division and the Corporate
Disbursing Office and Director of PNB Remittance Center, Inc., PNB Forex, Inc.
and Baguio Gold Holdings SpA Corporation.

MICHAEL O. DE JESUS, 47, Filipino, is First Senior Vice President and Head
of the Corporate Banking Sector of PNB. He obtained his B. A. in Economics in
1981 from Union College in Schenectady, New York and his MBA Major in
Finance in 1986 from The Wharton School of the University of Pennsylvania. Mr.
de Jesus has held senior executive positions in credit and corporate banking at
Citibank Manila, Citibank New York, Credit Lyonnias New York and The Dai-
Ichi Kangyo Bank New York. Prior to joining PNB in August 2002, Mr. de Jesus
was First Vice President and Head of the Corporate Bank of the United Coconut

41
Planters Bank. He was also a Director of its subsidiaries, UCPB Leasing and
Finance Corporation and UCPB Savings Bank.

RAMON L. LIM, 54, Filipino, is First Senior Vice President and Sector Head for
International Banking and Overseas Remittance Sector for Asia & Pacific
including Australia New Zealand, Guam & Saipan and the Middle East. He
obtained his Bachelor of Science in Commerce Major in Accounting (Magna
Cum Laude) from the University of San Carlos in 1971. A certified public
accountant, he completed his Masters in Business Management at the Asian
Institute of Management (AIM) in 1980 as full scholar under the Post-Graduate
Scholarship Program of Citibank Manila where he previously worked from 1976
to 1983. In 1984, he began his overseas posting at Citibank’s Head Office in New
York, next at its Taipei Branch as Vice President and Deputy Treasurer and,
finally at its Hongkong Regional Office as Currency Fund Manager. He then
moved to become the Managing Director of Solid Pacific Finance Ltd., Hongkong
from 1993 to 1995, and Investment Manager of MHK Properties & Investment
Ltd., Hongkong from 1995 to 1997. Before joining PNB in 2002, he was
Treasurer, then Business Manager & Trust Officer of Union Bank of the
Philippines from 1997 to 2002.

ISABELITA T. MANALASTAS-WATANABE, 52, Filipino, is First Senior

Vice President and Sector Head of International Banking and Overseas
Remittance for Europe, Israel and African Continent following her stint as
Managing Director of PNB’s Japan Operations and First Senior Vice President
and Area Head for Asia Pacific. She finished her Bachelor of Science in Business
Economics in 1974 at the University of the Philippines and completed her M.A. in
Economics in 1980 at Tsukuba Daigaku (Tokyo University). She has a Diploma
in Japanese Language from the Osaka University of Foreign Studies and
completed the Executive Program for Leaders in Development at Harvard
University, USA. Before joining PNB, she was Finance Attache of the Philippine
Embassy in Tokyo and Deputy Director of Asean-Japan Center, Tokyo.

MA. ELENA S. SARMIENTO, 52, Filipino, is First Senior Vice President and
Trust Officer of the Bank. She graduated Magna Cum Laude from the College of
the Holy Spirit in 1975 with a degree in Bachelor of Science in Commerce major
in Accounting. A certified public accountant, she also has Masteral Degree units
in Business Administration at the De La Salle Graduate School of Business. She
completed the American Bankers Association’s Trust Course at the National Trust
School of the Northwestern University in Evanston, Illinois, USA. She graduated
from the Philippine Trust Institute in 1984 as its Most Outstanding Graduate with
an Award of Excellence. Prior to her appointment with PNB, she has had about 20
years of trust banking/investment management experience with various banks and
financial institutions, including UCPB, Union Bank and Bancom Development
Corporation. She was President of the Trust Officers Association of the
Philippines in 2003 and currently a Director. She has also been a member of the

42
Board of Trustees of the Trust Institute Foundation of the Philippines for the past
8 years.

CYNTHIA V. JAVIER, 53, Filipino, is First Senior Vice President and Head of
the Information Technology Group. She holds a degree in Bachelor of Science in
Mathematics from the University of Santo Tomas. She started her banking career
with Citibank where she held the position of Senior System Analyst. In 1988 up
to 1990, she was the Vice President of Bank of Philippine Islands. She was also
the Vice President of Citibank Global Finance Technology in Tokyo, Japan and
Vice President for Cash Management Division of Citibank Latin America based
on Ft. Lauderdale, Florida, U.S.A.

RENATO A. CASTILLO, 52, Filipino, is the Chief Credit Officer and Head of
the Remedial Management of the Bank. He finished his Bachelor Science in
Commerce 1974 at the De La Salle University major in Accounting. He worked
with Bank of America for nineteen (19) years where he held the various positions
of Account Officer Group Head/VP and Country Credit Officer/VP. He joined JP
Morgan Chase Bank in 1997 as Country Credit Officer/Vice President. He was
appointed in 2003 as Senior Vice President of the Development Bank of the
Philippines.

EDGARDO T. NALLAS, 48, Filipino, is the First Senior Vice President and
Head of the Human Resource Group (HRG). He obtained his degree in AB
Economics (Accelerated) from the De La Salle University in 1977. He earned
units in Master in Business Administration (MBA) from the said school. He
started his career in banking in 1977 with Philippine Banking Corporation. In
1992, he joined Solidbank Corporation as an Assistant Vice President for the
Human Resource Group. He moved on as Vice President of HRG for BA Savings
Bank in 1997. Prior to joining PNB, Mr. Nallas was a Senior Vice President for
HRG at the Philippine Bank of Communications. He is an active member of the
Personnel Management Association of the Philippines (PMAP), and the Bankers
Council for People Management (BCPM). He was a former Director and Vice
President of BCPM and has handled the chairmanship of the various committees
of the Council.

PACITA P. HENSON, 38, Filipino, is the First Senior Vice President of the
Global Marketing for Remittance & Overseas Lending and Card Marketing
Sector of the Bank. She obtained her Bachelor of Arts Major in International
Relations, Cum Laude from Mount Holyoke College, South Hadley,
Massachusetts, U.S.A. and her Masters in Business Administration from the
University of the Philippines. Before joining PNB, she was Country Marketing
Director, American Express Bank Philippines. She was also previously connected
with Western Union Philippines as Marketing Manager and Citibank N.A. as
Asst. Vice President for marketing. Her marketing experience also includes stints
as Account Officer with PCIBank and as Marketing Manager with the Philippine
Exporters Foundation.

43
RAFAEL Z. SISON, JR. , 50 , Filipino, is the Senior Vice President and Head of
the Retail Banking Sector and Officer-in-Charge of the Consumer Finance Sector
of the Bank. He is a graduate of Bachelor of Science in Business Administration
Major in Management from the Ateneo de Davao College. Before joining PNB,
he was First Vice President for Sales and Distribution Head of the Chinatrust
Commercial Bank Corporation. He started his career in banking with Citytrust
Banking Corporation as Field Sales Manager, then Branch Manager. He moved
on to Solidabank where he rose from Branch Manager to Region Head. His retail
banking experience also includes stints with United Overseas Bank as Head of its
Retail and Branch Banking and Rizal Commercial Banking Corporation as Area
Head of its Manila Branches.

The following are the Board Advisors of the Bank

JOSE A. R. MELO, 73, Filipino, was appointed Chairman of the Board of

Advisors on June 25, 2002. He obtained his Bachelor of Laws (LlB) from the
Manuel Luis Quezon University (MLQ) and his Master of Laws from the
University of Santo Tomas. Justice Melo is currently a Director of PNB
Remittance Center Inc., and Island Power Corporation. He is Chairman of PNOC
Exploration Corporation as well as the Board of Directors of Fontana
Development Corporation and Fontana Golf and Country Club.. He is also the
Adviser to the Board of PNB General Insurers Co., Inc. Justice Melo is a member
of the Philippine Bar. He was an Associate Justice of the Supreme Court from
1992 to 2002, Associate Justice of the Court of Appeals from 1979 to 1992. He
also served as Commissioner of the Civil Service Commission. Justice Melo was
an Associate Commissioner of the Professional Regulation Commission, and was
a Staff member of the Legal Office, Office of the President rising from position of
Executive Assistant and attaining the second highest position of Junior
Presidential Staff Assistant now Presidential Director. Justice Melo was
Confidential Assistant to the Chairman, Presidential Anti-Graft Committee, Legal
Adviser, Board of Censors for Motion Pictures and Associate Attorney of the
Diokno Law Office.

ALEJANDRO R. ROCES, 81, Filipino, was appointed a Member of the Board

of Advisors on May 25, 2004. He obtained his Bachelor of Fine Arts from the
University of Arizona, U.S.A., his Master of Arts from the Far Eastern University
and his Doctorate in Literature from Tokyo University, Japan. Mr. Roces is
currently the Chairman of the College Assurance Plan Philippines, Inc., CAP
Pension, CAP College, CAP Health Maintenance, Inc. Colegio de San Agustin,
St. Louis University and St. Mary’s University. He is also Director of CAP Life,
CAP Technologies, Inc. He also served as Chairman of the Movie & Television
Review and Classification Board from March 2001 to June 2002. He was honored
as National Artist for Literature in 2003.

44
JOSE NGAW, 57, Filipino, was appointed a Member of the Board of Advisors
on May 24, 2005. He obtained his Bachelor of Science in Commerce Major in
Management (1st Honors-Gold Medalist) from Letran College, his Bachelor of
Laws from the San Beda Law School (Dean’s List) and he is a candidate for
MBA of the Ateneo Graduate School of Business. Mr. Ngaw is currently a
Director of PNB Securities, Inc., PNB Remittance Company (Canada) and
Bacnotan Steel, Industries, Inc. He is the Assistant to the Chairman of the Lucio
Tan Group of Companies, Board Member of the University of the East, U.E.R.M.,
Air Philippines Corporation and Board Advisor of Philippine Airlines, Inc. He is
also the Board Secretary of the Century Park Hotel and the Secretary
General/Corporate Secretary of the Federation of Filipino-Chinese Chambers of
Commerce & Industry. He was also engaged in law practice.

SANTIAGO S. CUA, JR., 53, was appointed a Member of the Board of

Advisors on May 24, 2005. He obtained his Bachelor of Science in Management
Engineering from the Ateneo de Manila University in 1974. Mr. Cua is currently
the Chairman of PNB Remittance Center Ltd. and a Director of PNB
International Investment Corporation, PNB Corporation Guam and PNB Europe
PLC. He is also a Director of Philippine Racing Club, Inc., Central Vegetable Oil
Manufacturing, Pacific Oil Products, Inc., ACL Management Corporation and
Trans-Visayan Marketing Inc., Iloilo. Mr. Cua is the Corporate Secretary of the
International School, Manila. He has more than 20 years of banking experience,
starting at the European Asian Bank AG from 1974 to 1984 where he served in
various capacities in Germany, the Philippines and Taiwan and in Deutsche Bank
Asia AG in Hamburg from 1985 to 1987. He was former Senior Executive Vice
President of Westmont Bank from 1994 to 1998. From July 1998 to May 2003, he
served as Senior Executive Vice President, Chief Operating Officer and Chief
Lending Officer of the Bank.

CIELO M. SALGADO, Ph.D., 64, Filipino, was appointed a Member of the

Board of Advisors on May 24, 2005. She obtained her Bachelor of Science Major
in Management at the Assumption College, Masters Degree in Economics at the
Ateneo de Manila University and a doctorate Degree in Economics at the
University of Sto. Tomas. She is presently the Chairperson of PNB General
Insurers Company, Inc. and PNB Remittance Company (Canada) and a Director
of Allied Savings Bank. She is a former PNB Director, former Chairperson of the
National Service Corporation, PNB Investment Limited and PNB International
Investment Corporation. She served PNB in various positions and retired as Vice
President after 22 years before she was elected as Vice Governor of the Province
of Pampanga for 2 terms. Ms. Salgado is a recipient of various awards from the
Technical Education & Skills Development Authority (TESDA), the Philippine
National Red Cross, Soroptimists International, the Girl Scouts of the Philippines,
a Most Outstanding Kapampangan Awardee for Government Service (32 years),
Luzon Journal and the Philippine National Bank itself. She is the Founder of the
Adopt-A-Family Movement and at present a director and its administrator. She is
the Chairperson of the Flames of Fire for Jesus Foundation and the Charter

45
 President of the Antipolo Sandigan Foundation of the Philippines. She was
recently elected director of the National Sandigan Foundation of the Philippines
and is its Assistant Treasurer.

C. Independent Directors
Among the Directors, Ms. Florencia G. Tarriela and Mr. Washington Z. SyCip
were elected as Independent Directors. Mr. Feliciano L. Miranda, Jr. was
subsequently named by the Board as an Independent Director. Ms. Tarriela’s
election as Independent Director is pending BSP approval although there is no
issue from the SEC.

D. Identity of Significant Employees

There is no person who is not an executive officer, who is expected to make a
significant contribution to the business.

E. Family Relationship
Directors Domingo Tee Chua and Lucio C. Tan are related by affinity as brothers-
in-law.

F. Involvement in Certain Proceedings

Except for Mr. Lucio C. Tan, neither the Directors nor any of the Executive
Officers have, for a period covering the past five (5) years, reported:

i) Any petition for bankruptcy filed by or against a business with which

they are related as a general partner or executive officer;
ii) Any criminal conviction by final judgment or being subject to a
pending criminal proceeding, domestic or foreign;
iii) Being subject to any order, judgment, or decree, of a competent
court domestic or foreign, permanently or temporarily enjoining,
barring, suspending or limiting involvement in any type of business,
securities, commodities or banking activities; and
iv) Being found by a domestic or foreign court of competent jurisdiction
(in a civil action), the Commission or comparable foreign body, or a
domestic or foreign Exchange or other organized trading market or
self regulatory organization, to have violated a securities or
commodities law or regulation, and the judgment has not been
reversed, suspended, or vacated.

Mr. Lucio C. Tan, in his capacity as Chairman of Fortune Tobacco Corporation, is

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

46
Item No. 10 – Executive Compensation

A. Executive Compensation

Annual compensation of executive officers consists of a 14 month guaranteed cash

emolument. There is no other form of compensation for services rendered by the
executive officers to the Bank and its subsidiaries. In view of the Bank’s ongoing
financial rehabilitation, no performance bonus or profit sharing has been granted to
directors and executive officers for the past two years.

B. Compensation of Directors

The Directors receive a reasonable renumeration for each attendance at a Board

meeting or any meeting of the Board Committees.

Summary of Compensation Table

ANNUAL COMPENSATION
(In Thousand Pesos)
Name Year Salary Bonus Others Total
A. Mr. Omar Byron T. Mier 1/
President/Chief Executive Officer (CEO)
and Vice Chairman
B.Four most highly compensated
Executive Officers other than the CEO:
1. Ms. Carmen G. Huang
Executive Vice President
2. Mr. Anthony Q. Chua
Executive Vice President
3. Mr. Asterio J. Favis
Executive Vice President
4. Ms. Cynthia V. Javier
First Senior Vice President
CEO and four (4) most highly Actual
Compensated executive officers 2004 13,272 2,265 126 15,663
Actual
2005 13,143 2,287 126 15,556
Projecte
d 2006 13,400 2,300 126 15,826
All other officers and directors Actual
(as a group unnamed) 2004 481,058 81,808 39,332 602,198
Actual
2005 509,652 85,596 42,430 637,678
Projecte
d 2006 586,000 98,500 48,500 733,000
1/
President & CEO effective April 11, 2005

47
 D. Employment of Contracts and Termination of Employment and Change-in-Control
Arrangements

All executive officers are covered by the Bank’s standard employment contract
which guarantees annual compensation on a 14-month schedule of payment. In
accordance with the Bank’s Amended By-Laws, Sec. 6.1, all officers with the
rank of Vice President and up serve at the pleasure of the Board of Directors.

E. Warrants and Options Outstanding: Repricing

No warrants or options on the Bank’s shares of stock have been issued or given to
the Directors or Executive Officers as a form of compensation for services
rendered.

Item 11. Security Ownership of Certain and Beneficial Owners and

Management

A. Security Ownership of Certain Record (R) and Beneficial Owners (B)

(more than 5%) as of March 31, 2006:

Name, address of Name of Beneficial

record owner and Owner and Percentage
Title of relationship with Relationship with of
Class issuer Record Owner Citizenship No. of Shares Ownership
Held
Common Republic of the Filipino 17,454,140 3.05%%
Shares Philippines i Shares
Malacañang
Palace
Manila

All Seasons Realty Lucio C. Tan 2 Filipino 443,879,707 77.43%

Corporation – #30 Biak Na Bato shares
7,023,387 Shares Quezon City

Allmark Holdings
Corp. – 14,624,256
Shares

Domingo T. Chua –
133,057 Shares

Donfar Mgt. Corp.

– 34,138,651
Shares

48
Dreyfuss Mutual
Investments, Inc. –
7,298,081 Shares

Dynaworld
Holdings, Inc. –
8,107,051 Shares

Fairlink Holdings
Corp. – 9,945,960
Shares

Fast Return
Enterprises, Ltd.–
27,926,481 Shares

Fil-Care Holdings,
Inc. – 11,119,076
Shares

Fragile Touch
Investment Ltd. –
31,157,859 Shares

Integrion
Investments, Inc. –
7,298,081 Shares

Ivory Holdings,
Inc. – 8,780,714
Shares

Kenrock Holdings
Corp. – 10,522,961
Shares

Kentron Holdings
& Equities Corp. –
10,243,270 Shares

Kentwood
Develop- ment
Corporation –
12,271,396 Shares

La Vida
Development Corp.
– 4,123,000 Shares

49
Leadway Holdings,
Inc. – 46,495,880
Shares

Local Trade &

Development Corp.
– 5,836,153 Shares

Lucio C. Tan – 10
Shares

Luys Securities
Co., Inc. –
1,686,000 Shares

Mariano
Tanenglian –
180,238 Shares

Mandarin
Securities
Corporation -
3,387,300 Shares

Mavelstone
International Ltd. –
34,055,186 Shares

Merit Holdings &

Equities Corp. –
4,377,119

Multiple Star
Holdings Corp. –
21,925,853 Shares

Opulent Land-
Owners, Inc. –
4,105,313 Shares

Pioneer Holdings
Equities, Inc. –
23,083,068 Shares

Power Realty
Develop-ment
Corp. – 589,268
Shares

50
 Profound Holdings,
Inc. – 12,872,543
Shares

Purple Crystal
Holdings, Inc. –
9,374,238 Shares

Safeway Holdings
& Equities, Inc. –
8,477,826 Shares

Society Holdings
Corp. – 7,315,399
Shares

Total Holdings
Corp. – 4,387,186
Shares

Triton Securities
Corp. – 763,277
Shares

Uttermost Success,
Ltd. -36,523,715
Shares

Witter Webber and

Schwab
Investment, Inc. -
7,298,081 Shares

Zebra Holdings,
Inc – 6,432,773
Shares
Preferred Philippine Deposit3 Filipino 54,357,751 9.48%
Shares Insurance Corp. Shares4
2228 Chino Roces
Ave., Makati City

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

51
B. Security Ownership of Management (Individual Directors and Executive
Officers) as of March 31, 2006
Name of Beneficial Number and
Owner and Amount of Shares
Title of Relationship with Beneficially Owned % of
Class Record Owner Citizenship Ownership
Common Florencia G. Tarriela 2 shares Filipino 0.0000003489%
Shares Chairman P80.00
-do- Omar Byron T. Mier 1/ 100 shares Filipino 0.0000174445%
Vice Chairman P4,000.00
-do- Virgilio R. Angelo 1 share Filipino 0.0000001744%
Director P40
-do- Domingo T. Chua 140,068 share Filipino 0.0244341906%
Director P5,602,720
-do- Feliciano L. Miranda 10 shares Filipino 0.0000017445%
Independent Director P400.00
-do- Vicente S. Perez, Jr. 1 share Filipino 0.0000001744%
Director P40.00
-do- Eric O. Recto 1 share Filipino 0.0000001744%
Director P40.00
-do- Washington Z. SyCip 34,010 shares American 0.0059328813%
Independent Director P1,360,400.00
-do- Lucio C. Tan 10 shares Filipino 0.0000017445%
Director P400.00
-do- Ricardo M. Tan 4 shares Filipino 0.0000006978%
Director P160.00
-do- Macario U. Te 10 shares Filipino 0.0000017445%
Director P400.00
-do- Isabelita T. Manalastas 216 shares Filipino 0.0000376802%
Watanabe P8,640.00
FSVP
-do- Cynthia V. Javier 5 shares Filipino 0.0000008722%
First Senior Vice Presiden P200.00
TOTAL 174,438 shares 0.0003039433%
P6,977,520.00
-do- All Executive Officers & 182,443 shares 0.0318263061%
and Directors P7,297,720.00
as a group
1/
Appointed President & CEO effective April 11, 2005

52
 C. Voting Trust Holders of 5% or More

There are no voting trust holders of 5% or more. After the Joint Sale on August
12, 2005, the Government’s 44.98% voting rights which were at par with the
Lucio Tan Group’s was reduced to 12.53% (for the Republic of the Philippines
and PDIC).

The Government was allowed to retain seats in the Board but its other nominees
before the Joint Sale were requested to stay by the controlling Lucio Tan Group
(77.43%) as an expression of confidence and in the interest of corporate
continuity.

On the other hand, the Government continues to support the Bank even after the
Joint Sale. Many of the government’s nominees remain in the boards of PNB
subsidiaries here in abroad.

The Memorandum of Agreement of the Republic of the Philippines and the PDIC
on the one hand, and the Lucio Tan Group, on the Other hand, dated May 3, 2002
has effectively expired on September 16, 2005.

D. Changes in Control

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

Item 12. Certain Relationships and Related Transactions

In the ordinary course of business, the Philippine National Bank (Parent

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

53
 For the past two (2) years, credit transactions with Philippine Air Lines, Asia
Brewery, Inc., Fortune Tobacco, and Air Philippines are classified as DOSRI
since these companies are known to be affiliated with the Lucio Tan Group of
Companies. Mr. Lucio C. Tan, a Director of the bank, is the Chairman & CEO of
Philippine Air Lines, also the Chairman of Asia Brewery, Inc. and Fortune
Tobacco. Mr. Domingo T. Chua, also a Director of the Bank, is the Chairman of
Air Philippines and a Director of Asia Brewery, Inc. Loans to these companies
were granted by the Bank before Messrs. Tan (since December 1999) and Chua
(since April 2001) became Directors of the Bank, and these loans continue to be
classified as performing. Other than the foregoing, there is no other transaction
with the Bank for the past two (2) years wherein any director, executive officer,
significant security holder, or members of their immediate family had or is to
have a direct or indirect material interest.

PART IV – CORPORATE GOVERNANCE

Item 13. Corporate Governance

PNB adheres to the principles of good governance as culled from leading best
practices internationally and on a national level. It subscribes to the philosophy of
integrity, accountability and transparency in its manner of doing business, fair
dealing with its clients, investors, staff, stockholders and its various publics,
professionalism in managing the company and its subsidiaries and respect for the
laws and regulations of the countries affecting its business. Internally, it follows a
philosophy of rational checks and balances as well as a structured approach to its
operating processes.

To this end the bank has promulgated a Revised Manual on Corporate

Governance and appointed a senior officer to ensure compliance with the
provisions of the Manual. The Directors, Advisors and Executive Officers of the
Bank have taken a course on Corporate Governance to be able to understand and
implement the principles thereof in a consistent and satisfactory manner.

• Measures to fully comply with Corporate Governance –

Under the Manual, compliance with the principles of good corporate

governance principally starts with the Board of Directors. It is the Board’s
responsibility to foster the long-term success of the corporation and secure its
sustained competitiveness in accordance with its fiduciary responsibility. In
order to have a central focus for the bank’s activities, the Board has
appropriately established the company’s Mission and Vision Statements.

54
 To have a structure for compliance, the Manual established and defined the
responsibilities and functions of the Board and the various Committees
necessary for good governance, i.e., the Corporate Governance Committee,
the Audit and Compliance Committee, the Risk Management Committee and
the roles of the External and Internal auditors and the Corporate Secretary.
The Manual also established an evaluation system by which the Directors and
the Executive Officers can rate the bank periodically against certain leading
practices and principles on good corporate governance. Last but not least, the
Manual made provisions for the protection of Investors’ Rights including
Minority Interests.

• Evaluation System

The evaluation system which was provided to measure or determine the extent
of compliance with the Manual of Corporate Governance consists of a Self-
Assessment Questionnaire which is filled up by the various functional groups
indicating the compliance rating of certain institutional
units/processes/activities which include the Board of Directors. Management,
Organizational and Procedural Controls, the Nomination process, Independent
Audit Mechanisms and Disclosure and Transparency among others. The
evaluation process includes a self-assessment scorecard which is filled up by
the Members of the Board. The above are submitted to the Compliance
Officer who issues the required certificate of compliance with the corporate
governance mechanism to the SEC. The Manual provides for a set of
graduated penalties for non-compliance with/violation of its provisions.

• No Material deviations -

Because of the heightened sense of corporate responsibility among the staff

and enhanced culture of compliance within the whole bank, there have been
no material deviations noted by the Compliance Officer.

• Plans to improve Corporate Governance -

The Manual was updated on March 2004, January 28, 2005 and April 8, 2006.
Apart from these there are no other plans to change the Manual for the
moment.

55
 PART V - EXHIBITS AND SCHEDULES

Item 14. Exhibits and Reports on SEC Form 17-C

A. Exhibits

1) Audited Financial Statements of Philippine National Bank and its

Subsidiaries as of December 31, 2005 & 2004 (as restated) and for the
years ended December 31, 2005 & 2004 (as restated) and Notes to
Financial Statements

2) Report of Independent Auditors

3) Statement of Management’s Responsibility

B. Reports on SEC Form 17-C

Item Reported Report Date

1) Approval and confirmation of the resignation from the service of January 14, 2005
the Bank of Mr. Jose Vicente M. Cuison, Special Assistant to the
President effective January 31, 2005.

2) Notice from Mr. Cesar V. Purisima, Secretary of Finance, acting March 16, 2005
for the Republic of the Philippines and Mr. Ricardo M. Tan,
President & CEO of Philippine Deposit Insurance Corporation
advising that the National Government will initiate the joint sale
of 67% shares of the National Government and the Lucio Tan
Group in PNB, pursuant to the provisions of the MOA dated May
3, 2002 and the Joint Sale Agreement dated August 1, 2002.

3) Approval of the resignation of Mr. Lorenzo V. Tan, President and April 8, 2005
CEO, effective April 8, 2005 and appointment of Mr. Omar
Byron T. Mier as Acting President of the Bank effective April 11,
2005.

4) Approval of the following nominees to the Board of Directors of May 23, 2005
the Philippine National Bank for the year 2005: Mr. Virgilio R.
Angelo, Mr. Domingo T. Chua, Mr. Omar Byron T. Mier, Mr.
Feliciano L. Miranda, Jr., Mr. Vincent S. Perez, Mr. Eric O
Recto, Mr. Washington Z. SyCip, Mr. Lucio C. Tan, Mr. Ricardo
M. Tan, Ms. Florencia G. Tarriela and Mr. Macario U. Te.

56
5) Approval of the election of the following Directors during the May 24, 2005
2005 Annual Stockholder’ Meeting to serve for a period of one
(1) year until their successors shall have been elected and
qualified: Mr. Virgilio R. Angelo, Mr. Domingo T. Chua, Mr.
Omar Byron T. Mier, Mr. Feliciano L. Miranda, Jr., Mr. Vincent
S. Perez, Mr. Eric O. Recto, Mr. Washington Z. SyCip, Mr.
Lucio C. Tan, Mr. Ricardo M. Tan, Ms. Florecia G. Tarriela and
Mr. Macario U. Te. (1) Approval of the election of the Corporate
Officers during the Organizational Meeting: Ms. Florencia G.
Tarriela, Chairperson of the Board, Mr. Omar Byron T. Mier,
Vice Chairman & President, Ms. Sylvia Chan-Lim, Treasurer,
Mr. Renato J. Fernandez, Corporate Secretary, Mr. Alvin C. Go,
Chief Legal Counsel and Chris S. Cabalatungan, Internal Auditor.

