THE STRENGTH AND STABILITY

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1 THE STRENGTH AND STABILITY you can rely on UCPB 2015 ANNUAL REPORT

2 UCPB 2015 Annual Report About the cover At UCPB, it is our mission to provide personal and proactive service that effectively responds to the diverse and dynamic needs of our clients. This is true whether we are offering customers a better way to bank, delivering long-term value for shareholders, advancing our employees development or investing in local communities. We make sure we effectively execute strategies that are steady and consistent, and yet agile and responsive to new opportunities and challenges. We provide financial solutions that cater to the local needs, and deliver them with deep commitment to customer service excellence. We offer innovations while keeping tried and tested values and traditions. We strive for dynamic growth while adopting sound and prudent risk management practices. Because of these, UCPB has built the strength and stability you can count on today and in the future. Table of Contents Message from the Chairman Report from the President and Chief Executive Officer Financial Highlights Operational Highlights Human Resources Personal and Proactive: The UCPB Experience Corporate Social Responsibility Risk Management Corporate Governance Board of Directors Advisory Council Management Committee List of Senior Officers Products and Services Statement of Management s Responsibility for Financial Statements Report of Independent Auditors Audited Financial Statements Notes to Financial Statements Branches and Subsidiaries The 2015 Annual Report is published by UCPB. Copy by Writers Edge, Inc. Design and layout by Perez NuMedia, Inc.

3 About UCPB 1 About UCPB For more than 52 years, UCPB has been at the forefront of Philippine banking, delivering a full range of products and services in consumer finance, commercial credit, corporate and investment banking, trust banking, domestic and international trade finance, treasury and money market investment, cash management and deposit services. It caters to corporations, government institutions, middle market companies, small and medium-sized businesses and individuals in the Philippines. In 1981, UCPB became the first private Philippine bank to obtain a universal banking license, paving its expansion into other commercial banking areas such as investment banking, trust banking, and other non-allied services. UCPB has also been among the first local banks to invade the customer service innovation space when it introduced an ATM service in the late 1980s. It has since established a multi-channel service delivery network that now includes telephone banking, internet banking, and mobile banking facilities, in addition to its 231 branches and 340 ATMs nationwide. Aside from being a local banking leader, UCPB is also a key player in countryside development. Through the UCPB- CIIF Finance and Development Corporation and UCPB-CIIF Foundation, it implements various programs that benefit coconut farmers and their families. UCPB has a diversified range of financial services provided by the Bank and its subsidiaries to its various clients. UCPB Savings Bank is the Bank s savings arm that caters to non-urban areas. UCPB Leasing and Finance Corporation provides leasing and commercial financing to medium-sized companies. UCPB Securities, Inc., an active member of the Philippine Stock Exchange, is the Bank s securities arm which provides clients with access to the Philippine capital market. UCPB has been creating a positive banking experience for its customers through personal and proactive service. More than just a brand promise, this is what defines the Bank s strength and stability that its customers, employees and shareholders can rely on.

4 2 UCPB 2015 Annual Report Message from the Chairman Mirroring the country s strength and stability, your Bank made 2015 another banner year as well, thanks to our clients and the individual and collective efforts of our directors, officers, and staff. Our annual report theme, The Strength and Stability You Can Rely On, captures the country s macroeconomic performance, as well as your Bank s. 2015, was seen as another volatile year for global growth. Amid all these however, the Philippine economy grew by 5.8% in GDP, among the fastest in Asia, next to India, the People s Republic of China, and Vietnam. While slower than the previous year s pace, this growth was respectable, given the difficult external environment that led us to post a lackluster export performance. This has also given the country a six-year average real GDP growth of 6.2%, the highest since the late 70s. The stable growth under the Aquino administration was due to investments in areas that created jobs and increased incomes, such as in tourism, construction, and the BPO sector. Mirroring the country s strength and stability, your Bank made 2015 another banner year as well, thanks to our clients and the individual and collective efforts of our directors, officers, and staff. The dedication of our combined workforce of 4,064, spread out in 231 branches nationwide, made this possible. Our total assets increased by 5.5%, our deposit funding base by 8.4%, and net income by 5.1%. Behind your Bank s success in 2015 is the corporate philosophy of taking great care of our people so they can also take great care of you, our valued clients, partners, and stakeholders. This mantra of the Bank s management of being a caring, supportive, and appreciative parent to every department or division head, branch manager, and staff member has created a unique company culture of self-esteem, confidence, pride, zeal, commitment, satisfaction, and joy factors that contribute to increased company loyalty, work performance, and client satisfaction. As we face the challenges and opportunities of 2016, which include the newly elected administration of national and local leaders entrusted to promote the best interest of the people, your Bank is prepared to respond to the dynamics of economic development.

5 Message from the Chairman 3 And from you, our clients and associates, we look forward to an even stronger personal and proactive relationship where we will be able to respond to your immediate and long-term needs not only as your Bank, but also as your family and friend. Menardo R. Jimenez Chairman of the Board

6 4 UCPB 2015 Annual Report Report from the President and Chief Executive Officer Over the past 52 years, we have been providing a foundation of financial strength and stability that our customers can rely on. The banking industry is facing a dramatic transformation, driven by the rapidly evolving customer behavior, the emergence of digital technology, and increasing regulations and competition was especially challenging, not only for the domestic market, but also for the global markets. This is because interest rates have remained low, major financial markets have been volatile, and geopolitical relations have been rocky. While the Philippines continued to show one of the best growth rates in Asia, most of the major economies of the world have yet to get back to a growth path. Amid these tough times, UCPB s commitment to delivering sustainable value remains steady. Over the past 52 years, we have been providing a foundation of financial strength and stability that our customers can rely on. Show of strength We have set our corporate objectives and strategic directions to grow our consumer loans business and increase our deposit base and non-interest income. In 2015, we continued to demonstrate our ability to deliver sound performance amid the challenging environment and the intense industry competition, particularly in consumer finance. We attribute this to the concerted effort of everyone in the UCPB Group: the parent bank and its subsidiaries UCPB Savings Bank, UCPB Leasing and Finance Corporation, and UCPB Securities, Inc. Our total loans increased to P127.7 billion from P116.0 billion, resulting in an overall loan growth of 10% among the highest in the industry for the period while preserving the quality of our loan portfolio. We have also generated deposits of P239.1 billion, 8.4% higher than year-ago levels, even as we have maintained a healthy 70:30 ratio in favor of low-cost deposits. Focusing on our core While we look for a government-approved alternative to our suspended recapitalization program, we have remained as focused as ever on our multi-pronged strategy: ensuring a stable pipeline of products and services that meet our customers financial needs, being well-positioned for stronger market demand as the economy expands, ensuring our long-term growth potential, adhering to good corporate governance principles and practices, ensuring strong shareholder support, and empowering communities. In 2015, prevailing low interest rates, combined with single-digit inflation, continued to stimulate the appetite

7 Report from the President and Chief Executive Officer 5 for consumption and spending, which ultimately fueled our economic growth. On the other hand, the environment made it more difficult for banks to earn spreads without taking in higher risks. Thus, we saw a proliferation of banks competing for a share of the consumers wallet, which offered higher rewards in terms of spreads. Accepting the challenge, we at UCPB intensified our efforts to reach out and cater to the needs of customers looking for home, auto, small business, and personal loans. In addition to putting up more Consumer Finance Business Centers nationwide, we also started fully implementing our homegrown IT innovation, called the Consumer Loans Origination System, to make loans processing faster and our service quality more competitive in the market. We have also partnered with reputable real estate developers and auto dealerships, and actively participated in consumer loan fairs and business symposia. Our highly driven sales team also helped our dealer network and branches deliver a more personalized service to attract potential customers and nurture customer loyalty.

8 6 UCPB 2015 Annual Report Report from the President and Chief Executive Officer The coming years will be an important period for UCPB, as we continue to lay the groundwork for a bank that is personal and proactive for each and every customer. All these efforts enabled us to expand our consumer loan business, which comprised 40% of our total loan portfolio, or P49.5 billion. As we are operating in a growing economy, we must constantly come up with product offerings to meet our customers rising economic mobility. Thus, in 2015, we launched two new Unit Investment Trust Fund (UITF) products: the UCPB Philippine Index Equity Fund (UPIEF) and the UCPB US$ Bond Fund (US$MMF). The UPIEF, a passively managed equity fund that replicates the Philippine Stock Exchange Index (PSEi) as a benchmark, offers newbie equities investors a good entry point. The US$MMF is an open-ended pooled fund invested in time deposits, government securities, global securities, and corporate bonds and notes denominated in US dollars. Both investment products have been added to the Bank s growing suite of trust investment instruments that give more options and greater value for investors of varied risk appetites, expertise and investment horizons. Sustaining our stability We are aware that our size and capabilities put us in a unique position in our society, as well as imply special obligations as a financial institution. It goes without saying that we are fully committed to being compliant with regulations and protecting the stability and credibility of our internal system for our customers and shareholders. In 2015, as information security risks globally rose and regulations on consumers financial protection tightened, UCPB continued to be vigilant against fraud and other incidents that could potentially compromise our internal controls. For more than a year now, we have been using a bank-wide database monitoring system that enhanced the auditing and security of all sensitive customer data. The automated tool allows us to closely monitor and audit the entire branch network s compliance with the Know Your Customer policy, immediately probe any unusual transactions, and any deviation from our risk management rules. We have also actively played a leadership role in the industry in the area of information security. Our UCPB Chief Security Officer and Head of Conglomerate Security Group, Captain Elpidio B. Misolas Jr., is serving his twoyear term as president of the Bank Security Management Association (BSMA) while our Vice President for Information Security, Manuel Joey A. Regala, is also president of the Information Security Officers Group (ISOG). The Bank was also given the honor to play host to ISOG s meeting and dialogue with representatives of Japan s The Center for Financial Industry Information

9 Report from the President and Chief Executive Officer 7 Systems (FISC), which served as an opportunity for chief information security officers from various financial institutions to establish relations and learn more about the latest information security regulations in the ASEAN and Asia-Pacific countries. Long a cornerstone of UCPB s success is our commitment to local communities through the UCPB-CIIF Finance and Development Corp. and the UCPB CIIF Foundation, which continued to help coconut farmers by extending credit to finance their livelihood activities and providing college scholarship grants to their children. In 2015, a total of 17,981 households of coconut farmers have been granted loans while 127 fresh scholars have been added to the 1,321 beneficiaries who graduated from college through the Cocofoundation s 13-year-old scholarship program. Through the efforts of our thrift banking arm, UCPB Savings Bank, we have also been recognized for our commitment towards financial inclusion. In 2015, UCPB Savings Bank received an award during the 25th anniversary celebration of BancNet for operating ATMs in remote locations, namely Numancia in Aklan, Aloran in Misamis Occidental, Caramoan in Camarines Sur, La Castellana in Negros Occidental, Sta. Ignacia in Tarlac, and Tuburan in Cebu. Moving forward Shareholder value is created by generating customer value. The coming years will be an important period for UCPB, as we continue to lay the groundwork for a bank that is personal and proactive for each and every customer. A bank that aspires to have the most satisfied customers in our market. A bank that meets its customers both personally and digitally in a seamless interaction that is driven by their preference. Although UCPB faces challenging conditions in the year ahead, we firmly believe the Bank is on track for longterm growth and success. Thanks to the tireless efforts of our Board, management team, employees, and partners everywhere, we are making steady gains in helping meet the growing financial needs of our customers each and every day. With your unshakeable trust and faith, UCPB will continue to defy the odds and become a stronger and more stable bank that you can always rely on. Jeronimo U. Kilayko President and Chief Executive Officer

10 8 UCPB 2015 Annual Report Financial Highlights DEPOSITS (in Billions Php) High Cost CASA LOAN PORTFOLIO (in Billions Php) Corporate Consumer CONSOLIDATED Operating Results (in million pesos except ratios) Increase/ Decrease % Increase (Decrease) Net Income 3,300 3, % Net Interest Income 9,171 8, % Return on Average Equity 17.3% 16.2% 1.1% NA Return on Average Assets 1.2% 1.2% 0.0% NA Net Interest Margin 4.5% 4.5% 0.0% NA Resources At Year-End Total Resources 285, ,391 14, % Loans and Receivables 127, ,954 11, % Gross Loan Portfolio 124, ,008 12, % Deposit Liabilities 239, ,542 18, % CASA 164, ,549 4, % Equity 18,813 19,350 (537) -2.8% Capital Adequacy Ratio 10.6% 11.2% -0.6% NA NPL Ratio (inclusive of Interbank Loans) 4.6% 4.5% 0.1% NA NPL Ratio (inclusive of Interbank Loans), Net of Allowance for Credit and Impairment Losses 2.2% 2.4% -0.1% NA Number of Employees 4,064 3, % UCPB 3,373 3, % UCPB Savings Bank % UCPB Leasing and Finance Corporation % UCPB Securities, Inc % Number of Branches UCPB % UCPB Savings Bank % Number of ATMs UCPB % UCPB Savings Bank %

11 Financial Highlights 9 Defying the Odds For many parts of the global economy, 2015 was quite eventful. There was significant uncertainty in world markets, with low oil prices, stock market volatility, and rising global interest rates. But there was also plenty of reason for optimism in this side of the world. The Philippine economy has remained resilient, posting a 5.8% GDP growth in 2015, still among the fastest in Asia. With rising purchasing power and prevailing low interest and inflation rates, consumers were thrust into the driver s seat of the country s economic growth in Robust household spending, which accounts for about 70% of GDP, has boosted several sectors, mainly retail, real estate, and automotive. Boosted by overseas Filipino workers remittances and business process outsourcing receipts, rising consumer confidence enabled the economy to remain relatively unscathed from lower exports that hurt the rest of the region. Delivering sustainable gains Higher consumer spending, coupled with excess market liquidity, and increased public sector spending on infrastructure also enlarged the Philippines economic pie. These economic activities, in turn, sparked greater competition in the consumer finance and corporate lending markets in This allowed UCPB to ride on the wave and differentiate its brand of personal and proactive service. Cesar A. Rubio Executive Vice President and Chief Finance Officer

12 10 UCPB 2015 Annual Report Financial Highlights By improving its revenue stream and increasing efficiency in the delivery of business growth, the Bank was able to post a net income of P3.3 billion during the year, 5.1% higher than in Addressing the demand of a growing economy, the Bank engaged in large project finance transactions and stepped up its lending activities to companies outside Metro Manila to fuel growth in the provinces. Its Corporate Banking also funded/co-funded a total of 716 megawatts of solar and coal-fired power generation projects to help alleviate the country s power supply. These deals enabled UCPB to generate higher fee income that contributed P1.49 billion to its bottom line. Bucking competitive pressures, UCPB also grew its consumer loan portfolio by 29% to P49.5 billion in 2015, from P38 billion the previous year. Higher consumer lending is aligned with UCPB s thrust to diversify its loan portfolio and rely more on its sustainable and consistent sources than on trading gains and on extraordinary income. With consumer loans comprising 40% of its total loan portfolio, the Bank was able to earn higher spreads, manage the risk profile of its loans, and diversify credit risk over a wider base of clients. The growing contribution of consumer loans, among the fastest growth in the industry, also boosted the Bank s total loans by 10% to P127.7 billion from P116 billion, year on year. Shifting to low-cost deposits Supporting the healthy expansion of its asset base, the Bank also generated higher deposits, which amounted to P239 billion in Of the total, nearly 70% were composed of low-cost deposits (current account and savings account or CASA). Shifting to low-cost deposits was a mandate that UCPB branches pursued more vigorously, as CASA growth even reached P164 billion by end Having a healthy deposit mix of 70:30 in favor of CASA enabled UCPB to reduce its interest expenses by 3.5% despite higher deposit levels, and maintain a net interest margin of 4.54%. Improving the bottom line While delivering more value from the core, the Bank also seized market opportunities to produce other income. In 2015, its fee-based income grew by 6.5% to P1 billion, which came from consumer loan, deposit and other product-related fees. It also booked a trading income of P201.9 million, a 16% growth from P174 million in Amid its double-digit loan growth, the Bank was able to keep its operating expenses at a very minimal 0.3% increase from 2014.