6) Approval of the retirement from the service of the Bank of Mr. July 1, 2005
Danilo C. Castro, Senior Vice President, effective June 30, 2005.

7) Listing of the additional 85,925,293 PNB Warrants and July 14, 2005
85,925,293 Underlying PNB Common Shares.

8) Approval of the hiring of Mr. Renato A. Castillo as Head of July 29, 2005
Remedial Management Group and Chief Credit Officer, effective
upon assumption of duties.

9) Received official communication from the Joint Technical August 19, 2005
Committee that the Government has received a formal notice
from the Lucio Tan Group that they will match the bid of Union
Bank for the government shares in the 67% equity sale of PNB.

9) Completion of the acquisition by the Lucio Tan Group of the August 26, 2005
shareholdings of ROP and PDIC comprising of 45,216,215
common shares and 140,817,693 preferred shares.

10) Approval of the resignation of Messrs. Ismael R. Sandig, August 29, 2005
Executive Vice President for Retail Banking Sector/Consumer
Finance Sector and Federico Y. Cadiz, Executive Vice President,
Asset Management Group effective August 31, 2005 and
September 15, 2005, respectively.

11) Advise of Ms. Cristina Q. Orberta, OIC and EVP of the PDIC December 5, 2005
and Chairperson of the Joint Technical Committee that the
Government will be offering its 20,670,435 PNB shares to small
local investors (SLI) as provided under Section 2 (f) of R.A. 7886
dated February 20, 1995.

57
 COVER SHEET

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

P H I L I P P I N E N A T I O N A L B A N K A N D S U B S

I D I A R I E S

(Company’s Full Name)

P N B F i n a n c i a l C e n t e r , P r e s i d e n t D

i o s d a d o M a c a p a g a l B o u l e v a r d , P a s a

y C i t y

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

Mr. Omar Byron T. Mier 891-6040 to 70

(Contact Person) (Company Telephone Number)

1 2 3 1 A A F S
Month Day (Form Type) Month Day
(Fiscal Year) (Annual Meeting)

(Secondary License Type, If Applicable)

Dept. Requiring this Doc. Amended Articles Number/Section

Total Amount of Borrowings

Total No. of Stockholders Domestic Foreign

To be accomplished by SEC Personnel concerned

File Number LCU

Document ID Cashier

STAMPS
Remarks: Please use BLACK ink for scanning purposes.

*SGVMC107795*
PHILIPPINE NATIONAL BANK AND SUBSIDIARIES

Financial Statements
December 31, 2005 and 2004

and

Report of Independent Auditors

SGV & CO SyCip Gorres Velayo & Co.
6760 Ayala Avenue
1226 Makati City
Philippines
Phone: (632) 891-0307
Fax: (632) 819-0872
www.sgv.com.ph
BOA/PRC Reg. No. 0001
SEC Accreditation No. 0012-F

Report of Independent Auditors

The Stockholders and the Board of Directors

Philippine National Bank
PNB Financial Center
President Diosdado Macapagal Boulevard
Pasay City

We have audited the accompanying statements of condition of Philippine National Bank and
Subsidiaries (the Group) and the statements of condition of Philippine National Bank (the Parent
Company) as of December 31, 2005 and 2004 and the related statements of income, changes in capital
funds and cash flows for the years then ended. These financial statements are the responsibility of the
Group’s management. Our responsibility is to express an opinion on these financial statements based
on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the Philippines.
Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

As discussed in Note 9 to the financial statements, to take advantage of incentives under Republic Act
(RA) No. 9182, The Special Purpose Vehicle Act of 2002, and at the same time improve its chances of
recovering from its non-performing loans (NPL), the Parent Company sold certain NPL to special
purpose vehicle (SPV) companies. In accordance with regulatory accounting policies prescribed by
the Bangko Sentral ng Pilipinas (BSP) for banks and financial institutions availing of the provisions of
RA No. 9182, losses amounting to = P4.3 billion in 2005 and =P1.1 billion in 2004 from the sale of the
NPL to the SPV companies, representing the allowance for impairment losses specifically provided for
the NPLs but released to cover other impairment losses of the Parent Company, were deferred over a
ten-year period. As of January 1, 2005, upon adoption of Philippine Accounting Standard 39, the
Parent Company had no longer set up allowance for impairment losses on the NPL sold in 2005. Had
the allowance for impairment losses on the sold NPL in 2005 been set up as of January 1, 2005 and the
2004 loss been charged against operations as required by accounting principles generally accepted in
the Philippines (Philippine GAAP), deferred charges and capital funds as of December 31, 2005 and
2004 would have decreased by = P5.2 billion and =
P1.1 billion, respectively, and 2005 net income would
have increased by P=124.8 million and 2004 net income would have decreased by = P1.1 billion.

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

 -2-

In 2004, the Parent Company received zero-coupon notes as part of the consideration for the NPL
sold. As of December 31, 2004, the loss of =P1.9 billion representing the difference between the
present value and the carrying value of these zero-coupon notes was deferred as allowed by BSP.
Philippine GAAP requires that the loss be charged to current operations. Had such loss been
recognized in 2004, investments in bonds and other debt instruments and capital funds as of
December 31, 2004 would have decreased by = P1.9 billion. Net income in 2004 would have decreased
by =
P1.9 billion. On January 1, 2005, the Parent Company recognized the loss on the zero-coupon
notes as a direct charge to deficit.

In our opinion, the financial statements referred to above present fairly, in all material respects the
financial position of the Group and of the Parent Company as of December 31, 2005 and 2004, and the
results of their operations and their cash flows for the years then ended in conformity with Philippine
GAAP, except for the effects on the 2005 and 2004 financial statements of deferring the losses on the
sale of NPL to SPV companies as discussed in the third paragraph and the effects on the 2004
financial statements of not recognizing the loss on the zero-coupon notes received from the sale of
NPL as discussed in the fourth paragraph.

SYCIP GORRES VELAYO & CO.

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

March 24, 2006

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

Group Parent Company

December 31
2004 2004
(As Restated - (As Restated -
2005 Note 3) 2005 Note 3)
RESOURCES
Cash and Other Cash Items (Note 15) P
=6,102,118 =3,342,672
P P
=5,765,899 =3,342,466
P
Due from Bangko Sentral ng Pilipinas (Note 15) 3,719,362 3,765,737 3,719,362 3,765,737
Due from Other Banks 5,696,540 7,051,470 5,098,751 6,092,449
Interbank Loans Receivable (Note 30) 16,914,045 18,921,030 16,881,081 18,882,242
Securities Held Under Agreements to Resell (Note 15) 12,300,000 4,000,000 12,300,000 4,000,000
Financial Assets at Fair Value Through Profit or
Loss (Note 7) 538,468 – 512,091 –
Trading Account Securities, at fair value (Note 7) – 754,703 – 712,229
Available-for-Sale Investments, at fair value
(Notes 8 and 15) 40,243,664 – 38,084,187 –
Held-to-Maturity Investments, at amortized cost
(Notes 8 and 24) 5,266,817 – 5,091,685 –
Investment Securities - net (Note 8) – 63,033,848 – 60,930,559
Loans and Receivables - net (Notes 9 and 25) 79,730,962 – 77,554,727 –
Receivables from Customers - net (Notes 9 and 25) – 56,151,608 – 54,002,036
Furniture, Fixtures, Equipment and Leasehold
Improvements, at cost - net (Note 10) 788,877 726,764 700,345 633,584
Bank Premises, at appraised value - net (Notes 10) 14,540,365 14,680,353 14,536,391 14,669,857
Investments in Subsidiaries and an Associate
(Notes 2 and 11) 684,171 643,718 5,500,591 5,509,803
Investment Properties - net (Notes 2 and 12 and 21) 26,847,767 27,989,971 26,765,021 27,989,395
Other Resources - net (Note 13) 9,745,868 18,679,150 9,394,360 17,965,720
P
=223,119,024 =219,741,024
P P
=221,904,491 =218,496,077
P

LIABILITIES AND CAPITAL FUNDS

Liabilities
Deposit Liabilities (Note 15)
Demand P
=15,849,762 =14,476,485
P P
=15,698,886 =14,433,937
P
Savings 127,672,738 120,041,480 127,657,683 119,997,438
Time 24,304,277 26,491,088 26,739,311 28,548,468
167,826,777 161,009,053 170,095,880 162,979,843
Bills and Acceptances Payable (Notes 2 and 16) 13,145,874 13,534,658 12,443,283 12,895,473
Due to Bangko Sentral ng Pilipinas (Note 18) 115,704 103,326 115,704 103,326
Margin Deposits and Cash Letters of Credit (Note 18) 69,527 137,991 69,527 137,991
Manager’s Checks and Demand Drafts
Outstanding (Note 18) 472,805 477,893 472,805 477,893
Accrued Taxes, Interest and Other Expenses (Notes 18) 4,939,651 6,139,490 4,795,600 6,076,517
Subordinated Debt (Note 17) 2,958,437 3,000,000 2,958,437 3,000,000
Other Liabilities (Note 18) 10,679,448 9,764,975 9,658,377 8,740,575
200,208,223 194,167,386 200,609,613 194,411,618
(Forward)
 -2-

Group Parent Company

December 31
2004 2004
(As Restated - (As Restated -
2005 Note 3) 2005 Note 3)
Capital Funds
Capital stock (Notes 2 and 19) P
=22,929,837 =22,929,837
P P
=22,929,837 =22,929,837
P
Capital paid in excess of par value (Note 2) 545,745 545,745 545,745 545,745
Surplus reserves (Notes 2 and 24) 495,118 481,694 495,118 481,694
Deficit (Notes 2, 3 and 9) (3,657,870) (267,142) (4,926,731) (1,173,317)
Revaluation increment on land and buildings
(Notes 2 and 10) 1,480,301 1,443,486 1,480,301 1,439,328
Accumulated translation adjustment (Notes 2 and 11) 217,479 496,817 – –
Net unrealized gain (loss) on available-for-sale
investments (Note 8) 806,825 (143,548) 770,608 (138,828)
22,817,435 25,486,889 21,294,878 24,084,459
Minority Interest 93,366 86,749 – –
22,910,801 25,573,638 21,294,878 24,084,459
P
=223,119,024 =219,741,024
P P
=221,904,491 =218,496,077
P

See accompanying Notes to Financial Statements.

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

Group Parent Company

Years Ended December 31
2004 2004
(As Restated - (As Restated -
2005 Note 3) 2005 Note 3)
INTEREST INCOME ON
Loans and receivables (Notes 9 and 25) P
=6,340,391 =4,753,299
P P
=6,118,239 =4,552,212
P
Investment securities (Note 8) 4,145,956 4,015,209 4,064,096 3,900,620
Deposits with banks and others 600,435 468,401 530,918 387,745
11,086,782 9,236,909 10,713,253 8,840,577
INTEREST EXPENSE ON
Deposit liabilities (Note 15) 4,728,664 4,845,233 4,789,760 4,863,293
Bills payable and other borrowings (Notes 16 and 17) 1,124,366 1,156,612 1,097,448 1,125,620
5,853,030 6,001,845 5,887,208 5,988,913
NET INTEREST INCOME 5,233,752 3,235,064 4,826,045 2,851,664
PROVISION FOR IMPAIRMENT LOSSES
(Note 14) 504,213 964,335 502,855 932,395
NET INTEREST INCOME AFTER PROVISION
FOR IMPAIRMENT LOSSES 4,729,539 2,270,729 4,323,190 1,919,269
OTHER INCOME
Service charges, fees and commissions 2,691,263 2,995,724 1,806,022 2,134,003
Foreign exchange gains - net 1,085,548 1,346,674 576,223 845,131
Trading and investment securities gains - net (Note 7) 940,205 417,898 922,447 412,336
Equity in net earnings of a subsidiary and an
associate (Note 11) 49,665 30,219 – –
Miscellaneous (Notes 23) 1,676,013 1,879,763 1,496,224 1,750,748
6,442,694 6,670,278 4,800,916 5,142,218
OTHER EXPENSES
Compensation and fringe benefits (Notes 20 and 25) 3,438,937 3,333,362 2,774,334 2,701,819
Occupancy and equipment-related costs (Note 21) 857,259 759,212 699,450 625,031
Depreciation and amortization (Notes 10 and 12) 800,452 763,447 769,078 722,788
Taxes and licenses (Note 22) 1,001,462 868,844 973,868 841,498
Miscellaneous (Notes 22 and 23) 2,554,859 2,239,464 1,924,620 1,652,809
8,652,969 7,964,329 7,141,350 6,543,945
INCOME BEFORE INCOME TAX 2,519,264 976,678 1,982,756 517,542
PROVISION FOR INCOME TAX (Note 22) 1,891,726 618,142 1,731,778 478,793
NET INCOME P
=627,538 =358,536
P P
=250,978 =38,749
P
ATTRIBUTABLE TO:
Equity Holders of the Parent Company (Note 28) P
=620,921 =351,917
P P
=250,978 =38,749
P
Minority Interest 6,617 6,619 – –
P
=627,538 =358,536
P P
=250,978 =38,749
P
Earnings Per Share Attributable to Equity Holders of
the Parent Company (Note 28)
Basic P
=1.08 =0.61
P P
=0.44 =0.07
P
Diluted P
=1.08 =0.61
P P
=0.44 =0.07
P

See accompanying Notes to Financial Statements.

PHILIPPINE NATIONAL BANK AND SUBSIDIARIES
STATEMENTS OF CHANGES IN CAPITAL FUNDS
(In Thousand Pesos)

Group

Net
Additional Accumulated Unrealized
Capital Paid-in Surplus Revaluation Translation Gain (Loss) Minority Total
Stock Capital Reserves Deficit Increment Adjustment on AFS Total Interest Capital Funds
Balance at December 31, 2003, as
previously reported =22,929,837
P P
=545,745 =
P445,146 (P
=3,558,857) P
=1,291,648 P
=433,702 P
=126,966 =22,214,187
P P
=– =
P22,214,187
Effect of change in accounting for (Note 3):
Minority interest - Philippine
Accounting Standard (PAS) 1 – – – – – – – – 80,130 80,130
Retirement benefits - PAS 19 – – – (17,868) – – – (17,868) – (17,868)
Investment properties - PAS 40 – – – 3,222,471 – – – 3,222,471 – 3,222,471
Adjustment on revaluation increment – – – (228,257) 155,214 – – (73,043) – (73,043)
Balance at December 31, 2003, as restated 22,929,837 545,745 445,146 (582,511) 1,446,862 433,702 126,966 25,345,747 80,130 25,425,877
Transfer to surplus reserves – – 36,548 (36,548) – – – – – –
Net deduction from revaluation increment – – – – (3,376) – – (3,376) – (3,376)
Net movement in unrealized loss on available-for-sale
(AFS) investments – – – – – – (270,514) (270,514) – (270,514)
Translation adjustment during the year – – – – – 63,115 – 63,115 – 63,115
Total income and expenses recognized directly in
equity – – – – (3,376) 63,115 (270,514) (210,775) – (210,775)
Net income for the year, as restated (Note 3) – – – 351,917 – – – 351,917 6,619 358,536
Total income and expenses for the year – – – 351,917 (3,376) 63,115 (270,514) 141,142 6,619 147,761
Balance at December 31, 2004 P
=22,929,837 P
=545,745 P
=481,694 (P
=267,142) P
=1,443,486 P
=496,817 (P
=143,548) P
=25,486,889 P
=86,749 P
=25,573,638
 -2-

Group
Net
Additional Accumulated Unrealized
Capital Paid-in Surplus Revaluation Translation Gain (Loss) Minority Total
Stock Capital Reserves Deficit Increment Adjustment on AFS Total Interest Capital Funds
Balance at December 31, 2004, as
previously reported =22,929,837
P P
=545,745 =
P481,694 (P
=3,242,226) P
=1,288,272 P
=496,817 (P
=143,548) P
=22,356,591 =–
P =22,356,591
P
Effect of change in accounting for (Note 3):
Minority interest - PAS 1 – – – – – – – – 86,749 86,749
Retirement benefits - PAS 19 – – – 13,073 – – – 13,073 – 13,073
Investment properties - PAS 40 – – – 3,190,268 – – – 3,190,268 – 3,190,268
Adjustment on revaluation increment – – – (228,257) 155,214 – – (73,043) – (73,043)
Balance at December 31, 2004, as
restated 22,929,837 545,745 481,694 (267,142) 1,443,486 496,817 (143,548) 25,486,889 86,749 25,573,638
Cumulative effect of change in accounting for
financial instruments - PAS 39 (Note 3) – – – (2,075,890) - – 19,861 (2,056,029) – (2,056,029)
Balance at January 1, 2005 22,929,837 545,745 481,694 (2,343,032) 1,443,486 496,817 (123,687) 23,430,860 86,749 23,517,609
Valuation loss on SPV subordinated notes (Note 9) – – – (1,868,299) – – – (1,868,299) – (1,868,299)
Amortization of deferred losses (Note 9) – – – (54,036) – – – (54,036) – (54,036)
Transfer to surplus reserves – – 13,424 (13,424) – – – – – –
Net movement in unrealized gain on AFS – – – – – – 930,512 930,512 – 930,512
Net addition to revaluation increment – – – – 36,815 – – 36,815 – 36,815
Translation adjustment during the year – – – – – (279,338) – (279,338) – (279,338)
Total income and expenses recognized directly in
equity – – – – 36,815 (279,338) 930,512 687,989 – 687,989
Net income for the year – – – 620,921 – – – 620,921 6,617 627,538
Total income and expenses for the year – – – 620,921 36,815 (279,338) 930,512 1,308,910 6,617 1,315,527
Balance at December 31, 2005 P
=22,929,837 P
=545,745 P
=495,118 (P
=3,657,870) P
=1,480,301 P
=217,479 P
=806,825 P
=22,817,435 P
=93,366 P
=22,910,801
 -3-

Parent Company
Net
Accumulated Unrealized
Capital Additional Surplus Revaluation Translation Gain (Loss) Total
Stock Paid-in Capital Reserves Deficit Increment Adjustment on AFS Capital Funds
Balance at December 31, 2003, as
previously reported =22,929,837
P P
=545,745 P
=445,146 (P
=3,558,857) P
=1,291,648 P
=433,702 P
=126,966 P
=22,214,187
Effect of change in accounting for (Note 3):
Retirement benefits - PAS 19 – – – (17,868) – – – (17,868)
Investment in subsidiaries in separate
financial statements - PAS 27 – – – (501,242) (6,400) (433,702) 4,633 (936,711)
Investment in an associate in separate
financial statements - PAS 28 – – – (91,764) – – – (91,764)
Investment properties - PAS 40 – – – 3,222,470 – – – 3,222,470
Adjustment on revaluation increment – – – (228,257) 155,214 – – (73,043)
Balance at December 31, 2003 as restated 22,929,837 545,745 445,146 (1,175,518) 1,440,462 – 131,599 24,317,271
Transfer to surplus reserves – – 36,548 (36,548) – – – –
Net deduction from revaluation increment – – – – (1,134) – – (1,134)
Net unrealized loss on AFS – – – – – – (270,427) (270,427)
Total income and expenses recognized directly in
equity – – – – (1,134) – (270,427) (271,561)
Net income for the year, as restated (Note 3) – – – 38,749 – – – 38,749
Total income and expenses for the year – – – 38,749 (1,134) – (270,427) (232,812)
Balance at December 31, 2004 P
=22,929,837 P
=545,745 P
=481,694 (P
=1,173,317) P
=1,439,328 P
=– (P
=138,828) P
=24,084,459
 -4-

Parent Company
Net
Accumulated Unrealized
Capital Additional Surplus Revaluation Translation Gain (Loss) Total
Stock Paid-in Capital Reserves Deficit Increment Adjustment on AFS Capital Funds
Balance at December 31, 2004, as
previously reported =22,929,837
P P
=545,745 P
=481,694 (P
=3,242,226) P
=1,288,272 P
=496,817 (P
=143,548) P
=22,356,591
Effect of change in accounting for (Note 3):
Retirement benefits - PAS 19 – – – 13,073 – – – 13,073
Investment in subsidiaries in separate
financial statements - PAS 27 – – – (784,191) (4,158) (496,817) 4,720 (1,280,446)
Investment in an associate in separate
financial statements - PAS 28 – – – (121,984) – – – (121,984)
Investment properties - PAS 40 – – – 3,190,268 – – – 3,190,268
Adjustment on revaluation increment – – – (228,257) 155,214 – – (73,043)
Balance at December 31, 2004, as
restated 22,929,837 545,745 481,694 (1,173,317) 1,439,328 – (138,828) 24,084,459
Cumulative effect of change in accounting for
financial instruments - PAS 39 (Note 3) – – – (2,068,633) – – 19,861 (2,048,772)
Balance at January 1, 2005 22,929,837 545,745 481,694 (3,241,950) 1,439,328 – (118,967) 22,035,687
Valuation loss on SPV subordinated notes (Note 9) – – – (1,868,299) – – – (1,868,299)
Amortization of deferred losses (Note 9) – – – (54,036) – – – (54,036)
Transfer to surplus reserves – – 13,424 (13,424) – – – –
Net movement in unrealized gain on AFS – – – – – – 889,575 889,575
Net addition to revaluation increment – – – – 40,973 – – 40,973
Total income and expenses recognized directly in
equity – – – – 40,973 – 889,575 930,548
Net income for the year – – – 250,978 – – – 250,978
Total income and expenses for the year – – – 250,978 40,973 – 889,575 1,181,526
Balance at December 31, 2005 P
=22,929,837 P
=545,745 P
=495,118 (P
=4,926,731) P
=1,480,301 P
=– P
=770,608 P
=21,294,878

See accompanying Notes to Financial Statements.

PHILIPPINE NATIONAL BANK AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
(In Thousand Pesos)
Group Parent Company
Years Ended December 31
2004 2004
(As Restated - (As Restated -
2005 Note 3) 2005 Note 3)
CASH FLOWS FROM OPERATING ACTIVITIES
Income before income tax P
=2,519,264 =976,678
P P
=1,982,756 =517,542
P
Adjustments for:
Provision for impairment losses (Note 14) 504,213 964,335 502,855 932,395
Depreciation and amortization (Notes 10 and 12) 800,452 763,447 769,078 722,787
Gain on sale of investment property (483,469) (249,551) (483,469) (249,551)
Gain on foreclosure (102,238) (385,578) (102,238) (385,578)
Equity in net earnings of investees (Note 11) (49,665) (30,219) – –
Dividends received (Note 11) 9,212 7,210 9,212 7,210
Changes in operating resources and liabilities:
Decrease (increase) in amounts of:
Financial assets at fair value through profit or
loss/Trading account securities (Note 7) 216,235 247,752 200,138 253,670
Loans and receivables (5,594,019) (1,172,583) (5,429,572) (826,079)
Other resources 4,579,070 2,017,794 4,274,137 2,466,411
Increase (decrease) in amounts of:
Deposit liabilities (Note 15) 6,817,724 15,093,865 7,116,037 14,688,745
Due to Bangko Sentral ng Pilipinas
(Note 18) 12,378 (74,738) 12,378 (74,738)
Margin deposits and cash letters
of credit (Note 18) (68,464) (64,198) (68,464) (64,198)
Manager’s checks and demand drafts outstanding
(Note 18) (5,088) (154,698) (5,088) (154,698)
Accrued taxes, interest and other
expenses (Note 18) (1,199,839) (2,496,435) (1,285,988) (2,449,613)
Other liabilities 403,846 2,687,205 679,791 2,522,176
Net cash generated from operations 8,359,612 18,130,286 8,171,563 17,906,481
Income taxes paid (505,581) (480,314) (522,063) (342,010)
Net cash provided by operating activities 7,854,031 17,649,972 7,649,500 17,564,471
CASH FLOWS FROM INVESTING ACTIVITIES
Decrease (increase) in amounts of:
Interbank loans receivables 2,346,334 (2,346,334) 2,346,334 (2,346,334)
Available-for-sale investments (11,191,803) 851,109 (9,033,469) 851,022
Held-to-maturity investments 8,670,327 (16,605,981) 6,697,986 (16,830,998)
Investments in subsidiaries and an associate – 43,031 – 111,499
Proceeds from sale of investment property 2,982,533 2,136,251 3,096,748 2,136,251
Net acquisition of bank premises, furniture fixtures, equipment
and leasehold improvements (Note 10) (275,148) (343,604) (276,376) (320,003)
Net cash provided by (used in) investing activities 2,532,243 (16,265,528) 2,831,223 (16,398,563)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from (settlement of) bills and acceptances payable
(Note 16) (388,784) 984,730 (452,190) 965,359
Proceeds from subordinated debt (Note 17) – 3,000,000 – 3,000,000
Net cash provided by (used in) financing activities (388,784) 3,984,730 (452,190) 3,965,359
NET INCREASE IN CASH AND CASH EQUIVALENTS 9,997,490 5,369,174 10,028,533 5,131,267
CASH AND CASH EQUIVALENTS AT BEGINNING OF
YEAR
Cash and other cash items 3,342,672 3,257,207 3,342,466 3,205,026
Due from Bangko Sentral ng Pilipinas 3,765,737 1,115,502 3,765,737 1,115,502
Due from other banks 7,051,470 5,807,556 6,092,449 5,142,524
Interbank loans receivable (Note 30) 16,574,696 13,785,136 16,535,908 13,742,241
Securities held under agreements to resell 4,000,000 5,400,000 4,000,000 5,400,000
34,734,575 29,365,401 33,736,560 28,605,293
(Forward)
 -2-

Group Parent Company

Years Ended December 31
2004 2004
(As Restated - (As Restated -
2005 Note 3) 2005 Note 3)

CASH AND CASH EQUIVALENTS AT END OF

YEAR
Cash and other cash items P
=6,102,118 =3,342,672
P P
=5,765,899 =3,342,466
P
Due from Bangko Sentral ng Pilipinas 3,719,362 3,765,737 3,719,362 3,765,737
Due from other banks 5,696,540 7,051,470 5,098,750 6,092,449
Interbank loans receivable (Note 30) 16,914,045 16,574,696 16,881,081 16,535,908
Securities held under agreements to resell 12,300,000 4,000,000 12,300,000 4,000,000
P
=44,732,065 =34,734,575
P P
=43,765,092 =33,736,560
P

See accompanying Notes to Financial Statements.

PHILIPPINE NATIONAL BANK AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS

1. General Information

Philippine National Bank (the Parent Company) was incorporated in 1916 and started commercial
operations that same year. Its principal place of business is at PNB Financial Center, President
Diosdado Macapagal Boulevard, Pasay City. As of December 31, 2005, the Parent Company is
owned 77.43% by Lucio Tan Group (LTG) and 12.53% by the National Government (NG). As of
December 31, 2004, the Parent Company was owned 44.98% by LTG and 44.98% by NG. The
Parent Company has 33,089 and 33,439 shareholders as of December 31, 2005 and 2004,
respectively.

The Parent Company provides a full range of banking and other financial services to corporate,
middle-market and retail customers, the NG, local government units (LGU’s) and government-
owned and controlled corporations (GOCC’s) and various government agencies. The Parent
Company’s principal commercial banking activities include deposit-taking, lending, bills
discounting, foreign exchange dealing, investment banking, fund transfers/remittance servicing
and a full range of retail banking and trust services through its 324 domestic and 33 overseas
branches and offices in 2005 and 324 domestic and 29 overseas branches and offices in 2004. The
Parent Company’s international subsidiaries have a network of 69 and 66 offices in 2005 and
2004, respectively, in key cities of the United States of America (USA), Canada, Western Europe,
Middle East and Asia.