13 Financial Highlights 11 By improving its revenue stream and increasing efficiency in the delivery of business growth, the Bank was able to post a net income of P3.3 billion during the year, 5.1% higher than in 2014, despite the challenges posed by its suspended recapitalization program. This translated to a higher return on average equity of 17.3% in 2015 versus 16.2% a year ago. While contributing significantly to the bottomline, UCPB subsidiaries also helped widen the Bank s customer footprint and the country s need for greater financial inclusion. strategic objectives that will result in a business that is being transformed, with a low-risk portfolio that is increasingly focused on its core businesses lending to consumers, corporates, and middle markets and a more efficient cost base. It shall emphasize consumer loan growth while continuing to grow its CASA business and increasing fee-based income. As UCPB continues to defy the odds, it will keep looking forward and adapt to the changing landscape. It will also continue to gain greater confidence in its strength and stability that customers and shareholders can depend on, today and in the future. UCPB Savings Bank, the Bank s savings bank arm that caters to non-urban areas, posted a net income of P437.4 million during the period, an increase of 22.6% from year ago levels. Extending leasing and commercial financing to medium-sized companies, UCPB Leasing and Finance Corporation reported P173.3 million in net income from P149 million in Cesar A. Rubio Executive Vice President and Chief Finance Officer Improving optimism, Renewed strength As the Bank gears up for the next phase of its journey towards recapitalization, it will continue to pursue its

14 12 UCPB 2015 Annual Report Operational Highlights Every day at UCPB, teams of hardworking men and women start the day with a passion to render personal and proactive service for our customers. They do so while looking to the future, pursuing new ideas and fueling innovation to serve our customers needs, and succeed in the changing, dynamic markets we face. In 2015, our various business units continued to build closer relationships with our customers and develop alternative channels to reach out to still untapped segments of the market. Branch Banking: Engaging our network Amid feverish competition, our Branch Banking business generated P164 billion in low-cost deposits in 2015 a historic high for the Bank. Our network of 231 branches also helped us increase our consumer loan volume by 29% in Active engagement among non-sales employees also played a key role in our acquisition of 11,143 new clients and consumer loan bookings of P909 million. Corporate and Commercial Banking: Driving value from the core To continue to grow our revenue and our customer base, we are focused on driving value from our core. While continuing to focus on middle markets, we engaged in

15 Operational Highlights 13 large project finance transactions in 2015 that delivered higher fee income and contributed to our bottom line. One of these deals involved harnessing the country s renewable energy resources where the Bank funded/ co-funded a total of 716 megawatts of solar and coal-fired power generation projects. We also extended our lending activities to companies outside Metro Manila to promote economic development in the provinces. Our Luzon and Visayas-Mindanao units reported a 17% increase in their corporate banking loan portfolio. Treasury Banking: Navigating the market Our Treasury Banking Group navigated a more volatile market environment in 2015, largely due to a year-long anticipation that the US Federal Bureau would raise interest rates. Despite this, Treasury ended the year with over P977 million in fee based revenues. While duplicating its 2014 feat, this was the second year that the Bank did not rely on trading gains to boost its bottom line as it continued to gain momentum in its core businesses. Consumer Banking: Fulfilling our customers needs We stepped up our efforts to cater to the needs of consumers looking for home, auto, small business and personal loans. We also started fully implementing the Consumer Loans Origination System that improved the turn-around time in processing loans which benefited our clients. We partnered with real estate developers and auto dealerships, and took part in consumer loan fairs and business symposia to bring UCPB even closer to our clients. These efforts resulted in a 29% year-onyear growth in our consumer loans business, the biggest contributor to the Bank s net income in Despite this exponential loan growth, driven primarily by our Auto, Small Business and Personal Loans, the Bank was able to maintain its credit quality. Trust Banking: Unlocking investments opportunities Our Trust Banking business continued to perform better than industry despite market volatility the past year. Feebased income from our six Unit Investment Trust Funds (UITFs) increased by 14% in 2015 on the back of a 67% jump in UITF Assets Under Management (AUM). The Trust Banking Group s core AUM also grew by 11% compared to a year ago. The year also saw the Bank growing its suite of UITF investment products with the launch of the UCPB Philippine Index Equity Fund, a fund that tracks the performance of the PSEi; and the UCPB US$ Bond Fund, a US dollar-denominated fund that invests in select sovereign and corporate issues. This addition brought the total UITF of UCPB to eight expertly managed funds catering to a variety of risk profiles.

16 14 UCPB 2015 Annual Report Operational Highlights Information Technology and Methods: Adapting to evolving needs To ensure that we meet the needs of our customers and our growing organization, our Information Technology and Methods Group (ITMG) continually enhances our internal processes using the latest IT solutions to create a better customer experience. In 2015, we launched our homegrown Consumer Loans Origination System that enabled us to hasten loan processing and support our consumer lending activities. We also continued to upgrade our infrastructure to ensure the availability of our software applications and faster delivery of products and services. We also invested in the appropriate security tools and training programs to maintain the integrity and security of all sensitive bank data and protect customer information. Branch Banking, Consumer Banking and Trust Banking. In 2015, we embarked on various marketing programs and activities that included incentive programs for associates and business partners (brokers and agents), consumer loan fairs, business briefings and roadshows to promote our products including the UCPB Mobile Phone Banking App. We also launched our e-statement service that enables clients to receive via their monthly account statements and scanned images of their issued checks. Marketing also actively participated in the Bank s successful migration to BancNet in October Operations: Making our processes better Aligned with our thrust to heighten our focus on auto, home and personal loans, our Operations Group improved existing processes in approving and booking consumer loans. This initiative included the opening of a Land Registration Authority Extension Office to provide accurate and faster title verification of properties, and improving our turn-around time in approving home loans. We also launched the CLOS-Credit Scoring system for loan applications to aid credit approval decision and keep the quality of our loan portfolio in check. Marketing: Reaching out to customers Through our Marketing Group, we are able to build topof-mind awareness among our customers and support our business directions and targets, particularly in Moving towards a paperless system, we launched the electronic Statement of Account (esoa) in 2015 to give clients the option to get their statements via , which is a lot faster than getting statements via regular mail. The esoa also contains the images of issued checks which not only saves processing time and manpower cost but also enables our clients to access check images at their convenience.

17 Operational Highlights 15 Internal Audit: Strengthening our organization Our Internal Audit Division (IAD), as the oversight arm of the Audit Committee to the Board of Directors, continued to provide recommendations to Management on enhancement of policies and improvement of processes. These are to further strengthen controls to minimize / prevent risk exposures of the Bank. Human Resources: Investing in our people At the heart of our strength and stability are our people. As such, we give a high priority to developing our human capital through the Human Resources Group. Our strategies toward talent attraction and acquisition produced the highest hiring rate in UCPB s history, with a total of 624 associates hired in We also upgraded the basic salary of our non-officers to a rate higher than the mandatory minimum wage. Despite this, we kept our operating expenses at a very minimal 0.3% increase from To strengthen our talent bench, we offered mandatory, technical and leadership training programs, including the Management Development Program that produces quality officers. These resulted in 71 candidates who became officers, and 373 officers and 328 non-officers promoted to higher posts during the year. These account for a combined 20% of the Bank s workforce. We also continued to promote health and wellness programs including sportsfests, grand wellness events and vaccine offerings. IAD conducted assurance reviews based on the results of risk assessment and the Bank s objectives and targets. Likewise, IAD performed consulting activities such as review as to controls of proposed policy guidelines, conduct of lectures, and participation in an advisory capacity on automation project committees. Compliance: Ensuring best practices Our Bank Compliance Division continually strengthened our compliance to align with regulatory changes in Philippine banking laws and regulations, the business environment, and emerging developments that affect the Bank s policies, processes and professional expertise. In 2015, we continued to enhance the Bank s Anti-Money Laundering (AML) monitoring and reporting system, conducted continuing AML education across the organization, and provided guidance to business units on legal and regulatory issues. A Compliance Testing Program was also put in place to effectively monitor the level of awareness and consistency of compliance with banking laws, rules and regulations, with emphasis on AML requirements.

18 16 UCPB 2015 Annual Report Human Resources: The heart of our strength and stability strengthening the selection criteria for the talents, revitalizing the onboarding program while continuing to be on the lookout for best practices that can be adapted for the Bank. As an organization, we continue to bring in new talent and place them where they excel because this provides us with fresh ideas that complement existing ones. At UCPB, we believe that our people are our greatest asset - they are at the heart of the Bank s strength and stability that customers rely on. As such, management gives high priority and importance to its human capital. Through the Human Resources Group, this is reflected in the talent attraction, acquisition, development and retention strategies, and the competitive and total rewards approach to benefits. This way, the organization nurtures a well-rounded and fulfilling corporate life for the UCPB Talent. Attracting and acquiring the best talent We continue to be creative and relevant in the talent attraction and acquisition strategies we employ. We let the best talents know we are ready and able to evolve with them. As a foundation, we look for talents who share the same values with us. We are clear with the leadership capabilities we look for, and we want to ensure this complements the kind of leadership culture we promote in the Bank. Likewise, we ensure we communicate the specific skills and attitude that will deliver personal and proactive service to provide the unique UCPB customer experience saw the highest hiring rate in UCPB s history. The recruitment and engagement teams pursued their projects in defining the employee brand, Developing the talent to be equipped for the present and capable for the future Learning and development are fundamental to our growth strategy. We invest in development opportunities that promote continuous learning as a way of life. We provide a holistic approach to development. We train for both hard and soft skills. We promote employee welfare by providing employee programs that showcase the strengths of our people such as in the area of sports. Likewise, we take pride that we grow talents from within. In all these, we highlight the importance of working together as one team to deliver the Bank s objectives. In 2015, we continued to offer the mandatory, technical and leadership training programs of the Bank. This includes the Management Development Program which produces quality officers that helps strengthen our talent bench. Part of the Bank s efforts to develop the organization is to safeguard the values that are expected of its people. In instances when an associate falls short of this expectation, the Bank protects both itself and the associate through a committee that ensures appropriate deliberation and due process. This extends to safeguarding people who handle and report irregularities in the Bank, including but not limited to, illegal and unethical behaviors of associates. HR procedures are in place to protect an employee who reports illegal/unethical behavior from retaliation. We will continue to grow our talent. We will nurture the organization making it the strong and stable Bank that it is now, and in the future.

19 Human Resources 17 Recognizing and rewarding the talent In UCPB, we continue to provide a healthy mix of 60:40 ratio in terms of monetary and non-monetary benefits. We promote a culture of high level performance where we recognize and reward our talents in terms of their contribution to the UCPB business results and how they uphold the corporate values. In 2015, the Bank reviewed the basic salary of the nonofficers and upgraded it to a rate that is higher than the mandatory minimum wage. The Bank offered programs that emphasize the high value it gives to its people, with their health and wellness at the forefront. This is seen in the strict enforcement of annual physical examination and executive check-up requirements, well-received grand wellness activities featuring lectures and consultations, and vaccine offerings. Employees Health, Safety and Welfare Likewise, the Bank further ensures employee health, safety and welfare through various programs including Basic Life Support training for designated Bank unit representative; partnership with the Security Department for regular safety training and orientation; emergency response simulations through fire drills and earthquake drills; and the implementation of a 5S program, an organizational tool to ensure a safe, healthy and well-organized workplace that results in efficiency and productivity. We will continue to provide efficient employee services that promote the health and wellness of our associates. As an organization, UCPB will continue to take pride in our talents decision to join and stay with us. We celebrate this and will continue to operate based on this trust. We will do this by continuing to attract, acquire, develop and retain the best talent, and ensure that they grow with the Bank. UCPB 2015 Health and Wellness Program We believe that our people are our greatest asset - they are at the heart of the Bank s strength and stability that customers rely on. Program Schedule No. of Participants Annual Physical Examination Head Office Associates March 837 Metro Manila Associates April 542 Provincial Associates July & August 471 Total 1850 Executive Check Up Head Office and Metro Manila Officers January-October 844 Provincial Officers July & August 172 Total 1016 Vaccination Anti-Flu (Head Office, Metro Manila and provincial May & June 1900 branches) Anti-Cervical (Head Office and Metro Manila) August & September 348 Anti-Hepatitis B (Head Office and Metro Manila) August & September 304 *Vaccination is extended to family members Total 2552 First Aid and Basic Life Support Training Head Office and Metro Manila Officers July & August 150 Provincial Officers September & October 95 Total 245 Grand Health and Wellness Fair 1st Grand Health and Wellness Fair June All Head Office associates 2nd Grand Health and Wellness Fair December All Head Office associates

20 18 UCPB 2015 Annual Report Personal and Proactive: The UCPB Experience Banking on Trust Antonio A. Ver, UCPB Home Loan client In many respects, Antonio A. Ver is not your average consumer banking client. Consultative Status since 2014 in the United Nations Economic and Social Council (UN-ECOSOC). After obtaining two degrees at the University of the Philippines and completing a post-graduate program in financial engineering and alternative strategies for infrastructure development, he worked as Program Director for Build-Operate-Transfer Projects in the Department of Transportation and Communications from 1989 to He was Independent Director of the Philippine Electricity Market Corporation that manages the country s Wholesale Electricity Spot Market from 2009 to He found Asia Pacific Basin for Energy Strategies in 2008, an economic and energy think-tank, with Special He is currently the president and chief executive officer of H&WB Asia Pacific (Pte Ltd) Corporation, an energy development company. A relationship built over time Judging by his professional background as an active player and advocate of energy and infrastructure development, one can say that Mr. Ver is a very patient man a person who knows the value of long-term relationships and trustworthiness. And this shows in the way he banks. For 26 years now, his banking relationship with UCPB has

21 Personal and Proactive: The UCPB Experience 19 I have always thought that a bank is one of the most difficult institutions to deal with. UCPB changed that perception. Whenever I took out a loan from UCPB, the processing was always fast and efficient. evolved from being an individual to a corporate depositor, and then to a consumer loan client. He has financed three properties through UCPB: two high-end residential condominiums, and construction of a house in Tagaytay Highlands. One thing I like about UCPB is its professionalism and (strict adherence to regulatory) compliance. For my personal deals and my line of business, where the projects have long gestation periods, this is very important, he said. Like most clients, Mr. Ver goes beyond looking for an excellent mix of products in choosing his primary bank; he goes for superior customer experiences that fulfill basic expectations while providing added value. When asked what made him bank with UCPB, this was the top of mind for the 56-year-old father of two: efficiency. I have always thought that a bank is one of the most difficult institutions to deal with. UCPB changed that perception. Whenever I took out a loan from UCPB, the processing was always fast and efficient, Mr. Ver said. Despite the friendships I ve built with several UCPB personnel, we have always maintained an arm s length relationship. They are very professional in addressing my financial needs no irregular transactions, no under-thetable deals. And since they are in-charge of safekeeping my money, I feel safe knowing this, he added. Trust is also what has transformed clients such as Mr. Ver into active brand advocates for UCPB. After nearly 30 years, I ve seen and personally experienced how the Bank has grown and has demonstrated its strength and stability. This is why I have recommended it to others, Mr. Ver said. Earning the trust After three successful consumer loans, he said he has already created and earned friendships with several UCPB branch managers and personnel, which was among the reasons he stayed loyal to the Bank despite the temptation of shifting to other financial service providers.

22 20 UCPB 2015 Annual Report Personal and Proactive: The UCPB Experience No pipe dream Jacinto Uy, Chairman, Moldex Group of Companies Jacinto Jack Uy said it was sheer luck and innovation that allowed him to transform a small factory in what was then a sleepy residential area of Quezon City to what is today the multi-billion peso Moldex Group of Companies and a name that had become synonymous with high-quality pipes and fittings. With a P60,000 capital, he founded the company in 1967, and started with little things, like the production of sealing caps. It was a very small operation, he said. We had a 100-square-meter factory and 20 employees. I had a small office, and my table was made of plywood. I did the delivery, the selling. I had one secretary. Innovative spirit Things started to look up in the early 1970s when, searching for new ways to get his venture off the ground, he successfully perfected a formula for PVC bottles, the first in the country. Still not satisfied, he saw an opportunity where others saw nothing but junk: he found a way to recycle plastic scraps that many companies paid just to dispose into raw materials that quickly became popular in the plastics industry. Soon Moldex started to introduce products in the market, including its trademark upvc pipes, fittings, and water

23 Personal and Proactive: The UCPB Experience 21 The smooth and efficient repayment process of the loan exemplified the importance of a reliable facility. If there are unexpected opportunities or problems, I can rely on it and act fast. systems. Moving to a bigger factory in Valenzuela and utilizing German technology this time, the company entered the upvc pipes business and produced pipes and fittings that eventually made it a household name. Growing relationship The company ventured into real estate in 1987 with Moldex Realty, Inc. and vertical developments with Moldex Land, Inc. As it did with its pipes and water systems, the Moldex brand began to earn a name for itself in real estate development, with a growing portfolio of development projects in Laguna, Tagaytay, Cavite, Bulacan, and Pampanga, as well as high-rise residences along scenic Roxas Boulevard and other Metro Manila Area. The financing of one such high-rise the 55-storey Grand Riviera Suites became the highlight of Moldex s relationship with UCPB Malate branch, where the Moldex Group has been banking since 2005, relying on its cash management and payroll needs. Their branch manager [Joycelyn Potato] is very hardworking, Mr. Uy said. The smooth and efficient repayment process of the loan exemplified the importance of a reliable facility. If there are unexpected opportunities or problems, I can rely on it and act fast, he said. It was this audacious spirit that has steered Moldex for nearly 50 years, during which it grew from having 20 employees to more than a thousand, from a 100-squaremeter factory to a 10-hectare plant. In the same way, the banking industry had also become increasingly competitive over the years, Mr. Uy said. And even with many banks approaching him, thanks to the trusted Moldex name, he said UCPB would continue to be the company s trusted partner as it navigates into its next 50 years. In 2010, Moldex took out a P1.2-billion loan facility from UCPB to finance the building s construction. The loan was repaid way before the amortization period ended.

24 22 UCPB 2015 Annual Report Personal and Proactive: The UCPB Experience YH Green Energy Riding the Green Wave Derrick Chua, President, YH Green Energy In the face of current warming trends, unprecedented sea level rise, and a global resolve to slash carbon emissions, solar power provides a ray of hope for sustainable energy. Cebu-based YH Green Energy Incorporated has joined the growing bandwagon of companies tapping renewable energy with its 14.5-megawatt solar photovoltaic power plant at the Hermosa Ecozone Industrial Park in Bataan. This was among the solar plants that qualified for the Feed- In-Tariff (FIT) program of the government. The solar project is a testament to the shift to clean energy sources in a country still predominantly powered by coal-fired plants but has resolved to feed a mix of green energy into its grid. Renewable energy, after all, is clean, unlimited, and free, compared to fossil fuel energy. The way of the future YH Green Energy is the first foray of the three-generation Chua family in the renewable energy sector. Under their flagship Simon Group of Companies, the family built its major trading and distribution enterprise in 1961, when its patriarch Simon Chuahe established a general merchandise and trading firm in Mandaue City. Diversification saw the companies interests expanding into furniture and accessory exports, residential and commercial real estate, logistics, and micro-financing.