The Parent Company and its Subsidiaries (the Group) are engaged in a number of diversified
financial and related businesses such as merchant banking, remittance servicing, non-life
insurance, leasing, stock brokerage, foreign exchange trading and related services. A certain
associate of the Parent Company is also engaged in other services such as financing of small and
medium-sized industries, life-insurance, as well as financial advisory services.

The accompanying financial statements of the Group and of the Parent Company were authorized
for issue by the Parent Company’s board of directors (BOD) on March 24, 2006.

2. Restructuring and Rehabilitation

The Parent Company is currently operating under a rehabilitation program pursuant to the
Memorandum of Agreement (MOA) signed by the Republic of the Philippines, the Philippine
Deposit Insurance Corporation (PDIC) and the LTG on May 3, 2002.

Pursuant to the MOA, the following measures have been implemented:

(1) Capital Restructuring

i. The Parent Company instituted a capital reduction exercise as of December 31, 2001,
reducing the par value of its common shares from P
=60 per share to =
P40 per share,

*SGVMC107795*
 -2-

resulting in a total capital reduction of =

P7.6 billion. This resulted in a decrease in the
authorized capital stock of the Parent Company from = P50.0 billion divided into
833,333,334 common shares to = P33.3 billion divided into 833,333,334 common shares.
The reduction in par value and the amendment to the articles of incorporation of the
Parent Company were approved by the BOD of the Parent Company on May 17, 2002 and
by the Philippine Securities and Exchange Commission (SEC) on July 23, 2002.

ii. On May 16, 2002, the Bangko Sentral ng Pilipinas (BSP) approved the following:
(a) booking of an appraisal increment of =P431.8 million for the year ended
December 31, 2001 on branch premises and recognition of the same for the purpose of
determining the Parent Company’s capital adequacy ratio; and (b) booking of translation
adjustment of P
=1.6 billion for the year ended December 31, 2001 representing the increase
in peso value of the Parent Company’s investment in foreign subsidiaries, for the purpose
of the Rehabilitation Plan and as an exception to existing BSP regulations, provided that
the same shall be excluded for dividend distribution purposes.

iii. The translation adjustment of = P1.6 billion was applied to eliminate the Parent Company’s
remaining deficit of =P1.3 billion as of December 31, 2001, after applying the total
reduction in par value amounting to P =7.6 billion as a result of the capital reduction
exercise. This corporate act was approved by the SEC on November 7, 2002, subject to
the following conditions: (a) the remaining translation adjustment of = P310.7 million as of
December 31, 2001 (shown in the statements of condition as part of Capital Paid in Excess
of Par Value) will not, without the prior approval of the SEC, be used for or applied
towards any provisions for losses that may be incurred in the future; and (b) for purposes
of declaration of dividends, any future surplus account of the Parent Company shall be
restricted to the extent of the deficit wiped out by the translation adjustment.

The foregoing capital restructuring measures were aimed at reducing the deficit in the
capital funds of the Parent Company which amounted to =P8.9 billion as of December 31,
2001.

The Parent Company’s deficit before and after the quasi-reorganization follows
(in thousand pesos):

Deficit before the quasi-reorganization (balance at

December 31, 2001) =
P8,877,094
Reduction in par value during the year (7,561,409)
Application of translation adjustment to deficit on
quasi-reorganization (1,626,430)
Deficit after the quasi-reorganization (310,745)
Transfer to capital paid in excess of par value =
P310,745
 -3-

(2) Debt-to-Equity Conversion

In 2002, convertible preferred shares were issued to the PDIC as payment for the = P7.8 billion
borrowed by the Parent Company from the PDIC. This increased (i) the authorized capital
stock of the Parent Company to = P50.0 billion consisting of 1,054,824,557 common shares
with a par value of =
P40 each and 195,175,444 convertible preferred shares with a par value of
=40 each and (ii) the issued capital stock of the Parent Company to =
P P22.9 billion consisting of
378,070,472 common shares with a par value of = P40 each and 195,175,444 convertible
preferred shares with a par value of P=40 each.

(3) Assignment of Certain Government Accounts to the PDIC

On July 30, 2002, the Parent Company and the PDIC signed an agreement whereby the Parent
Company transferred and conveyed by way of “dacion en pago”, or payment in kind, its rights
and interests to the loans of the NG, certain LGU’s, certain GOCC’s and various government
agencies and certain debt securities issued by various government entities (the Government
accounts), to the PDIC. The “dacion en pago” arrangement reduced the Parent Company’s
outstanding obligations arising from the financial assistance given to the Parent Company by
the BSP and the PDIC. The accrual of interest incurred by the Parent Company on the
government accounts and = P10.0 billion payable to the PDIC ceased on October 1, 2001.

After the completion of the corporate actions and rehabilitation set out above (especially, the
conversion of debt to equity and the “dacion en pago” arrangement), the balance of the Parent
Company’s outstanding obligations to the PDIC was = P6.1 billion. This balance was restructured
into a term loan of 10 years, with interest payable at 91-day treasury bills (T-bills) rate plus 1.00%
(Note 16).

In line with the rehabilitation program of the Parent Company as approved under Monetary Board
(MB) Resolution No. 626 dated April 30, 2003, the Parent Company and the BSP entered into a
Memorandum of Understanding (MOU) on September 16, 2003. Pursuant to the MOU, the Parent
Company shall comply to the full extent of its capability with the following directives of MB
Resolution No. 649, among others:

(1) Maintain a strong management team supported by competent staff;

(2) Improve the Parent Company’s past due ratio;
(3) Sell the PNB Financial Center;
(4) Dispose real and other properties owned or acquired (ROPOA) (now investment property);
and
(5) Comply with certain prescribed limits.
 -4-

3. Summary of Significant Accounting Policies

Basis of Financial Statement Preparation

The accompanying financial statements have been prepared in compliance with the accounting
principles generally accepted in the Philippines (Philippine GAAP) as set forth in Philippine
Financial Reporting Standards (PFRS). The financial statements are prepared under the historical
cost convention as modified for the measurement at fair value of derivatives, land and buildings,
and trading and investment securities other than those classified as held-to-maturity (HTM) and
loans and receivables.

The financial statements of the Parent Company reflect the accounts maintained in the Regular
Banking Unit (RBU) and Foreign Currency Deposit Unit (FCDU). The financial statements
individually prepared for these units are combined and inter-unit accounts are eliminated.

The books of accounts of the RBU are maintained in Philippine pesos, while those of FCDU are
maintained in their original currencies. For financial reporting purposes, FCDU accounts and
foreign currency-denominated accounts in RBU are translated into their equivalents in Philippine
pesos based on the Philippine Dealing System weighted average rate (PDSWAR) prevailing at the
end of the year (for resources and liabilities) and at the average PDSWAR for the year (for income
and expenses). Foreign exchange differentials arising from foreign currency transactions and
restatements of foreign currency-denominated resources and liabilities, except non-monetary
assets, are credited to or charged against operations in the year in which the rates change.

The accounting policies have been consistently applied to all the periods presented, except for
those relating to the classification and measurement of financial instruments. The comparative
figures for 2004 were restated to reflect the adjustments resulting from adoption of new and
revised accounting standards, except Philippine Accounting Standard (PAS) 32, Financial
Instruments: Disclosure and Presentation and PAS 39, Financial Instruments: Recognition and
Measurement, for which the Philippine SEC has allowed to be applied from January 1, 2005.

Consolidation
The Group financial statements comprise the financial statements of the Parent Company and the
following wholly owned and majority owned subsidiaries:

Effective
Country of Functional Percentage
Subsidiary Industry Incorporation Currency of Ownership
PNB Capital and Investment Corporation
(PNB Capital) Financial Markets Philippines Philippine Peso 100.00
PNB Forex, Inc. - do - - do - - do - 100.00
PNB Holdings Corporation (PNB Holdings) - do - - do - - do - 100.00
PNB Securities, Inc. - do - - do - - do - 100.00
PNB Corporation – Guam - do - Guam US dollar 100.00
PNB International Investments Corporation - do - USA US dollar 100.00
PNB Europe PLC - do - United Kingdom Pounds Sterling 100.00
Hong Kong
PNB International Finance Limited - do - Hong Kong dollar 100.00
PNB Italy – SpA - do - Italy Euro 100.00
Hong Kong
PNB Remittance Center, Ltd. Services Hong Kong dollar 100.00

(Forward)
 -5-

Effective
Country of Functional Percentage
Subsidiary Industry Incorporation Currency of Ownership
Omicron Asset Portfolio (SPV-AMC), Inc. Financial Markets Philippines Philippine Peso 100.00
Opal Portfolio Investments (SPV-AMC), Inc. - do - - do - - do - 100.00
Tanzanite Investments (SPV-AMC), Inc. - do - - do - - do - 100.00
Tau Portfolio Investments (SPV-AMC), Inc. - do - - do - - do - 100.00
Japan - PNB Leasing and Finance Corporation
(Japan - PNB Leasing) - do - - do - - do - 60.00

The financial statements of PNB Venture Capital Corporation (PVCC), a 60%-owned subsidiary,
are not included in the Group’s financial statements due to immateriality of balances and PVCC is
already approved for liquidation.

The financial statements of the Subsidiaries are prepared for the same reporting year as the Parent
Company, using consistent accounting policies.

Subsidiaries are consolidated from the date on which control is transferred to the Group and cease
to be consolidated from the date on which control is transferred out of the Group. The results of
Subsidiaries acquired or disposed of during the financial year are included in or excluded from the
Group statements of income from the respective dates of their acquisition or disposal. Inter-
company balances and transactions and resulting unrealised profits and losses are eliminated in
full on consolidation.

Changes in Accounting Policies

On January 1, 2005, the following new accounting standards became effective and were adopted
by the Group:

• PAS 19, Employee Benefits, provides for the accounting for long-term and other employee
benefits. The adoption of this standard resulted in the recognition of a net transition liability
of P
=17.9 million as a charge against deficit as of January 1, 2004. Net income in 2004
increased by =P30.9 million. The change in accounting policy also resulted in the inclusion of
additional disclosures in the accompanying financial statements.

• PAS 21, The Effects of Changes in Foreign Exchange Rates, prohibits the capitalization of
foreign exchange losses. The standard also requires the entities in the Group to determine
their functional currency. The adoption of this standard has no material impact on the
financial statements.

• PAS 30, Disclosures in the Financial Statements of Banks and Similar Financial Institutions,
provides for the required disclosure and presentation in respect of the accounts of banks and
similar financial institutions. It also provides that any provision for general banking risks is
treated as an appropriation of surplus and should not be included in the determination of net
income for the period. The effect of adopting this standard resulted in the reallocation of the
general loan loss reserves as of January 1, 2005 amounting to P =342.3 million to cover the
additional specific reserves required upon the adoption of PAS 39. The standard requires
more comprehensive disclosure about the Group’s financial instruments, whether recognized
or unrecognized in the financial statements. The required new disclosures are reflected in the
financial statements, where applicable.
 -6-

• PAS 32, Financial Instruments: Disclosure and Presentation, covers the disclosure and
presentation of all financial instruments. The standard requires more comprehensive
disclosures about the Group’s financial instruments. New disclosure requirements include
terms and conditions of financial instruments used by the Group, types of risks associated with
financial instruments (market risk, foreign exchange risk, price risk, credit risk, liquidity risk
and cash flow risk), fair value information of financial assets and financial liabilities, and the
Group’s financial risk management policies and objectives. The standard also requires
financial instruments to be classified as debt or equity in accordance with their substance and
not their legal form.

The standard also requires presentation of financial assets and financial liabilities on a net
basis when, and only when, an entity: (a) currently has a legally enforceable right to set off the
recognized amounts; and (b) intends either to settle on a net basis, or to realize the asset and
settle the liability simultaneously.

• PAS 39, Financial Instruments: Recognition and Measurement, establishes the accounting and
reporting standards for recognizing and measuring the Group’s financial assets and financial
liabilities. It also covers the accounting for derivative instruments.

The effect of adopting this standard did not result in the restatement of prior year financial
statements as allowed by the SEC under its Memorandum Circular 19 Series of 2004. The
total cumulative effect of adopting the standard amounting to = P2.1 billion, however, was
charged against deficit as of January 1, 2005. The disclosures required by PAS 32 are
reflected in the financial statements, where applicable.

The adoption of the provision of PAS 39 on the classification and related measurement, other
than impairment, of financial assets and liabilities on the Group financial statements resulted
in an increase in deficit as of January 1, 2005 amounting to P=80.9 million.

Prior to January 1, 2005, the adequacy of allowance for impairment losses on loans and other
receivables and risk assets was determined based on management criteria and BSP
requirements. The effect of adopting PAS 39 provisions on impairment of financial resources
as of January 1, 2005 amounted to = P8.2 billion, net of the general reserves reallocated to
specific reserves. However, allowance for impairment losses charged to deficit as of
January 1, 2005 amounted to = P1.9 billion, net of the =
P1.9 billion loss on the zero-coupon notes
received in 2004 as consideration of the non-performing loans (NPL) sold to special purpose
vehicle (SPV) companies which was separately charged to deficit on January 1, 2005. As of
December 31, 2004, this loss on the zero-coupon notes was not recognized in the financial
statements.

In 2005, the Parent Company sold certain NPL to an SPV company at a loss of =P4.4 billion.
The Parent Company availed of the incentives under Republic Act (RA) No. 9182 on the
deferral of losses incurred from the sale of NPL to SPV companies. Accordingly, as of
January 1, 2005, no allowance for impairment losses on these NPLs was set up in the financial
statements.

The Group adopted the fair valuation method for all its derivative transactions. The effect of
adopting fair valuation method resulted in an increase in deficit as of January 1, 2005
amounting to =P74.2 million.
 -7-

• PAS 40, Investment Property, prescribes the accounting treatment for investment property and
related disclosure requirements. The Group adopted the cost model in accounting for its
investment property. The effect of adopting the cost model in accounting for ROPOA
qualified as investment property resulted in a net decrease in deficit as of December 31, 2003
by =P3.2 billion. Net income decreased by = P32.2 million in 2004. Previously, ROPOA were
carried at the lower of total outstanding exposure at the time of foreclosure or bid price, less
allowance for impairment losses (i.e. net realizable value).

• PFRS 4, Insurance Contract, specifies the financial reporting for all insurance contracts
(including reinsurance contracts) that an entity issues and to reinsurance contracts that it holds.

• PFRS 5, Non-current Assets Held for Sale and Discontinued Operations, specifies the
accounting for assets held for sale and the presentation and disclosure of discontinued
operations. As of December 31, 2005, the Group had no assets that qualify as noncurrent
assets held for sale and discontinued operations.

The Group also adopted in 2005 the following revised standards:

• PAS 1, Presentation of Financial Statements, provides a framework within which an entity

assesses how to present fairly the effects of transactions and other events; provides the base
criteria for classifying liabilities as current or noncurrent; prohibits the presentation of income
from operating activities and extraordinary items as separate line items in the statements of
income; and specifies the disclosures about key sources of estimation uncertainty and
judgments that management has made in the process of applying the entity’s accounting
policies. It also requires changes in the presentation of minority interest in the statements of
condition and statements of income.

• PAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, removes the
concept of fundamental error and the allowed alternative to retrospective application of
voluntary changes in accounting policies and retrospective restatement to correct prior period
errors. It defines material omission or misstatements, and describes how to apply the concept
of materiality when applying accounting policies and correcting errors.

• PAS 10, Events after the Balance Sheet Date, provides a limited clarification of the
accounting for dividends declared after the statement of condition date.

• PAS 16, Property, Plant and Equipment, provides additional guidance and clarification on the
recognition and measurement of items of property, plant and equipment. It also provides that
each part of an item of property, plant and equipment with a cost that is significant in relation
to the total cost of the item shall be depreciated separately.

• PAS 17, Leases, provides a limited revision to clarify the classification of a lease of land and
buildings and prohibits expensing of initial direct costs in the financial statements of lessors.

• PAS 24, Related Party Disclosures, provides additional guidance and clarity in the scope of
the standard, the definitions and the disclosures for related parties. It also requires disclosure
of the total compensation of key management personnel by benefit type.
 -8-

• PAS 27, Consolidated and Separate Financial Statements, reduces alternatives in accounting
for subsidiaries in the consolidated financial statements and in accounting for investments in
the separate financial statements of a parent company, venturer or investor. The adoption of
this standard in the Parent Company financial statements resulted in the increase in deficit
amounting to = P501.2 million as of December 31, 2003. However, accumulated equity income
reversed to deficit represents the income received after the quasi-reorganization as discussed in
Note 2. Other downward adjustments to capital funds representing the Parent Company’s
share in revaluation increment, net unrealized loss on available-for-sale investments (AFS) and
equity translation adjustment of the subsidiaries as of January 1, 2004 amounted to
=
P438.5 million. The accumulated translation adjustment reversed excludes those that have
been closed to deficit on restructuring date as discussed in Note 2. Net income of the Parent
Company decreased by P =282.6 million in 2004.

• PAS 28, Investments in Associates, reduces alternatives in accounting for associates in the
consolidated financial statements and in accounting for investments in the separate financial
statements of an investor. The effect of adopting this standard in the Parent Company
financial statements resulted in an increase in deficit as of December 31, 2003 amounting to
=
P91.8 million. Net income of the Parent Company in 2004 decreased by = P30.2 million.

• PAS 33, Earnings per Share, prescribes principles for the determination and presentation of
earnings per share for entities with publicly traded shares, entities in the process of issuing
ordinary shares to the public, and any entities that calculate and disclose earnings per share.

• PAS 36, Impairment of Assets, establishes the frequency of impairment testing for certain
intangibles and provides additional guidance on the measurement of an asset’s value in use.

• PAS 38, Intangible Assets, provides additional clarification on the definition and recognition
of certain intangibles.

The adoption of the above new and revised accounting standards involved changes in accounting
policies and the Group has accordingly restated the comparative financial statements retroactively
in accordance with the transitional provisions of these accounting standards. The tables and
related notes below provide the reconciliation of financial position as of December 31, 2004 and
2003 and the results of operations for 2004 (in thousand pesos) following the adoption of PFRS:
Group Parent Company
December 31, 2004 (end of last period presented under previous GAAP)
Effect of Effect of
Previous Transition Previous Transition
Account Description Item GAAP to PFRS PFRS GAAP to PFRS PFRS
RESOURCES =
P3,342,672 =
P– =
P3,342,672 =
P3,342,466 =
P– P
=3,342,466
Cash and Other Cash Items
Due from Bangko Sentral ng Pilipinas 3,765,737 – 3,765,737 3,765,737 – 3,765,737
Due from Other Banks 7,051,470 – 7,051,470 6,092,449 – 6,092,449
Interbank Loans Receivable 18,921,030 – 18,921,030 18,882,242 – 18,882,242
Securities Held under Agreements to Resell 4,000,000 – 4,000,000 4,000,000 – 4,000,000
Trading Account Securities, at fair value 754,703 – 754,703 712,229 – 712,229
Investment Securities - net 63,033,848 – 63,033,848 60,930,559 – 60,930,559
Receivables from Customers - net 56,151,608 – 56,151,608 54,002,036 – 54,002,036
Furniture, Fixtures, Equipment and
Leasehold Improvements, at cost - net 726,764 – 726,764 633,584 – 633,584
Bank Premises, at appraised value - net 14,680,353 – 14,680,353 14,669,857 – 14,669,857
Investments in Subsidiaries and an
Associate - net a 782,704 (138,986) 643,718 7,059,371 (1,549,568) 5,509,803
Investment Properties - net b 24,827,015 3,162,956 27,989,971 24,826,439 3,162,956 27,989,395
Other Resources - net c 18,403,652 275,498 18,679,150 17,684,027 281,693 17,965,720
P
=216,441,556 =
P3,299,468 =
P219,741,024 =
P216,600,996 =
P1,895,081 =
P218,496,077

(Forward)
 -9-

Group Parent Company

December 31, 2004 (end of last period presented under previous GAAP)
Effect of Effect of
Previous Transition Previous Transition
Account Description Item GAAP to PFRS PFRS GAAP to PFRS PFRS
LIABILITIES AND CAPITAL FUNDS
Liabilities
Deposit Liabilities
Demand =
P14,476,485 =
P– =
P14,476,485 =
P14,433,937 =
P– P14,433,937
=
Savings 120,041,480 – 120,041,480 119,997,438 – 119,997,438
Time 26,491,088 – 26,491,088 28,548,468 – 28,548,468
161,009,053 – 161,009,053 162,979,843 – 162,979,843
Bills and Acceptances Payable 13,534,658 – 13,534,658 12,895,473 – 12,895,473
Due to Bangko Sentral ng Pilipinas 103,326 – 103,326 103,326 – 103,326
Margin Deposits and Cash Letters of Credit 137,991 – 137,991 137,991 – 137,991
Manager’s Checks and Demand Drafts
Outstanding 477,893 – 477,893 477,893 – 477,893
Accrued Taxes, Interest and Other Expenses d 6,043,362 96,128 6,139,490 5,980,389 96,128 6,076,517
Subordinated Debt 3,000,000 – 3,000,000 3,000,000 – 3,000,000
Other Liabilities e 9,778,681 (13,706) 9,764,975 8,669,489 71,086 8,740,575
194,084,965 82,427 194,167,386 194,244,405 167,217 194,411,618
Capital Funds
Preferred stock 7,807,018 – 7,807,018 7,807,018 – 7,807,018
Common stock 15,122,819 – 15,122,819 15,122,819 – 15,122,819
Capital paid in excess of par value 545,745 – 545,745 545,745 – 545,745
Surplus reserves 481,694 – 481,694 481,694 – 481,694
Deficit f (3,242,226) 2,975,084 (267,142) (3,242,226) 2,068,909 (1,173,317)
Revaluation increment on land and buildings g 1,288,272 155,214 1,443,486 1,288,272 151,056 1,439,328
Accumulated translation adjustment h 496,817 – 496,817 496,817 (496,817) –
Net unrealized loss on available-for-
sale investments i (143,548) – (143,548) (143,548) 4,720 (138,828)
22,356,591 3,130,298 25,486,889 22,356,591 1,727,868 24,084,459
Minority Interest j – 86,749 86,749 – – –
22,356,591 3,217,047 25,573,638 22,356,591 1,727,868 24,084,459
P
=216,441,556 =
P3,299,468 =
P219,741,024 =
P216,600,996 =
P1,895,081 =
P218,496,077

Group Parent Company

December 31, 2003 (Date of Transition)
Effect of Effect of
Previous Transition Previous Transition
Account Description Item GAAP to PFRS PFRS GAAP to PFRS PFRS
RESOURCES
Cash and Other Cash Items P
=3,257,207 =
P– =
P3,257,207 =
P3,205,026 =
P– =3,205,026
P
Due from Bangko Sentral ng Pilipinas 1,115,502 – 1,115,502 1,115,502 – 1,115,502
Due from Other Banks 5,807,556 – 5,807,556 5,142,524 – 5,142,524
Interbank Loans Receivable 13,785,136 – 13,785,136 13,742,241 – 13,742,241
Securities Held under Agreements to Resell 5,400,000 – 5,400,000 5,400,000 – 5,400,000
Trading Account Securities, at fair value 1,002,455 – 1,002,455 965,899 – 965,899
Investment Securities - net 47,326,768 – 47,326,768 44,998,375 – 44,998,375
Receivables from Customers - net 60,040,313 – 60,040,313 58,205,304 – 58,205,304
Furniture, Fixtures and Equipment and
Leasehold Improvements, at cost - net 678,833 – 678,833 607,687 – 607,687
Bank Premises, at appraised value - net 14,869,381 – 14,869,381 14,812,915 – 14,812,915
Investments in Subsidiaries and an
Associate - net k 739,611 (118,902) 620,709 6,737,815 (1,147,889) 5,589,926
Investment Properties - net l 24,882,574 3,191,276 28,073,850 24,881,999 3,191,276 28,073,275
Other Resources - net m 18,246,056 150,097 18,396,153 18,042,548 147,597 18,190,145
P
=197,151,392 =
P3,222,471 =
P200,373,863 =197,857,835
P =
P2,190,984 =
P200,048,819

LIABILITIES AND CAPITAL FUNDS

Liabilities
Deposit Liabilities
Demand =
P13,122,823 =
P– =
P13,122,823 =
P13,223,617 =
P– P13,223,617
=
Savings 106,610,304 – 106,610,304 106,571,865 106,571,865
Time 26,182,061 – 26,182,061 28,495,616 – 28,495,616
145,915,188 – 145,915,188 148,291,098 – 148,291,098
Bills and Acceptances Payable 12,549,928 – 12,549,928 11,930,114 – 11,930,114
Due to Bangko Sentral ng Pilipinas 178,064 – 178,064 178,064 – 178,064
Margin Deposits and Cash Letters of Credit 202,189 – 202,189 202,189 – 202,189
Manager’s Checks and Demand Drafts
Outstanding 632,591 – 632,591 632,591 – 632,591
Accrued Taxes, Interest and Other Expenses n 8,374,387 17,868 8,392,255 8,262,278 17,868 8,280,146
Other Liabilities o 7,084,858 (7,087) 7,077,771 6,147,314 70,032 6,217,346
174,937,205 10,781 174,947,986 175,643,648 87,900 175,731,548

(Forward)
 - 10 -

Group Parent Company

December 31, 2003 (Date of Transition)
Effect of Effect of
Previous Transition Previous Transition
Account Description Item GAAP to PFRS PFRS GAAP to PFRS PFRS
Capital Funds
Preferred stock =
P7,807,018 =
P– =
P7,807,018 =
P7,807,018 =
P– P7,807,018
=
Common stock 15,122,819 – 15,122,819 15,122,819 – 15,122,819
Capital paid in excess of par value 545,745 – 545,745 545,745 – 545,745
Surplus reserves 445,146 - 445,146 445,146 - 445,146
Deficit p (3,558,857) 2,976,346 (582,511) (3,558,857) 2,383,339 (1,175,518)
Revaluation increment on land and buildings q 1,291,648 155,214 1,446,862 1,291,648 148,814 1,440,462
Accumulated translation adjustment h 433,702 – 433,702 433,702 (433,702) –
Net unrealized gain on available-
for-sale investments i 126,966 – 126,966 126,966 4,633 131,599
22,214,187 3,131,560 25,345,747 22,214,187 2,103,084 24,317,271
Minority Interest j – 80,130 80,130 – – –
22,214,187 3,211,690 25,425,877 22,214,187 2,103,084 24,317,271
P
=197,151,392 =
P3,222,471 =
P200,373,863 =
P197,857,835 =
P2,190,984 =
P200,048,819

Reconciliation of 2004 results of operations (in thousand pesos) upon adoption of PFRS follows:
Group Parent Company
Effect of Effect of
Previous Transition Previous Transition
Item GAAP to PFRS PFRS GAAP to PFRS PFRS
INTEREST INCOME ON
Receivables from customers =
P4,753,299 =
P– =
P4,753,299 =
P4,552,212 =
P– =
P4,552,212
Trading and investment securities 4,015,209 – 4,015,209 3,900,620 – 3,900,620
Deposits with banks and others 468,401 – 468,401 387,745 – 387,745
9,236,909 – 9,236,909 8,840,577 – 8,840,577
INTEREST EXPENSE ON
Deposit liabilities 4,845,233 – 4,845,233 4,863,293 – 4,863,293
Bills payable and other borrowings 1,156,612 – 1,156,612 1,125,620 – 1,125,620
6,001,845 – 6,001,845 5,988,913 – 5,988,913
NET INTEREST INCOME 3,235,064 – 3,235,064 2,851,664 2,851,664
PROVISION FOR IMPAIRMENT
LOSSES r 840,913 123,422 964,335 808,973 123,422 932,395
NET INTEREST INCOME AFTER
PROVISION FOR IMPAIRMENT
LOSSES 2,394,151 123,422 2,270,729 2,042,691 123,422 1,919,269
OTHER INCOME
Service charges, fees and commissions 2,995,724 – 2,995,724 2,134,003 – 2,134,003
Foreign exchange gain - net 1,346,674 – 1,346,674 845,131 – 845,131
Trading and investment securities gains - net 417,898 – 417,898 412,336 – 412,336
Equity in net earnings of a subsidiary and
an associate s 30,219 – 30,219 331,586 (331,586) –
Miscellaneous t 1,487,566 392,197 1,879,763 1,346,752 403,996 1,750,748
6,278,081 392,197 6,670,278 5,069,808 72,410 5,142,218