25 Personal and Proactive: The UCPB Experience 23 I am surprised by the level of personalized service delivered by UCPB, considering it is our first transaction. Today, third-generation family member and YH Green Energy president Derrick Chua has laid the groundwork for the family s venture into solar power generation. granted in just 45 days because of UCPB s dynamic and hardworking team which understands the solar power industry. Renewable energy is no longer a green field investment. It s the way of the future, said Mr. Chua. He foresaw the high growth in solar renewable energy in the Philippines, which would enable the country to meet or surpass the Paris agreement aimed to limit global warming to well below 2 C by Besides looking forward to participate in the government s FIT program, the company also plans to enter the business-to-business (B2B) arena. Now in talks with its solar panel suppliers for its next phase, YH Green Energy is exploring opportunities ranging from the provision of solar rooftop panels for a major steel manufacturing enterprise, to small solar panels for lowcost housing. I am surprised by the level of personalized service delivered by UCPB, considering it is our first transaction, he said. Timely approval and release of the loan proved to be highly critical for a project striving to meet the deadline for the government s Feed-In-Tariff (FIT) program. For YH Green Energy, it s not just about riding the wave of the future but also banking on the strength of its relationship with UCPB which would eventually pave the way for its success in to the green future. Personalized service A reliable banking partnership is helping YH Green Energy realize its vision. A P725-million loan from UCPB helped build its 14.5-MW solar plant in Bataan. Mr. Chua said the loan application was approved and

26 24 UCPB 2015 Annual Report Corporate Social Responsibility UCPB-CIIF Finance and Development Corp s Program Reach Region I Ilocos Sur Ilocos Norte Pangasinan La union Region II Cagayan Isabela Region III Aurora Bataan Zambales Region IV-A Batangas Cavite Laguna Quezon Region IV-B Marinduque Oriental Mindoro Occidental Mindoro Palawan Romblon Region V Albay Camarines Norte Camarines Sur Catanduanes Masbate Sorsogon Region VI Aklan Antique Capiz Guimaras Iloilo Negros Occidental Region VII Bohol Cebu Negros Oriental Siquijor Region VIII Biliran Leyte Southern Leyte Eastern Samar Northern Samar Samar Region IX Zamboanga del Norte Zamboanga del Sur Zamboanga Sibugay Region X Bukidnon Camiguin Lanao del Norte Misamis Occidental Misamis Oriental Region XI Compostela Valley Davao del Norte Davao del Sur Davao Oriental Region XII North Cotabato Sarangani South Cotabato Sultan Kudarat Region XIII Agusan del Norte Agusan del Sur Surigao del Norte Surigao del Sur ARMM Basilan Lanao del Sur Maguindanao Ilocos Norte Abra Ilocos Sur Mountain Province La Union Benguet Pangasinan Zambales Bulacan Bataan Cavite Tarlac Batangas Oriental Mindoro Occidental Mindoro Palawan Batanes Cagayan Kalinga Apayao Nueva Ecija Pampanga Quezon Manila Rizal Laguna Camarines Norte Camarines Sur Quezon Catanduanes Marinduque Antique Isabela Nueva Vizcaya Aurora Romblon Aklan Masbate Capiz Iloilo Guimaras Bacolod/Negros Occidental Albay Cebu Sorsogon Leyte Northern Samar Samar EasternSamar Southern Leyte Bohol Surigao del Norte Camiguin Negros Oriental Siquijor Agusan del Norte Misamis Oriental Surigao del Sur Misamis Occidental Lanao del Norte Agusan del Sur Bukidnon Zamboanga del Norte Lanao del Sur Zamboanga del Sur Davao del Norte Zamboanga Sibugay North Cotabato Compostela Valley Zamboanga City Maguindanao Davao City Davao Oriental Basilan Sultan Kudarat South Cotabato Sulu Sarangani Davao del Sur Tawi-tawi

27 Corporate Social Responsibility 25 Carlito s way RESPONSIBLE CITIZENSHIP YOU CAN RELY ON At UCPB, we believe that our core business is founded on a powerful social good: we help fulfill the financial needs of thousands of customers so they can manage their daily lives and face the future with more confidence. We know that impressive numbers alone are not enough to justify our business: the societies and communities where we operate also want us to focus on enhancing lives and livelihoods. And this is what our corporate social responsibility is all about: sustaining our strength and stability as an institution so that people can continue to rely on us to empower their dreams of a better future. UCPB-CIIF FINANCE AND DEVELOPMENT CORP. Channeling credit to the countryside UCPB-CIIF Finance and Development Corp. (Cocofinance) continued to implement rural credit programs to give coconut farmers access to development funds that build their self-reliance. In 2015, Cocofinance released P609.8 million in loans, 17% higher than in the previous year, to finance livelihood activities in 39 coconut provinces. The loans directly benefited 17,981 coconut farming households and were released through partner cooperatives and rural financial institutions. Since launching its first rural credit programs in 1995, the company has already pumped in P7.8 billion to the local economies of 63 out of 68 coconut provinces. More than 405,000 coconut farmer households have benefitted from its loans. Coconut farmer Carlito Labial of Gingoog City, Misamis Oriental used to live in a 15-square meter house with his wife Isabilita, and their only child in the a one-hectare farm that he inherited from his parents. Carlito wanted a better life for his family, but he did not have the means to increase the yield of his farm. The coconut trees planted by his father decades ago were already way past their prime and production had been declining. He wanted to engage in other livelihood activities but he could not get any financing. He tried several times to secure a loan, but his application just kept getting denied by banks. In 2004, he was invited to join the Agay-agayan Multi-Purpose Cooperative. He was hesitant at first thinking membership might deny him time from his farm. Eventually, his wife prevailed upon him to sign up with the cooperative, and it turned out to be the best decision he has ever made. The cooperative had just been accredited to the lending program of the UCPB-CIIF Finance and Development Corporation, which provides funds for relending to cooperative members for their alternative incomegenerating projects. Carlito availed of a small loan at first. After paying the loan, he applied for a bigger amount and this became a cycle. After a few years, he was able to put up a poultry farm with 250 egg-laying hens, a livestock business with 14 goats, and a nursery producing dwarf coconut seedlings that he sells to other farms. He has also replanted his coconut farm. Always on the lookout for other sources of income, he attended a seminar on coconut sugar production and now produces enough to sell to his neighbors. Once a subsistence farmer, Carlito is now a successful village entrepreneur. He was able to send his child to a vocational-technical school and the child is now helping in the family businesses. From a 15-square meter shack, Carlito and his family now lives in a 90-square meter, two-storey home with three rooms. On his yard sits two brand new motorcycles. Hindi ko alam kung papaano ko pasasalamatan ang Agay-agayan Multi-Purpose Cooperative at ang UCPB-CIIF Finance and Development Corp. Ang partnership nila ang nagbigay daan sa mas maginhawang pamumuhay ng aking pamilya (I don t know how to thank Agay-agayan Multi-Purpose Cooperative and the UCPB-CIIF Finance and Development Corp. Their partnership paved the way for our family to lead a better life), Carlito said. Coconut farmer Carlito Labial

28 26 UCPB 2015 Annual Report Corporate Social Responsibility UCPB-CIIF FOUNDATION Breaking the poverty chain through education In 2015, a total of 127 children of coconut farmers joined the ranks of scholar-graduates of the UCPB-CIIF Foundation, under its scholarship program. From 11 scholars in 2003, to a total of 2,400 scholars since the program started Nearly two-thirds or 82 of them earned college degrees from 18 state colleges and universities while the other 45 obtained vocational-technical proficiency certificates from six trade schools. The academic performance of the college graduates last year was particularly noteworthy as their overall general weighted average of 1.84 was higher than the 2.50 grade requirement of the program. Moreover, 15 finished their courses with honors, with two graduating magna cum laude and 13 cum laude. The scholarship program, the flagship social development initiative of the UCPB Group and the Coconut Industry Investment Fund (CIIF) companies, aims to enable children of coconut farmers to pursue Geographical Distribution of All Scholars Area College Voctech Total Luzon Visayas Mindanao ,026 Total 1, ,400 Geographical Distribution of Graduates Area College Voctech Total Luzon Visayas Mindanao Total ,321

29 Corporate Social Responsibility 27 higher education or learn trade skills so they can earn a decent living. As of end-2015, the program has already produced 1,321 college and vocational-technical graduates including 93 with academic honors comprising two summa cum laude, seven magna cum laude, and 84 cum laude graduates. To replace the ranks of those who graduated, Cocofoundation took in 259 new scholars 209 for college and 50 for vocational-technical training in Cocofoundation has already given out 2,400 scholarship grants to children of coconut farmers from 59 of the country s 68 coconut provinces in the past 13 years. Most have joined the ranks of the employed and are now helping their families with their daily expenses and the education of their siblings. Based on a 2015 survey, more than four-fifths of the graduates have already either found a job, put up their own business, or returned to the farm to apply the skills they learned in college or trade school. Less than a fifth remained unemployed, mostly from the ranks of the new graduates. Magna cum laude graduates (L-R) Ma. Hanifa Nur Carnites, BS Business Administration and Leonie Cansabo, BS Agriculture Number of Scholars ( ) Cumulative New Scholars Year New Scholars Cumulative ,075 1,246 1,427 1,619 1,887 2,141 2,400

30 28 UCPB 2015 Annual Report Risk Management UCPB has put in place a risk management system to monitor and manage the risks it faces, particularly critical risk areas of credit, market (liquidity and interest rate), and operational risks (human factor, inadequate or failed internal processes and systems or external events, legal risk, compliance and regulatory risk, among others). The Risk Oversight Committee (ROC) oversees the risk management process, provides overall policy direction, and ensures that it has the appropriate infrastructure to properly identify, measure, and monitor risks arising from its day-to-day operations. This mitigates and controls risks that would adversely impact the Bank s business policy objectives, compliance with regulatory and legal requirements, as well as contractual obligations. The Bank s risk management framework is anchored in educating and promoting risk consciousness by inculcating risk awareness in the entire workforce, which is critical to mitigating and controlling risks. In addition to the conduct of risk management training programs, relevant employees are involved in risk identification, assessment, and monitoring. The Risk Management Division facilitates the task of identifying, monitoring, measuring and mitigating risks through an independent, timely, and effective risk monitoring framework. The Risk Management program also covers the relevant Bangko Sentral ng Pilipinas (BSP) regulations and directives in implementing an effective Internal Capital Adequacy Assessment Process (ICAAP). The risk management framework is likewise adopted by the Bank s subsidiaries and the Trust Banking Group. The ROC is informed of critical risk areas identified by the Bank, its subsidiaries, and the Trust Banking Group, to ensure policy directions are consistent and action plans to address common risks are synchronized. I. RISK MANAGEMENT PHILOSOPHY, SYSTEM AND STRUCTURE A. Risk Management Philosophy 1. The Bank recognizes that risks are inevitable but losses are optional in its operations. It is the Bank s philosophy that risk is better managed and controlled if it is measured consistently and accurately. 2. The Bank recognizes that an effective risk management system is a critical component of bank management and a foundation for its safe and sound operation. 3. The Risk Management process is a top-down process and shall continually operate at all levels within the Bank. It is important to emphasize that each individual within the Bank has a role and must participate in the process.

31 Risk Management The Bank shall develop a strong control culture and promote a culture of risk awareness and not risk aversion based on the framework recommended by the Bankers Association of the Philippines (BAP). 5. All activities shall conform to applicable legal and regulatory provisions of the Republic of the Philippines as well as to the Bank s internal policies and procedure guidelines. 6. Policies and practices that generate incentives or temptations for inappropriate actions shall be avoided. These include, but are not limited to overemphasis on short-term performance results that ignore long- term risks, ineffective segregation of duties that allow for misuse of resources or concealment of poor results and insignificant penalties for improper activity. 7. It is the Bank s firm policy that liquidity shall never be compromised for profitability. B. Risk Oversight Committee The Risk Oversight Committee (ROC), a Board-level Committee, reviews regular management reports on current risk exposures and controls on credit, market, interest rate, liquidity, operational, legal, compliance, strategic/ financial, reputational, technology and trust risks; addresses said risks; and endorses for Board review/approval the proposed risk policies, controls, systems and procedures. The Committee has the authority to conduct or direct any investigation required to fulfill its mandate. It also has the ability to retain legal, accounting, or other advisers, consultants, or experts, as it considers necessary, in the performance of its duties. For this purpose, it may access all bank records. The Committee exercises functional authority over the Risk Management Division (RMD). The RMD furnishes the Committee with all the reportorial requirements to achieve its mandate. The Committee, as well as the RMD, is not directly involved in the approval of any Bank transactions. The Committee reviews, determines, recommends and oversees the system of limits to discretionary authority that the Board delegates to management. It ensures that the system remains effective, limits are observed, and that immediate corrective actions are taken whenever limits are breached. C. Subsidiaries The risk analyses and discussions during UCPB Savings Bank s (USB) own ROC meeting are reported to the monthly meetings of the Bank s ROC. Risk reports of UCPB Leasing & Finance Corp (ULFC) and UCPB Securities, Inc. (USI) are likewise reported to the monthly meetings of the parent bank s ROC. Portfolio quality review of subsidiaries USB and ULFC are also reported to and discussed by the ROC. The one-year Maximum Cumulative Outflow for USB, ULFC, and USI is also reported monthly to the ROC. Subsidiaries are part of the Bank s ICAAP exercise.

32 30 UCPB 2015 Annual Report II. CAPITAL MANAGEMENT Despite the Bank s impressive income growth, the Bank is still handicapped by issues over its legal ownership that limited its capital-raising activities. While surpassing the major components of the financial plan, the Bank also had very limited leeway in managing its Capital Adequacy Ratios (CAR) even under the Basel II Standards and in complying with the minimum capitalization for universal banks under BSP Circular 854. The Bank has always recognized the National Government s continued support for its rehabilitation. Given the current challenges, its Board of Directors and Management are determined to pursue government-approved measures to increase the Bank s capitalization to sustain its growth. A. Regulatory Qualifying Capital In view of ownership issues and the sequestration status of the Bank, it has not been able to raise capital since In 2009, to address the Bank s capital gap and pending resolution of the ownership issue, UCPB issued Interim Capital Notes to PDIC. The Bangko Sentral ng Pilipinas, pursuant to BSP Circular No. 595, allowed the Bank to consider the amount of P12 billion as Tier 1 Capital. Capital ratios during the period are as follows: Table A (in millions Php) Consolidated Parent Bank Total Qualifying Capital 19,391 20,262 19,887 15,527 16,773 15,870 Risk Weighted Assets 183, , , , , ,660 TIER 1 Capital Ratio 9.89% 10.52% 11.21% 9.28% 10.16% 10.26% Total Capital Ratio 10.56% 11.19% 11.82% 9.28% 10.16% 10.26% The Consolidated and Parent Bank s Tier 1 Capital and Total Capital Ratios are computed based on Basel and BSP Regulations. Capital ratios involving components of regulatory capital are calculated as follows: Consolidated Parent Bank Total capital ratio : Total Qualifying Capital 19,391 20,262 19,887 15,527 16,773 15,870 Risk-Weighted Assets 183, , , , , ,660 Tiel I capital ratio : Tier 1 Capital (net of Regulatory Deductions) 18,161 19,043 18,863 15,527 16,773 15,870 Risk-Weighted Assets 183, , , , , ,660 Under existing BSP regulations, the determination of the Bank s compliance with regulatory requirements and ratios is based on the amount of the Bank s unimpaired capital (regulatory net worth) as reported to the BSP, which is determined on the basis of regulatory accounting policies that differ from the Philippine Financial Reporting Standards (PFRS) in some respect. The amount of surplus funds available for dividend declaration is also determined on the basis of regulatory net worth after considering certain adjustments.