OTHER EXPENSES
Compensation and fringe benefits u 3,364,303 (30,941) 3,333,362 2,732,760 (30,941) 2,701,819
Taxes and licenses 868,844 – 868,844 841,498 – 841,498
Occupancy and equipment-related costs 759,212 – 759,212 625,031 – 625,031
Depreciation and amortization v 469,089 294,358 763,447 428,430 294,358 722,788
Miscellaneous 2,239,464 – 2,239,464 1,652,809 – 1,652,809
7,700,911 263,418 7,964,329 6,280,527 263,418 6,543,945
INCOME BEFORE INCOME TAX 971,321 5,357 976,678 831,972 (314,430) 517,542
PROVISION FOR INCOME TAX 618,142 – 618,142 478,793 – 478,793
NET INCOME =353,179
P =
P5,357 P
=358,536 =
P353,179 (P
=314,430) =
P38,749
 - 11 -

a. The adjustment on investments in Subsidiaries and an Associate in 2004 consists of:

Group Parent Company

Other investment in shares of stock reclassified to
other resources, net of allowance for decline in
value of =
P332.1 million (see item c) (P
=138,986) (P
=145,181)
Reversal of share in accumulated:
Income of subsidiaries (see item f) – (784,191)
Translation adjustment (see item h) – (496,817)
Income of an associate (see item f) – (121,984)
Revaluation increment – (6,115)
Unrealized loss on AFS (see item i) – 4,720
(P
=138,986) (P
=1,549,568)

b. The adjustment on Investment Properties of the Group and of the Parent Company in 2004
consists of:

Reversal of allowance for probable losses on

ROPOA under previous GAAP (see item f) =4,143,964
P
Initial measurement of investment properties
at fair value (see item f) 3,954,809
Recognition of allowance for impairment losses on
investment properties (see item f) (3,272,257)
Recognition of accumulated depreciation on
investment properties (see item f) (1,636,248)
Reclassification of foreclosed machineries and other
equipment to other resources (see item c) (27,312)
=
P3,162,956

c. The adjustment on Other Resources in 2004 consists of:

Group Parent Company

Reclassification of other investment in shares of
stock from investments in subsidiaries and
associate, net of allowance of =
P332.1 million
(see item a) =
P138,986 =
P145,181
Reversal of amortization of prepaid retirement
expenses 109,200 109,200
Reclassification of foreclosed machineries and other
equipment from investment properties (see item b) 27,312 27,312
=275,498
P =
P281,693
 - 12 -

d. The adjustment on Accrued Taxes, Interest and Other Expenses of the Group and of the Parent
Company consists of:

Recognition of transition liability on retirement fund

(see item f) =17,868
P
Recognition of additional liability on retirement
fund in 2004 78,260
P
=96,128

e. The adjustment on Other Liabilities in 2004 consists of:

Group Parent Company

Recognition of deferred income tax liability on
reclassified revaluation increment on land (see
item g) =73,043
P =
P73,043
Reclassification of minority interest from other
liabilities to capital funds (see item j) (86,749) –
Reversal of deferred income tax liability on share in
revaluation increment of a subsidiary – (1,957)
(P
=13,706) =
P71,086

f. The adjustment on Deficit in 2004 consists of:

Group Parent Company

Reversal of allowance for probable losses on
ROPOA under previous GAAP (see item b) =4,143,964
P =
P4,143,964
Initial measurement of investment properties at fair
value (see item b) 3,954,809 3,954,809
Recognition of allowance for impairment losses on
investment properties (see item b) (3,272,257) (3,272,257)
Recognition of accumulated depreciation on
investment properties (see item b) (1,636,248) (1,636,248)
Reclassification of revaluation increment on land
(see item g) (228,257) (228,257)
Reversal of retirement expense under previous
GAAP 30,941 30,941
Recognition of transition liability on retirement fund
(see item d) (17,868) (17,868)
Reversal of accumulated equity in net income of
subsidiaries (see item a) – (784,191)
Reversal of accumulated equity in net income of an
associate (see item a) – (121,984)
=2,975,084
P =
P2,068,909
 - 13 -

g. The adjustment on Revaluation Increment on Land and Buildings in 2004 consists:

Group Parent Company

Reclassification of revaluation increment on land
(see item f) =228,257
P =
P228,257
Recognition of deferred income tax on revaluation
increment on land (see item e) (73,043) (73,043)
Reversal of share in revaluation increment on
building of a subsidiary – (4,158)
=155,214
P =
P151,056

h. The adjustment in the Parent Company financial statements pertains to the reversal of
accumulated translation adjustment on foreign subsidiaries amounting to =
P496,817 in 2004
and =
P433,702 in 2003 (see items a and k).

i. The adjustment in the Parent Company financial statements pertains to the reversal of the
share in accumulated unrealized loss on available-for-sale investments (AFS) of a subsidiary
amounting to =
P4,720 in 2004 and =P4,633 in 2003 (see items a and k).

j. The adjustment in the Group financial statements pertains to the reclassification of Minority
Interest amounting to = P86,749 in 2004 and = P80,130 in 2003 previously reported under Other
Liabilities to capital funds (see items e and o).

k. The adjustment on Investment in Subsidiaries and an Associate in 2003 consists of:

Group Parent Company

Other investment in shares of stock reclassified to
other resources, net of allowance for decline in
value of =
P332.1 million (see item m) (P
=118,902) (P
=116,402)
Reversal of share in accumulated:
Income on subsidiaries (see item p) – (501,242)
Translation adjustment (see item h) – (433,702)
Income of an associate (see item p) – (91,764)
Revaluation increment – (9,412)
Unrealized loss on AFS (see item i) – 4,633
(P
=118,902) (P
=1,147,889)
 - 14 -

l. The adjustment on Investment Properties in 2003 consists of:

Reversal of allowance for probable losses on ROPOA

under previous GAAP (see item p) P
=4,015,695
Initial measurement of investment properties at fair value
(see item p) 3,569,231
Recognition of allowance for impairment losses on
investment properties (see item p) (3,020,565)
Recognition of accumulated depreciation on investment
properties (see item p) (1,341,890)
Reclassification of foreclosed machineries and other
equipment to other resources (see item m) (31,195)
P
=3,191,276

m. The adjustment on Other Resources in 2003 consists of:

Group Parent Company

Reclassification of other investment in shares of
stocks from investments in subsidiaries and
associates - net of allowance for decline in value
of P
=352.1 million (see item k) =
P118,902 =
P116,402
Reclassification of foreclosed machineries and other
equipment from investment properties (see item l) 31,195 31,195
=150,097
P =
P147,597

n. The adjustment pertains to the recognition of transition liability on retirement fund amounting
to =
P17,868.

o. The adjustment on Other Liabilities in 2003 consists of:

Group Parent Company

Recognition of deferred income tax liability on
reclassified revaluation increment on land (see
item q) =
P73,043 =
P73,043
Reclassification of minority interest from other
liabilities to capital funds (see item j) (80,130) –
Reversal of deferred income tax liability on share
in revaluation increment of a subsidiary – (3,011)
(P
=7,087) =
P70,032
 - 15 -

p. The adjustment on Deficit in 2003 consists of:

Group Parent Company

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

q. The adjustment on Revaluation Increment in 2003 consists of:

Group Parent Company

Adjustment on revaluation increment on land (see
item p) =228,257
P =
P228,257
Recognition of deferred income tax on reclassified
revaluation increment on land (see item o) (73,043) (73,043)
Reversal of revaluation increment of a subsidiary – (6,400)
=155,214
P =
P148,814

r. The adjustment pertains to additional provision for impairment losses on investment

properties amounting to =
P123,422.

s. The adjustment in the Parent Company financial statements represents the reversal of
accumulated equity income of subsidiaries and an associate amounting to =
P331,586 in
2004.

t. The adjustment on Miscellaneous Income in 2004 consists of:

Group Parent Company

Recognition of gain on foreclosure resulting from
initial measurement of investment properties
at fair value =385,578
P =
P385,578
Minority interest in income of a consolidated
subsidiary 6,619 –
Recognition of dividend income of a subsidiary – 18,418
=392,197
P =
P403,996
 - 16 -

u. The adjustment represents the reversal of retirement expense in 2004 amounting to

30,941 recognized under previous GAAP (see item f).

v. The adjustment pertains to the recognition of depreciation on investment properties in 2004

amounting to =
P294,358.

The table below presents the reconciliation of financial position (in thousand pesos) at January 1,
2005 following the adoption of PAS 32 and 39:
Group Parent Company
January 1, 2005 (Date of Transition)
Effect of Effect of
PFRS Adoption to PFRS Adoption
December 31, PAS 32 PFRS December 31, of PAS 32 and PFRS
Account Description Note 2004 and PAS 39 January 1, 2005 2004 PAS 39 January 1, 2005
RESOURCES
Cash and Other Cash Items a =
P3,342,672 =
P2,196,473 =
P5,539,145 =
P3,342,466 =
P2,054,969 =
P5,397,435
Due from Bangko Sentral ng Pilipinas 3,765,737 – 3,765,737 3,765,737 – 3,765,737
Due from Other Banks 7,051,470 – 7,051,470 6,092,449 – 6,092,449
Interbank Loans Receivable 18,921,030 – 18,921,030 18,882,242 – 18,882,242
Securities Held under Agreements to Resell 4,000,000 – 4,000,000 4,000,000 – 4,000,000
Financial Assets at Fair Value Through Profit or 754,703
Loss b – 754,703 – 712,229 712,229
Available-for-sale investments, at fair value c – 27,733,003 27,733,003 – 27,772,796 27,772,796
Held-to-Maturity Investments, at amortized cost d – 13,937,144 13,937,144 – 11,789,671 11,789,671
Trading Account Securities, at fair value b 754,703 (754,703) – 712,229 (712,229) –
Investment Securities - net e 63,033,848 (63,033,848) – 60,930,559 (60,930,559) –
Loans and Receivables - net f 56,151,608 26,219,964 82,371,572 54,002,036 26,231,612 80,233,648
Furniture, Fixtures, Equipment and Leasehold
Improvements, at cost - net 726,764 – 726,764 633,584 – 633,584
Bank Premises, at appraised value - net 14,680,353 – 14,680,353 14,669,857 – 14,669,857
Investments in Subsidiaries and an Associate - net 643,718 – 643,718 5,509,803 – 5,509,803
Investment Properties - net 27,989,971 – 27,989,971 27,989,395 – 27,989,395
Other Resources - net g 18,679,150 (8,982,342) 9,696,808 17,965,720 (8,840,838) 9,124,882
P
=219,741,024 (P
=1,929,606) =
P217,811,418 =
P218,496,077 (P
=1,922,349) =
P216,573,728

LIABILITIES AND CAPITAL FUNDS

Liabilities
Deposit Liabilities
Demand =
P14,476,485 =
P– =
P14,476,485 =
P14,433,937 =
P– =
P14,433,937
Savings 120,041,480 – 120,041,480 119,997,438 – 119,997,438
Time 26,491,088 – 26,491,088 28,548,468 – 28,548,468
161,009,053 – 161,009,053 162,979,843 – 162,979,843
Bills and Acceptances Payable 13,534,658 – 13,534,658 12,895,473 – 12,895,473
Due to Bangko Sentral ng Pilipinas 103,326 – 103,326 103,326 – 103,326
Margin Deposits and Cash Letters of Credit 137,991 – 137,991 137,991 – 137,991
Manager’s Checks and Demand Drafts
Outstanding 477,893 – 477,893 477,893 – 477,893
Accrued Taxes, Interest and Other Expenses 6,139,490 – 6,139,490 6,076,517 – 6,076,517
Subordinated Debt h 3,000,000 (51,543) 2,948,457 3,000,000 (51,543) 2,948,457
Other Liabilities i 9,764,975 177,966 9,942,941 8,740,575 177,966 8,918,541
194,167,386 126,423 194,293,809 194,411,618 126,423 194,538,041
Capital Funds
Preferred stock 7,807,018 – 7,807,018 7,807,018 – 7,807,018
Common stock 15,122,819 – 15,122,819 15,122,819 – 15,122,819
Capital paid in excess of par value 545,745 – 545,745 545,745 – 545,745
Surplus reserves 481,694 – 481,694 481,694 – 481,694
Deficit j (267,142) (2,075,890) (2,343,032) (1,173,317) (2,068,633) (3,241,950)
Revaluation increment on land and buildings 1,443,486 – 1,443,486 1,439,328 – 1,439,328
Accumulated translation adjustment 496,817 – 496,817 – – –
Net unrealized loss on available-for-sale
investments k (143,548) 19,861 (123,687) (138,828) 19,861 (138,828)
25,486,889 (2,056,029) 23,430,860 24,084,459 (2,048,772) 22,015,826
Minority interest 86,749 – 86,749 – – –
25,573,638 (2,056,029) 23,517,609 24,084,459 (2,048,772) 22,015,826
=219,741,024
P (P
=1,929,606) =
P217,811,418 =
P218,496,077 (P
=1,922,349) =
P216,573,728
 - 17 -

a. The adjustment on Cash and Other Cash Items consists of reclassification from Other
Resources:

Group Parent Company

Foreign currency notes and coins on hand, checks
and other cash items (FCOCI) =
P1,762,348 =
P1,620,844
Miscellaneous cash and other cash items (MCOC) 434,125 434,125
=2,196,473
P =
P2,054,969

b. The adjustment represents reclassification of trading account securities (TAS) to financial

assets at fair value through profit or loss (FVPL).

c. The adjustment on AFS consists of reclassification from investment securities amounting to

=27,772,796 and =
P P27,733,003 for the Group and the Parent Company, respectively.

d. The adjustment on HTM in the Group and Parent Company financial statement consists of:

Group Parent Company

Reclassification from investment securities =
P13,956,761 =
P11,809,288
Effect of change from straight-line to effective
interest method of amortization (19,617) (19,617)
=13,937,144
P =
P11,789,671

e. The adjustment on Investment Securities consists of reclassification to the following accounts:

Group Parent Company

HTM (see Note d) =
P13,956,761 =
P11,809,288
AFS (see Note c) 27,733,003 27,772,796
Loans and receivables (see Note f) 21,344,084 21,348,475
=63,033,848
P =
P60,930,559

f. The adjustment on Loans and Receivables consists of:

Group Parent Company

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

g. The adjustment on Other Resources consists of (in thousand pesos):

Group Parent Company

Reclassification of sales contract receivables to loans
and receivables (see Note f) (P
=18,797,890) (P
=18,797,890)
Reclassification of allowance for impairment losses
on transferred accounts (see Note f) 11,955,937 11,955,937
Reclassification of FCOCI and MCOCI to cash and
other cash items (see Note a) (2,196,473) (2,054,969)
Recognition of the mark-to-market gain on
embedded derivatives (see Note j) 103,778 103,778
Unamortized transaction cost of subordinated debt
under previous GAAP (47,694) (47,694)
(P
=8,982,342) (P
=8,840,838)

h. The adjustment on Subordinated Debt represents the unamortized transaction cost determined
under PAS 39 amounting to P
=51,543.

i. The adjustment represents the market valuation loss on stand alone derivatives amounting to
=177,966.
P

j. The adjustment on Deficit consists of:

Group Parent Company

Recognition of additional impairment losses (see
Note f) (P
=1,920,801) (P
=1,913,544)
Recognition of the change in fair values of
freestanding derivatives at transition date
(see Note i) (177,966) (177,966)
Recognition of the change in fair values of
embedded derivatives at transition date
(see Note g) 103,778 103,778
Recognition of the unamortized discount on sales
contract receivables with off-market rates (see
Note f) (45,272) (45,272)
Unrealized gain on AFS credited to income in prior
years (see Note k) (19,861) (19,861)
Take up of the effect of change from straight line to
effective interest method (15,768) (15,768)
(P
=2,075,890) (P
=2,068,633)

k. The adjustment represents the unrealized gain on AFS credited to income in prior years
amounting to =
P19,861 (see Note j).
 - 19 -

The Group has yet to adopt the following standards and amendments that have been approved but
are not yet effective:

• Amendments to PAS 19, Employee Benefits - Actuarial Gains and Losses, Group Plans and
Disclosures - The revised disclosures from the amendments will be included in the Group’s
financial statements when the amendments are adopted in 2006.

• PFRS 6, Exploration for and Evaluation of Mineral Resources - This standard does not apply
to the activities of the Group.

• PFRS 7, Financial Instruments - Disclosures - The revised disclosures on financial

instruments provided by this standard will be included in the Group’s financial statements
when the standard is adopted in 2007.

Effect on the Statement of Cash Flows for 2004

There are no material differences between the statement of cash flows prepared under PFRS and
statement of cash flows presented under previous GAAP except for the presentation of FCOCI and
MCOCI under Cash and Other Cash Items (COCI) in 2005. Previously, FCOCI and MCOCI were
presented under Other Resources.

Investments in Subsidiaries and Associates

Investments in Subsidiaries
Subsidiaries are all entities (including special purpose entities) over which the Group has the
power to govern the financial and operating policies generally accompanying a shareholding of
more than one half of the voting rights. The existence and effect of potential voting rights that are
currently exercisable or convertible are considered when assessing whether the Group controls
another entity.

Investments in Associates
Investments in associates are accounted for under the equity method of accounting. Associates are
all entities over which the Group has significant influence but not control, generally accompanying
a shareholding of between 20% and 50% of the voting rights. Investments in associates are
accounted for by the equity method of accounting and are initially recognized at
cost. The Group’s share of its associates’ post-acquisition profits or losses is recognized in the
statements of income, and its share of post-acquisition movements in reserves is recognized in
reserves. The cumulative post-acquisition movements are adjusted against the carrying amount of
the investment. When the Group’s share of losses in an associate equals or exceeds its interest in
the associate, including any other unsecured receivables, the Group does not recognize further
losses, unless it has incurred obligations or made payments on behalf of the associate.

Investments in subsidiaries and associates in the Parent Company financial statements are carried
at cost, less any impairment in value. Cost represents the carrying value of the investments as at
the quasi-reorganization date of the Parent Company as discussed in Note 2, reduced by dividends
subsequently received from the investees.
 - 20 -

Other Investments
Other investments in shares of stock where the Group’s ownership interest is less than 20% or
where control is likely to be temporary are initially recognized at cost, being the fair value of the
consideration given and including acquisition charges associated with the investments.

After initial recognition, investments are classified as available-for-sale and measured at fair
value. Gains or losses are recognized as a separate component of equity until the investment is
sold, collected or otherwise disposed of, or until the investment is determined to be impaired, at
which time the cumulative gain or loss previously reported in equity is included in the statements
of income.

Equity Adjustment from Foreign Currency Translation

Each entity in the Group determines its own functional currency and items included in the
financial statements of each entity are measured using that functional currency. Transactions in
foreign currencies are initially recorded in the functional currency rate at the date of the
transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at
the functional currency rate of exchange at statement of condition date.

Exchange differences are taken to profit or loss. Non-monetary items that are measured in terms
of historical cost in a foreign currency are translated using the exchange rates as at the dates of the
initial transactions. Non-monetary items measured at fair value in a foreign currency are translated
using the exchange rates at the date when the fair value was determined.

Financial statements of consolidated foreign subsidiaries that are not integral to the operations of
the Group are translated into the presentation currency of the Group (the Philippine peso) at the
rate of exchange at statement of condition date and, their income statements are translated at the
weighted average exchange rates for the year. The exchange differences arising from the
translation are taken directly to a separate component of equity (under Accumulated Translation
Adjustment). On disposal of a foreign entity, the deferred cumulative amount recognized in
equity relating to that particular foreign operation is recognized in the statements of income.

Cash Equivalents
For purposes of reporting cash flows, cash equivalents include amounts due from BSP and other
banks and interbank loans receivable and securities held under agreements to resell that are
convertible to known amounts of cash, with original maturities of three months or less from dates
of placements and that are subject to an insignificant risk of changes in value.

Repurchase and Resale Agreements

Repurchase agreements are contracts under which a party sells securities and simultaneously
agrees to repurchase the same securities at a specified future date at a fixed price. Resale
agreements are contracts under which a party purchases securities and simultaneously agrees to
resell the same securities at a specified future date at a fixed price. Securities sold under
repurchase agreements (repos) are retained in the financial statements as trading or investment
securities and the counterparty liability is included in amounts due to other banks or bills payable,
as appropriate. Securities held under resale agreements (reverse repos) are recorded at cost under
Securities Held under Agreements to Resell account. The corresponding interest expense or
interest income is accrued when incurred or earned.
 - 21 -

Financial Assets
The Group classifies its financial assets in the following categories: financial assets at FVPL;
loans and receivables; HTM investments; and AFS investments. Management determines the
classification of its investments at initial recognition. When financial assets are recognized
initially, they are measured at fair value, plus in the case of investments not at fair value through
profit or loss, directly attributable transaction costs.

Regular way purchases and sales of financial assets are recognized on the trade date – the date on
which the Group commits to purchase or sell the asset. Loans and receivables are recognized
when cash is advanced to the borrowers.

Financial assets at fair value through profit or loss

A financial asset is classified as financial assets at FVPL if acquired principally for the purpose of
selling in the short term or if so designated by management. Derivatives are also categorized as
held for trading unless they are designated as hedges. Gains and losses arising from changes in
the fair value of the financial assets are included in the statements of income in the period in
which they arise.

The fair value of investments that are actively traded in organized financial markets is determined
by reference to quoted market bid price at the close of business on the statement of condition date.
For investments with no active market, fair value is determined using valuation techniques. Such
techniques include using recent arm’s length market transactions, reference to the current market
value of another instrument which is substantially the same, discounted cash flow analysis and
option pricing models.

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments
that are not quoted in an active market. These are carried at amortized cost using the effective
interest rate method, less impairment in value. Gains and losses are recognized in income when
the loans and receivables are derecognized and impaired, as well as through the amortization
process.

Held-to-maturity investments
HTM investments are non-derivative financial assets with fixed or determinable payments and
fixed maturities that the Group’s management has the positive intention and ability to hold to
maturity. Where the Group sell other than an insignificant amount of HTM assets, the entire
category would be tainted and reclassified as AFS. These investments are carried at amortized
cost using the effective interest rate method, less impairment in value. Gains and losses are
recognized in income when the HTM are derecognized and impaired, as well as through the
amortization process.

Available-for-sale investments
AFS investments are non-derivative financial assets that are designated as AFS or those securities
that are intended to be held for an indefinite period of time, which may be sold in response to
needs for liquidity or changes in interest rates, exchange rates or equity prices. After initial
recognition, AFS financial assets are measured at fair value with gains and losses being
recognized as a separate component of capital funds until the financial asset is derecognized or
impaired at which time the cumulative gain or loss previously recognized in capital funds should
 - 22 -

be recognized in the statements of income. Premiums and discounts and directly attributable
transaction costs on these investments are amortised using the effective interest rate method and
taken to interest income. Dividends on AFS equity instruments are recognized in the statements of
income when the entity’s right to receive payment is established.

Prior to January 1, 2005, trading and investment securities were accounted for as follows:

Trading Account Securities

TAS, which consist of government and private debt and equity securities, are purchased and held
principally with the intention of selling them in the near term. These securities are carried at fair
value; realized and unrealized gains and losses on these instruments are recognized in Trading and
Securities Gain - net in the statements of income. Interest earned on debt instruments is reported
as Interest Income.

Available-for-Sale Securities
Securities are classified as AFS when purchased and held indefinitely, i.e., neither held to
maturity nor for trading purposes, where the Group anticipates to sell in response to liquidity
requirements or in anticipation of changes in interest rates or other factors. AFS are carried at fair
market value and any unrealized gains or losses are reported as a separate component of capital
funds.

Investments in Bonds and Other Debt Instruments (IBODI)

IBODI are debt securities where the Group has the positive intent and ability to hold to maturity.
These securities are carried at amortized cost on a straight-line basis; realized gains and losses are
included in Trading and Securities Gain - net in the statements of income.

Property and Equipment

The Group’s depreciable properties, excluding buildings, are stated at cost less accumulated
depreciation and amortization, and any impairment in value.

The initial cost of property and equipment consists of its purchase price, including import duties,
taxes and any directly attributable costs of bringing the asset to its working condition and location
for its intended use. Expenditures incurred after items of property and equipment have been put
into operation, such as repairs and maintenance are normally charged against operations in the
year in which the costs are incurred. In situations where it can be clearly demonstrated that the
expenditures have resulted in an increase in the future economic benefits expected to be obtained
from the use of an item of property and equipment beyond its originally assessed standard of
performance, the expenditures are capitalized as an additional cost of property and equipment.
When property and equipment are retired or otherwise disposed of, the cost and the related
accumulated depreciation and amortization are removed from the accounts, and any resulting gain
or loss is reflected as income or loss in the statements of income.

Land is stated at appraised values less any impairment in value while buildings are stated at
appraised value less accumulated depreciation and any impairment in value. Valuations are
performed frequently enough to ensure that the fair value of a revalued asset does not differ
materially from its carrying amount.
 - 23 -

Any revaluation surplus is credited to the Revaluation Increment on Land and Buildings included
in the equity section of the statements of condition, except that it reverses a revaluation decrease
of the same asset previously recognized in statements of income, in which case the increase is
recognized in statements of income. A revaluation deficit is recognized in statements of income,
except that a deficit directly offsetting a previous surplus on the same asset is directly offset
against the surplus in the Revaluation Increment on Land and Buildings.

Depreciation is computed using the straight-line method over the estimated useful lives of the
respective assets. Leasehold improvements are amortized over the shorter of the terms of the
covering leases and the estimated useful lives of the improvements.

The estimated useful life of the respective asset follows:

Useful Life in Years

Buildings 25 - 50
Furniture, fixtures and equipment 5
Leasehold improvements 3 - 10

The useful life and the depreciation and amortization method are reviewed periodically to ensure
that the period and the method of depreciation and amortization are consistent with the expected
pattern of economic benefits from items of property and equipment.

The carrying values of the property and equipment are reviewed for impairment when events or
changes in circumstances indicate the carrying value may not be recoverable. If any such
indication exists and where the carrying values exceed the estimated recoverable amount, an
impairment loss is recognized in the statements of income (see accounting policy on Impairment
of Non-Financial Assets).

Investment Properties
Investment properties include ROPOA in settlement of loans and receivables from customers.
Investment properties are recorded at fair value at acquisition date and subsequently carried at cost
less accumulated depreciation and impairment in value. Transaction costs including
nonrefundable taxes such as capital gains tax and documentary stamp tax that were paid by the
Group are capitalized as part of cost. Depreciation is computed using the straight-line method
over the estimated useful life of the assets.

The estimated useful life of the depreciable investment properties which generally include
building and improvements range from 25 to 50 years.

Investment properties are derecognized when they have either been disposed of or when the
investment properties are permanently withdrawn from use and no future benefit is expected from
their disposal. Any gains or losses on retirement or disposal of an investment property are
recognized in the statements of income in the year of retirement or disposal.

Software Costs
Software costs are capitalized on the basis of the cost incurred to acquire and bring to use the
specific software. These costs are amortized over five years on a straight-line basis.
 - 24 -

Costs associated with developing or maintaining the computer software programs are recognized
as expense when incurred.