33 Risk Management 31 The BSP sets and monitors compliance to minimum capital requirements for Solo (Parent Bank) and Consolidated level (Parent and Financial Subsidiaries). In implementing capital requirements, BSP Circular 538 was issued, which implemented the Revised Risk-Based Capital Adequacy Framework under Basel II effective July 1, It requires the Bank to maintain a prescribed risk-based capital adequacy ratio (percentage of qualifying capital to risk-weighted assets) of not less than 10%. The Bank is also required to maintain a minimum Tier 1 capital ratio of 6% (in millions). The regulatory qualifying capital of the Bank consists of Tier 1 (core) and Tier 2 (supplementary) capital. Tier 1 capital is comprised of common stock, Interim Capital Notes and surplus (deficit), including current year profit and surplus reserves less required deductions such as unbooked valuation reserves (except for the P18.6 billion approved for deferral of booking up to 2018). Tier 2 is composed of upper Tier 2 and lower Tier 2. Upper Tier 2 consists of preferred stock, revaluation increment reserve, general loan loss provision and deposit for common stock subscription. Lower Tier 2 consists of the unsecured subordinated debt. BSP Circular 560 dated January 31, 2007, which took effect on February 22, 2007, requires the deduction of unsecured loans, other credit accommodations and guarantees granted to subsidiaries and affiliates from capital accounts for purposes of computing CAR. On February 26, 2009, the Monetary Board (MB) of the BSP exempted the Parent Bank from sanctions that may be imposed for its non-compliance with the 10% CAR and all capital-based regulatory ratios for the year 2008 until such time that the Parent Bank s rehabilitation plan is fully implemented. The MB also approved the Parent Bank s request for temporary relief by reducing the Parent Bank s CAR to 8% for a period of three years up to 2011 or until such time that the Parent Bank is able to comply with the required 10% CAR, whichever comes first. As of December 31, 2011, the Parent Bank had already complied with the required RBCAR of 10%. B. Regulatory Qualifying Capital and Capital Ratios of the Group and the Parent Bank Table B (in millions Php) Consolidated Parent Bank TIER 1 TIER 2 TIER 1 TIER 2 TIER 1 TIER 2 TIER 1 TIER 2 TIER 1 TIER 2 TIER 1 TIER 2 Gross qualifying capital Paid-up common stock & Interim TIER 1 Capital Notes per BSP Circular 595 Interim TIER 1 Capital Notes per BSP Circular 595 1, , , , , , , , , , , , Retained earnings 2, , , , , , Undivided profits 2, , , , , , Cumulative foreign currency translation (0.55) Minority interest in subsidiary financial allied undertakings which are less than wholly-owned Net unrealized gains on available for sale equity securities purchased General loan loss provision 1, , , , , , Total 18, , , , , , , , , , , , (Forward)

34 32 UCPB 2015 Annual Report Consolidated Parent Bank TIER 1 TIER 2 TIER 1 TIER 2 TIER 1 TIER 2 TIER 1 TIER 2 TIER 1 TIER 2 TIER 1 TIER 2 Deductions from Gross qualifying capital Total outstanding unsecured credit accommodations, both direct and indirect, to DOSRI (net of specific provisions, if any), and unsecured loans, other credit accommodations , , and guarantees granted to subsidiaries and affiliates (net of specific provisions, if any) referred to in Circular No. 560 Common stock treasury shares Deferred tax assets Investments in equity of unconsolidated subsidiary financial allied undertakings , , , , , , (50% from Tier 1 & 50% from TIER 2) Investments in equity of unconsolidated subsidiary securities dealers/brokers, reciprocal investments in equity of other banks/enterprises and securitization tranches in the banking book which are rated below investment grade/ unrated (50% from TIER 1 & 50% from TIER 2) Reciprocal investments in equity of other banks/enterprises (50% from TIER 1 & 50% from TIER 2) Securitization tranches in the banking book which are rated below investment grade/ unrated (50% from TIER 1 & 50% from TIER 2) Deductions due to negative Tier 2 Capital , , Total , , , , , , , Net Tier 1 & 2 18, , , , , , , (0.00) 16, , (0.00) Additional Deductions from TIER 1 due to negative TIER Net Tier 1 & 2 18, , , , , , , (0.00) 16, , (0.00) Total qualifying capital 19, , , , , , Risk weighted assets 183, , , , , , Tier 1 capital ratio 9.892% % % 9.281% % % Total capital ratio % % % 9.281% % % *Note: The Bank has no CET 1 capital and capital conservation buffer pending its ongoing recapitalization program. Main features of TIER 1 Capital The Bank s TIER 1 Capital is composed of two capital instruments namely common shares and capital notes. Common Shares A substantial portion of the outstanding common shares of the Parent Bank remains sequestered as a result of the sequestration orders issued by the Presidential Commission on Good Government (PCGG) on June 26, 1986 (Civil Case No A). Court proceedings on the ownership issue have been ongoing since then in the Sandiganbayan and the Supreme Court. Meantime, PCGG exercises the right to vote on the sequestered shares of the Parent Bank. On January 24, 2012, the Supreme Court denied the petition of COCOFED, et. al., and affirmed the resolutions issued by the Sandiganbayan on June 5, 2007, that there is no more necessity of further trial with respect to the issue of ownership of: (i) the sequestered UCPB shares, (ii) the CIIF block of SMC shares, and (iii) the CIIF Companies, as they have been finally adjudicated in the Partial Summary Judgment dated July 11, 2003 and May 7, 2004.

35 Risk Management 33 The Supreme Court decision on Civil Case no A became final and executory and has been recorded in the Book of Entries of Judgment on December 10, On March 18, 2015, President Benigno S. Aquino III of the Republic of the Philippines issued Executive Order No. 179 (Providing the Administrative Guidelines for the Inventory and Privatization of Coco Levy Assets) and No. 180 (Providing the Administrative Guidelines for the Reconveyance and Utilization of Coco Levy Assets for the Benefit of the Coconut Farmers and the Development of the Coconut Industry, and For Other Purposes), together referred to as the EOs. In June 2016, the Supreme Court issued a Temporary Restraining Order (TRO) versus EOs 179 and 180, thus the recapitalization and privatization exercise of the Bank was temporarily put on hold. Capital Notes The Parent Bank originally obtained P12.0 billion in financial assistance from PDIC on July 7, 2003, consisting of a P7.0-billion 5.0% Unsecured Subordinated debt due in 2013 and P5.0-billion proceeds from sale of NPLs with buyback by However, on March 31, 2009, the ROP, PDIC, PCGG and the Parent Bank agreed to convert the PDIC financial assistance into Capital Notes. On the same date, the Parent Bank issued P12.0-billion Interim Tier 1 Capital Notes (the Capital Notes or Notes ) to PDIC which will qualify as Interim Tier 1 capital. The Capital Notes has no maturity date but shall become due and demandable if the Parent Bank fails to perform any of its material obligations under the Notes. However, as allowed by the BSP and in keeping with the objectives of the Rehabilitation Plan, the Parent Bank has presented the Capital Notes in the equity section of the statements of financial position. C. Reconciliation of Regulatory Capital elements and its adjustments/deductions as applicable Table C (in millions Php) Consolidated Parent Bank Regulatory Capital Reconciling Regulatory Capital Reconciling AFS AFS Gross qualifying capital TIER 1 TIER 2 Total Items* TIER 1 TIER 2 Total Items* Paid-up common stock & Interim TIER 1 Capital Notes per BSP Cir , , , , , , Interim TIER 1 Capital Notes per BSP Cir , , , , , , Retained earnings 2, , , , , , Undivided profits 2, , , , , , , , Cumulative foreign currency translation Minority interest in subsidiary financial allied undertakings which are less than wholly-owned Net unrealized gains on available for sale equity securities purchased Remeasurement losses on retirement plan Total 18, , , , , , , General loan loss provision - 1, , , , , , Total Gross qualifying capital 18, , , , , , , , ,078.76

36 34 UCPB 2015 Annual Report Consolidated Parent Bank Regulatory Capital Reconciling Regulatory Capital AFS Gross qualifying capital TIER 1 TIER 2 Total Items* TIER 1 TIER 2 Total AFS Reconciling Items* Regulatory Adjustments/Deductions from Gross qualifying capital Total outstanding unsecured credit accommodations, both direct and indirect, to DOSRI (net of specific provisions, if any), and unsecured loans, other credit accommodations and guarantees granted to subsidiaries and affiliates (net of specific provisions, if any) referred to in Circular No. 560 Deferred tax assets Investments in equity of unconsolidated subsidiary financial allied undertakings (50% from TIER 1 & 50% , , , , from TIER 2) Investments in equity of unconsolidated subsidiary securities dealers/ brokers, reciprocal investments in equity of other banks/enterprises and securitization tranches in the banking book which are rated below investment grade/unrated (50% from TIER 1 & 50% from TIER 2) Reciprocal investments in equity of other banks/enterprises (50% from TIER 1 & % from TIER 2) Deductions due to negative Tier 2 Capital Total , , , , , , * Per summary of reconciling items as of December 31, 2015 as submitted to the Bangko Sentral ng Pilipinas (BSP). III. CREDIT RISK A. Strategies, Processes, Structure and Organization, Scope/Nature of reporting and measurement Credit risk is the risk of financial loss if borrower/counterparty fails to meet its contractual obligations. We manage and control credit risk by setting limits on the amount of risk it is willing to accept for counterparties and for geographical and industry concentrations. On a monthly basis, the Credit Risk report is discussed during the Risk Oversight Committee meeting. Management of Credit Risk The Bank s credit approval and monitoring system is intended to enable the Bank to manage and control credit risks. Grant of credits goes through a process of evaluation and approvals. To ensure an objective evaluation of credit applications and enable the Bank to monitor its credit risk profile and the extent of its credit risks, the Bank has adopted an internal credit risk rating system for corporate borrowers to measure credit risks. The system covers corporate borrowers with asset size of above P15 million. The basis for determining credit risk rating is the financial statements of the borrower for the last three years. The risk rating assigned by the Relationship Manager is reviewed independently and validated by the Risk Management Division through the Credit Review Officer pursuant to BSP Circular No On a periodic basis, the Corporate and Consumer Banking Group generates credit risk ratings for existing loan accounts to assess performance and to determine which account will be retained, expanded, or phased out. A separate review of the loan portfolio is conducted by the Risk Management Division to assess the quality of individual accounts and the concentration of the Bank s credit exposures. Monitoring of payment of credit exposures is done on a continuing basis to determine risk. The Bank continues to internally review and validate its Internal Credit Risk Rating System (ICRRS) model, covering the minimum requirements of qualitative and quantitative validation, as stipulated under BSP Circular 855.

37 Risk Management 35 For consumer accounts, the Bank has strengthened credit underwriting measures by using credit scoring to determine credit worthiness. A maker-checker setup is in place where Product Officers make recommendations to the Credit Review and Evaluation Department (CRED) that evaluates and approves credit. Scorecard parameters are continuously enhanced by the Bank s Credit Review and Evaluation Department (CRED), in collaboration with the Consumer Banking Group, to ensure an effective and efficient scoring system. The consumer credit scoring model was internally reviewed and validated to make it more responsive in terms of efficiently identifying, measuring, and controlling risk. Credit review and evaluation remain with the operations group to ensure stronger and more independent credit risk management. In 2015, the Bank continued to focus on consumer accounts and loans to maximize interest margins and reduce concentrating loans on large accounts. This helped us minimize the impact caused by the continued decline in market interest rates. The Bank s Central Liability System continued to facilitate monitoring and reporting of a client s/counterparty s total credit risk exposure across all bank products, including Loans, Trade, Treasury, Trust, and Branches. B. Credit Risk Concentration Credit risk concentration arises whenever a significant number of borrowers with similar characteristics are affected by changes in economic or other conditions. We analyze the credit risk concentration to an individual borrower, related/connected group of accounts, industry, geographic, internal rating buckets/groupings, currency term and security. Financial assets are broadly categorized into: (1) loans and receivables, (2) trading and financial investment securities, (3) loans and advances to banks, and (4) others. To mitigate risk concentration, the Bank maintains a regular monitoring system to spot breaches in regulatory and internal limits. Table D (in thousands Php) An analysis of concentrations of credit risk at the reporting date is shown below: Loans and Receivables Investment Securities (a) Consolidated Parent Bank Loans and Advances to Banks (b) Others (c) Total Loans and Receivables Investment Securities (a) Loans and Advances to Banks (b) Others (c) Total Real estate, renting and business activities 36,002,811 2,356,931 38,359,742 34,244,975 2,356,931 36,601,906 Wholesale and retail trade, repair of motor vehicles, motorcycles, personal and household goods 19,544,625 19,544,625 16,987,021 16,987,021 Other community, social and personal services activities 39,277, ,168 3,869,053 43,652,566 29,266, ,167 3,869,053 33,641,916 Manufacturing 13,576, ,298 13,800,127 11,994, ,298 12,218,112 Financial intermediaries 6,805,179 6,679,950 16,692,025 30,177,154 9,575,663 6,679,950 15,815,299 32,070,912 Transport, storage and communication 10,045,407 1,815,658 11,861,065 6,970,721 1,815,658 8,786,379 Government 41,339,388 47,524,537 2,403,449 91,267, ,786 41,165,724 45,772,123 2,400,949 90,063,582 Construction 4,491,109 93,085 4,584,194 2,617,642 93,085 2,710,727 Agriculture, hunting and forestry and fishing 3,765,613 3,765,613 5,714,166 5,714, ,508,918 53,014,478 64,216,562 6,272, ,012, ,096,484 52,840,813 61,587,422 6,270, ,794,721 Less: Unearned interest discount 275, ,592 35, ,527 Allowance for credit and impairment losses 5,519, ,261-6,391,598 5,152, ,186-6,024, ,713,989 52,142,217 64,216,562 6,272, ,345, ,908,292 51,968,627 61,587,422 6,270, ,734,343

38 36 UCPB 2015 Annual Report Loans and Receivables Investment Securities (a) Consolidated Parent Bank Loans and Advances to Banks (b) Others (c) Total Loans and Receivables Investment Securities (a) Loans and Advances to Banks (b) Others (c) Total Real estate, renting and business activities 37,139,850 2,422, ,562,563 33,780,672 2,422, ,203,385 Wholesale and retail trade, repair of motor vehicles, motorcycles, personal and household goods 15,974, ,974,840 15,974, ,974,840 Other community, social and personal services activities 30,146,994 1,239,451-3,080,032 34,466,477 21,993,082 1,048,061-3,080,032 26,121,175 Manufacturing 16,014, , ,268,353 15,097, , ,350,894 Financial intermediaries 9,415,654 6,673,372 14,062,762-30,151,788 8,113,558 6,673,372 13,473,951-28,260,881 Transport, storage and communication 6,915,854 1,779, ,695,208 6,915,854 1,779, ,695,208 Government 1,580,864 43,577,328 39,502,248 2,405,949 87,066,389 1,580,864 38,244,884 2,400,949 42,226,697 Construction 2,860,134 85, ,946,068 2,860,134 85, ,946,068 Agriculture, hunting and forestry and fishing 1,517, ,517,619 1,406,669 43,150, ,557, ,566,804 56,031,510 53,565,010 5,485, ,649, ,723,209 55,413,229 51,718,835 5,480, ,336,254 Less: Unearned interest discount 296, ,330 31, ,892 Allowance for credit and impairment losses 5,316, , ,193,102 4,977, , ,853, ,953,528 55,155,354 53,565,010 5,485, ,159, ,713,602 54,537,073 51,718,835 5,480, ,450,491 Loans and Receivables Investment Securities (a) Consolidated Parent Bank Loans and Advances to Banks (b) Others (c) Total Loans and Receivables Investment Securities (a) Loans and Advances to Banks (b) Others (c) Total Real estate, renting and business activities 29,368,509 1,576, ,945,142 27,938,561 1,572, ,510,924 Wholesale and retail trade, repair of motor vehicles, motorcycles, personal and household goods 18,632, ,632,327 18,632, ,632,327 Other community, social and personal services activities 17,969,209 1,187,872-3,628,582 22,785,663 16,171, , ,515,498 Manufacturing 17,057, , ,404,878 10,952,747 1,104,264-3,628,582 15,685,593 Financial intermediaries 11,812,056 4,966,240 3,145,407-19,923,703 10,397,038 4,890,085 3,042,712-18,329,835 Transport, storage and communication 10,228, , ,080,596 10,228, , ,078,217 Government 2,353,431 47,171,383 67,708,866 2, ,236,180 2,047,166 81, ,128,482 Construction 2,047,166 81, ,128,482 1,841, ,841,426 Agriculture, hunting and forestry and fishing 1,884, ,884,444 1,483,228 46,516,316 66,068, ,067, ,353,631 56,181,856 70,854,273 3,631, ,021,415 99,693,173 55,357,379 69,110,903 3,628, ,790,037 Less: Unearned interest discount 289, ,126 39, ,448 Allowance for credit and impairment losses 5,487, , ,128,562 5,066, , ,707,963 P105,577,237 P55,540,562 P70,854,273 P3,631,655 P235,603,727 P94,586,982 P54,716,159 P69,110,903 P3,628,582 P222,042,626 a. Comprised of Financial assets at FVPL, AFS financial assets and HTM investments b. Comprised of Due from BSP, Due from other banks and Interbank loans receivable c. Comprised of Letters of Credit C. Credit Quality per Class of Financial Assets The credit quality of financial assets is assessed and managed using external and internal ratings. Loans and Receivables The credit quality is generally monitored using the 10-grade ICRR system which is integrated in loan pricing and provision for credit losses. The model on risk ratings is assessed and updated regularly.