Interest-bearing Loans and Borrowings

All loans and borrowings are initially recognized at the fair value of the consideration received
less directly attributable transaction costs. After initial recognition, interest-bearing loans and
borrowings are subsequently measured at amortized cost using the effective interest rate method.
Gains and losses are recognized in the statements of income when the liabilities are derecognized
as well as through the amortization process.

Income Taxes
Deferred income tax is provided, using the balance sheet liability method, on all temporary
differences at the statement of condition date between the tax bases of assets and liabilities and
their carrying amounts for financial reporting purposes.

Deferred income tax liabilities are recognized for all taxable temporary differences. Deferred
income tax assets are recognized for all deductible temporary differences, carryforward of unused
tax credits from excess minimum corporate income tax (MCIT) over regular corporate income tax
(RCIT) and unused net operating loss carryover (NOLCO), to the extent that it is probable that
taxable profit will be available against which the deductible temporary differences and
carryforward of unused MCIT and unused NOLCO can be utilized. Deferred income tax, however,
is not recognized when it arises from the initial recognition of an asset or liability in a transaction
that is not a business combination and, at the time of the transaction, affects neither the accounting
profit nor taxable profit or loss.

Deferred tax liabilities are not provided on non-taxable temporary differences associated with
investments in domestic subsidiaries, associates and interests in joint ventures. With respect to
investments in foreign subsidiaries, associates and interests in joint ventures, deferred tax
liabilities are recognized except where the timing of the reversal of the temporary difference can
be controlled and it is probable that the temporary difference will not reverse in the foreseeable
future.

The carrying amount of deferred income tax assets is reviewed at each statement of condition date
and reduced to the extent that it is no longer probable that sufficient taxable profit will be available
to allow all or part of the deferred income tax asset to be utilized.

Deferred income tax assets and liabilities are measured at the tax rates that are applicable to the
period when the asset is realized or the liability is settled, based on tax rates enacted on
substantially enacted at the statement of condition date.

Impairment of Financial Assets

The Group assesses at each statement of condition date whether there is objective evidence that a
financial asset may be impaired.
 - 25 -

Assets carried at amortized cost

A financial asset or a group of financial assets is impaired and impairment losses are incurred if,
and only if, there is objective evidence of impairment as a result of one or more events that
occurred after the initial recognition of the asset (a “loss event”) and that loss event has an impact
on the estimated future cash flows of the financial asset or group of financial assets that can be
reliably estimated.

The Group first assesses whether objective evidence of impairment exists individually for
financial assets that are individually significant, and individually or collectively for assets that are
not individually significant. If it is determined that no objective evidence of impairment exists for
individually assessed financial asset, whether significant or not, the asset is included in a group of
financial assets with similar credit risk characteristics (i.e., on the basis of the Group’s grading
process that considers asset type, industry, geographical location, collateral type, past-due status
and other relevant factors) and that group of assets is collectively assessed for impairment. Those
characteristics are relevant to the estimation of future cash flows for groups of such assets by
being indicative of the debtors’ ability to pay all amounts due according to the contractual terms
of the assets being evaluated. Assets that are individually assessed for impairment and for which
an impairment loss is or continues to be recognized are not included in a collective assessment for
impairment.

If there is objective evidence that an impairment loss on loans and receivables carried at
amortized cost has been incurred, the amount of the loss is measured as the difference between the
asset’s carrying amount and the present value of the estimated future cash flows (excluding future
credit losses that have not been incurred) discounted at the financial asset’s original effective
interest rate. The carrying amount of the asset is reduced through use of an allowance account.

The amount of loss is charged to current operations. If a loan or HTM investment has a variable
interest rate, the discount rate for measuring any impairment loss is the current effective interest
rate determined under the contract.

The calculation of the present value of the estimated future cash flows of a collateralized financial
asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling
the collateral, whether or not foreclosure is probable.

When a loan is uncollectible, it is written off against the related allowance for loan impairment.
Such loans are written off after all the necessary procedures have been completed and the amount
of the loss has been determined. Subsequent recoveries of amounts previously written off
decrease the amount of the provision for loan impairment in the statements of income.

If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be
related objectively to an event occurring after the impairment was recognized (such as an
improvement in the debtor’s credit rating), the previously recognized impairment loss is reversed
by adjusting the allowance account. Any subsequent reversal of an impairment loss is recognized
in the statements of income, to the extent that the carrying value of the asset does not exceed its
amortized cost at the reversal date.
 - 26 -

Assets Carried at Cost

If there is objective evidence that an impairment loss on an unquoted equity instruments that are
not carried at fair value because its fair value cannot be reliably measured, or on a derivative asset
that is linked to and must be settled by delivery of such unquoted equity instrument has been
incurred, the amount of the loss is measured as the difference between the asset’s carrying amount
and the present value of estimated future cash flows discounted at the current market rate of return
for a similar financial asset.

Available-for-sale Investments
If an AFS is impaired, an amount comprising the difference between its cost (net of any principal
payment and amortization) and its current fair value, less any impairment loss on that financial
asset previously recognized in profit or loss – is removed from equity and recognized in the
statements of income. Impairment losses recognized in the statements of income on equity
instruments are not reversed through the statements of income. If, in a subsequent period,
the fair value of a debt instrument classified as AFS increases and the increase can be objectively
related to an event occurring after the impairment loss was recognized in profit or loss, the
impairment loss is reversed through the statements of income.

Impairment of Non-Financial Assets

The Group assesses at each statement of condition date whether there is an indication that an asset
may be impaired. If such impairment indication exists, or when an annual impairment testing for
an asset is required, the Group makes an estimate of the asset’s recoverable amount. An asset’s
recoverable amount is the higher of the asset’s value in use or its net selling price. Where the
carrying amount of an asset exceeds its recoverable amount, the asset is considered impaired and
is written down to its recoverable amount. In assessing value in use, the estimated future cash
flows are discounted to their present value using a pre-tax discount rate that reflects current
market assessments of the time value of money and the risks specific to the asset.

An impairment loss is charged against operations in the year in which it arises, unless the asset is
carried at a revalued amount, in which case the impairment loss is charged to the revaluation
increment of the said asset.

A previously recognized impairment loss is reversed by a credit to current operations (unless the
asset is carried at a revalued amount in which case the reversal of the impairment loss is credited
to the revaluation increment of the same asset) to the extent that it does not restate the asset to a
carrying amount in excess of what would have been determined (net of any accumulated
depreciation and amortization) had no impairment loss been recognized for the asset in prior years.

Derecognition of Financial Assets and Liabilities

Financial Asset
A financial asset (or, where applicable, a part of a financial asset or part of a group of financial
assets) is derecognized when:

1. the rights to receive cash flows from the asset have expired;
2. the Group retains the right to receive cash flows from the asset, but has assumed an obligation
to pay them in full without material delay to a third party under a “pass-through” arrangement;
or
 - 27 -

3. the Group has transferred its rights to receive cash flows from the asset and either
(a) has transferred substantially all the risks and rewards of the asset, or (b) has neither
transferred nor retained the risk and rewards of the asset but has transferred the control of the
asset.

Financial Liability
A financial liability is derecognized when the obligation under the liability is discharged or
cancelled or expired.

Income Recognition
Income is recognized to the extent that it is probable that economic benefits will flow to the Group
and the income can be reliably measured. The following specific recognition criteria must also be
met before income is recognized:

Interest income
Interest on loans and receivables, trading and investment securities, and interest-bearing
placements is recognized using the effective interest method of amortization.

The effective interest method is a method of calculating the amortized cost of a financial asset or a
financial liability and of allocating the interest income or interest expense over the relevant period.
The effective interest rate is the rate that exactly discounts estimated future cash payments or
receipts through the expected life of the financial instrument or, when appropriate, a shorter period
to the net carrying amount of the financial asset or financial liability. When calculating the
effective interest rate, the Group estimates cash flows considering all contractual terms of the
financial instrument (for example, prepayment options) but does not consider future credit losses.
The calculation includes all fees and points paid or received between parties to the contract that are
an integral part of the effective interest rate, transaction costs and all other premiums or discounts.
Interest income on impaired financial assets is recognized using the rate of interest used to discount
the future cash flows for the purpose of measuring the impairment loss.

Loan fees and service charges

Loan fees that are directly related to acquisition and origination of loans are included in the cost of
receivable and are amortized using effective interest rate method over the term of the loan. Fees
related to the administration and servicing of a loan are recognized as revenue as the services are
provided.

Dividends
Dividend income is recognized when the right to receive payment is established.

Underwriting fees, commissions, and sale of shares of stock

Underwriting fees and commissions are accrued when earned. Income derived from sales of shares
of stock is recognized upon sale.

Discounts earned on credit cards

Discounts are taken to income upon receipt from member establishments of charges arising from
credit availments by credit cardholders. These discounts are computed based on certain agreed
rates and are deducted from amounts remitted to the member establishments. Purchases by the
credit cardholders which are collected on installment are recorded at the cost of the items
 - 28 -

purchased plus a certain percentage of cost. The excess is credited to Unearned Discounts and
Lease Income and is shown as a deduction from Loans and Receivables in the statements of
condition. The deferred income is amortized using the effective interest method over the
installment term.

Retirement Cost
The Group determines retirement cost under the projected unit credit cost method. Under this
method, the current service cost is the present value of retirement benefits payable in the future
with respect to services rendered in the current period.

The defined benefit liability recognized in the statements of condition is the present value of the
defined benefit obligation and actuarial gains and losses reduced by past service cost not yet
recognized and the fair value of plan assets out of which the obligation are to be settled directly.
The present value of the defined benefit obligation is determined by discounting the estimated
future cash outflows using interest rates of government bonds that are denominated in the
currency in which the benefits will be paid, and that have terms to maturity approximating to the
terms of the related retirement liability. Actuarial gains and losses are recognized as income or
expense when the net cumulative unrecognized actuarial gains and losses of the plan at the end of
the previous reporting year exceeded 10% of the higher of the defined benefit obligation and the
fair value of plan assets at that date. These gains and losses are recognized over the expected
average remaining working life of the employees participating in the plans.

Past service costs are recognized immediately in income, unless the changes to the pension plan
are conditional on the employees remaining in service for a specified period of time (the vesting
period). In this case, the past service costs are amortized on a straight-line basis over the vesting
period.

Provisions and Contingencies

Provisions are recognized when an obligation (legal or constructive) is incurred as a result of a
past event and where it is probable that an outflow of resources embodying economic benefits will
be required to settle the obligation and a reliable estimate can be made of the amount of the
obligation. If the effect of the time value of money is material, provisions are determined by
discounting the expected future cash flows at a pre-tax rate that reflects current market assessment
of the time value of money and, where appropriate, the risks specific to the liability. Where
discounting is used, the increase in the provision due to the passage of time is recognized as an
interest expense.

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

Leases
Finance leases, which transfer to/from the Group substantially all the risks and benefits incidental
to ownership of the leased item, are capitalized at the inception of the lease at the fair value of the
leased property or, if lower, at the present value of the minimum lease payments. Lease payments
are apportioned between the finance charges and reduction of the lease liability so as to achieve a
constant rate of interest on the remaining balance of the liability. Finance charges are included as
Interest Expense in the statements of income.
 - 29 -

Capitalized leased assets are depreciated over the shorter of the estimated useful lives of the assets
or the respective lease terms.

Leases where the lessor retains substantially all the risks and benefits of ownership of the asset are
classified as operating leases. Operating lease payments are recognized as an expense/income in
the statements of income on a straight-line basis over the lease term.

Derivative Instruments
The Group uses derivative financial instrument such as currency forwards and cross currency and
interest rate swap contracts to manage its risks associated with interest rate and foreign currency
fluctuations. Such derivative financial instruments are initially recorded at fair value on the date at
which the derivative contract is entered into and are subsequently remeasured at fair value.
Derivatives are carried as assets when the fair value is positive and as liabilities when the fair
value is negative.

Any gain or losses arising from changes in fair value on derivatives that do not qualify for hedge
accounting are taken directly to the statements of income.

The fair value of currency forwards is calculated by reference to current forward exchange rates
for contracts with similar maturity profiles. The fair value of cross currency and interest rate swap
contracts is determined using discounted cash flow techniques with reference to prevailing market
rates.

Certain derivatives are embedded in financial and non-financial host contracts, and these include
conversion options in convertible debt instruments, credit default swaps and foreign-currency
derivatives in structured notes, and currency derivatives in purchase orders and service
agreements. These derivatives are bifurcated and carried at fair value with fair value changes
being reported through profit or loss, when their economic risks and characteristics are not closely
related to those of their respective host contracts and where the entire hybrid contracts (composed
of both the host contract and the embedded derivative) are not accounted for as financial assets at
FVPL.

Offsetting
Financial assets and financial liabilities are offset and the net amount reported in the statements of
condition when there is a legally enforceable right to set off the recognized amounts and the Group
intends to either settle on a net basis, or to realize the asset and the liability simultaneously.

Earnings per Share

Basic earnings per share is calculated by dividing the net income for the year attributable to
common shareholders by the weighted average number of common shares outstanding during the
year.

Diluted earnings per share is calculated by dividing the net income attributable to common
shareholders by the weighted average number of common shares outstanding during the year
adjusted for the effects of dilutive convertible preferred shares.
 - 30 -

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

4. Significant Accounting Judgments and Estimates

The preparation of the financial statements in accordance with Philippine GAAP requires the
Group to make estimates and assumptions that affect the reported amounts of resources, liabilities,
income and expenses and disclosure of contingent resources and contingent liabilities. Future
events may occur which will cause the assumptions used in arriving at the estimates to change.
The effects of any change in estimates are reflected in the financial statements as they become
reasonably determinable.

Estimates and judgments are continually evaluated and are based on historical experience and
other factors, including expectations of future events that are believed to be reasonable under the
circumstances.

Impairment losses on loans and receivables

The Group reviews its loan portfolios to assess impairment at least on a quarterly basis (refer to
the significant accounting policies on impairment). As of December 31, 2005, loans and
receivables amounted to = P79.7 billion and P
=77.6 billion for the Group and the Parent Company,
respectively, net of the allowance for impairment losses of P =24.1 billion and =
P23.9 billion,
respectively (see Note 9).

Fair value of derivatives

The fair values of derivatives that are not quoted in active markets are determined by using
valuation techniques. Where valuation techniques (for example, models) are used to determine
fair values, they are validated and periodically reviewed by qualified personnel independent of the
area that created them. All models are reviewed to ensure that the resulting values reflect actual
data and comparative market prices. To the extent practical, models use only observable data,
however, areas such as credit risk (both own and counterparty), volatilities and correlations
require management to make estimates and apply considerable judgment. Changes in assumptions
about these factors could affect the reported fair value of financial instruments. As of
December 31, 2005, the net positive fair value of derivatives that were valued using valuation
techniques amounted to = P72.6 million (see Note 27).

Impairment of available for-sale equity securities

The Group determines that AFS equity investments are impaired when there has been a
significant or prolonged decline in the fair value below their cost. This determination of what is
significant or prolonged requires judgment. In making this judgment, the Group evaluates among
other factors, the normal volatility in share price. In addition, impairment may be appropriate
when there is evidence of deterioration in the financial health of the investee, industry and sector
performance, changes in technology, and operational and financing cash flows. As of
December 31, 2005, available-for-sale equity securities amounted to = P1.1 billion for the Group
and the Parent Company, net of allowance for impairment losses of = P122.8 million (see Note 8).
 - 31 -

Held-to-maturity investments
The classification to HTM requires significant judgment. In making this judgment, the Group
evaluates its intention and ability to hold such investments to maturity. If the Group fails to keep
these investments to maturity other than for the specific circumstances (such as selling an
insignificant amount close to maturity), it will be required to reclassify the entire class as AFS.
The investments would therefore be measured at fair value not amortized cost. As of
December 31, 2005, HTM amounted to = P5.3 billion for the Group and =
P5.1 billion for the Parent
Company (see Note 8).

Pension and other retirement benefits

The expected rate of return on plan assets of 10% was based on the average historical premium of
the fund assets. The assumed discount rates were determined using the market yields on
Philippine government bonds with terms consistent with the expected employee benefit payout as
of statement of condition dates. As of December 31, 2005 and 2004, the present value of the
retirement obligation of the Parent Company amounted to =P775.7 million and =P667.3 million,
respectively (see Note 20).

Impairment of Non-Financial Assets

The Group assesses impairment on assets whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. The factors that the Group considers
important which could trigger an impairment review include the following:

• significant underperformance relative to expected historical or projected future operating

results;
• significant changes in the manner of use of the acquired assets or the strategy for overall
business; and
• significant negative industry or economic trends.

The Group recognizes an impairment loss whenever the carrying amount of an asset exceeds its
recoverable amount. The recoverable amount is the value in use. The net selling price is the
amount obtainable from the sale of an asset in an arm’s length transaction while value in use is the
present value of estimated future cash flows expected to arise from the continuing use of an asset
and from its disposal at the end of its useful life. Recoverable amounts are estimated for individual
assets or, if it is not possible, for the cash-generating unit to which the asset belongs.

As of December 31, 2005, the carrying value of the bank premises, furniture, fixtures, equipment,
and leasehold improvements and investment properties amounted to = P15.3 billion and
=26.8 billion, respectively, for the Group and =
P P15.2 billion and =
P26.8 billion, respectively, for the
Parent Company. As of December 31, 2004, the carrying value of the bank premises, furniture,
fixtures, equipment, and leasehold improvements and investment properties amounted to
=
P15.4 billion and =P28.0 billion, respectively, for the Group and =
P15.3 billion and P=28.0 billion,
respectively, for the Parent Company (see Notes 10 and 12).
 - 32 -

Recognition of deferred income taxes

The Group has been in a tax loss position over the past several years. However, estimates of
future taxable income indicate that certain temporary differences will be realized in the future. As
discussed in Note 22, recognized deferred tax assets as of December 31, 2005 and 2004 amounted
to =
P3.4 billion and =
P4.5 billion, respectively, for the Group and =
P3.3 billion and =
P4.5 billion,
respectively, for the Parent Company. Deferred tax assets on the temporary differences amounting
to =
P7.8 billion and =
P6.3 billion for Group and for the Parent Company as of December 31, 2005
and 2004, respectively, were not recognized.

5. Financial Risk Management Objectives and Policies

The Group’s activities are principally related to the use of financial instruments. The Group
accepts deposits from customers at fixed rates, and for various periods, and seeks to earn above-
average interest margins by investing these funds in high-quality assets. The Group seeks to
increase these margins by consolidating short-term funds and lending for longer periods at higher
rates, while maintaining sufficient liquidity to meet all claims that might fall due.

The Group also seeks to raise its interest margins by obtaining above-average margins, net of
allowances, through lending to commercial and retail borrowers with a range of credit standing.
Such exposures involve not just on-balance sheet loans and advances; the Group also enters into
guarantees and other commitments such as letters of credit and performance, and other bonds.

The Group trades in financial instruments where it takes positions in traded and over-the-counter
instruments, including derivatives, to take advantage of short-term market movements in equities
and bonds and in currency and interest rate. The Group places trading limits on the level of
exposure that can be taken in relation to both overnight and intra-day market positions.

Credit risk
The Group takes on exposure to credit risk, which is the risk that a counterparty will be unable to
pay amounts in full when due. Impairment provisions are provided for losses that have been
incurred at the statement of condition date. Significant changes in the economy, or in the health
of a particular industry segment that represents a concentration in the Group’s portfolio, could
result in losses that are different from those provided for at the statement of condition date.
Management therefore carefully manages its exposure to credit risk.

The Group structures the levels of credit risk it undertakes by placing limits on the amount of risk
accepted in relation to one borrower, or groups of borrowers, and to geographical and industry
segments. Such risks are monitored on a revolving basis and subject to an annual or more frequent
review. Limits on the level of credit risk by product, industry sector and by country are approved
regularly by the Executive Committee of the BOD. The exposure to any one borrower including
banks and brokers is further restricted by sub-limits covering on- and off-balance sheet exposures,
and daily delivery risk limits in relation to trading items such as forward foreign exchange
contracts. Actual exposures against limits are monitored daily.
 - 33 -

Exposure to credit risk is managed through regular analysis of the ability of borrowers and
potential borrowers to meet interest and capital repayment obligations and by changing these
lending limits where appropriate. Exposure to credit risk is also managed in part by obtaining
collateral and corporate and personal guarantees, but a significant portion is personal lending
where no such facilities can be obtained.

In compliance with BSP requirements, the Group has recently developed an Internal Credit Risk
Rating System (ICRRS) for corporate accounts and credit scoring for retail banking aimed at
uniformly assessing its credit portfolio in terms of risk profile. The ICRRS is now in place and
has been implemented through the grading of new and existing corporate loan borrowers with
total assets of over =
P15.0 million.

Similarly, the Bank manages credit risk through a continuing review of credit policies, system and
procedures.

Credit-related commitments
The primary purpose of these instruments is to ensure that funds are available to a customer as
required. Guarantees and standby letters of credit which represent irrevocable assurances that the
Group will make payments in the event that a customer cannot meet its obligations to third parties
carry the same credit risk as loans. Documentary and commercial letters of credit which are
written undertakings by the Group on behalf of a customer authorizing a third party to draw
drafts on the Group up to a stipulated amount under specific terms and conditions are
collateralized by the underlying shipments of goods to which they relate and therefore carry less
risk than a direct borrowing.

Commitments to extend credit represent unused portions of authorizations to extend credit in the
form of loans, guarantees or letters of credit. With respect to credit risk on commitments to extend
credit, the Group is potentially exposed to loss in an amount equal to the total unused
commitments. However, the likely amount of loss is less than the total unused commitments, as
most commitments to extend credit are contingent upon customers maintaining specific credit
standards. The Group monitors the term to maturity of credit commitments because long-term
commitments generally have a greater degree of credit risk than short-term commitments.

Concentration of credit
Concentrations arise when a number of counterparties are engaged in similar business activities,
or activities in the same geographic region, or have similar economic features that would cause
their ability to meet contractual obligations to be similarly affected by changes in economic,
political or other conditions. Concentrations indicate the relative sensitivity of the Group’s
performance to developments affecting a particular industry or geographic location.
 - 34 -

The distribution of resources, liabilities, off-balance sheet items and revenues by geographic
region of the Group as of December 31, 2005 follows (in thousand pesos):

Credit
Resources Liabilities Commitments Revenues
Geographic region:
Philippines P
=207,866,283 P
=189,460,401 P
=65,840,030 =
P14,962,961
Asia (excluding Philippines) 8,200,366 7,122,249 754,369 982,928
United Kingdom 1,448,746 581,802 60,658 171,281
Other European Union
Countries 762,066 759,740 – 104,206
United States and Canada 4,841,563 2,284,031 43,121 1,308,100
=223,119,024
P P
=200,208,223 P
=66,698,178 P
=17,529,476

The Philippines is the home country of the Parent Company, which is also the main operating
company. The Group offers a wide range of financial services as discussed in Note 1.
Additionally, most of the remittance services are managed and conducted in Asia, Canada, USA
and United Kingdom.

The areas of operation include all the primary business segments.

As one of the largest Philippine banks, the Group accounts for a significant share of credit
exposure to many sectors of the economy. However, credit risk is spread over a diversity of
personal and commercial customers.

Note 9 also provides information on the concentration of credit on loans and receivables from
customers.

Market Risk
The Parent Company is exposed to the potential loss in its trading portfolio because the values of
its trading positions are sensitive to changes in the market prices and rates. Similarly, it is also
exposed to market risk in its investment portfolio. Market risk is dimensioned and controlled in
both the trading book and in the statements of condition. In the trading book, market risk is
controlled by a daily analysis of the Value-at-Risk (VAR) of trading instruments under normal
market conditions. The volatilities used for this regular analysis are those for a rolling one-year
period, updated quarterly. The risk amounts computed are for 99% confidence level.

The Parent Company also uses back testing to verify the results of the daily VAR calculation.
Likewise, the Parent Company performs stress tests wherein the trading portfolios are valued
under extreme market scenarios not covered by the confidence interval of the Parent Company’s
VAR model. Stress tests determine the effects of potentially extreme market developments on the
value of market risk sensitive exposures.
 - 35 -

Below is a table showing the VAR of the Parent Company for the year ended December 31, 2005
(in million pesos).

Year End Average High Low

Interest rate risk =
P34.76 P
=76.29 P
=272.22 =
P18.91
Foreign exchange risk 5.59 8.29 18.79 2.38
Total VAR =
P40.35 P
=84.58 P
=278.13 =
P23.43
Note: The high and low for the total portfolio may not equal to the sum of the individual components as the highs
and lows of the individual trading portfolios may have occurred on different trading days.

Complementary trading to the use of the VAR approach to control maximum exposure, the Bank
also employs dealer’s limit and loss control limits.

Foreign Currency Risk

The Group takes on exposure to effects of fluctuations in the prevailing foreign currency
exchange rates on its financial position and cash flows.

Foreign currency liabilities generally consist of foreign currency deposits in the Bank's FCDU,
accounts made in the Philippines or which are generated from remittances to the Philippines by
Filipino expatriates and overseas Filipino workers who retain for their own benefit or for the
benefit of a third party, foreign currency deposit accounts with the Parent Company and foreign
currency-denominated borrowings appearing in the regular books of the Parent Company.

Foreign currency deposits are generally used to fund the Parent Company's foreign currency-
denominated loan and investment portfolio in the FCDU. Banks are required by the BSP to match
the foreign currency assets with the foreign currency liabilities held through FCDUs. In addition,
the BSP requires a 30% liquidity reserve on all foreign currency liabilities held through FCDUs.
Outside the FCDU, the Parent Company has additional foreign currency assets and liabilities in its
foreign branch network.

The Group's policy is to maintain foreign currency exposure within acceptable limits and within
existing regulatory guidelines. The Group believes that its profile of foreign currency exposure on
its assets and liabilities is within conservative limits for a financial institution engaged in the type
of business in which the Group is engaged.
 - 36 -

The table below summarizes the Group’s exposure to foreign currency exchange rate risk as of
December 31, 2005. Included in the table are the Group’s assets and liabilities at carrying
amounts (in thousand pesos), categorized by currency.

USD Others Total

Resources
Cash and Due from BSP P
=1,407,663 =
P133,072 =
P1,540,735
Due from other banks 894,331 1,237,476 2,131,807
Interbank loans receivable and securities held
under agreements to resell 15,269,943 404,332 15,674,275
Investment securities
Available-for-sale investments 21,041,109 184,350 21,225,459
Held-to-maturity investments 5,017,574 – 5,017,574
Loans and receivables 10,311,463 1,320,334 11,631,797
Other resources 3,692,028 170,574 3,862,602
Total resources 57,634,111 3,450,138 61,084,249
Liabilities
Deposit liabilities 41,390,246 633,420 42,023,666
Bills payable 2,720,514 1,384,243 4,104,757
Accrued taxes, interest and other expenses 73,669 3,309 76,978
Other liabilities 5,471,267 538,465 6,009,732
Total liabilities 49,655,696 2,559,437 52,215,133

Contingent Foreign Exchange Asset

Spot purchases 137,582 – 137,582
Forward purchases 1,218,484 502,143 1,720,627
Total contingent foreign exchange asset 1,356,066 502,143 1,858,209

Contingent Foreign Exchange Liabilities

Spot sales 265,236 31,439 296,675
Forward sales 10,140,513 1,140,661 11,281,174
Total contingent foreign exchange liabilities 10,405,749 1,172,100 11,577,849

Net Exposure (P
=1,071,268) =
P220,742 (P
=850,526)

Interest Rate Risk

The Parent Company seeks to ensure that exposure to fluctuations in interest rates are kept within
acceptable limits. Interest margins may increase as a result of such changes but may reduce or
create losses in the event that unexpected movements arise.

The Parent Company measures the sensitivity of its assets and liabilities to interest rate
fluctuations by way of a “repricing gap” analysis using the repricing characteristics of its balance
sheet positions tempered with approved assumptions. To evaluate earnings exposure, interest rate
sensitive liabilities in each time band are subtracted from the corresponding interest rate assets to
produce a “repricing gap” for that time band. The difference in the amount of assets and liabilities
maturing or being repriced over a one year period would then give the Parent Company an
indication of the extent to which it is exposed to the risk of potential changes in net interest
income. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds
 - 37 -

the amount of interest rate sensitive assets. A gap is considered positive when the amount of
interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. Accordingly,
during a period of rising interest rates, a company with a positive gap would be better positioned
than one with a negative gap to invest in higher yielding assets more quickly than it would need to
refinance its interest-bearing liabilities. During a period of falling interest rates, a company with a
positive gap would tend to see its assets repricing at a faster rate than one with a negative gap,
which may restrain the growth of its net income or result in a decline in net interest income.

For risk management purposes, the repricing gap covering the one year period is multiplied by an
assumed change in interest rates to yield an approximation of the change in net interest income
that would result from such an interest rate movement. The Parent Company’s BOD sets a limit on
the level of earnings at risk (EAR) exposure tolerable to the Parent Company. Compliance to the
EAR limit is monitored monthly by the Risk Management Group.

The following table sets forth the repricing gap position of the Parent Company as of
December 31, 2005 (in million pesos):

Greater
Up to 1 to 3 3 to 6 6 to 12 than 1
1 month months Months months year Total
Resources
Placements with other banks =
P8,818 =
P– =
P– =
P– =
P– =
P8,818
Interbank loans receivable 11,759 5,122 – – – 16,881
Securities Held Under Agreements to
Resell 12,300 – – – – 12,300
Financial assets at fair value through
profit or loss (including
trading) 512 – – – – 512
Available-for-sale investments 9,949 6,203 4,826 3,351 13,755 38,084
Held-to-maturity investments – – 310 760 4,0220 5,0920
Loans and receivables 23,920 15,180 1,418 1,159 35,878 77,555
Other resources 3,062 62 683 949 57,9068 62,6624
Total resources P
=70,320 P
=26,567 P
=7,237 P
=6,219 P
=111,561 P
=221,904
Liabilities
Deposit liabilities 45,217 22,096 10,961 13,258 78,5645 170,0967
Bills payable 7,246 – – – 5,1978 12,4434
Subordinated debt – – – – 2,958 2,958
Other liabilities 8,813 412 213 1,725 3,9498 15,112
Capital funds – – – – 21,2954 21,2954
Total Liabilities and Capital Funds P
=61,276 P
=22,508 P
=11,174 P
=14,983 P
=111,963 P
=221,904
Repricing Gap P
=9,044 P
=4,059 (P
=3,937) (P
=8,764) (P
=402) P
=–
Cumulative Gap 9,044 13,103 9,166 402 – –

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

Given the repricing position of the resources and liabilities of the Parent Company as of
December 31, 2005, if interest rates increase by 100 basis points, the Parent Company would
expect annualized non-consolidated net interest income to increase by = P4.0 million. Conversely, if
interest rates decrease by 100 basis points, the annualized non-consolidated net interest income
would decrease by P =4.0 million. This EAR computation is accomplished monthly, with a
quarterly stress test.
 - 38 -

Maturity (Liquidity Risk)

The Group’s liquidity management involves maintaining sufficient and diverse funding capacity to
accommodate fluctuations in asset and liability levels due to changes in the Group’s business
operations or unanticipated events created by customer behavior or capital market conditions. The
Group seeks to ensure sufficient liquidity through a combination of active management of
liabilities, a liquid asset portfolio composed substantially of deposits in primary and secondary
reserves, the securing of ample money market lines and the maintenance of repurchase facilities to
pre-empt any unexpected liquidity situations.

Liquidity risk is monitored and controlled primarily by a gap analysis of maturities of relevant
assets and liabilities reflected in the maximum cumulative outflow report, as well as an analysis of
liquid assets, which provides guidance as to the Group’s ability to generate sufficient liquidity.
Further, an internal liquidity ratio has been set to determine sufficiency of liquid resources over
deposit liabilities.

Liability is dimensioned on a daily basis and under stressed situations. The table below analyses
the Group’s resources and liabilities as of December 31, 2005 into relevant maturity groupings
based on the remaining period at statement of condition date to the contractual maturity date (in
million pesos):

Greater
Up to 1 to 3 3 to 6 6 to than 1
1 month months months 12 months year Total
Resources
Placements with other banks =
P7,654 =
P624 =
P– =
P5 =
P1,132 =
P9,415
Interbank loans receivables 11,792 5,122 – – – 16,914
Securities Held Under Agreements to
Resell 12,300 – – – – 12,300
Financial assets at fair value through
profit or loss (including
trading) 10 278 78 120 52 538
Available-for-sale investments 7,377 4,141 3,309 3,410 22,007 40,244
Held-to-maturity investments 2 28 312 760 4,165 5,267
Loans and receivables 3,819 4,492 4,210 2,889 64,321 79,731
Other resources 6,734 63 688 1,797 49,428 58,710
Total resources P
=49,688 P
=14,748 P
=8,597 P
=8,981 P
=141,105 P
=223,119
Liabilities
Deposit liabilities =
P 5,351 =
P10,696 =
P15,889 =
P31,986 =
P103,905 =
P167,827
Bills payable 1,702 24 6 325 11,089 13,146
Subordinated debt – – – – 2,958 2,958
Other liabilities 9,316 412 220 1,840 4,489 16,277
Capital funds – – – – 22,911 22,911
Total liabilities and capital funds P
=16,369 P
=11,132 P
=16,115 P
=34,151 P
=145,352 P
=223,119
Total Gap P
=33,319 P
=3,616 (P
=7,518) (P
=25,170) (P
=4,247) –
Cumulative Gap 33,319 36,935 29,417 4,247 – –
 - 39 -

Fair Values of Financial Resources and Liabilities

The following table summarizes the carrying amounts and fair values of those financial resources
and liabilities as of December 31, 2005 that are either not presented on the Group’s statement of
condition at their fair values or where the carrying values do not approximate their respective fair
values. Generally, bid prices are used to estimate fair values of assets, whereas offer prices are
applied for liabilities.

Group Parent Company

Carrying Value Fair value Carrying Value Fair value
(In Thousand Pesos)
Financial Assets
Due from other banks =
P5,696,540 P
=5,693,538 P
=5,098,751 P
=5,095,749
Held-to-maturity investments 5,266,817 5,365,103 5,091,685 5,189,971
Loans and receivables 79,730,961 79,712,455 77,554,727 77,415,652

Financial Liabilities
Subordinated debt 2,958,437 3,117,041 2,958,437 3,117,041

COCI, due from BSP, interbank loans receivables, and securities held under agreements to resell
The carrying amount of these financial instruments approximates fair values due to their relatively
short-term maturities.

Due from other banks

Due from other banks includes interbank placements and items in the course of collection. The
fair value of floating rate placements and overnight deposits is their carrying amount. The
estimated fair value of fixed interest-bearing deposits is based on discounted cash flows using
prevailing money market interest rates for debts with similar credit risk and remaining maturity.

Loans and receivables

Loans and receivables are net of provisions for impairment. The estimated fair value of loans and
receivables represents the discounted amount of estimated future cash flows expected to be
received. Expected cash flows are discounted at current market rates to determine fair value.

Held-to-maturity investments
Fair value for HTM is based on market prices or broker/dealer price quotations. When this
information is not available, fair value has been estimated using quoted market prices for
securities with similar credit, maturity and yield characteristics.

Deposit liabilities, due to BSP and other banks and other liabilities
The estimated fair value of due to other banks, deposit liabilities and other liabilities with no stated
maturity, which includes noninterest-bearing deposits, is the amount repayable on demand.

Bills and acceptances payable

The estimated fair value of floating rate borrowings is their carrying amount.

Subordinated debt
The fair value of subordinated debt is determined to be the present value of estimated future cash
flows using a discount rate based on a benchmark rate adjusted for risk and remaining term to
maturity considerations.
 - 40 -

6. Segment Information

Business Segments
The Group’s operating businesses are determined and managed separately according to the nature
of services provided and the different markets served with each segment representing a strategic
business unit. The Group’s business segments follow:

Retail Banking - principally handling individual customers’ deposits, and providing consumer
type loans, overdrafts, credit card facilities and fund transfer facilities;

Corporate Banking - principally handling loans and other credit facilities and deposit accounts for
corporate and institutional customers;

Treasury - principally providing money market, trading and treasury services, as well as the
management of the Group’s funding operations by use of T-bills, government securities and
placements and acceptances with other banks, through treasury and wholesale banking.

These segments are the bases on which the Group reports its primary segment information. Other
operations of the Group comprise of the operations and financial control groups. Transactions
between segments are conducted at estimated market rates on an arm’s length basis. Interest is
credited to or charged against business segments based on a pool rate which approximates the
marginal cost of funds.

Business segment information of the Group follows (in thousand pesos):

2005
Retail Banking Corporate Banking Treasury Others Total
Gross income P
=3,259,217 P
=5,758,863 P
=6,640,983 P
=1,870,413 P
=17,529,476
Segment result P
=1,873,642 P
=947,084 P
=2,239,614 P
=816,562 P
=5,876,902
Unallocated expenses 3,357,638
Income from operations before
tax 2,519,264
Provision for income tax (1,891,726)
Minority interest (6,617)
Net income for the year
attributable to holders
of the Parent Company P
=620,921
Other Information
Segment resources P
=31,320,808 P
=78,498,210 P
=67,397,607 P
=26,546,286 P
=203,762,911
Unallocated resources 19,356,113
Total resources P
=223,119,024
Segment liabilities P
=27,881,924 P
=69,879,460 P
=59,997,654 P
=23,631,624 P
=181,390,662
Unallocated liabilities 18,817,561
Total liabilities P
=200,208,223
Other Segment Information
Capital expenditures P
=259,386 P
=8,519 P
=2,044 P
=30,743 P
=300,692
Unallocated capital
expenditures 193,269
Total capital expenditures P
=493,961
Depreciation and amortization P
=141,797 P
=7,801 P
=32,414 P
=8,321 P
=190,333
Unallocated depreciation and
amortization 610,119
Total depreciation and
amortization P
=800,452
 - 41 -

2004 (As Restated - Note 3)

Retail Banking Corporate Banking Treasury Others Total
Gross income P
=2,665,170 =
P5,347,414 =
P6,452,622 =
P1,441,981 =
P15,907,187
Segment result =
P1,299,763 =
P315,801 =
P1,349,744 =
P313,827 =
P3,279,135
Unallocated expenses 2,302,457
Income from operations before
tax and minority interest 976,678
Provision for income tax (618,142)
Minority interest (6,619)
Net income for the year
attributable to holders of
the Parent Company P
=351,917
Other Information
Segment resources =
P35,152,132 =
P76,767,000 =
P94,917,336 =
P5,417,254 =
P212,253,722
Unallocated resources 7,487,302
Total resources =
P219,741,024
Segment liabilities =
P32,109,282 =
P67,080,807 =
P86,828,027 =
P5,021,365 =
P191,039,481
Unallocated liabilities 3,127,905
Total liabilities =
P194,167,386
Other Segment Information
Capital expenditures =
P177,622 =
P1,624 =
P13,401 =
P143,415 =
P336,062
Unallocated capital
expenditures 81,147
Total capital expenditures =
P417,209
Depreciation and amortization =
P177,747 =
P13,563 =
P32,932 =
P244,847 =
P469,089
Unallocated depreciation and
amortization 294,358
Total depreciation and
amortization P
=763,447

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

7. Financial Assets at Fair Value Through Profit or Loss/Trading Account Securities

This account consists of:

Group Parent Company

2005 2004 2005 2004
(In Thousand Pesos)
Government securities - net P
=507,139 =
P712,229 P
=512,091 =
P712,229
Other debt securities 31,329 42,474 – –
P
=538,468 =
P754,703 P
=512,091 =
P712,229

Government securities include unrealized gain of =

P0.8 million as of December 31, 2005 and net of
unrealized loss of =
P9.7 million as of December 31, 2004 for the Group and the Parent Company.

Other securities include unrealized gain of =

P2.8 million and P
=6.2 million as of December 31, 2005
and 2004, respectively, for the Group.

In 2005, the effective interest rates range from 5.83% to 12.09%.

 - 42 -

8. Investment Securities

As of December 31, 2005, this account consists of:

Parent
Group Company
(In Thousand Pesos)
Available-for-sale investments
Government securities (Notes 15 and 24) P
=38,790,610 P
=36,986,894
Other debt securities 339,688 –
Other equity securities - net of allowance for
impairment losses of = P122.8 million
(Note 14) 1,113,366 1,097,243
40,243,664 38,084,187
Held-to-maturity investments
Government securities (Notes 15 and 24) 5,266,817 5,091,685
P
=45,510,481 P
=43,175,872

As of December 31, 2004, investment securities consist of:

Parent
Group Company
(In Thousand Pesos)
Available-for-sale investments
Government securities (Notes 15 and 24) =
P4,114,884 =
P4,114,884
Other debt securities 199,310 196,119
4,314,194 4,311,003
Investments in bonds and other debt instruments
Government securities (Notes 9, 15 and 24) 53,545,167 51,665,567
Zero-interest coupon notes - net of allowance
for impairment losses of =P259.8 million
(Notes 9 and 14) 3,771,805 3,771,805
Other debt securities - net of allowance for
impairment losses of = P267.6 million
(Note 14) 1,402,682 1,182,184
58,719,654 56,619,556
=63,033,848
P =
P60,930,559

Unrealized gain on AFS amounted to = P913.6 million (net of unrealized loss of =

P2.8 million of
subsidiaries) and =
P868.7 million as of December 31, 2005 for the Group and Parent Company,
respectively, and unrealized loss on AFS amounted to =P143.5 million (including = P4.7 million of
subsidiaries) and =
P138.8 million as of December 31, 2004 for the Group and Parent Company,
respectively.

On January 1, 2005, the Group has reclassified certain securities from HTM (classified as IBODI
as of December 31, 2004) to AFS amounting to = P22.0 billion as allowed by the transition
provisions of PAS 39.
 - 43 -

As of December 31, 2004, IBODI also includes the following securities:

a. Twelve-year peso-denominated bonds with face value amounting to P =11.2 billion. These
bonds, with an original amount of = P24.3 billion, were issued by the NG in settlement of the
Parent Company’s claims from NG. These bonds, which will mature in 2007, are eligible as
part of the liquidity cover requirements on government deposits. These bonds were
redeemable at any time at the option of the NG and were originally issued as nontransferable
until the lifting of such restriction in 1997. In February 1998, =P10.0 billion of these bonds
were sold with an agreement to swap interest payments based on the average 91-day and 364-
day T-bill rates during the three-month period preceding the annual repricing date for the
remaining term of the bonds. As of December 31, 2004, IBODI includes = P0.8 billion of bonds
pledged to secure performance for the estimated net interest differential under the interest rate
swap agreement (see Note 27).

b. Bonds issued by Philippine Sugar Corporation (PSC) amounting to = P2.8 billion. The bonds
carry an annual interest rate of 4.00% and will mature in 2014. The full repayment of
principal and accumulated interest to maturity is guaranteed by a sinking fund managed by the
Parent Company’s Trust Banking Group (TBG). As of December 31, 2005 and 2004, the net
asset value of the sinking fund amounted to =
P3.04 billion and =
P2.8 billion, respectively,
earning an average rate of return of 9.44% per annum. Management expects that the value of
the sinking fund in the year 2014 will be more than adequate to cover the full redemption
value of PSC bonds.

On January 1, 2005, these bonds were reclassified to Loans and discounts under Loans and
receivables (see Note 9).

In 2005, effective interest rates range from 4.20% to 17.28% and 4.03% to 10.63% for peso-
denominated and foreign currency-denominated AFS, respectively. HTM securities have
effective interest rates ranging from 4.17% to 8.57% and 5.19% to 8.88% for peso-denominated
and foreign currency-denominated HTM, respectively, in 2005.

9. Loans and Receivables

This account consists of:

Group Parent Company

2005 2004 2005 2004
(In Thousand Pesos)
Loans receivable:
Loans and discounts (Note 8) P
=85,977,058 =
P65,208,588 P
=85,108,439 =
P64,197,772
Bills purchased 2,994,513 2,139,659 2,994,513 2,139,659
Customers’ liabilities on acceptances,
letters of credit and trust receipts 1,744,153 3,225,426 1,744,153 3,225,426
Lease contracts receivable 824,179 952,270 – –
Credit card accounts 558,896 1,021,588 558,896 1,021,588
Finance lease receivable 144,351 138,252 – –
Premiums receivable – 400,970 – –
92,243,150 73,086,753 90,406,001 70,584,445
(Forward)
 - 44 -

Group Parent Company

2005 2004 2005 2004
(In Thousand Pesos)
Other receivables (Note 13):
Accrued interest receivable P
=6,014,291 =
P– P
=5,964,368 =
P–
Accounts receivable 3,781,525 – 3,229,825 –
Sales contract receivables 2,175,412 – 2,175,412 –
Transferred receivables 339,810 – 339,810 –
Special rehabilitation receivable accounts 209,137 – 209,137 –
Miscellaneous 333,287 – 301,697 –
12,853,462 – 12,220,249 –
105,096,612 73,086,753 102,626,250 70,584,445
Unearned discount and lease income (107,147) (117,045) (7,317) (7,555)
Capitalized interest on restructured loans (538,425) (1,108,709) (538,425) (1,108,709)
Unrealized profit on asset sold or exchanged (588,998) – (588,999) –
Allowance for impairment losses (Note 14) (24,131,080) (15,709,391) (23,936,782) (15,466,145)
=79,730,962 =
P P56,151,608 P=77,554,727 = P54,002,036

As of December 31, 2005 and 2004, 62.91% and 73.70%, respectively, of the total loans
receivables of the Parent Company were subject to periodic interest repricing. Remaining
receivables carry annual fixed interest rates ranging from 5.70% to 12.28 % in 2005 and from
4.75% to 8.42% in 2004 for foreign currency-denominated receivables, and from 5.70% to 29.0%
in 2005 and from 5.00% to 13.00% in 2004 for peso-denominated receivables.

Sales contract receivable bear fixed interest rate per annum of 0.58% to 19.05% in 2005 and
10.30% to 21.00% in 2004.

The effective interest rates of Loans receivables and Sales contract receivables range from 5.26%
to 15.00% for foreign currency-denominated receivables, and from 6.00% to 19.05% for peso-
denominated receivables.

The breakdown of loans and receivables by contractual maturity follows:

Group
2005 2004
Due Within Due Beyond Due Within Due Beyond
One Year One Year Total One Year One Year Total
(In Thousand Pesos)
Loans and discounts P
=55,760,992 P
=30,216,066 P
=85,977,058 =34,897,835
P =
P30,310,753 =
P65,208,588
Bills purchased 2,295,656 698,857 2,994,513 2,139,659 – 2,139,659
Customers’ liabilities on
acceptances, letters
of credit and trust
receipts 1,473,826 270,327 1,744,153 1,188,633 2,036,793 3,225,426
Lease contracts receivable 422,959 401,220 824,179 477,279 474,991 952,270
Credit card accounts 558,896 – 558,896 1,021,588 – 1,021,588
Premiums receivable – – – 400,970 – 400,970
Finance lease receivable 144,351 – 144,351 25,095 113,157 138,252
Accrued interest receivable 5,694,926 319,365 6,014,291 – – –
Accounts receivable 3,781,525 – 3,781,525 – – –
Sales contract receivable 124,187 2,051,225 2,175,412 – – –
Transferred assets 339,810 – 339,810 – – –
Special rehabilitation
accounts 209,137 – 209,137 – – –
Miscellaneous 333,286 – 333,287 – – –
P
=71,139,551 P
=33,957,060 P
=105,096,612 =40,151,059
P =
P32,935,694 =
P73,086,753
 - 45 -

Parent Company
2005 2004
Due Within Due Beyond Due Within Due Beyond
One Year One Year Total One Year One Year Total
(In Thousand Pesos)
Loans and discounts P
=55,284,170 P
=29,824,269 P
=85,108,439 =34,035,572
P =
P30,162,200 =
P64,197,772
Bills purchased 2,295,656 698,857 2,994,513 2,139,659 – 2,139,659
Customers’ liabilities on
acceptances, letters
of credit and trust
receipts 1,473,826 270,327 1,744,153 1,188,633 2,036,793 3,225,426
Credit card accounts 558,896 – 558,896 1,021,588 – 1,021,588
Accrued interest receivable 5,645,003 319,365 5,964,368 – – –
Accounts receivable 3,229,825 – 3,229,825 – – –
Sales contract receivable 124,187 2,051,225 2,175,412 – – –
Transferred assets 339,810 – 339,810 – – –
Special rehabilitation
accounts 209,137 – 209,137 – – –
Miscellaneous 301,697 – 301,697 – – –
P
=69,462,207 P
=33,164,043 P
=102,626,250 =38,385,452
P =
P32,198,993 =
P70,584,445

Actual maturities may differ from contractual maturities because borrowers can prepay certain
obligations, sometimes without penalties.

The information relating to loans as to secured and unsecured and as to collateral follows:

Group
2005 2004
Amount % Amount %
(Amounts In Thousand Pesos)
Secured:
Real estate mortgage P
=32,520,658 35.26 =
P20,801,859 28.46
Chattel mortgage 5,080,822 5.51 3,863,525 5.29
Shares of stock 1,631,539 1.77 1,483,679 2.03
Bank deposit hold-out 1,522,865 1.69 1,339,987 1.83
Others 33,733,053 36.57 24,552,747 33.60
74,488,937 80.75 52,041,797 71.21
Unsecured 17,754,213 19.25 21,044,956 28.79
P
=92,243,150 100.00 =
P73,086,753 100.00

Parent Company
2005 2004
Amount % Amount %
(Amounts In Thousand Pesos)
Secured:
Real estate mortgage P
=32,439,639 35.88 =
P20,694,302 29.32
Chattel mortgage 4,885,738 5.40 3,725,273 5.28
Shares of stock 1,625,370 1.80 1,231,266 1.74
Bank deposit hold-out 1,436,121 1.59 1,265,992 1.79
Others 32,762,271 36.24 23,600,477 33.44
73,149,139 80.91 50,517,310 71.57
Unsecured 17,256,862 19.09 20,067,135 28.43
P
=90,406,001 100.00 =
P70,584,445 100.00
 - 46 -

The information on loan concentration as to industry follows:

Group
2005 2004
Amount % Amount %
(Amounts In Thousand Pesos)
Financial intermediaries P
=17,505,713 18.98 =
P855,632 1.17
Manufacturing (various) 14,021,970 15.20 15,614,858 21.37
Real estate, renting and business activities 11,169,810 12.11 11,586,121 15.85
Wholesale and retail trade 8,547,133 9.27 12,210,086 16.71
Electricity, gas and water 8,471,278 9.18 8,267,178 11.31
Transport, storage and communications 8,468,672 9.18 4,663,815 6.38
Public administration and defense 8,427,260 9.14 2,579,331 3.53
Agriculture, hunting and forestry 6,281,693 6.81 2,486,479 3.40
Other community, social and personal services 3,158,873 3.42 10,232,527 14.00
Construction 2,594,055 2.81 2,036,870 2.79
Private household 1,681,407 1.82 878,864 1.20
Hotel and restaurant 355,079 0.39 132,195 0.18
Education 317,829 0.35 803,065 1.10
Mining and quarrying 280,933 0.30 513,679 0.70
Health and social work 19,114 0.02 36,472 0.05
Fishing 10,439 0.01 27,611 0.04
Others 931,892 1.01 161,970 0.22
P
=92,243,150 100.00 =
P73,086,753 100.00

Parent Company
2005 2004
Amount % Amount %
(Amounts In Thousand Pesos)
Financial intermediaries P
=17,455,957 19.31 =
P921,421 1.31
Manufacturing (various) 13,478,628 14.91 15,098,420 21.39
Real estate, renting and business activities 11,169,810 12.36 11,165,571 15.82
Electricity, gas and water 8,471,278 9.37 8,267,178 11.71
Public administration and defense 8,427,260 9.32 2,579,331 3.65
Wholesale and retail trade 8,266,138 9.14 11,820,686 16.75
Transport, storage and communications 8,314,264 9.20 4,351,476 6.16
Agriculture, hunting and forestry 6,281,693 6.95 2,486,479 3.52
Other community, social and personal services 3,083,092 3.41 10,066,268 14.26
Construction 2,592,903 2.87 2,034,931 2.88
Private household 1,347,433 1.49 307,343 0.44
Hotel and restaurant 350,673 0.39 131,178 0.19
Education 309,560 0.34 776,401 1.10
Mining and quarrying 280,933 0.31 513,679 0.73
Health and social work 19,114 0.02 36,472 0.05
Fishing 10,440 0.01 27,611 0.05
Others 546,825 0.60 – –
P
=90,406,001 100.00 =
P70,584,445 100.00

The BSP considers that loan concentration exists when the total loan exposure to a particular
industry exceeds 30.00% of the total loan portfolio. As of December 31, 2005 and 2004, the
Group and the Parent Company do not have loan concentration risk to any particular industry.
 - 47 -

NPL as to secured and unsecured follows:

Group Parent Company

2005 2004 2005 2004
(In Thousand Pesos)
Secured P
=24,893,915 =
P23,367,492 =24,816,311 =
P P23,250,326
Unsecured 3,021,588 14,370,701 3,021,588 14,370,701
P
=27,915,503 =
P37,738,193 =27,837,899 =
P P37,621,027

Current banking regulations allow banks that have no unbooked valuation reserves and capital
adjustments to exclude from nonperforming classification those receivables classified as Loss in
the latest examination of the BSP which are fully covered by allowance for impairment losses,
provided that interest on said receivables shall not be accrued. The details of the NPL of the
Group and of the Parent Company follow:

Group Parent Company

2005 2004 2005 2004
(In Thousand Pesos)
Total NPL P
=27,915,503 =
P37,738,193 P
=27,837,899 =
P37,621,027
Less NPL fully covered by allowance for
impairment losses 6,738,098 9,532,547 6,674,646 9,436,975
P
=21,177,405 =
P28,205,646 P
=21,163,253 =
P28,184,052

Most of these receivables are secured mainly by real estate or chattel mortgages.

Restructured receivables of the Group and of the Parent Company as of December 31, 2005 and
2004 amounted to P=23.2 billion and =
P19.5 billion, respectively.

As discussed in Note 8, loans and discounts include investment in twelve-year peso-denominated

bonds amounting to = P0.4 billion pledged to secure performance for the estimated net interest
differential under the interest rate swap agreement (see Note 27).

In 2004, the Parent Company sold the outstanding loans receivable of = P5.3 billion from National
Steel Corporation (NSC) to SPV companies under the provisions of RA No. 9182, The Special
Purpose Vehicle Act of 2002. In consideration for such sale, the Parent Company received zero-
coupon notes and cash totaling = P4.2 billion. In accordance with the BSP Memorandum dated
February 16, 2004, Accounting Guidelines on the Sale of Nonperforming Assets (NPAs) to Special
Purpose Vehicles, the =P1.6 billion allowance for impairment losses previously provided for the
NSC loans receivable was released by the Parent Company to cover additional allowance for
impairment losses required for other existing NPAs and other risk assets of the Parent Company.
With the release of such allowance, the loss on the sale of the NSC loans receivable to the SPV
amounting to =P1.1 billion representing the difference between the carrying value of the receivables
and consideration received was deferred by the Parent Company as allowed under the regulations
issued by the BSP for banks and financial institutions availing of the provisions of RA No. 9182.
 - 48 -

The zero-coupon notes received by the Parent Company on October 15, 2004 at the principal
amount of =P803.5 million (Tranche A Note) payable in five years and at the principal amount of
=3.4 billion (Tranche B Note) payable in eight years in exchange for the outstanding receivable
P
from NSC of = P5.3 billion are included under loans and discounts as of December 31, 2005. The
notes are secured by a first ranking mortgage and security interest over the NSC plant assets.