39 Risk Management 37 The following table shows the description of credit quality of commercial loans: Table E Credit Quality ICRR System Grade Description High grade 1 Excellent 2 Strong 3 Good 4 Satisfactory Standard grade 5 Acceptable 6 Watchlist 7 Especially mentioned Substandard grade 8 Substandard 9 Doubtful Impaired 10 Loss The table below shows credit quality per class of financial assets, based on the Bank s rating system (gross of allowance for credit losses and unearned discount): Table F (in thousands Php) High Consolidated Parent Bank Neither Past Due nor Impaired Neither Past Due nor Impaired Standard Past Due but not High Standard Grade (a) Grade (b) Grade (c) Unrated Impaired Impaired Total Grade (a) Grade (b) Grade (c) Unrated Impaired Impaired Total Due from BSP 47,524, ,524,537 45,772,123 45,772,123 Due from other banks 7,682, ,682,039 7,505,313 7,505,313 Interbank loans receivable and SPURA 9,009, ,009,986 8,309,986 8,309,986 64,216, ,216,562 61,587, ,587,422 Loans and receivables: Receivables from customers: Corporate loans 40,314,643 24,163,808 2,904,946 3,043,045 1,370,315 3,531,449 75,328,206 33,341,613 24,119,853 1,879,402 3,042,500 1,343,013 3,472,163 67,198,544 Consumer loans 47,918, ,190-12, ,972 1,250,785 49,526,632 41,796, ,042 1,038,345 42,979,679 Unquoted debt securities 3,707, ,707,405 3,455,083 3,455,083 Sales contracts receivable 7,448 4,495 1,913,827 22, ,535 2,087,194-1,869, ,535 2,007,803 Accrued interest receivable 481, ,895 30,871 1,070,929 9,323 53,997 1,861, , ,759 30,871 1,066,844 8,929 53,836 1,797,938 Accounts receivable 40, , , , , , ,778 Other receivables 292,967-12,907 31, ,110-1,659 1,659 Other assets: - - Statutory reserves 2,400,949 2,500 2,403,449 2,400,949 2,400,949 Security deposit with Philippine Clearing House Corporation (PCHC) ,164,514 24,536,200 2,935,817 6,305,833 1,597,499 5,372, ,912,367 81,475,636 24,275,612 1,910,273 6,285,881 1,496,984 5,053, ,497, ,381,076 24,536,200 2,935,817 6,305,833 1,597,499 5,372, ,128, ,063,058 24,275,612 1,910,273 6,285,881 1,496,984 5,053, ,084,855 Substandard Substandard Past Due but not

40 38 UCPB 2015 Annual Report High Grade (a) Consolidated Parent Bank Neither Past Due nor Impaired Neither Past Due nor Impaired Standard Grade (b) Substandard Grade (c) Unrated Past Due but not Impaired Impaired Total High Grade (a) Standard Grade (b) Substandard Grade (c) Unrated Past Due but not Impaired Impaired Total Due from BSP 39,502, ,502,248 38,244,884 38,244,884 Due from other banks 2,253, ,253,958 2,165,147 2,165,147 Interbank loans receivable and SPURA 11,808, ,808,804 11,308,804 11,308,804 53,565, ,565,010 51,718, ,718,835 Loans and receivables: Receivables from customers: Corporate loans 39,083,478 22,867,573 2,423,852 3,966,529 1,993,255 3,294,400 73,629,087 31,514,336 22,734,367 2,412,949 3,966,529 1,895,179 2,954,966 65,478,326 Consumer loans 36,778, , , ,488 38,459,146 32,369, , ,138 33,538,935 Unquoted debt securities 4,508,253-4,508,253 4,250,629 4,250,629 Sales contracts receivable 28,723 42, ,465,685 4, ,979 1,834,961 1,465, ,917 1,744,602 Accrued interest receivable 397, ,876 22,079 1,122,831 18,580 76,792 1,861, , ,589 22,077 1,122,831 18,488 76,749 1,796,626 Accounts receivable 34,675 11, , , , , , ,141 Other receivables , ,830 - Other assets: - - Statutory reserves 2,400,949 2,400,949 2,400,949 2,400,949 Security deposit with Philippine Clearing House Corporation (PCHC) 45,784 45,784-83,277,606 23,692,670 2,445,938 7,099,806 2,971,820 4,525, ,013,537 70,930,351 22,895,956 2,435,026 7,237,297 2,555,919 4,069, ,124, ,842,616 23,692,670 2,445,938 7,099,806 2,971,820 4,525, ,578, ,649,186 22,895,956 2,435,026 7,237,297 2,555,919 4,069, ,843,043 High Grade (a) Consolidated Parent Bank Neither Past Due nor Impaired Neither Past Due nor Impaired Standard Grade (b) Substandard Grade Unrated Past Due but not Impaired Impaired Total High Grade (a) Standard Grade (b) Substandard Grade Unrated Past Due but not Impaired Impaired Total Due from BSP 67,708, ,708,866 66,068, ,068,191 Due from other banks 1,885, ,885,130 1,782, ,782,435 Interbank loans receivable 1,260, ,260,277 1,260, ,260,277 70,854, ,854,273 69,110, ,110,903 Loans and receivables: Receivables from customers: Corporate loans 32,809,963 28,647,270 1,707,484 3,385,062 1,728,960 3,170,766 71,449,505 28,891,400 26,134,020 1,630,693 4,321,696 1,496,896 3,082,089 65,556,794 Consumer loans 26,886, , ,578 2,610, ,367 30,753,240 22,292, ,051 2,447, ,188 25,698,562 Unquoted debt securities 5,438, ,438,282 5,176, ,176,947 Sales contracts receivable 79, ,288 18, , , , , ,452 Accrued interest receivable 1,246, ,518 68, ,289 2,831 54,728 1,809,559 1,246, ,064 68, ,106 2,830 54,728 1,746,909 Accounts receivable 36, , , , , , ,509 Other receivables - 479, , , ,000 Other assets - security deposit with Philippine Clearing House Corporation (PCHC) - 59, ,932 66,497,304 29,607,788 1,775,794 4,157,801 4,360,878 5,013, ,413,563 57,608,138 26,274,084 1,699,003 5,461,925 3,947,129 4,702,894 99,693, ,351,577 29,607,788 1,775,794 4,157,801 4,360,878 5,013, ,267, ,719,041 26,274,084 1,699,003 5,461,925 3,947,129 4,702, ,804,076 a. Includes Loans and receivables with an ICRR system Grade of 1-4 b. Includes Loans and receivables with an ICRR system Grade of 5-7 c. Includes Loans and receivables with an ICRR system Grade of 8-9

41 Risk Management 39 D. Credit Exposures to Trading and Investment Securities To ensure the quality of its trading and investment portfolio, the Bank uses international and local credit risk rating agencies such as Moody s and PhilRatings, coupled with internal assessment. The table below shows the credit risk rating of trading and investment securities (gross of allowance for credit and impairment losses): Table G (in thousands Php) Consolidated Parent Bank CCC to D CCC to D AAA to BBB- BB+ to B- and Unrated Total AAA to BBB- BB+ to B- and Unrated Total Financial assets at FVPL: Debt securities: Government 2,264,588 2,264,588 2,198,081 2,198,081 Corporate 18,020 18,020 18,020 18,020 Equity securities - Quoted 120, , , ,088 Derivative assets 42,520 1,104 43,624 42,520 1,104 43,624 2,445,826-1,104 2,446,930 2,364,709-1,104 2,365,813 AFS financial assets: Debt securities: Government 11,215,146 11,215,146 11,147,989 11,147,989 Corporate 10,167, ,274 1,064,788 11,613,446 10,167, ,274 1,064,788 11,613,446 Equity securities: - - Quoted 109, , , , ,517 Unquoted 648, , , ,963 21,492, ,274 2,110,269 23,983,596 21,315, ,274 2,110,268 23,806,915 HTM investments: Government debt securities 27,859,653-27,859,653 27,819, ,819,653 51,797, ,274 2,111,373 54,290,179 51,499, ,274 2,111,372 53,992,381 Consolidated Parent Bank CCC to D CCC to D AAA to BBB- BB+ to B- and Unrated Total AAA to BBB- BB+ to B- and Unrated Total Financial assets at FVPL: Debt securities: Government 471, ,919 63, ,558 Corporate 192,193-22, , ,193-22, ,267 Equity securities - Quoted 240,007-35, , ,312-35, ,389 Derivative assets 34, ,780 34, , ,658-57, , ,602-57, ,994 AFS financial assets: Debt securities: Government 16,560, ,560,516 16,490, ,490,949 Corporate 9,810, ,973 10,719,346 9,810, ,973 10,719,346 Equity securities: - - Quoted 169, , , , ,517 Unquoted , , , ,010 26,540,143-1,957,016 28,497,159 26,301,322-1,956,500 28,257,822 HTM investments: Government debt securities 28,030, ,030,756 27,890, ,890,328 55,509,557-2,014,408 57,523,965 54,700,252-2,013,892 56,714,144

42 40 UCPB 2015 Annual Report Consolidated Parent CCC to D CCC to D AAA to BBB- BB+ to B- and Unrated Total AAA to BBB- BB+ to B- and Unrated Total Financial assets at FVPL: Debt securities: Government 709, , , ,970 Private 81,641-11,104 92,745 81,641-11,104 92,745 Quoted equity securities 213, , , ,561-75, ,337 Derivative assets 31, ,473 39,152 31, ,473 39,152 1,036, ,739 1,137, , , ,204 AFS financial assets: Debt securities: Government 16,525,830 1,840,982-18,366,812 16,335,847 1,840,982-18,176,829 Private 6,407, , ,547 7,384,257 6,407, , ,547 7,384,257 Equity securities: Quoted 7,877 79, , , , ,517 Unquoted , , , ,659 22,941,061 2,576,315 1,429,116 26,946,492 22,743,201 2,496,658 1,355,403 26,595,262 HTM investments: Government debt securities 28,097, ,097,374 27,955, ,955,913 52,074,594 2,576,407 1,530,855 56,181,856 51,410,891 2,496,732 1,449,756 55,357,379 E. Eligible Credit Risk Mitigants The credit risk mitigants the Bank uses and as reported in the CAR are Republic of the Philippines Sovereign Debt (ROPs) paired with warrants, holdout on deposits, Philexim guarantee, and guarantee by Local Government Unit- Electric Cooperative-Partial Credit Guarantee (LGU-ECPCG). The Bank has no securitization structures and credit derivatives for the years 2013, 2014 and F. Embedded Derivatives Embedded derivatives are valued separately from their host contracts at fair value, with fair value changes being recognized in the statements of income and included in Trading and securities gains (losses) - net account. This is done under any of the following conditions: a) the entire hybrid contracts (composed of both the host contract and the embedded derivative) are not accounted for as financial assets or financial liabilities at FVPL; b) the economic risks and characteristics are not closely related to those of the respective host contracts; and c) when a separate instrument with the same terms as the embedded derivatives would meet the definition of a derivative. The Bank assesses the existence of an embedded derivative on the date it first becomes a party to the contract, and performs re-assessment only where there is a change to the contract that significantly modifies the contractual cash flows. The Bank s embedded derivatives, comprised of interest rate-linked options and range accrual, matured in 2013.

43 Risk Management 41 G. Policies for hedging and/or mitigating risk and strategies and processes for monitoring the continuing effectiveness of hedges/mitigants. No deals were designated specifically as hedges for the period covering 2013, 2014 and All Treasury trades across all asset classes were treated as independent transactions. As such, these are subject to the Risk Measurement Policies as prescribed in the Board approved Market Risk Manual. Table H Total Credit Risk Exposures by Type, Risk Buckets and Risk Weighted Assets (in millions Php) 2015 Type of Exposures Consolidated Credit Total Total Risk Credit Risk Risk Weights Exposures* Mitigants Exposure (CRM) after CRM 0% 20% 50% 75% 100% 150% Total Risk Weighted Assets On-Balance Sheet Exposures Sovereigns 97, , , , , , Banks 9, , , , , , Interbank call loans 1, , , Local government units and Public Sector Entities Government corporations 1, , , , Corporates 92, , , , , , Housing Loans 9, , , , , MSME qualified portfolio 11, , , , Defaulted exposures 3, , , , Housing Loans Others 2, , , , ROPA 5, , , , All other assets, net of deductions 50, , , , , Total on-balance sheet exposures 283, , , , , , , , , , Off-Balance Sheet Exposures Transaction-related contingencies 1, , , , Trade-related contingencies Others - - Total off-balance sheet exposures 1, , , , Counterparty Risk-Weighted Assets in the Banking Book Sovereigns Banks Government corporations - - Corporates Total counterparty RWA in banking book 1, , , Counterparty Risk-Weighted Assets in the Trading Book Derivatives-interest rate contracts Derivatives-exchange rate contracts Credit Derivatives - - Repo-style transactions-held for trading-sovereign - - Repo-style transactions-held for trading- Corporates - - Total counterparty RWA in trading book Risk-Weighted Amount of Credit Linked Notes in the Banking Book Risk-Weighted Securitization Exposures Total 286, , , , , , , , , , Deductions from Capital General loan loss provision (in excess of the amount permitted to be included in Upper Tier2) - Unbooked valuation reserves and other capital adjustments - Total, net of deductions 286, , , , , , , , , , *Principal amount for on-balance sheet and credit equivalent amount for off-balance sheet, net of specific provision

44 42 UCPB 2015 Annual Report Type of Exposures Parent Bank Credit Total Total Risk Credit Risk Risk Weights Exposures* Mitigants Exposure (CRM) after CRM 0% 20% 50% 75% 100% 150% Total Risk Weighted Assets On-Balance Sheet Exposures Sovereigns 94, , , , , , Banks 9, , , , , , Interbank call loans 1, , , Local government units and Public Sector Entities - - Government corporations 1, , , , Corporates 87, , , , , , Housing Loans 8, , , , MSME qualified portfolio 10, , , , Defaulted exposures 2, , , , Housing Loans Others 2, , , , ROPA 5, , , , All other assets, net of deductions 45, , , , , Total on-balance sheet exposures 266, , , , , , , , , , Off-Balance Sheet Exposures Transaction-related contingencies 1, , , , Trade-related contingencies Others - - Total off-balance sheet exposures 1, , , , Counterparty Risk-Weighted Assets in the Banking Book Sovereigns Banks Government corporations - - Corporates Total counterparty RWA in banking book 1, , , Counterparty Risk-Weighted Assets in the Trading Book Derivatives-interest rate contracts Derivatives-exchange rate contracts Credit Derivatives - - Repo-style transactions-held for trading-sovereign - - Repo-style transactions-held for trading- Corporates - - Total counterparty RWA in trading book Risk-Weighted Amount of Credit Linked Notes in the Banking Book Risk-Weighted Securitization Exposures Total 269, , , , , , , , , , Deductions from Capital General loan loss provision (in excess of the amount permitted to be included in Upper Tier2) Unbooked valuation reserves and other capital adjustments Total, net of deductions 269, , , , , , , , , , *Principal amount for on-balance sheet and credit equivalent amount for off-balance sheet, net of specific provision 2014 Type of Exposures Consolidated Credit Total Total Risk Credit Risk Risk Weights Exposures* Mitigants Exposure (CRM) after CRM 0% 20% 50% 75% 100% 150% Total Risk Weighted Assets On-Balance Sheet Exposures Sovereigns 93, , , , , , Banks 3, , , , , Interbank call loans 5, , , , Local government units and Public Sector Entities Government corporations 1, , , , Corporates 86, , , , , , Housing Loans 7, , , , MSME qualified portfolio 11, , , , Defaulted exposures 3, , , , Housing Loans Others 3, , , , ROPA 2, , , , All other assets, net of deductions 55, , , , , Total on-balance sheet exposures 270, , , , , , , , , ,833.88

45 Risk Management Type of Exposures Consolidated Credit Total Total Risk Credit Risk Risk Weights Exposures* Mitigants Exposure (CRM) after CRM 0% 20% 50% 75% 100% 150% Total Risk Weighted Assets Off-Balance Sheet Exposures Transaction-related contingencies 1, , , , Trade-related contingencies Others - - Total off-balance sheet exposures 1, , , , Counterparty Risk-Weighted Assets in the Banking Book Sovereigns Banks 1, , , Government corporations Corporates 9, , , , Total counterparty RWA in banking book 10, , , , , Counterparty Risk-Weighted Assets in the Trading Book Derivatives-interest rate contracts Derivatives-exchange rate contracts Credit Derivatives - - Repo-style transactions-held for trading-sovereign Repo-style transactions-held for trading- Corporates Total counterparty RWA in trading book Risk-Weighted Amount of Credit Linked Notes in the Banking Book Risk-Weighted Securitization Exposures Total 282, , , , , , , , , , Deductions from Capital General loan loss provision (in excess of the amount permitted to be included in Upper Tier2) - Unbooked valuation reserves and other capital adjustments - Total, net of deductions 282, , , , , , , , , , *Principal amount for on-balance sheet and credit equivalent amount for off-balance sheet, net of specific provision Type of Exposures Parent Bank Credit Total Total Risk Credit Risk Risk Weights Exposures* Mitigants Exposure (CRM) after CRM 0% 20% 50% 75% 100% 150% Total Risk Weighted Assets On-Balance Sheet Exposures Sovereigns 91, , , , , , Banks 3, , , , , Interbank call loans 5, , , , Local government units and Public Sector Entities Government corporations 1, , , , Corporates 81, , , , , , Housing Loans 6, , , , MSME qualified portfolio 10, , , , Defaulted exposures 2, , , , Housing Loans Others 2, , , , ROPA 2, , , , All other assets, net of deductions 50, , , , , Total on-balance sheet exposures 254, , , , , , , , , , Off-Balance Sheet Exposures Transaction-related contingencies 1, , , , Trade-related contingencies Others - - Total off-balance sheet exposures 1, , , , Counterparty Risk-Weighted Assets in the Banking Book Sovereigns Banks 1, , , Government corporations Corporates 9, , , , Total counterparty RWA in banking book 10, , , , ,907.19