As of December 31, 2004, the zero-coupon notes were classified as IBODI and had an outstanding
balance of =
P3.8 billion, after receipt of an additional cash payment of =P140.3 million and the
recognition of an allowance for impairment losses of = P259.8 million. Using a discount rate of
13.24%, the present value of such notes as of that date amounted to = P1.9 billion. The =
P1.9 billion
difference between the present value and the outstanding balance of the notes was deferred over a
ten-year period in accordance with regulatory accounting policies prescribed by the BSP for banks
and non-bank financial institutions availing of the provisions of RA No. 9182. However, on
January 1, 2005, the Parent Company recognized this difference as a direct charge against deficit.
As of December 31, 2005, these notes had a carrying value of P =2.0 billion.

In 2005, the Parent Company sold another pool of NPL with outstanding balance of = P4.7 billion.
As discussed in Note 3, upon adoption of PAS 39 on January 1, 2005, the Parent Company had not
set up allowance for impairment losses on the NPLs sold to SPV since it availed of the provisions
of RA No. 9182 in the recognition of the loss from sale of =
P4.3 billion.

Under RA 9182, losses on sale of NPL to SPV companies can be amortized over 10 years based
on the following schedule:

End of Period From Date of Cumulative Write-down of

Transaction Deferred Charges
Year 1 5%
Year 2 10%
Year 3 15%
Year 4 25%
Year 5 35%
Year 6 45%
Year 7 55%
Year 8 70%
Year 9 85%
Year 10 100%

For the purpose of computing the Parent Company’s income tax, the loss is treated as an ordinary
loss and will be carried over as a deduction from the Parent Company’s taxable gross income for a
period of five consecutive taxable years immediately following the year of sale.

Had the allowance for impairment losses on the sold NPLs in 2005 been set up as of
January 1, 2005 and the 2004 loss on the sale of NPL been charged against operations as required
by Philippine GAAP, net income in 2005 would have increased by = P124.8 million and net income
in 2004 would have decreased by = P1.1 billion. Capital funds as of December 31, 2005 and 2004
would have decreased by =P5.2 billion and =P1.1 billion, respectively.

In 2005, the amortization of the loss on sale of NPLs in 2004 amounting to =

P54.0 million was
charged against deficit.
 - 49 -

On November 27, 1997, Maybank Philippines, Inc. (Maybank) and the Parent Company signed a
deed of assignment transferring to the Parent Company certain Maybank assets (Transferred
receivables) and liabilities amounting to =P1.9 billion and = P1.3 billion, respectively, in connection
with the sale of the Parent Company’s 60.00% equity in Maybank. As of December 31, 2005 and
2004, the balance of Transferred Receivables amounting to = P2.9 billion, P=2.6 billion of which is
included under loans and receivables, may be offset against the equivalent amount of transferred
liabilities (included under Bills Payable to BSP and Local Banks - Note 16). The excess of the
transferred receivables over the transferred liabilities is fully covered by an allowance for probable
losses. The remaining equity ownership of the Parent Company in Maybank was sold in June
2000 (see Note 26).

Special rehabilitation receivable accounts represent the portion of the assets previously transferred
to the NG as part of the Parent Company’s rehabilitation in 1986. These receivables were
repurchased by the Parent Company from the NG at a discount and are mostly secured by real
estate mortgages. These receivables are likewise fully covered by allowance for impairment
losses.

10. Bank Premises, Furniture, Fixture , Equipment and, Leasehold Improvements

The composition of and changes in furniture, fixtures and equipment and leasehold improvements
follow:

Group
2005
Furniture,
Fixtures and Leasehold
Equipment Improvements Total 2004
(In Thousand Pesos)
Cost
Balance at beginning of year P
=3,752,142 P
=163,205 P
=3,915,347 =3,758,092
P
Additions 467,554 26,407 493,961 417,209
Disposals (1,089,249) (12,790) (1,102,039) (259,954)
Balance at end of year 3,130,447 176,822 3,307,269 3,915,347
Accumulated Depreciation and Amortization
Balance at beginning of year 3,150,438 38,145 3,188,583 3,079,259
Depreciation and amortization 202,059 42,946 245,005 307,371
Disposals (915,196) – (915,196) (198,047)
Balance at end of year 2,437,301 81,091 2,518,392 3,188,583
Net Book Value at End of Year P
=693,146 P
=95,731 P
=788,877 =726,764
P
 - 50 -

Parent Company
2005
Furniture,
Fixtures and Leasehold
Equipment Improvements Total 2004
(In Thousand Pesos)
Cost
Balance at beginning of year P
=3,510,412 P
=103,227 P
=3,613,639 =3,502,536
P
Additions 435,970 14,913 450,883 355,550
Disposals (1,053,133) – (1,053,133) (244,447)
Balance at end of year 2,893,249 118,140 3,011,389 3,613,639
Accumulated Depreciation and Amortization
Balance at beginning of year 2,959,623 20,432 2,980,055 2,894,849
Depreciation and amortization 180,185 18,240 198,425 268,064
Disposals/others (867,436) – (867,436) (182,858)
Balance at end of year 2,272,372 38,672 2,311,044 2,980,055
Net Book Value at End of Year P
=620,877 P
=79,468 P
=700,345 =633,584
P

The composition of and changes in land and buildings follow:

Group
2005
Land Buildings Total 2004
(In Thousand Pesos)
Appraised Value
Balance at beginning of year P
=10,412,116 P
=5,702,510 P
=16,114,626 =16,157,650
P
Additions – 21,929 21,929 19,845
Disposals/others (8,018) (12,137) (20,155) (62,869)
Balance at end of year 10,404,098 5,712,302 16,116,400 16,114,626
Accumulated Depreciation and
Impairment Loss
Balance at beginning of year 231,344 1,202,929 1,434,273 1,288,269
Depreciation – 144,833 144,833 148,815
Disposals/others – (3,071) (3,071) (2,811)
Balance at end of year 231,344 1,344,691 1,576,035 1,434,273
Net Book Value at End of Year P
=10,172,754 P
=4,367,611 P
=14,540,365 =14,680,353
P

Parent Company
2005
Land Buildings Total 2004
(In Thousand Pesos)
Appraised Value
Balance at beginning of year P
=10,412,116 P
=5,689,338 P
=16,101,454 =16,097,628
P
Additions – 21,929 21,929 19,845
Disposals/others (8,018) (5,799) (13,817) (16,019)
Balance at end of year 10,404,098 5,705,468 16,109,566 16,101,454
Accumulated Depreciation and
Impairment Loss
Balance at beginning of year 231,344 1,200,253 1,431,597 1,284,713
Depreciation – 144,656 144,656 147,373
Disposals/others – (3,078) (3,078) (489)
Balance at end of year 231,344 1,341,831 1,573,175 1,431,597
Net Book Value at End of Year P
=10,172,754 P
=4,363,637 P
=14,536,391 =14,669,857
P

Depreciation on the revaluation increment of the buildings amounted to P

=55.7 million and
P60.3 million in 2005 and 2004, respectively, for the Parent Company.
=
 - 51 -

Depreciation and amortization expense, inclusive of the depreciation on revaluation increment of

the buildings, charged against operations of the Group amounted to = P550.6 million and
=456.2 million in 2005 and 2004, respectively, and =
P P524.6 million in 2005 and = P429.5 million in
2004 for the Parent Company. Had the land and buildings been carried at cost, the net book value
of the land and buildings would have been =P5.2 billion and =
P5.3 billion as of December 31, 2005
and 2004, respectively, for the Group and Parent Company.

Land and buildings with carrying amount of =

P9.8 billion as of December 31, 2005 and
=10.0 billion as of December 31, 2004 were pledged as collateral to secure the Parent Company’s
P
borrowings from PDIC (see note 16).

11. Investments in Subsidiaries and an Associate

The details of this account follow:

Group Parent Company

Equity 2004
Interest (As Restated -
(Percentage) 2005 2004 2005 Note 3)
(In Thousand Pesos)
At equity:
Acquisition cost of:
PNB International Investments
Corporation 100 P
=– =–
P P
=2,028,202 =2,028,202
P
PNB Europe PLC 100 – – 785,309 785,309
PNB International Finance Limited 100 – – 753,061 753,061
PNB Holdings 100 – – 577,876 577,876
PNB Capital 100 – – 350,000 350,000
PNB Forex, Inc. 100 – – 105,000 105,000
PNB Securities, Inc. 100 – – 62,351 62,351
PNB Italy – SpA 100 – – 58,380 58,380
PNB Remittance Center, Ltd. 100 – – 32,042 32,042
Omicron Asset Portfolio (SPV - AMC), Inc. 100 – – 31,250 31,250
Opal Portfolio Investments (SPV - AMC),
Inc. 100 – – 31,250 31,250
Tanzanite Investments (SPV - AMC), Inc. 100 – – 31,250 31,250
Tau Portfolio Investments (SPV - AMC),
Inc. 100 – – 31,250 31,250
PNB Corporation – Guam 100 – – 7,672 7,672
Japan - PNB Leasing 60 – – 103,176 103,176
PNB Venture Capital Corporation 60 5,061 5,061 5,061 5,061
Beneficial - PNB Life Insurance
Company, Inc. 40 516,673 516,673 507,461 516,673
521,734 521,734 5,500,591 5,509,803
Accumulated equity in net earnings:
Balance at beginning of year 121,984 98,975 – –
Equity in net earnings for the year 49,665 30,219 – –
Dividends received during the year (9,212) (7,210) – –
Balance at end of year 162,437 121,984 – –
P
=684,171 =643,718 P
P =5,500,591 =5,509,803
P

As discussed in Note 2, the SEC approved on November 7, 2002 the application of the
accumulated translation adjustment of =P1.6 billion to eliminate the Parent Company’s remaining
deficit of =
P1.3 billion as of December 31, 2001, after applying the total reduction in par value
amounting to = P7.6 billion. The SEC approval is subject to the following conditions: (a) the
remaining translation adjustment of =
P310.7 million as of December 31, 2001 (shown as part of
 - 52 -

Capital Paid in Excess of Par Value) will not be used to wipe out losses that may be incurred in
the future without prior approval of SEC; and (b) for purposes of dividend declaration, any future
surplus account of the Parent Company shall be restricted to the extent of the deficit wiped out by
translation adjustment.

As of December 31, 2005 and 2004, acquisition cost of the investments in the Parent Company
financial statements include the translation adjustment and accumulated equity in net earnings, net
of dividends subsequently received from the quasi-reorganization date, that were closed to deficit
on restructuring date.

12. Investment Properties

The composition and movement of this account follow:

Group
2005
Building and
Land Improvements Total 2004
(In Thousand Pesos)
Cost
Balance at beginning of year P
=25,166,743 P
=7,718,612 P
=32,885,355 =32,456,027
P
Additions 1,736,691 387,296 2,123,987 2,143,382
Disposals/others (1,876,041) (306,098) (2,182,139) (1,714,054)
Balance at end of year 25,027,393 7,799,810 32,827,203 32,885,355
Accumulated Depreciation
and Impairment Losses
Balance at beginning of year 2,512,914 2,382,470 4,895,384 4,353,217
Depreciation – 316,268 316,268 290,475
Impairment losses 147,748 70,471 218,219 251,692
Reversals/others 549,565 – 549,565 –
Balance at end of year 3,210,227 2,769,209 5,979,436 4,895,384
Net Book Value at End of
Year P
=21,817,166 P
=5,030,601 P
=26,847,767 =27,989,971
P

Parent Company
2005
Building and
Land Improvements Total 2004
(In Thousand Pesos)
Cost
Balance at beginning of year P
=25,166,167 P
=7,718,612 P
=32,884,779 =32,455,451
P
Additions 1,736,691 286,051 2,022,742 2,143,382
Disposals/others (1,876,041) (306,098) (2,182,139) (1,714,054)
Balance at end of year 25,026,817 7,698,565 32,725,382 32,884,779

(Forward)
 - 53 -

Parent Company
2005
Building and
Land Improvements Total 2004
(In Thousand Pesos)
Accumulated Depreciation
and Impairment Losses
Balance at beginning of year P
=2,512,914 P
=2,382,470 P
=4,895,384 =4,353,217
P
Depreciation – 297,345 297,345 290,475
Impairment loss 147,748 70,471 218,219 251,692
Reversal/others 549,413 – 549,413 –
Balance at end of year 3,210,075 2,750,286 5,960,361 4,895,384
Net Book Value at End of
Year P
=21,816,742 P
=4,948,279 P
=26,765,021 =27,989,395
P

Certain investment properties consisting of prime commercial properties amounting to

P1.8 billion and =
= P1.9 billion as of December 31, 2005 and 2004, respectively, were pledged as
collateral to secure the Parent Company’s bills payable to PDIC inclusive of the bills payable
transferred from BSP (see Note 16).

The fair value of the investment properties as of December 31, 2005 and 2004 amounted to
=
P34.4 billion and =P37.4 billion, respectively, as determined by independent and/or in-house
appraisers.

13. Other Resources

This account consists of:

Group Parent Company

2005 2004 2005 2004
(In Thousand Pesos)
Deferred charges - net (Note 9) P
=5,287,440 =
P1,214,125 P
=5,287,190 =
P1,207,338
Deferred tax assets (Note 22) 3,368,679 4,547,802 3,331,461 4,510,584
Net interoffice accounts 563,319 367,589 563,319 367,589
Prepaid expenses 123,139 94,569 108,103 80,696
Sundry debits 78,076 35,299 76,992 34,909
Accrued interest receivable – 6,881,625 – 6,843,589
Deficiency claims receivable – 4,619,191 – 4,619,191
Accounts receivable – 3,452,155 – 3,382,590
Transferred assets – 2,937,519 – 2,937,519
Foreign currency notes and coins on hand,
checks and other cash items – 1,762,348 – 1,620,844
Sales contract receivable - includes unrealized
profit on sale of =
P612.8 million in 2004 – 2,181,182 – 2,181,182
Special rehabilitation accounts – 241,290 – 241,290
Deferred reinsurance premiums – 134,320 – –
Miscellaneous (Note 27) 1,333,237 2,420,768 933,476 2,105,850
10,753,890 30,889,782 10,300,541 30,133,171
Less allowance for impairment losses (Note 14) 1,008,022 12,210,632 906,181 12,167,451
P
=9,745,868 =
P18,679,150 P
=9,394,360 =
P17,965,720

On January 1, 2005, financial assets included under Other Resources were reclassified to loans and
receivables upon adoption of PAS 39.
 - 54 -

14. Allowance for Impairment Losses

Changes in the allowance for impairment losses follow:

Group Parent Company
2004 2004
(As Restated - (As Restated -
2005 Note 3) 2005 Note 3)
(In Thousand Pesos)
Balance at beginning of year, as previously stated
Investment securities P
=527,421 =
P201,745 P
=527,421 =
P201,745
Loans and receivables 15,709,391 18,127,028 15,466,145 17,926,497
Investment properties 4,143,964 4,015,695 4,143,964 4,015,695
Other resources 12,210,632 10,446,911 12,167,451 10,380,063
32,591,408 32,791,379 32,304,981 32,524,000
Allowance on SPV subordinated notes charged to
deficit (Note 9) 1,868,299 – 1,868,299 –
Effect of change in accounting for impairment
losses (Note 3) 1,920,801 – 1,913,544 –
Balance at beginning of year, as restated 36,380,508 32,791,379 36,086,824 32,524,000
Provisions during the year 504,213 964,335 502,855 932,395
Accounts charged off and others (7,586,611) (1,164,306) (7,587,708) (1,151,414)
Balance at end of year
Investment securities (Note 8) 122,846 527,421 122,846 527,421
Loans and receivables (Note 9) 24,131,080 15,709,391 23,936,782 15,466,145
Investment properties (Note 12) 4,036,162 4,143,964 4,036,162 4,143,964
Other resources (Note 13) 1,008,022 12,210,632 906,181 12,167,451
P
=29,298,110 =
P32,591,408 P
=29,001,971 =
P32,304,981

15. Deposit Liabilities

The breakdown of deposit liabilities by contractual maturity follows:

Group
2005 2004
Due Within Due Beyond Due Within Due Beyond
One Year One Year Total One Year One Year Total
(In Thousand Pesos)
Demand P
=15,849,762 P
=– P
=15,849,762 =14,476,485
P =
P– =
P14,476,485
Savings 120,834,525 6,838,213 127,672,738 72,082,712 47,958,768 120,041,480
Time 20,551,230 3,753,047 24,304,277 2,829,742 23,661,346 26,491,088
P
=157,235,517 P
=10,591,260 P
=167,826,777 =89,388,939
P =
P71,620,114 =
P161,009,053

Parent Company
2005 2004
Due Within Due Beyond Due Within Due Beyond
One Year One Year Total One Year One Year Total
(In Thousand Pesos)
Demand P
=15,698,886 P
=– P
=15,698,886 =14,433,937
P =
P– =
P14,433,937
Savings 120,819,469 6,838,214 127,657,683 72,038,670 47,958,768 119,997,438
Time 22,986,265 3,753,046 26,739,311 4,887,122 23,661,346 28,548,468
P
=159,504,620 P
=10,591,260 P
=170,095,880 =91,359,729
P =
P71,620,114 =
P162,979,843
 - 55 -

Of the total deposit liabilities of the Parent Company, =

P6.6 billion in 2005 and =
P6.1 billion in 2004
were noninterest-bearing. Remaining deposit liabilities generally earned annual fixed interest
rates ranging from 0.50% to 4.62% in 2005 and from 0.50% to 4.13% in 2004 for foreign
currency-denominated deposit liabilities, and from 0.50% to 12.66% in 2005 and from 1.00% to
14.55% in 2004 for peso-denominated deposit liabilities.

Under existing BSP regulations, non-FCDU deposit liabilities of the Parent Company are subject
to liquidity reserves equivalent to 10.00% which increased to 11.00% starting July 15, 2005 and
statutory reserves equivalent to 10.00%. Available reserves follow:

2005 2004
(In Thousand Pesos)
Cash on hand P
=4,040,539 =3,285,009
P
Due from BSP 3,719,362 3,765,737
Securities held under agreements to resell 12,300,000 –
AFS 9,477,683 144,943
IBODI – 22,207,192
P
=29,537,584 =29,402,881
P

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

16. Bills and Acceptances Payable

This account consists of:

Group Parent Company

2005 2004 2005 2004
(In Thousand Pesos)
Bills payable to:
BSP and local banks (Note 9) P
=2,931,894 =
P2,884,474 P
=2,539,894 =
P2,704,474
Foreign banks 1,824,408 1,844,440 1,513,817 1,385,255
PDIC and others (Notes 2 and 10) 8,328,539 8,716,846 8,328,539 8,716,846
13,084,841 13,445,760 12,382,250 12,806,575
Acceptances outstanding 61,033 88,898 61,033 88,898
P
=13,145,874 =
P13,534,658 P
=12,443,283 =
P12,895,473

As of December 31, 2005, 94.11% and 96.08% of the bills payable of the Group and the Parent
Company, respectively, were subject to periodic interest repricing. The annual interest rates
ranged from 2.13% to 5.43% in 2005 and from 1.00% to 3.44% in 2004 for foreign currency-
denominated borrowings, and from 3.00% to 12.00% in 2005 and from 3.00% to 12.00% in 2004
for peso-denominated borrowings.
 - 56 -

The breakdown of bills and acceptances payable by contractual maturity follows:

Group
2005 2004
Due Within Due Beyond Due Within Due Beyond
One Year One Year Total One Year One Year Total
(In Thousand Pesos)
Bills payable P
=1,868,178 P
=11,216,663 P
=13,084,841 =3,971,513
P =
P9,474,247 =
P13,445,760
Acceptances outstanding 61,033 – 61,033 88,898 – 88,898
P
=1,929,211 P
=11,216,663 P
=13,145,874 =4,060,411
P =
P9,474,247 =
P13,534,658

Parent Company
2005 2004
Due Within Due Beyond Due Within Due Beyond
One Year One Year Total One Year One Year Total
(In Thousand Pesos)
Bills payable P
=1,481,722 P
=10,900,528 P
=12,382,250 =3,673,116
P =
P9,133,459 =
P12,806,575
Acceptances outstanding 61,033 – 61,033 88,898 – 88,898
P
=1,542,755 P
=10,900,528 P
=12,443,283 =3,762,014
P =
P9,133,459 =
P12,895,473

The Parent Company’s bills payable to BSP includes the transferred liabilities from Maybank
amounting to =P2.3 billion and =
P2.5 billion as of December 31, 2005 and 2004, respectively
(see Note 9).

Under the MOA mentioned in Note 2, the note payable to BSP of = P13.9 billion was assigned to
PDIC. Such assignment increased the Parent Company’s total obligation to PDIC to = P23.9 billion.
Of this amount, (a) =P10.0 billion was settled thru “dacion en pago” of the Parent Company’s
resources comprising of loans to, and debt securities issued by various government entities,
(b) P
=7.8 billion was converted into convertible preferred shares of the Parent Company, and (c) the
balance of =P6.1 billion was converted into a note payable in ten years with interest of 91-day
T-bill rate plus 1.00%.

Bills Payable - Others also includes funding from the Development Bank of the Philippines, Land
Bank of the Philippines and the Social Security System under which the Parent Company acts as a
conduit for certain financing programs of these institutions. Lending to such programs is shown
under Loans and receivables (see Note 9).

17. Subordinated Debt

On December 19, 2003, the Parent Company’s BOD approved the raising of lower tier 2 capital
through the issuance in the local capital market of subordinated notes with maximum principal
amount of =P3.0 billion maturing in 10 years but callable with step-up on August 16, 2009. The
notes bear a coupon rate of 12.50% per annum with step-up after five years.

The issuance of the foregoing subordinated notes under the terms approved by the BOD was
approved by the MB, in its Resolution No. 06/01-23-04 dated January 22, 2004, subject to the
Parent Company’s compliance with certain conditions.
 - 57 -

Relative to this, on February 16, 2004, the Parent Company issued =

P3.0 billion, 12.50%
Subordinated Notes (the Notes) due in 2014. As discussed in Note 27, on March 2, 2004, the
Parent Company swapped the proceeds from the Notes into USD, which are then invested in
USD-denominated interbank placements, Republic of the Philippines (ROP) and US Treasury
bonds.

Among the significant terms and conditions of the issuance of such Notes are:

(a) Issue price at 100.00% of the principal amount;

(b) The Notes bear interest at the rate of 12.50% per annum from and including February 16, 2004
to but excluding February 16, 2009. Interest will be payable semi-annually in arrears on
February 16 and August 16 of each year, commencing on August 16, 2004. Unless the Notes
are previously redeemed, interest from and including February 16, 2009 to but excluding
February 16, 2014 will be reset at 11.23%, the equivalent of the five-year Money Market
Association of the Philippines 1 Fixed Rate Treasury Notes (MART1 FXTN) as of
February 9, 2004, plus a spread of 5.27% per annum. The stepped-up interest will be payable
semi-annually in arrears on February 16 and August 16 of each year, commencing on
August 16, 2009;
(c) The Notes constitute direct, unconditional unsecured and subordinated obligations of the
Parent Company and at all times rank pari passu without preference among themselves and at
least equally with all other present and future unsecured and subordinated obligations of the
Parent Company;
(d) The Parent Company may redeem the Notes in whole but not in part at a redemption price
equal to 100.00% of the principal amount together with accrued and unpaid interest on the day
following the last day of the tenth interest period from issue date, subject to the prior consent
of the BSP. The Notes may not be redeemed at the option of the noteholders; and
(e) Each noteholder, by accepting a Note, irrevocably agrees and acknowledges that: (a) it may
not exercise or claim any right of set-off in respect of any amount owed by the Parent
Company arising under or in connection with the Notes; and (b) it shall to the fullest extent
permitted by applicable law, waive and be deemed to have waived all such rights of set-off.

As of December 31, 2005, Subordinated debt is net of unamortized transaction cost of

=41.6 million. As of December 31, 2004, Subordinated debt is presented at face amount and the
P
unamortized transaction cost is included in Deferred Charges under Other Resources.
 - 58 -

18. Other Liabilities

The following liabilities are due within one year from their respective statement of condition
dates:

Group Parent Company

2004 2004
(As Restated - (As Restated -
2005 Note 3) 2005 Note 3)
(In Thousand Pesos)
Due to BSP P
=115,704 =
P103,326 P
=115,704 =
P103,326
Margin deposits and cash letters of credit 69,527 137,991 69,527 137,991
Manager’s checks and demand drafts outstanding 472,805 477,893 472,805 477,893
Accrued taxes, interest and other expenses 4,939,651 6,139,490 4,795,600 6,076,517
Other liabilities 10,679,448 9,764,975 9,658,377 8,740,575
P
=16,277,135 =
P16,623,675 P =15,112,013 = P15,536,302

Accrued taxes, interest and other expenses consist of:

Group Parent Company

2004 2004
(As Restated - (As Restated -
2005 Note 3) 2005 Note 3)
(In Thousand Pesos)
Taxes (Note 22) P
=154,209 =
P187,991 P
=142,403 =
P187,991
Interest 2,972,222 4,235,961 2,963,687 4,235,961
Others (Note 21) 1,813,220 1,715,538 1,689,510 1,652,565
P
=4,939,651 =
P6,139,490 P
=4,795,600 =
P6,076,517

Other liabilities consist of:

Group Parent Company

2004 2004
(As Restated - (As Restated -
2005 Note 3) 2005 Note 3)
(In Thousand Pesos)
Accounts payable P
=4,117,883 =
P3,554,073 P
=3,461,310 =
P3,176,634
Bills purchased - contra 2,894,236 1,668,085 2,894,236 1,668,085
Due to other banks 924,504 1,891,312 924,504 1,852,878
Deferred tax liability (Note 22) 741,216 679,288 732,527 677,331
Deferred credits 349,646 805,086 348,270 801,978
Reserve for unearned premiums 293,547 241,602 – –
Retirement liability (Note 20) 179,824 96,128 179,824 96,128
Miscellaneous (Note 27) 1,178,592 829,401 1,117,706 467,541
P
=10,679,448 =
P9,764,975 P
=9,658,377 =
P8,740,575
 - 59 -

19. Capital Funds

Capital stock as of December 31, 2005 and 2004 consists of (in thousands except for par value and
number of shares):

2005 2004
Shares Amount Shares Amount
Preferred - P
=40 par value
Authorized 195,175,444 195,175,444
Issued and outstanding
Balance at beginning of year 195,175,444 P
=7,807,018 195,175,444 =
P7,807,018
Conversion to common stock (140,817,693) (5,632,708) – –
Balance at end of year 54,357,751 2,174,310 195,175,444 7,807,018
Common - = P40 par value
Authorized 1,054,824,557 – 1,054,824,557 –
Issued and outstanding
Balance at beginning of year 378,070,472 15,122,819 378,070,472 15,122,819
Conversion from preferred stock 140,817,693 5,632,708 – –
Balance at end of year 518,888,165 20,755,527 378,070,472 15,122,819
P
=22,929,837 =22,929,837
P

The preferred shares have the following features:

(a) Non-voting, non-cumulative, fully participating in dividends with the common shares;

(b) Convertible, at any time at the option of the holder who is qualified to own and hold common
shares;

(c) With mandatory and automatic conversion into common shares upon the sale of such preferred
shares to any person other than the NG or any GOCC’s; and

(d) With rights to subscribe to additional new preferred shares with all of the features described
above.

In 2005, the NG sold a portion of its preferred shareholdings in the Parent Company to LTG. In
accordance with the Articles of Incorporation, the preferred shares were automatically converted
into common shares.

Under existing BSP regulations, the determination of the Parent Company’s compliance with
regulatory requirements and ratios is based on the amount of the Parent Company’s “unimpaired
capital” (regulatory net worth) reported to the BSP, which is determined on the basis of regulatory
accounting policies, which differ from Philippine GAAP in some respects. In addition, the
risk-based capital ratio of a bank, expressed as a percentage of qualifying capital to risk-weighted
resources, should not be less than 10.00% for both solo basis (head office and branches) and
consolidated basis (parent bank and subsidiaries engaged in financial allied undertakings but
excluding insurance companies). Qualifying capital and risk-weighted resources are computed
based on BSP regulations.

As discussed in Note 2, the BSP has approved the booking of additional appraisal increment of
P431.8 million in 2001 on branch premises and recognition of the same in determining the capital
=
adequacy ratio, and booking of translation adjustment of =
P1.6 billion in 2001 representing the
 - 60 -

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

20. Retirement Plan

The Parent Company’s noncontributory retirement plan provides a retirement benefit equal to one
hundred and twelve percent (112.00%) of plan salary per month for every year of credit service.
Retirement expense charged against operations amounted to =
P83.7 million and =P78.3 million (as
restated) in 2005 and 2004, respectively.

The following table shows the actuarial assumptions used in determining the retirement benefit
obligation of the Parent Company:

2005 2004
Expected rate of return on plan assets 10.00% 10.00%
Discount rate 14.00% 12.00%
Salary rate increase =1,000 effective =
P P1,100 effective
July 1, 2006 July 1, 2005
6.00% per year P =1,000 effective
thereafter July 1, 2006
6.00% per year
thereafter
Actuarial valuation is made at least every two years.

The amount of liability recognized in the Parent Company statements of condition (included under
Other Liabilities) is as follows (in thousand pesos):

2005 2004
Present value of defined benefit obligation P
=775,689 =667,328
P
Fair value of plan assets 710,317 677,330
65,372 (10,002)
Unrecognized actuarial losses 114,452 106,130
Retirement liability P
=179,824 =96,128
P

The amounts included in Compensation and Fringe Benefits in the Parent Company statements of
income are as follows (in thousand pesos):

2005 2004
Current service cost P
=60,403 =63,044
P
Interest cost 93,425 80,569
Expected return on plan assets (67,733) (65,354)
Net actuarial gains recognized during the year (2,399) –
P
=83,696 =78,259
P
 - 61 -

The actual return on plan assets amounted to =

P78.5 million and =
P37.5 million in 2005 and 2004,
respectively.

The movements in the retirement liability recognized in the Parent Company statements of
condition follow (in thousand pesos):

2005 2004
Balance at beginning of year P
=96,128 =17,869
P
Retirement expense 83,696 78,259
Balance at end of year P
=179,824 =96,128
P

Changes in the present value of the defined benefit obligation are as follows (in thousand pesos):

2005 2004
Defined benefit obligation at beginning of year P
=667,328 =671,412
P
Interest cost 93,425 80,569
Current service cost 60,403 63,044
Benefits paid (45,467) (13,756)
Actuarial gain – (133,941)
Defined benefit obligation at end of year P
=775,689 =667,328
P

Changes in the fair value of the plan assets are as follows (in thousand pesos):

2005 2004
Fair value of plan assets at beginning of year P
=677,330 =653,543
P
Expected return 67,733 65,354
Benefits paid (45,467) (13,756)
Actuarial gain (loss) 10,721 (27,811)
Fair value of plan assets at end of year P
=710,317 =677,330
P

The fair value of the plan assets as of December 31, 2005 and 2004 includes the fair value of the
investments in the Parent Company shares of stocks amounting to P=184.1 million and
=176.3 million, respectively.
P

As of January 1, 2004 (transition date), December 31, 2004 and 2005, the net retirement liability
(asset) of Japan-PNB and PNB General Insurers, Co., Inc. (PNB Gen), a wholly owned subsidiary
of the Group follows (in thousand pesos):

Japan-PNB PNB Gen

January 1, 2004 =
P– (P
=5,740)
December 31, 2004 1,580 6,260
December 31, 2005 2,169 7,015

Retirement expense of the Group charged to operations amounted to =

P92.4 million and
P80.5 million (as restated) in 2005 and 2004, respectively.
=
 - 62 -

21. Leases

The Parent Company leases the premises occupied by majority of its branches (about 41.59% of
the branch sites are Parent Company-owned). Some of its subsidiaries also lease the premises
occupied by their Head Offices and most of their branches. The lease contracts are for periods
ranging from 1 to 25 years and are renewable at the Group’s option under certain terms and
conditions. Various lease contracts include escalation clauses, most of which bear an annual rent
increase of 10.00%.

Rent expense charged against current operations (included in Occupancy and Equipment-related
Costs in the statements of income) amounted to P=383.2 million in 2005 and =
P369.0 million in
2004, for the Group, of which =P274.7 million in 2005 and =
P235.1 million in 2004, pertain to the
Parent Company.

Future minimum rentals payable under non-cancelable operating leases follow:

Group Parent Company

2005 2004 2005 2004
(In Thousand Pesos)
Within one year P
=229,228 =117,251
P P
=165,632 =117,251
P
Beyond one year but not more than five years 294,313 251,350 270,990 251,350
Beyond more than five years 42,019 26,474 42,019 26,474
P
=565,560 =395,075
P P
=478,641 =395,075
P

The Parent Company has entered into commercial property leases on its investment property
portfolio consisting of the Parent Company’s ROPOA. These non-cancelable leases have
remaining lease terms of between two and five years. Some leases include a clause to enable
upward revision of the rental charge on an annual basis based on prevailing market rates (such as
5.00% per year).

Future minimum rentals receivable under non-cancelable operating leases follow:

2005 2004
(In Thousand Pesos)
Within one year P
=44,400 =
P51,692
Beyond one year but not more than five years 22,200 97,036
P
=66,600 =148,728
P

22. Income and Other Taxes

Under Philippine tax laws, the Parent Company and certain subsidiaries are subject to percentage
and other taxes (presented as Taxes and Licenses in the statements of income) as well as income
taxes. Percentage and other taxes paid consist principally of gross receipts tax and documentary
stamp tax.
 - 63 -

Income taxes include the corporate income tax, discussed below, and final tax paid at the rate of
20%, which represents final withholding tax on gross interest income from government securities
and other deposit substitutes. These income taxes, as well as the deferred tax benefits and
provisions, are presented as Provision for Income Tax in the statements of income.

Prior to November 1, 2005, the RCIT was 32%. Interest allowed as a deductible expense is
reduced by an amount equivalent to 38% of interest income subjected to final tax. RA No. 9337,
An Act Amending National Internal Revenue Code, provides that effective November 1, 2005, the
RCIT rate shall be 35% until January 1, 2009. Starting January 1, 2009, the RCIT shall be 30%.
Interest expense allowed as a deductible expense is reduced by 42% starting November 1, 2005
until January 1, 2009. Starting January 1, 2009, interest expense allowed as a deductible expense
shall be reduced by 33%.

An MCIT of 2% on modified gross income is computed and compared with the regular income
tax. Any excess of MCIT over the RCIT is deferred and can be used as a tax credit against future
income tax liability for the next three years. In addition, NOLCO is allowed as a deduction from
taxable income in the next three years from the period of incurrence for the Parent Company and
certain subsidiaries.

FCDU offshore income (income from non-residents) is tax-exempt while gross onshore income
(income from residents) is generally subject to 10.00% income tax. In addition, interest income
on deposit placement with other FCDUs and offshore banking units (OBUs) is taxed at 7.50%.
RA No. 9294, which became effective in May 2004, provides that the income derived by the
FCDU from foreign currency transactions with non-residents, OBUs, local commercial banks
including branches of foreign banks is tax-exempt while interest income on foreign currency loans
from residents other than OBUs or other depository banks under the expanded system is subject to
10.00% income tax.

Provision for income tax consists of:

Group Parent Company
2004 2004
(As Restated - (As Restated -
2005 Note 3) 2005 Note 3)
(In Thousand Pesos)
Current P
=712,602 =
P614,783 P
=552,654 =
P478,793
Deferred 1,179,124 3,359 1,179,124 –
P
=1,891,726 =
P618,142 P
=1,731,778 =
P478,793

The components of net deferred tax assets included in Other Resources follow:

Group Parent Company

2005 2004 2005 2004
(In Thousand Pesos)
Deferred tax asset on:
Allowance for impairment losses P
=3,490,509 =
P4,530,782 P
=3,470,311 =
P4,510,584
NOLCO and others 17,020 17,020 – –
3,507,529 4,547,802 3,470,311 4,510,584
Less deferred tax liability on unrealized trading gains
on derivatives 138,850 – 138,850 –
P
=3,368,679 =
P4,547,802 P
=3,331,461 =
P4,510,584
 - 64 -

Based on the five-year financial forecast prepared by management and duly approved by the
Executive Committee of the BOD, the Parent Company’s deferred tax assets of = P3.3 billion as of
December 31, 2005 is expected to be realized from its taxable profits within the next three to five
years. The Parent Company and certain subsidiaries did not recognize deferred tax assets on the
following temporary differences:

Group Parent Company

2004 2004
(As Restated - (As Restated -
2005 Note 3) 2005 Note 3)
(In Thousand Pesos)
Investment properties:
Allowance for impairment losses P
=4,036,162 =
P3,268,531 P
=4,036,162 =
P3,268,531
Accumulated depreciation 1,924,199 1,626,854 1,924,199 1,626,854
Fair value adjustment (4,057,047) (3,954,809) (4,057,047) (3,954,809)
1,903,314 940,576 1,903,314 940,576
Allowance for impairment losses on loans
and receivables and other resources 12,604,086 10,073,326 12,375,272 9,850,018
NOLCO 10,899,139 8,258,313 10,899,139 8,264,445
MCIT 42,891 17,380 41,459 15,949
Others 617,937 505,370 627,614 505,370
P
=26,067,367 =
P19,794,965 P
=25,846,798 =
P19,576,358

The components of deferred tax liability included in Miscellaneous Liabilities relating to items
credited to capital funds follow:

Group Parent Company

2004 2004
(As Restated - (As Restated -
2005 Note 3) 2005 Note 3)
(In Thousand Pesos)
Deferred tax liability on:
Revaluation increment on land
and buildings P
=634,415 =
P679,288 P
=634,415 =
P677,331
Unrealized gain on AFS 106,801 – 98,112 –
P
=741,216 =
P679,288 P
=732,527 =
P677,331

Details of the Group’s NOLCO follow:

Year Incurred Amount Used/Expired Balance Expiry Year

(In Thousand Pesos)
1992 to 1999 =
P12,121 =
P6,324 =
P5,797 2002 to 2009
2002 4,400,046 4,400,046 – 2005
2003 2,228,206 1,555 2,226,651 2006
2004 1,700,948 – 1,700,948 2007
2005 7,029,130 – 7,029,130 2008 to 2010
=
P15,370,451 =
P4,407,925 =
P10,962,526

The Group’s NOLCO of P =7.0 billion in 2005 includes the Parent Company’s loss on sale of NPLs
to SPV companies amounting to = P5.4 billion which can be claimed as deductions from taxable
income for a period of five consecutive taxable years immediately following the year of sale.
 - 65 -

The Group’s NOLCO includes net operating losses of PNB Corporation - Guam from 1992 to
1999 amounting to =
P12.1 million recognized based on applicable tax laws similar to those of USA.
Guam’s NOLCO matures 10 years from the date such NOLCO was incurred.

Details of the Group’s MCIT follow:

Year Incurred Amount Used/Expired Balance Expiry Year

(In Thousand Pesos)
2002 =
P1,275 =
P1,275 =
P– 2005
2003 953 – 953 2006
2004 16,428 – 16,428 2007
2005 25,510 – 25,510 2008
=
P44,166 =
P1,275 =
P42,891

Details of the Parent Company’s NOLCO follow:

Year Incurred Amount Used/Expired Balance Expiry Year

(In Thousand Pesos)
2002 =
P4,394,436 =
P4,394,436 =
P– 2005
2003 2,180,979 – 2,180,979 2006
2004 1,689,030 – 1,689,030 2007
2005 7,029,130 – 7,029,130 2008 to 2010
=
P15,293,575 =
P4,394,436 =
P10,899,139

Details of the Parent Company’s MCIT follow:

Year Incurred Amount Used/Expired Balance Expiry Year

(In Thousand Pesos)
2003 =
P176 =
P– =
P176 2006
2004 15,773 – 15,773 2007
2005 25,510 – 25,510 2008
=
P41,459 =
P– =
P41,459

The reconciliation between the statutory income tax rate to effective income tax rate follows:

Group Parent Company

2004 2004
(As Restated - (As Restated -
2005 Note 3) 2005 Note 3)
Statutory income tax rate 32.50% 32.00% 32.50% 32.00%
Tax effects of:
Unrecognized deferred tax assets 76.27 74.87% 96.82 141.28
Non-deductible expenses 10.38 37.72 13.19 71.18
FCDU income before tax (25.35) (44.86) (32.21) (84.65)
Tax-exempt income (12.38) (7.96) (15.73) (15.02)
Tax-paid income (6.96) (27.70) (7.23) (52.28)
Others - net 0.63 (0.78) – –
Effective income tax rate 75.09% 63.29% 87.34% 92.51%
 - 66 -

Revenue Regulations (RR) No. 10-2002 defines expenses to be classified as entertainment,

amusement and recreation expenses (EARE) and set a limit for the amount that is deductible for
tax purposes. EARE are limited to 1.00% of net revenues for sellers of services. EARE charged
against current operations (included in Miscellaneous Expense) amounted to =P110.1 million in
2005 and =P98.2 million in 2004 (Note 23).

23. Miscellaneous Income and Expenses

Miscellaneous income consists of:

Group Parent Company

2004 2004
(As Restated - (As Restated -
2005 Note 3) 2005 Note 3)
(In Thousand Pesos)
Gain on sale or exchange of assets P
=486,891 =
P638,612 P
=483,469 =
P635,130
Income from derivatives 391,166 230,073 391,166 230,073
Trust income (Note 24) 202,160 168,371 202,160 168,371
Rental (Notes 21 and 25) 64,855 188,504 63,693 187,373
Others (Note 25) 530,941 654,203 355,736 529,801
P
=1,676,013 =
P1,879,763 P
=1,496,224 =P1,750,748

Miscellaneous expenses consist of:

Group Parent Company

2005 2004 2005 2004
(In Thousand Pesos)
Insurance P
=424,245 =
P399,188 P
=422,380 =
P396,258
Management and professional fees 358,683 143,199 243,251 129,480
Foreclosure 247,888 223,165 247,888 223,165
Promotional expense 153,910 85,028 152,192 85,027
Transportation and travel 123,917 123,080 118,064 120,642
Stationery and supplies used 120,076 107,704 119,632 105,768
Representation and entertainment
(Note 22) 116,099 102,395 110,100 98,215
Banking fees 98,459 95,596 95,718 93,045
Others 911,582 960,109 415,395 401,209
P
=2,554,859 =
P2,239,464 P
=1,924,620 =
P1,652,809

Miscellaneous - Others include information technology-related expenses, postage, telephone and

telegraph, repairs and maintenances, and litigation expense.

24. Trust Operations

Securities and other properties held by the Parent Company in fiduciary or agency capacities for
its customers are not included in the accompanying statements of condition since these are not
resources of the Parent Company. Such resources held in trust were carried at a value of
=14.9 billion and =
P P14.6 billion as of December 31, 2005 and 2004, respectively (Note 26). In
connection with the trust functions of the Parent Company, government securities amounting to
=152.0 million and =
P P307.3 million as of December 31, 2005 and 2004, respectively, are deposited
with the BSP in compliance with the trust regulations.
 - 67 -

In compliance with existing banking regulations, the Parent Company transferred from surplus to
surplus reserves of =
P13.7 million and =P36.5 million in 2005 and 2004, respectively, corresponding
to the 10.00% of the net income realized from its trust, investment management and other
fiduciary business until such related surplus constitutes 20.00% of its regulatory capital
(see Note 19).

25. Related Party Transactions

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

The information relating to the DOSRI loans of the Group follows (amounts in thousand pesos):

2005 2004
Total outstanding DOSRI loans
Inclusive of loans extended to NG, LGU’s and
GOCC’s P
=14,921,141 =10,472,610
P
Exclusive of loans extended to NG, LGU’s and
GOCC’s 2,757,635 1,909,666
Percent of DOSRI loans to total loans
Inclusive of loans extended to NG, LGU’s and
GOCC’s 21.34% 14.33%
Exclusive of loans extended to NG, LGU’s and
GOCC’s 3.94% 2.61%
Percent of unsecured DOSRI loans to total
DOSRI loans
Inclusive of loans extended to NG, LGU’s and
GOCC’s 1.20% 1.38%
Exclusive of loans extended to NG, LGU’s and
GOCC’s 6.25% 7.59%
Percent of past due DOSRI loans to total DOSRI
loans 0.05% 0.02%
Percent of nonperforming DOSRI loans to total
DOSRI loans – –

In accordance with existing BSP regulations, the reported DOSRI performing loans exclude loans
extended to certain borrowers before these borrowers became DOSRI.
 - 68 -

The information relating to Parent Company’s receivables and other accommodations to the
following government units follows:

2005 2004
(In Thousand Pesos)
NG P
=13,349,059 =476,915
P
LGU’s 3,659,812 2,905,168
GOCC’s 24,377,332 9,180,861
P
=41,386,203 =12,562,944
P

For purposes of computing the maximum allowable DOSRI loans, which should not exceed the
lower of the Parent Company’s capital funds or 15.00% of the Parent Company’s total loan
portfolio, the aforementioned receivables from government units are not included in the
computation of DOSRI limit.

The Parent Company has lease agreements with some of its subsidiaries. In 2005, the lease
agreement was amended to indicate the share of the subsidiaries in the maintenance of the building
in lieu of rental payments. The income related to these agreements amounting to =P4.7 million in
2005 and = P2.4 million in 2004 is included in Miscellaneous Income in the statements of income.

The significant account balances with respect to related parties included in the financial statements
(after appropriate eliminations have been made) follow:

2005 2004
Loans Interest Loans Interest
Related Party Receivable Income Receivable Income
(In Thousand Pesos)
Fortune Tobacco Corporation P
=1,500,000 P=95,172 =
P1,000,000 =
P109,434
Asia Brewery Inc. 500,000 49,385 500,000 54,330
Philippine Air Lines 243,405 14,007 261,412 13,869
Asian Institute of Management 154,425 12,342 166,323 24,284
Others 282,913 71,202 293,595 71,283
P
=2,680,743 P
=242,108 =
P2,221,330 =
P273,200

The compensation of the key management personnel follows:

Group Parent Company

2005 2004 2005 2004
(In Thousand Pesos)
Short term employee benefits P
=101,522 =
P106,458 P
=46,059 =
P54,538
Post-employment benefits 6,002 5,912 3,781 4,253
P
=107,524 =
P112,370 P
=49,840 =
P58,791
 - 69 -

26. Commitments and Contingent Liabilities

In the normal course of business, the Group makes various commitments and incurs certain
contingent liabilities that are not presented in the financial statements. These commitments and
contingent liabilities include various guarantees, forward exchange contracts, commitments to
extend credit, standby letters of credit, pending litigations including litigations involving
redemption of foreclosed properties already sold to third parties and contested tax assessments.
Several suits and claims remain unsettled. However, no specific disclosures on such unsettled
assets and claims are made because any such specific disclosures would prejudice the Group’s
position with the other parties with whom it is in dispute. Such exemption from disclosures is
allowed under PAS 37, Provisions, Contingencies and Post Balance Sheet Events. The Group and
its legal counsel believe that any losses arising from these contingencies which are not specifically
provided for will not have a material adverse effect on the financial statements.

In November 1994, the BSP, Maybank and the Parent Company executed a Memorandum of
Agreement (MA) providing for the settlement of Maybank’s = P3.0 billion liabilities to the BSP.
Under this MA, the Parent Company is jointly and severally liable with Maybank for the full
compliance and satisfaction of the terms and conditions therein. The MA provides for the creation
of an escrow fund to be administered by the BSP where all collections from conveyed assets and
certain annual guaranteed payments required under the MA are to be deposited.

Relative to the sale of the Parent Company’s 60.00% interest in Maybank, the Parent Company
has requested the BSP to consider the revision of the terms of the MA to, among others,
(a) delete the provision on the annual guaranteed payments in consideration of an immediate
payment by the Parent Company of an agreed amount, and (b) exclude Maybank as a party to the
MA. On May 7, 1997, the BSP approved the Parent Company’s request to amend the terms of the
MA, subject to the following conditions among others:

a) The Parent Company shall remit =

P150.0 million to the escrow account out of the proceeds
from sale;

b) The Parent Company shall remit to the escrow account an amount equivalent to 50.00% of any
profit that may be realized by the Parent Company on account of the sale; and

c) If the amount in the escrow account has not reached the total of P
=3.0 billion by June 30, 2013,
the difference shall be paid by the Parent Company by way of a debit to its regular account
with the BSP.

On November 28, 1997, the Parent Company remitted = P150.0 million in compliance with
item (a). The Parent Company anticipates that the payment of = P150.0 million to the BSP together
with the existing balance of the funds in escrow as of that date will allow the escrow account to
reach the required = P3.0 billion earlier than programmed. This has effectively released the Parent
Company from any further payments under the MA. As of December 31, 2005 and 2004, the total
trust assets of the escrow account maintained with the BSP amounted to = P1.7 billion and
=1.6 billion, respectively. Average yield during the year ranged from 11.00% to 16.00%.
P
Management expects that the value of the escrow account by 2013 will be more than adequate to
cover the P=3.0 billion liability due the BSP.
 - 70 -

The Parent Company’s remaining investment in Maybank was sold on June 29, 2000. The sale
was approved by the BSP on August 16, 2000.

The following is a summary of various commitments, contingent assets and contingent liabilities
at their equivalent peso contractual amounts:

Group Parent Company

2005 2004 2005 2004
(In Thousand Pesos)
Trust department accounts (Note 24) P
=14,938,781 =
P14,561,817 P
=14,938,781 =
P14,561,817
Deficiency claims receivable 9,929,287 – 9,929,287 –
Inward bills for collection 8,585,697 10,535,492 8,585,697 10,535,492
Unused commercial letters of credit 5,229,104 12,422,322 5,229,104 12,422,322
Confirmed export letters of credit 2,968,974 3,673,416 2,968,974 3,673,416
Outward bills for collection 218,009 133,462 218,009 132,405
Outstanding guarantees issued 172,683 – 167,376 –
Items held as collateral 1,760 – 1,748 –
Other contingent accounts 47,900 – 49,900 –

27. Derivative Financial Instruments

Freestanding Derivatives
The Parent Company enters into currency forwards, cross currency swap and interest rate swap
contracts to manage its foreign exchange and interest rate risks. Currency forwards are contractual
agreements to buy or sell a specified currency at a specific price and date in the future. Interest
rate and cross currency swaps are contractual agreements to exchange interest and foreign
exchange differentials based on specific notional amounts. These derivatives are accounted for as
non-hedges, with the fair value changes being reported immediately in the statements of income.

As of December 31, 2005, the total notional amounts of USD currency buy and sell forwards
amounted to US$23.0 million and US$136.6 million, respectively, with total positive fair value of
=78.8 million. The Parent Company also has an outstanding forward sell of ROP bonds with face
P
value of $108.4 million with a total negative fair value of P
=196.0 million.

As discussed in Note 8, the Parent Company sold in February 1998 = P10.0 billion bonds with an
agreement to swap interest payments based on the average 91-day and 364-day T-bill rates of the
auction result immediately preceding the annual repricing date for the remaining term of the
bonds. As of December 31, 2005, the fair value of the interest rate differential on the basis swap
agreement, representing the net present value of the interest differential that the Parent Company
has to pay the counterparty, amounted to =
P267.4 million.
 - 71 -

On March 2, 2004, the Parent Company entered into a cross currency swap agreement with a
counterparty bank in which the proceeds from the Notes were swapped for USD. The USD
amounts were then invested by the Parent Company in ROP and US Treasury bonds. Under the
swap agreement, the Parent Company is committed to sell USD and buy PHP in 2009 at a
specified exchange rate. On a semi-annual basis, the Parent Company pays 5.66% on the USD leg
and receives 12.5% on the PHP leg. As of December 31, 2005, the aggregate notional amount of
the cross currency swap is US$53.25 million or =
P3 billion while the positive fair value amounted
to =
P278.5 million.

Embedded Derivatives
Certain financial and non-financial contracts of the Parent Company that contain embedded
derivatives are treated as separate derivatives when their economic characteristics and risks are not
closely related to those of the host contract and the host contract is not carried at fair value through
profit or loss. These embedded derivatives are measured at fair value with the changes in fair
value recognized in the statements of income. Such derivatives include conversion options in
convertible debt instruments, credit default swaps and foreign-currency derivatives in structured
notes and deposits, call and put options in investment securities and loans and receivables, bond-
linked deposits, and foreign currency derivatives on non-financial contracts such as purchase
orders and service agreements.

Among the embedded derivatives that have been bifurcated and are outstanding as of
December 31, 2005 include the following:

i. credit derivatives in structured notes and deposits with a notional reference of

US$36.7 million and a positive fair value of =P123.6 million;

ii. conversion option in a foreign currency denominated convertible preferred share with a
notional quantity of 18,495 shares and a positive fair value of =
P7 million;

iii. foreign currency derivative in a structured note with a notional reference of =

P40.0 million
and a negative fair value of =
P6.7 million; and

iv. bond-linked deposits derivative with a notional amount of US$124.9 million and a
positive fair value of =
P30.3 million.

As of December 31, 2005, Other Resources and Other Liabilities include the total positive
fair value of =
P511.8 million and total negative fair value of =
P439.2 million, respectively,
of the Parent Company’s derivative financial instruments.
 - 72 -

28. Earnings Per Share

The earnings per share is calculated as follows:

Group
(Attributable to Equity Holders
of the Parent) Parent Company
2004 2004
(As Restated - (As Restated -
2005 Note 3) 2005 Note 3)
a) Net income (in thousand pesos)
a.1 Common shares P
=460,356 =
P232,098 P
=186,077 =
P25,556
Preferred shares 160,565 119,819 64,901 13,193
a.2 Total 620,921 351,917 250,978 38,749
b) Weighted average number of
common shares for basic earnings
per share 425,009,703 378,070,472 425,009,703 378,070,472
c) Weighted average number of
common shares for diluted earnings
per share
Effect of dilution:
Convertible preferred shares 148,236,213 195,175,444 148,236,213 195,175,444
Adjusted weighted average
number of common shares
for diluted earnings per share 573,245,916 573,245,916 573,245,916 573,245,916
d) Basic earnings per share (a.1/b) P
=1.08 =
P0.61 P
=0.44 =
P0.07
e) Diluted earnings per share (a.2/c) 1.08 0.61 0.44 =
P0.07

29. Financial Performance

The following basic ratios measure the financial performance of the Group and of the Parent
Company:

Group Parent Company

2004 2004
(As Restated - (As Restated -
2005 Note 3) 2005 Note 3)
Return on average equity 2.59% 1.41% 1.11% 0.16%
Return on average assets 0.28% 0.17% 0.11% 0.02%
Net interest margin on average earning assets 3.66% 2.63% 3.50% 2.42%

30. Notes to Cash Flow Statements

Of the total interbank loans receivable of the Group and of the Parent Company as of
December 31, 2004, = P16.6 billion and =
P16.5 billion, respectively, have original maturities of three
months or less.
 - 73 -

31. Other Matters

On March 24, 2006, the Parent Company’s BOD approved the issuance of at least
US$100.0 million or =
P5.0 billion additional Tier 2 Capital.