46 44 UCPB 2015 Annual Report Type of Exposures Parent Bank Credit Total Total Risk Credit Risk Risk Weights Exposures* Mitigants Exposure (CRM) after CRM 0% 20% 50% 75% 100% 150% Total Risk Weighted Assets Counterparty Risk-Weighted Assets in the Trading Book Derivatives-interest rate contracts Derivatives-exchange rate contracts Credit Derivatives - - Repo-style transactions-held for trading-sovereign Repo-style transactions-held for trading- Corporates Total counterparty RWA in trading book Risk-Weighted Amount of Credit Linked Notes in the Banking Book Risk-Weighted Securitization Exposures Total 266, , , , , , , , , , Deductions from Capital General loan loss provision (in excess of the amount permitted to be included in Upper Tier2) Unbooked valuation reserves and other capital adjustments Total, net of deductions 266, , , , , , , , , , *Principal amount for on-balance sheet and credit equivalent amount for off-balance sheet, net of specific provision 2013 Type of Exposures Consolidated Credit Total Total Risk Credit Risk Risk Weights Exposures* Mitigants Exposure (CRM) after CRM 0% 20% 50% 75% 100% 150% Total Risk Weighted Assets On-Balance Sheet Exposures Sovereigns 115, , , , , , Banks 4, , , , , Interbank call loans Local government units and Public Sector Entities Government corporations 1, , , , Corporates 77, , , , , , , Housing Loans 6, , , , MSME qualified portfolio 10, , , , Defaulted exposures 1, , , , Housing Loans Others 1, , , , ROPA 6, , , , All other assets, net of deductions 51, , , , , Total on-balance sheet exposures 275, , , , , , , , , , Off-Balance Sheet Exposures Transaction-related contingencies 1, , , , Trade-related contingencies Others - - Total off-balance sheet exposures 1, , , , Counterparty Risk-Weighted Assets in the Banking Book Sovereigns 1, , , , Banks 1, , , Government corporations Corporates 3, , , , Total counterparty RWA in banking book 7, , , , , Counterparty Risk-Weighted Assets in the Trading Book Derivatives-interest rate contracts Derivatives-exchange rate contracts Credit Derivatives - - Repo-style transactions-held for trading-sovereign Repo-style transactions-held for trading- Corporates - - Total counterparty RWA in trading book

47 Risk Management Type of Exposures Consolidated Credit Total Total Risk Credit Risk Risk Weights Exposures* Mitigants Exposure (CRM) after CRM 0% 20% 50% 75% 100% 150% Total Risk Weighted Assets Risk-Weighted Amount of Credit Linked Notes in the Banking Book Risk-Weighted Securitization Exposures Total 284, , , , , , , , , , Deductions from Capital General loan loss provision (in excess of the amount permitted to be included in Upper Tier2) - Unbooked valuation reserves and other capital adjustments - Total, net of deductions 284, , , , , , , , , , *Principal amount for on-balance sheet and credit equivalent amount for off-balance sheet, net of specific provision Type of Exposures Parent Bank Credit Total Total Risk Credit Risk Risk Weights Exposures* Mitigants Exposure (CRM) after CRM 0% 20% 50% 75% 100% 150% Total Risk Weighted Assets On-Balance Sheet Exposures Sovereigns 113, , , , , , Banks 4, , , , , Interbank call loans Local government units and Public Sector Entities Government corporations 1, , , , Corporates 75, , , , , , , Housing Loans 5, , , , MSME qualified portfolio 9, , , , Defaulted exposures 1, , , Housing Loans Others , ROPA 5, , , , All other assets, net of deductions 44, , , , , Total on-balance sheet exposures 261, , , , , , , , , , Off-Balance Sheet Exposures Transaction-related contingencies 1, , , , Trade-related contingencies Others - - Total off-balance sheet exposures 1, , , , Counterparty Risk-Weighted Assets in the Banking Book Sovereigns 1, , , , Banks 1, , , Government corporations Corporates 3, , , , Total counterparty RWA in banking book 7, , , , , Counterparty Risk-Weighted Assets in the Trading Book Derivatives-interest rate contracts Derivatives-exchange rate contracts Credit Derivatives - - Repo-style transactions-held for trading-sovereign Repo-style transactions-held for trading- Corporates - - Total counterparty RWA in trading book Risk-Weighted Amount of Credit Linked Notes in the Banking Book Risk-Weighted Securitization Exposures Total 270, , , , , , , , , , Deductions from Capital General loan loss provision (in excess of the amount permitted to be included in Upper Tier2) Unbooked valuation reserves and other capital adjustments Total, net of deductions 270, , , , , , , , , , *Principal amount for on-balance sheet and credit equivalent amount for off-balance sheet, net of specific provision

48 46 UCPB 2015 Annual Report Table I: Total Credit Risk-Weighted Assets Broken Down by Type of Exposures and Capital Requirement Total Risk Weighted Assets Total Risk Weighted Assets Total Risk Weighted Assets Consolidated Parent Bank Consolidated Parent Bank Consolidated Parent Bank A. Credit Risk (in million Php) (in million Php) (in million Php) (in million Php) (in million Php) (in million Php) Total Credit Exposures (on-balance sheet) 164, , , , , , Total Credit Exposures (off-balance sheet) 1, , , , , , Total Credit Exposures (On-and Off-balance sheet) 166, , , , , , Exposures Covered by CRM, Gross of Materiality Threshold Total Credit Risk Exposure After Risk Mitigation 166, , , , , , Total Counterparty Risk Weighted Assets in the Banking Book (Derivatives and Repo-style Transactions) 1, , , , , , Total Counterparty Risk Weighted Assets in the Trading Book (Derivatives and Repo-style Transactions) Total Credit-Risk Weighted Assets Broken Down By Type Of Exposures 167, , , , , , Capital Requirement for Credit Risk 16, , , , , , Note: The Bank has no securitization exposures. IV. MARKET RISK A. Strategies, Processes, Structure and Organization, Scope/Nature of Reporting and Measurement Market risk is the risk of loss to future earnings, fair values or future cash flows that may result from changes in the price of a financial instrument. Trading portfolios are exposed to market risk because the values of trading positions are sensitive to changes in market prices. Assets and liabilities portfolios are affected by market risks because the revenues derived from these activities, such as securities gains and losses and net interest income are sensitive to changes in interest and foreign exchange rates. The Bank s market risk originates from its holdings of foreign exchange instruments, debt securities and derivatives. The Market Risk Department (MRD) independently monitors and manages UCPB s exposure to market, liquidity, and interest rate risks on a daily basis. It evaluates the current and prospective maturity structure of its resources and liabilities, as well as prevailing market conditions, in order to guide pricing and asset/liability allocation strategies to manage the Bank s liquidity risks. MRD uses various loss limits and risk measurement methodologies as follows: Stop loss limits Loss alert limits Position limits Mark-to-market valuation Value-at-Risk (VaR) Earnings-at-Risk (EaR)

49 Risk Management 47 B. VaR Methodology Assumptions and Parameters The Bank computes the VaR to estimate the maximum potential loss that can be incurred in its trading books under normal market conditions given a specified confidence level and holding period. VaR is one of the key measures in the Bank s management of market risk. The Bank uses a 1-day and a 10-day holding period for its foreign exchange VaR and interest rate VaR, respectively. The Bank adopts a historical simulation approach using a 99.0% confidence level and a one year observation period in its VaR calculation. The Bank s VaR limit is agreed annually by the Treasury Group and Risk Management Division. This is presented to the Risk Oversight Committee and the Board based on the tolerable risk appetite of the Bank. Monitoring reports, which include the VaR figures and exposures to VaR limits are sent to the risk-taking units on a daily basis. These are also reported monthly to the Risk Oversight Committee. Although VaR is an important tool for measuring market risk, the assumptions on which the model is based give rise to the following limitations: The holding period assumes that it is possible to hedge or dispose of positions within that period. This is considered to be a realistic assumption in almost all cases but may not be the case in situations in which there is severe market illiquidity for a prolonged period; A 99.0% confidence level does not reflect losses that may occur beyond this level. Even within the model used, there is a one percent probability that losses could exceed the VaR; VaR is calculated on an end-of-day basis and does not reflect exposures that may arise on positions during the trading day; The use of historical data as a basis for determining the possible range of future outcomes may not always cover all possible scenarios, especially those of an exceptional nature; The VaR measure is dependent upon the Bank s position and the volatility of market prices; and The VaR of an unchanged position reduces if the market price volatility declines and vice versa. The limitations of the VaR methodology are recognized by supplementing VaR limits with other position and sensitivity limit structures, including limits to address potential concentration risks within each trading portfolio. While VaR measures risk during normal times, it is supplemented with stress testing, which is used to measure the potential effect of a crisis or low probability event. The RMD conducts stress testing to measure and monitor market risks in extreme market conditions. The VaR figures are back-tested against actual and unrealized profit and loss of the trading book to validate the robustness of the VaR model. Results of back-testing and stress testing are reported to the ROC on a monthly basis. VaR computations include outliers and assume normal distribution.

50 48 UCPB 2015 Annual Report Table J: Summary of the VaR Position of the RBU Trading Portfolios: 2015 At Dec 31 Average Maximum Minimum (In Thousands) Foreign currency risk 8,488 4,029 17,592 1 Interest rate risk 33,440 25,585 78,385 3, At Dec 31 Average Maximum Minimum (In Thousands) Foreign currency risk 6,419 5,689 18, Interest rate risk 1,821 9,213 45,743 1, At Dec 31 Average Maximum Minimum (In Thousands) Foreign currency risk 3,004 3,771 12,648 6 Interest rate risk 16,078 25, ,111 2,047 Table K: Total Interest Rate Risk VaR of the Fixed-Income Instruments 2015 At Dec 31 Average Maximum Minimum (In Thousands) Interest rate risk 242, , ,093 99, At Dec 31 Average Maximum Minimum (In Thousands) Interest rate risk 222, , , , At Dec 31 Average Maximum Minimum (In Thousands) Interest rate risk 647, ,071 1,032, ,601 Table L: Summary of the VaR Position of the FCDU Trading Portfolios 2015 At Dec 31 Average Maximum Minimum (In Thousands) Interest rate risk 68,870 66, ,478 39,305

51 Risk Management At Dec 31 Average Maximum Minimum (In Thousands) Interest rate risk 80, , ,878 66, At Dec 31 Average Maximum Minimum (In Thousands) Interest rate risk 239, , ,849 51,722 *Interest Rate Risk VaR is calculated only for fixed income instruments traded by the Bank s FCDU. C. Other Structured Products The Bank has no other structured products. D. The Scope of Acceptance by the BSP The Bangko Sentral ng Pilipinas (BSP) in its annual review of the Market Risk Department, covers Risk Policies and Procedures/Methodology, as well as Risk Management Models implemented. Paramount among BSP s recommendations is for an independent Third Party Model Validation for the Parent Bank s VaR measurement and VaR backtesting Models. Table M: Total Market Risk Weighted Assets Broken Down by Type of Exposures (Interest Rate, Equity, Foreign Exchange and Options) and Capital Requirement Total Risk Weighted Assets Total Risk Weighted Assets Total Risk Weighted Assets Consolidated Parent Bank Consolidated Parent Bank Consolidated Parent Bank B. Market Risk (in million Php) (in million Php) (in million Php) (in million Php) (in million Php) (in million Php) Using Standardized Approach Interest Rate Exposures 1, , Equity Exposures Foreign Exposures 1, , Total Market-Risk Weighted Assets 2, , , , , , Capital Requirement for Market Risk E. Liquidity Risk Liquidity risk is generally defined as the current and prospective risk to earnings or capital arising from the Bank s inability to meet its obligations when they become due. The Bank closely monitors the current and prospective maturity structure of its resources and liabilities and the market condition. This guides pricing and asset/liability allocation strategies to manage its liquidity risks. Maximum Cumulative Outflow (MCO) limits and funding diversification/concentration limits are used to monitor liquidity risk.

52 50 UCPB 2015 Annual Report The Bank also manages liquidity risk by holding sufficient liquid assets of appropriate quality. This is to ensure that short-term funding requirements are met and a balanced loan portfolio is maintained and repriced on a regular basis. Moreover, the Bank maintains sufficient liquidity to take advantage of interest rate and exchange rate opportunities. The MCO is subjected to stress scenarios, including simultaneous core deposit and heavy withdrawals, as well as pullout of government and large funding sources. The portfolio under Available for Sale (AFS) is assumed to be reinvested, while loans are assumed to be replaced with new ones. The MCO is periodically revisited and revised accordingly. The UCPB Contingency Funding Plan, a framework designed to take effect in the event of a liquidity problem was, likewise, updated in The Plan, spearheaded by RMD, minimizes any adverse longer-term implications for the Bank, identifies trigger events that could cause such crisis and prescribes the actions to be taken to manage the situation. This is integrated into the Bank s ICAAP. The Contingency Funding Committee is tasked to establish and enforce the Plan. It is chaired by the President and is composed of Group Heads from Treasury, Branch Banking, Corporate and Consumer, Support Services, Operations, Marketing, Chief Risk Officer and Chief Compliance Officer. F. Interest Rate Risk Strategies, Processes, Structure and Organization, Scope/Nature of Reporting and Measurement Interest rate risk arises from the possibility that changes in interest rates will affect future cash flows or fair values of financial instruments. The Bank measures the sensitivity of its assets and liabilities to interest rate fluctuations through gap analysis. This analysis provides the Bank with a measure of the impact of changes in interest rates on the accrual portfolio or reported earnings (the risk exposure of future accounting income). The repricing gap is calculated by subtracting the interest rate sensitive liabilities in each time bucket from interest rate sensitive assets to produce repricing gap for that particular time bucket. The difference in the amount of assets and liabilities maturing would then give the Bank an indication of its exposure to the risk of potential changes in net interest income. A positive gap occurs when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. This is favorable to the Bank during a period of rising interest rates since it is in a position to invest in higher yielding assets more quickly than it would need to refinance its interest bearing liabilities. Conversely, during a period of falling interest rates, a positively gapped position could result in restrained growth or even declining net interest income. A negative gap occurs when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. This is unfavorable to the Bank during a period of rising interest rates because it would need to refinance its maturing interest bearing liabilities at a higher level. Conversely, during a period of falling interest rates, a negatively gapped position is favorable to the Bank because it can take advantage of lower repricing and refunding cost leading to improved net interest income.

53 Risk Management 51 The Bank also monitors its exposure to fluctuations in interest rates by measuring the impact of interest rate movements on its interest income. This is done by modeling the impact and doing a sensitivity scenario analysis of various changes in interest rates to the Bank s interest-related income and expenses. The Bank uses gap analysis to measure the sensitivity of its assets and liabilities to interest rate fluctuations, specifically by the Earnings at Risk (EaR) or the risk of deterioration in interest income over the next 12 months due to unfavorable movements in interest rates. It also subjects the EaR values to various interest rate shocks to determine the impact on earnings in the banking book. This analysis allows the Bank to measure the impact of changes in interest rates on the accrual portfolio or reported earnings. The repricing gap for a particular time bucket is calculated by subtracting the interest rate sensitive liabilities in each time bucket from interest rate sensitive assets. The difference in the amount of maturing assets and liabilities will provide the Bank with an indication of its exposure to the risk of potential changes in net interest income. Among the assumptions used for the computation of Earnings at Risk are: 1. Annual re-pricing on amortized loans; 2. Based on maturity for bullet payments; 3. Payment date based on farthest maturity; and 4. Behavior of non-maturing deposits. Our EAR model is measured based on the repricing schedule of the balance sheet accounts. To illustrate, loans are mapped on its maturity date. Non-maturing deposit accounts that do not have defined maturity dates (e.g. savings and current accounts) have been slotted into the earliest/first bucket for conservatism. Table N: Repricing Gap Position (in thousands Php) 2015 Up to 1 Month 1 to 3 Months 3 to 6 Months 6 to 12 Months Total Financial Assets Due from BSP 5,650 5,650 Due from other bank 7,373 7,373 Interbank loans receivable 7,835 7,835 Loans and receivables 1,000 28,106 6, ,037 AFS financial assets 7, ,415 21,795 29,059 6,405 8,051 65,310 Financial Liabilities Deposit liabilities: Demand 4,365 4,365 Savings 124, ,495 Time 43,914 8,039 4, ,578 Bills payable 8, , ,310 8,946 4, ,026 Repricing Gap (159,515) 20,113 2,230 7,456 (129,716) Cumulative Gap (159,515) (139,402) (137,172) (129,716) -

54 52 UCPB 2015 Annual Report 2014 Up to 1 Month 1 to 3 Months 3 to 6 Months 6 to 12 Months Total Financial Assets Due from BSP 4,200 4,200 Due from other bank 1,986 1,986 Interbank loans receivable 5,308 5,308 Loans and receivables ,442 6, ,487 AFS financial assets 8,302 1,036 9,338 18,608 27,478 6,539 2,694 55,319 Financial Liabilities Deposit liabilities: Demand 3,463 3,463 Savings 127, ,078 Time 33,688 4, ,566 40,733 Bills payable 8,783 1,115 9, ,012 5, , ,172 Repricing Gap (154,404) 21,701 5,722 1,128 (125,853) Cumulative Gap (154,404) (132,703) (126,981) (125,853) to 3 3 to 6 Up to 1 Month Months Months 6 to 12 Months Total Financial Assets Due from BSP 32, ,448 Due from other bank ,096 2,096 Interbank loans receivable Loans and receivables ,186 4, ,123 Financial assets at FVPL AFS financial assets 5, ,002 39,298 29,687 5,404 2,906 77,295 Financial Liabilities Deposit liabilities: Demand 3,125 3,125 Savings 102, ,256 Time 46,385 16,202 8, ,394 Bills payable 9, , ,638 17,055 8, ,500 Repricing Gap (122,340) 12,632 (2,661) 2,164 (110,205) Cumulative Gap (122,340) (109,708) (112,369) (110,205) - To address the negative gap, the Bank continually assesses various options such as: Lengthen duration of liabilities Shorten duration on asset and investments Implement previous strategies such as the issuance of LTNCD The Bank also monitors its exposure to fluctuations in interest rates by measuring the impact of interest rate movements on its interest income. This is done by modeling the impact and doing a sensitivity scenario analysis of various changes in interest rates to the Bank s interest-related income and expenses.

55 Risk Management 53 Table O: Impact of Changes in Interest Rates on Net Interest Income(in thousands Php) 2015 Changes in interest rates (in basis points) Change on annualized net interest income: PHP 515,891 (515,891) 208,383 (208,383) USD 72,961 (72,961) 93,807 (93,807) 588,852 (588,852) 302,190 (302,190) 2014 Changes in interest rates (in basis points) Change on annualized net interest income: PHP 36,273 (36,273) 44,624 (44,624) USD 5,272 (5,272) 7,029 (7,029) 41,545 (41,545) 51,653 (51,653) 2013 Changes in interest rates (in basis points) Change on annualized net interest income: PHP (32,108) 32,108 (71,925) 71,925 USD -14,119 14,119-21,179 21,179 (46,227) 46,227 (93,104) 93,104 Given the repricing position of the assets and liabilities of the Bank as of December 31, 2015, 2014 and 2013, if interest rates increased by 100 basis points, the Bank would expect annualized interest income to increase by P302.2 million, to increase by P51.6 million, and to decrease by P93.1 million respectively. The EaR computation is prepared monthly. Table P: Estimated Change in Equity Due to a Reasonable Possible Change in Market Prices of Quoted Bonds Classified Under AFS Financial Assets, Brought About by Movement in the Interest Rate Curve: (in thousands Php) Consolidated Impact of Changes in Interest Rates on Equity** Change on mark-tomarket gain/loss on AFS financial assets (405,332) 405,332 (810,664) 810,664 (598,865) 599,045 (1,197,559) 1,198,289 (663,010) 663,680 (1,325,470) 1,328,010 ** The impact on the Bank s equity already excludes the impact on transactions affecting the statements of income. Parent Impact of Changes in Interest Rates on Equity** Change on mark-tomarket gain/loss on AFS financial assets (284,707) 284,707 (569,414) 569,414 (595,815) 595,815 (1,191,629) 1,191,629 (654,040) 654,040 (1,308,080) 1,308,080 ** The impact on the Bank s equity already excludes the impact on transactions affecting the statements of income.

56 54 UCPB 2015 Annual Report G. FOREIGN CURRENCY RISK Foreign currency risk is the probability of loss to earnings or capital arising from changes in foreign exchange rates. The Group takes on exposure to effects of fluctuations in the current foreign currency exchange rates on its financial performance and cash flows. The Bank actively manages its exposure to effects of fluctuations in foreign currency exchange rates by maintaining foreign currency exposure within the existing regulatory guidelines. This is a level believed to be relatively conservative for a financial institution engaged in that type of business. BSP requires to match the foreign currency liabilities with the foreign currency assets held in the FCDU with a 30% liquidity reserve and 100% asset cover on all foreign currency liabilities. Table Q: Exposure to Foreign Exchange Risk, Categorized by Currency (Amounts in USD): (in thousands Php) 2015 Foreign Currencies Philippine Pesos Total Resources: Cash and other cash items 637,252 5,556,736 6,193,988 Due from BSP 45,772,123 45,772,123 Due from other banks 96,171 7,409,142 7,505,313 Interbank loans and SPURA 1,746,689 6,563,297 8,309,986 Financial assets at FVTPL 761,903 1,603,910 2,365,813 AFS financial assets 6,532,654 16,402,075 22,934,729 HTM investments 27,819,653 27,819,653 Loans and receivables 2,983, ,924, ,908,292 Statutory reserves 2,400,949 2,400,949 12,758, ,452, ,210,846 Liabilities: Deposit liabilities 15,814, ,116, ,930,606 Bills payable and SSURA 2,760,610 8,026,124 10,786,734 LTNCD 9,506,307 9,506,307 Accrued interest and other expenses 15, , ,690 Other liabilities 4,002,968 7,638,579 11,641,547 22,593, ,870, ,463, Foreign Currencies Philippine Pesos Total Resources: Cash and other cash items 618,193 6,422,907 7,041,100 Due from BSP 38,244,884 38,244,884 Due from other banks 2,030, ,323 2,165,147 Interbank loans and SPURA 5,307,804 6,001,000 11,308,804 Financial assets at FVTPL 245, , ,994 AFS financial assets 9,466,073 17,915,593 27,381,666 HTM investments 27,890,328 27,890,328 Loans and receivables 2,043, ,670, ,713,602 Statutory reserves 2,400,949 2,400,949 19,711, ,000, ,712,474 Liabilities: Deposit liabilities 16,580, ,338, ,919,000 Bills payable and SSURA 1,139,407 9,897,580 11,036,987 LTNCD 9,484,078 9,484,078 Accrued interest and other expenses 21, , ,281 Other liabilities 84,892 14,990,856 15,075,748 17,826, ,223, ,050,094

57 Risk Management Foreign Currencies Philippine Pesos Total Resources: Cash and other cash items 510,429 5,718,158 6,228,587 Due from BSP 63,667,242 63,667,242 Due from other banks 1,684,996 97,439 1,782,435 Interbank loans and SPURA 1,259,277 1,000 1,260,277 Financial assets at FVTPL 122, , ,204 AFS financial assets 11,048,026 14,906,016 25,954,042 HTM investments 27,955,913 27,955,913 Loans and receivables 8,095,389 86,491,593 94,586,982 Statutory reserves 2,400,949 2,400,949 22,720, ,922, ,642,631 Liabilities: Deposit liabilities 19,703, ,161, ,865,339 Bills payable and SSURA 1,131,127 10,724,687 11,855,814 LTNCD 9,463,973 9,463,973 Accrued interest and other expenses 19, , ,081 Other liabilities 955,493 8,588,369 9,543,862 21,809, ,522, ,332,069 Other currencies include British Pound (GBP), Euro (EUR), Japanese Yen (JPY), Australian Dollar (AUD), Singapore Dollar (SGD), Hong Kong Dollar (HKD) and Swiss Franc (CHF). H. EQUITY PRICE RISK Equity price risk is the risk of loss arising from movements in equity prices. The Bank manages its exposures to equity prices by way of position limits, VaR and stop loss limits. The BOD approves limits on the amount of potential loss that may be undertaken, which is monitored daily by the RMD and reported to the ROC. V. OPERATIONAL RISK A. Strategies, Processes, Structure and Organization, Scope/Nature of Reporting and Measurement Operational risk is defined as the risk of loss or impact resulting from human factors, inadequate or failed internal processes and systems or external events. This definition includes legal and compliance risk, but excludes strategic and reputational risk. The Bank recognizes that operational risks are inherent in its business activities and functions and seeks to keep these risks at appropriate levels. Operational risk is managed throughout the Bank with the creation of an independent operational risk management function under the Board of Directors through the Risk Oversight Committee (ROC). The function, which is supported by Operational Risk Management Department (ORMD), is responsible for establishing a risk framework, in addition to the development of policies and procedures and strategies to identify, measure, monitor, and control/mitigate operational risks.

58 56 UCPB 2015 Annual Report The business and support units as the primary risk owners are responsible for the implementation of the framework, including the day-to-day operational risk management. The Group has an existing system of internal controls that enforces operational risk management measures, including: Top level reviews by the senior management committees A system of approvals and authorizations Periodic performance and exception reports Physical controls such as restricted access Enforcement of exposure limits A system of verifications and reconciliation. ORMD utilizes a range of risk tools and methodologies in managing risks such as: 1. Operational Risk and Self-Assessment (ORSA) 2. Key Risk Indicators (KRIs) monitoring and reporting 3. Loss and risk incident management and escalation processes, 4. Risk awareness and training programs. 5. Business Continuity Plan (BCP) and Disaster Recovery Program (DRP) In addition, as part of its risk management approach, the Bank also has an existing insurance program in place to mitigate the impact of some operational risks. The results of the Bank-wide implementation of these activities/programs, including the overall risk profile, are reported and discussed with Senior Management and the Directors in the monthly ROC meetings. These methodologies and tools provide Management and the ROC with information in determining appropriate controls and mitigating measures. The Internal Audit Division further provides the independent review and challenge of the Bank s operational risk management controls, processes and systems. In 2015, the Bank continued to institute risk mitigating measures by enhancing existing anti-money laundering processes and systems that include improved monitoring and controls and risk awareness through focused AML training program. On the progress of the Operational Risk Management (ORM) System project, system acceptance has been issued and the bank-wide user training has been initiated. This is expected to further improve existing operational risk management functions once fully implemented. Other risk management-related initiatives include: Enhanced Risk and Control Self-Assessment process Implementation of the Insurance Risk and Outsourcing Risk programs Ongoing risk awareness trainings and seminars to cover various ORM programs Continuous collection and build-up of operational risk loss data in line with the future plan to move to the more advanced approaches to capital measurement.

59 Risk Management 57 These, alongside the hiring of associates to fill vacant positions, provided needed support in implementing the various ORM programs across the Bank. Information technology risks and information security issues have become progressively more complex and pressing in years. The trend in cyber attacks, intrusions, and other incidents on computer systems not only persist, but will continue to increase in frequency and spread in magnitude saw the revision and approval of various information security-related policies, guidelines, and procedures covering the following domains: Information Security Incident Management Information Systems Lifecycle Access Control Likewise, the review and revisions to the IT Risk Management Framework (ITRMF) and Information Security Key Risk Indicators (KRIs) Guidelines and Scoring Benchmark are expected to be completed this year. Further, dissemination of updates on current IT threats, trends and related circulars were continuously performed to strengthen the technology and security risk awareness of the Bank s shareholders and associates. B. Capital Measurement The Bank currently utilizes the Basic Indicator Approach (BIA) to measure the regulatory capital for operational risk. Pursuant to the BIA approach, the operational risk capital charge would be the fixed percentage of 15% of the average non-negative annual gross income for the past three years. The total operational risk-weighted assets (ORWA) would then be computed by dividing the operational risk charge by the Capital Adequacy Ratio of 10%. Table R: Three-Year Risk-Weighted Assets and Corresponding Capital Requirement: Total Risk Weighted Assets Total Risk Weighted Assets Total Risk Weighted Assets Consolidated Parent Bank Consolidated Parent Bank Consolidated Parent Bank C. Operational Risk (in million Php) (in million Php) (in million Php) (in million Php) (in million Php) (in million Php) Using Basic Indicator Approach Gross Income-Year 3 5, , , , , , Gross Income-Year 2 6, , , , , , Gross Income-Last Year 8, , , , , , Year 3 Capital Charge , , , , Year 2 Capital Charge 1, , , , , Last Year Capital Charge 1, , , , , Average Capital charge 1, , , , , Total Operational-Risk Weighted Assets 13, , , , , , Capital Requirement for Operational Risk 1, , , , , , C. Operational Risk Assessment and Profile The Bank s operational risk events have a generally low associated financial cost. In 2015, 88% of operational loss incidents had a value of P50,000 or less.

60 58 UCPB 2015 Annual Report Table S: Operational Risk Events in Terms of Impact Internal Fraud Legal Risk External Fraud Damage to Physical Assets Execution, Delivery and Process Management Compliance Risk 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% In terms of financial impact, Compliance Risk accounted for the highest proportion of losses by value at 91% mainly due to penalties for under-compliance with the required credit allocation for Micro & Small Enterprises and Agri-Agra credit. The exposure and frequency of recorded incidents for the other risk types, particularly under Internal Fraud, Legal Risk and External Fraud, remained low. Table T: Operational Risk Events in Terms of Frequency Legal Risk Internal Fraud External Fraud Damage to Physical Assets Compliance Risk Execution, Delivery and Process Management 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

61 Risk Management 59 Under Basel 2 risk and loss event classification, the highest frequency of events with losses occurred under Execution, Delivery and Process Management at 55% due to branch processing errors, mostly shortages. VI. REPUTATIONAL RISK Reputational risk refers to the impact on earnings or capital arising from negative public opinion. This risk may expose the Bank to litigation, financial loss, or a decline in its customer base. The Bank considers reputational risk a primary factor in its achievement of its business goals and eventual success. The Bank maintains limited appetite in accepting risks that may potentially damage its reputation. In this regard, it takes every measure in managing reputational risk and continuously strives to ensure that appropriate and effective corporate governance and control mechanisms are firmly in place and continuously reviewed and updated, as necessary. The Bank has established a top-down approach in managing reputational risks with the Board through the Corporate Governance Committee, providing bank-wide oversight. Issues that have the potential to materially affect the Bank s reputation are escalated to Senior Management and the Board in a timely manner. Managing reputational risk on a day-to-day basis remains the direct responsibility of the associates involved in making decisions in their respective businesses or functions. Each associate is expected to deliver and perform his/her functions consistent with the Bank s goals, values, and culture, as articulated through the Code of Conduct and supported by policies and procedures. In addition, the Bank has identified its reputational risk drivers and ensures that these are managed effectively. For other risks, the Bank defines scenarios on what could possibly affect its operations, and the possible adverse market and political developments that could evolve into negative media/publicity exposure. It has developed its Reputational Risk Management Manual (RRM) that defines reputational risks, the role of the Board of Directors, Senior Management, and Bank associates, including risk management, monitoring and reportorial procedures. Among the major risk events identified that pose considerable reputational risk for the Bank are the following: Customer complaints Legal cases Business strategies/practices Involvement of bank officers and associates on irregularities Systems failures and operational breakdowns Labor issues Anti-money laundering issues

62 60 UCPB 2015 Annual Report The Bank has established action plans and has contracted the services of a public relations consultant in detecting and addressing possible reputational issues and determining which issues can escalate into crisis events. Stories, mentions and opinions from print, broadcast and electronic media that could have a negative effect on the Bank are closely monitored and, when necessary, responded through relevant channels. All units have been instructed to immediately report rumors, negative feedback from clients and trade partners, and incidents that could attract negative media attention. External and internal communications of the Bank are centralized with its Marketing Services Department under the Marketing Group. Treasury and Branch Banking Groups keep a constant watch on liquidity and deposit levels. In 2015, UCPB was mentioned in some news reports regarding the privatization of government s stake in the Bank and the coco levy funds. The Bank issued clarificatory statements and there were no adverse effects on the Bank s operations. The Bank undertakes corporate social responsibility projects that would generate goodwill and enhance its standing in the community. It also implements a continuing program of training and work-life balance activities for its associates to enhance institutional pride, loyalty and support. VII. STRATEGIC RISK The Bank recognizes strategic risk as the failure to achieve business plans due to improper implementation of strategies that may have significant repercussions on the Bank s financial position, reputation, competitiveness or business prospects. The Board is responsible for strategic risk oversight through the Management Committee and the Strategic Planning and Analysis Division (SPAD). The functional departments and business units assist the Senior Management in strategy formulation. The risk management function is carried out through several processes that include: Identification of potential risks through business planning and scenario analysis; Monitoring of business plans and financial performance versus targets through the Asset and Liability Committee, ROC and BOD; Evaluation and feedback through the establishment of performance indicators; and Implementation of the performance evaluation system on Key Result Areas (KRAs). The main strategic risk for the Bank is to build up its capital to comply with Basel III requirements. Meantime that the Bank awaits for the approval of the President on capital call, the Bank optimizes its operating strategies in improving its capital level.

63 Risk Management 61 VIII. TRUST RISK MANAGEMENT The Trust Risk Management Unit is responsible for risk management for Trust Banking Group. In 2015, the Trust Risk Management Unit (TRMU) continued enhancements which were geared to improve accuracy and efficiency of the reports routinely sent to concerned business and oversight units. The TRMU also continued to take part in the development of the new Trust Banking System by providing risk models and methodologies needed in the business. The Unit reports to the Risk Oversight Committee and the Trust Committee monthly. In addition, TRMU continues to make improvements on its Trust Risk Manual. Finally, the Unit uses Key Risk Indicators for the Trust Banking Group in order to quantify overall risk. The bigger picture is key to the Group s ability to render decisions in managing its risks.

64 62 UCPB 2015 Annual Report Corporate Governance At UCPB, corporate governance is considered a vital component of sound strategic management in sustaining growth, stability, and success. The Bank continues to inculcate a culture of good corporate governance throughout the organization, sustain the highest standards of ethical conduct at all times, and uphold the principles of transparency, accountability and fairness in all its business relationships. In 2015, the President and Chief Compliance Officer issued a Compliance Statement which states that the Bank has consistently complied with all applicable banking laws, rules and regulations, including directives from all pertinent regulatory agencies. UCPB s revised Corporate Governance Manual promotes and institutionalizes the principles of good governance and professional practices within the UCPB Group. I. GOVERNANCE STRUCTURE BOARD OF DIRECTORS The Board of Directors is responsible for governing the business and affairs of the Bank, and for exercising all such powers pursuant to its Articles of Incorporation. While carrying out its duties and responsibilities, the Board is committed to ensuring the highest corporate governance standards by undertaking to: Provide strategic leadership to the Bank; Review and approve the Bank s annual strategic business plan, monitor its implementation, measure actual versus targeted results, and approve adjustments to the plan as may be necessary; Ensure the maintenance of an effective system of internal controls that is able to identify and manage principal risks resulting in greater efficiency in operations and a stable financial environment; Foster corporate values and ethical principles in parallel with the goal to enhance shareholders value; Monitor and evaluate the performance of the management team to ensure that the performance criteria remains dynamic; and Formulate a succession plan to ensure business continuity. BOARD COMPOSITION AND STRUCTURE Pursuant to the Bank s By-Laws, the powers of the Bank shall be vested in and exercised, its business conducted, and its property controlled by a Board of Directors composed of 15 members. It further states that: The Board of Directors shall always act in the best interest of the Bank in a manner characterized by transparency, accountability and fairness. The Board of Directors, vested with trust and confidence, shall direct and supervise the affairs of the Bank under its collective responsibility, shall exercise such powers and perform such functions as are granted to it by law or reasonably necessary to accomplish the purpose or purposes for which the Bank is formed. Twelve of the 15 members of the UCPB Board are Independent Directors. They ensure that there is effective check and balance in the functioning of the Board. They meet the criteria of independence as they are not involved in the day-to-day management of the Bank, nor do they participate in any of its business dealings. This ensures that they remain free of any conflict of interest and can undertake their roles and responsibilities in an effective manner. The UCPB Board is complemented by an advisory council composed of three members. The Board is assisted in its governance function by the Board Committees on Corporate Governance, Audit, Risk Oversight and Anti Money-Laundering Oversight. In turn, the Management oversight units, namely Compliance, Internal Audit, and Risk Management, report directly to the respective Board committees.

65 Corporate Governance 63 BOARD OF DIRECTORS COMPOSITION AND STRUCTURE Shareholders Board of Directors Board Committees Executive Audit Corporate Governance Risk Oversight Assists in the general supervision, administration and management of the Bank Ensures that the auditing, accounting, financial management principles and practices are in line with international and Philippine best practices and conform with all legislative and regulatory requirements Supports the Board in sustaining the principles of good corporate governance and high ethical standards throughout UCPB, and upholding the principles of transparency, accountability and fairness in its business engagements and relationships, and with its financial consumers Assists the Board in performing its oversight functions to manage the Bank s credit, market, interest rate, liquidity, operational, legal, compliance, strategic/financial, technology, trust risks, and reputational risks Compensation and Remuneration Trust Coconut Farmers Program Development Anti-Money Laundering Oversight Assists the Board in fulfilling its responsibilities as related to the development of criteria and goals for the Bank s compensation policy. The Committee reviews, evaluates and recommends to the Board the benefit plans and compensation policy for the Bank and whollyowned subsidiaries Manages the Bank s trust and fiduciary activities Supports and assists in the development and implementation of impact projects beneficial to the small and marginalized coconut farmers Oversees compliance with antimoney laundering laws, rules and regulations; sets policies, institutional directions and operational mechanisms in pursuing UCPB s commitment to support the global efforts in combatting money laundering and terrorist financing Legal Oversight Related Party Transactions Recommends to the Board policies and guidelines in case management including the adoption of legal strategies in important cases for or against the Bank. The Committee shall render oversight in the monitoring, supervision and handling of cases by the Bank s external counsels, as well as by its internal lawyers Provides oversight and institutes effective control systems in managing UCPB s transactions that are significantly related to any of the Bank s affiliated or controlled entities, stockholders, directors, officers and associates

66 64 UCPB 2015 Annual Report QUALIFICATIONS AND TRAINING As the governing body of a major financial provider, the Board recognizes that its Members must have the appropriate skill set, as well as the necessary experience and commitment, to effectively contribute towards the growth and expansion of the Bank. Being on the Board of a financial institution, Board Members are expected to be responsive to the constantly changing global financial landscape. Directors attend an orientation program, as well as corporate governance seminars conducted by accredited government or private institutions prior to, or at least immediately after, assumption of office. In 2015, each of the Board Members attended the following training programs: Planning Conference: Significance of Partnership and Teamwork, conducted by Mr. Rex Mendoza; Economic Briefing: Economic Outlook and its Impact to the Philippines, conducted by Mr. Shanaka Jayanath Peiris, IMF Philippine Resident Representative; and Briefing on the U.S. Foreign Account Tax Compliance Act, conducted by SGV. In addition, the Board Members are provided continuous briefings on market trends and developments, the Philippine and global economic outlook, anti-money laundering initiatives, Bangko Sentral ng Pilipinas circulars, and other banking-related matters. PERFORMANCE EVALUATION Consistent with the principles of good corporate governance, the Board conducts an annual self-assessment of its performance as a body. The process involves numerical rating of key components of the Board --- the Board of Directors (25%), the Chairman (10%), the Directors of the Board (15%), Board meetings (25%), and Board Committees and Issues (25%); based on each Director s personal evaluation of specific corporate governance mechanisms and practices. Overall, the Board s self-rating in 2015 indicates full compliance with the best practices in corporate governance. The Board also conducts an annual evaluation of the performance of the President and CEO against established performance targets, for which the Board meets separately at least once a year (without the presence of the President and CEO and other executive directors). Additionally, the Board reviews regular management reports and information on corporate and business issues to assess the Bank s performance against business targets and objectives. BOARD MEETINGS AND DIRECTORS ATTENDANCE The Board holds regular monthly meetings on the last Thursday of each month to discuss business strategies, financial performance, matters pertaining to compliance and governance, as well as reports on matters deliberated by Board Committees and their recommendations. It likewise holds special meetings to discuss developments or issues that require expeditious action in between the scheduled regular meetings. In 2015, the Board held 12 Regular Meetings (11 of which were on the scheduled date of the meeting) and 2 Special Meetings, for a total of 14 Board meetings.

67 Corporate Governance Board Meetings Date of Meeting Total Board of Directors Mr. Menardo R. Jimenez P P P P P P A P P P P A P P 12 Mr. Jeronimo U. Kilayko P P P P P P P P P P P P P P* 14 Datu Mao K. Andong, Jr. P P P P P P P P P P P P P P 14 Mr. Jesus L. Arranza P P P P P P P P P P P P P P 14 Mr. Arthur A. Bautista P P P P P P P P P P P P P P 14 Atty. Nilo T. Divina P P P P P P P A P P P P P P 13 Atty. Karlo Marco P. Estavillo P P P P P P P P A P P P P P 13 Atty. Primitivo Y. Garcia, III P P P P P P P P P P P P P P 14 Mr. Higinio O. Macadaeg, Jr. P A P P P P P P A P P P P P 12 Mr. Roberto M. Macasaet, Jr. P P P P P A A P P P P P P P 12 Mr. Danilo V. Pulido P P P P P P P P P P P P P P 14 Ms. Imelda S. Singzon P P P P P P P P P P P P P P 14 Mr. Oscar C. Solidor P P A P P P P P P P A P P P 12 Mr. Efren M. Villaseñor P P P P P P P P P P P P P P 14 Mr. John M. Young P P P A P A P P P P P P P P 12 Advisory Council Atty. J. Andres D. Bautista* P P P P P 5 Ms. Cristina Q. Orbeta P P P P A P A P P A P P P P 13 Atty. Richard R. T. Amurao P P P P P P P P P P P A P P 11 Atty. Jovencito R. Zuño P P P P P P P P P P P P P P 14 *resigned from the Board effective May 4, 2015 Legend: P Present A Absent P* During the first part of the Board meeting, the Board of Directors met without the President and CEO to conduct an annual evaluation of his performance.

68 66 UCPB 2015 Annual Report Board meetings are carried out systematically and strategically, with the Chairman of the Board engaging all the Directors and ensuring their active participation in the discussions and deliberations. Attendance rate in all meetings has been satisfactory, with an average of 90% of the Directors in attendance in the 14 Board meetings held in BOARD MATERIALS Agenda folders or Board papers are distributed to the members of the Board and the Advisers at least five days before a scheduled meeting. BOARD COMMITTEES The Board also functions through committees that handle specific responsibilities. Assisting the Board in its governance task are the Corporate Governance, Audit, Risk Oversight, and Anti-Money Laundering Oversight Committees. In turn, the Management oversight units, namely, Compliance, Internal Audit, and Risk Management, report directly to the respective Board Committees. The following are the Board Committees with their specific membership: Executive Committee Assists in the general supervision, administration and management of the Bank. It is composed of four members of the Board of Directors, including the President and CEO. The Committee also reviews, considers and approves credit proposals within its approving authority. It formulates recommendations to the Board, for consideration and approval, relating to strategies, credit and debt restructuring, borrowings and expenditures, acquisition and disposal of key assets, issuance of and investment in securities, technology and operational concerns, changes to organization and key management, changes to policies, manuals and bank regulations, and other matters requiring Board approval which are not within the purview of other Board Committees. All actions taken by the Committee are reported to the Board of Directors, and are subject to revision or alteration, provided that rights of third parties are not affected or prejudiced thereby. The Executive Committee held 42 regular meetings in Member Name Meetings Attended Jeronimo U. Kilayko, Chairman 36 Jesus L. Arranza 38 Arthur A. Bautista 40 Primitivo Y. Garcia III 42 Cristina Q. Orbeta, Adviser 35 Audit Committee The Bank gives primary importance to the orderly conduct of business with strong emphasis on observance of policies and procedures. To support this objective, the Internal Audit Division (IAD) aligns its audit plan with the Bank s strategic thrusts. The audit processes are focused on the key risk areas identified in coordination with Risk Management Division and the business units. The Board Audit Committee ensures the proper implementation of the audit processes in a manner that generally conforms to the Institute of Internal Auditors definition of the Profession, the Code of Ethics, and the International Standards for the Professional Practice of Internal Auditing. The Internal Audit Division, which reports directly to the Audit Committee, provides independent and objective assurance and advisory services to the Bank. The Audit Committee held 54 meetings in 2015, of which 45 were regular and nine were special meetings. Member Name Meetings Attended Arthur A. Bautista, Chairman up to June 19, Imelda S. Singzon, Chairperson effective June 26, Member up to June 19, Karlo Marco P. Estavillo 45 Roberto M. Macasaet, Jr. 50 Danilo V. Pulido 51 Cristina Q. Orbeta, Adviser 46

69 Corporate Governance 67 The Audit Committee provides assistance to the Board of Directors in reviewing the assurance reports of the Internal Audit Division (IAD) covering the results of assessment on the adequacy and effectiveness of internal controls, risk management, and governance processes; and in overseeing the financial reporting and financial management processes, the systems of internal accounting and financial controls, the performance and independence of the external and internal auditor, and the annual independent audit of the Bank s financial statement. The Audit Committee reviews and approves the IAD annual audit plan, the risk assessment of units/activities that will form part of the audit universe, as well as IAD s financial budget / resources. It also provides oversight on the completion of audit activities based on the approved annual audit plan. In 2015, the Audit Committee, giving emphasis to regulatory compliance, governance, risk management, business operations, and human resources, discussed 249 various internal audit reports covering the following, among others: Know Your Client (KYC)/Anti-Money Laundering Act (AMLA) requirements; IT processes, systems, and information security; Risk management tools and processes; Credit processes; Treasury and Trust processes; and Certain accounts and transactions considering their risk impact to the Bank. As a matter of procedure, business units are invited, as necessary, to discuss plans of actions in the management of business risks, as well as in meeting compliance requirements of policies and regulations. This is to encourage Management and auditees to view audit as a means to improve their processes and accomplish the Bank s objectives. On financial reporting, the Audit Committee reviewed the 2015 quarterly reports to the Board of Directors and assessed the independence and scope of work of Punongbayan & Araullo (Grant Thornton), the Bank s external auditor in The Audit Committee evaluated the completeness and fairness of UCPB s and Trust Banking Group s Audited Financial Statements, and the adequacy and correctness of disclosures prior to presentation and approval by the Board of Directors. In carrying out its mandate, the Audit Committee ensures the independence and integrity of the internal audit activity with due regard to the explanations and circumstances cited by the auditees. To measure performance of auditees (in terms of internal control, risk management, and governance), an audit rating system has been adopted. Audit ratings are also used for purposes of incentive awards, performance appraisal and promotions of associates. The importance of the audit processes is also underscored by the involvement of the auditees, where those with failed ratings attend the Audit Committee meetings to explain and commit to improve their performance, while those with outstanding ratings share their actions and strategies in managing their units to be emulated by others. The Audit Committee applies the following approaches of deterrence and addressing process gaps: Promotes value of ethics by instilling consciousness in proper observance of policies; in strengthening of training; and in recognizing the importance of compliance with policies through the performance rating system. Recommends for approval of the Board of Directors enhancements to policy guidelines based on the reports of the Internal Audit Division, as well as those noted during the examinations by the Bangko Sentral ng Pilipinas and the Philippine Deposit Insurance Corporation. Refers significant issues to the President and CEO for appropriate action and disposition. The Audit Committee s evaluation of the Bank s internal control and risk management framework is an ongoing activity. The Audit Committee believes that mechanisms are generally in place to achieve UCPB s business objectives in accordance with acceptable banking practices. This is based on reports provided by Internal Audit, information from

70 68 UCPB 2015 Annual Report Management, and the opinion of the external auditor on the Bank s financial statements. Internal control and risk management are further strengthened with the Board of Directors approval / notation of Audit Committee recommendations arising from the periodic review of Internal Audit, and Management reports, and consultations with the Bank s frontline and support units. As recommended by the Audit Committee, the organizational structure of Internal Audit was enhanced through the creation of the Special Engagement Audit Department, and of an additional Branch Audit Services Department. This is to further strengthen the audit function and to enable IAD to respond to unprogrammed audit engagements. The Audit Committee supports the continuing education of the associates of the Internal Audit Division through training, seminars, and professional certifications. As oversight to the Chief Audit Executive (CAE), the Committee is responsible for approving decisions regarding the appointment, replacement/dismissal, performance appraisal, annual compensation and salary adjustment of the CAE*. *Revised as approved during the meeting of the Board of Directors on April 28, The Audit Committee is responsible for recommending for approval of the Board of Directors, the appointment, reappointment, or replacement / dismissal of the Chief Audit Executive. Any action taken by the Audit Committee in the exercise of this function shall be done in coordination with the Human Resources Group Matters pertaining to compensation, promotion, bonuses and performance appraisal of internal audit personnel shall be in accordance with the Bank s Performance Management System / remuneration policy. In line with BSP Circular 871 issued on March 5, 2015, the Audit Committee meets with the respective Chief Audit Executives (CAEs) of the Bank s subsidiaries to discuss matters concerning the status of audit activities in the subsidiaries and to improve coordination of the audit function with the parent bank. The Audit Committee sees to it that the principles and practices of the internal audit function are in line with international and Philippine best practices and conform to regulatory requirements. In compliance with the International Professional Practices Framework, IAD confirms to the Board of Directors, through the Audit Committee, the organizational independence of IAD. The integrity of the Bank s audit activities has been vetted by the Institute of the Internal Auditors (IIA) to be in general conformity with the IIA definition of the Profession, the Code of Ethics, and the International Standards for the Professional Practice of Internal Auditing. Anti-Money Laundering (AML) Oversight Committee The Committee is primarily responsible for overseeing the Bank s compliance with Philippine anti-money laundering laws, rules and regulations, and applicable global practices; and ensures that related bank policies, systems and procedures are appropriate, and the required expertise are adequate for this purpose. The AML Oversight Committee held 13 regular meetings in Member Name Meetings Attended Primitivo Y. Garcia III, Chairman 13 Arthur A. Bautista 12 Nilo T. Divina 11 Karlo Marco P. Estavillo 9 Roberto M. Macasaet, Jr. 11 Danilo V. Pulido 13 Imelda S. Singzon 12 Richard T. Amurao, Adviser 4 Cristina Q. Orbeta, Adviser 11 Jovencito R. Zuño, Adviser 12

71 Corporate Governance 69 Coconut Farmers Program Development Committee Supports and assists in the development and implementation of impact projects beneficial to the small and marginalized coconut farmers. The Committee also coordinates with government agencies, accredited cooperatives, farmers groups and other private sectors in securing management funding and assistance for the establishment of feasible development programs for the coconut farming industry. The Coconut Farmers Program Development Committee held 11 meetings in Member Name Meetings Attended Efren M. Villaseñor, Chairman 11 Jeronimo U. Kilayko 9 Mao K. Andong, Jr. 11 Jesus L. Arranza 11 Karlo Marco P. Estavillo 11 Higinio O. Macadaeg, Jr. 0 Roberto M. Macasaet, Jr. 10 Oscar C. Solidor 9 J. Andres D. Bautista, Adviser* 5 Richard T. Amurao, Adviser 9 Jovencito R. Zuño, Adviser 9 *resigned from the Board effective May 4, 2015 Compensation and Remuneration Committee The Committee reviews, evaluates and recommends to the Board the benefit plans and compensation policy for the Bank and wholly owned subsidiaries. The Compensation and Remuneration Committee held 3 meetings in In 2015, the Committee approved adjustments in employee benefits including salary adjustment for non-officers, annual merit increase, and increase in financial assistance, clothing allowance and rice subsidy. Member Name Meetings Attended Menardo R. Jimenez, Chairman 3 Jeronimo U. Kilayko 3 Karlo Marco P. Estavillo 3 Primitivo Y. Garcia III 3 John Y. Young 3 Cristina Q. Orbeta, Adviser 0 Corporate Governance Committee Assists the Board in promoting the principles of good corporate governance transparency, accountability and fairness in the conduct of UCPB s business engagements and consumer relationships and those of the UCPB Group. The Committee recommends to the Board policies and improvement that are consistent with the regulations and directives of the BSP, the Securities and Exchange Commission, and the Philippine Stock Exchange, and other pertinent regulatory bodies, as well as internationally recognized industry practices. The Committee nominates the composition and chairmanship of various Board committees, and recommends enhancement of the respective charters, and oversees the conduct of a periodic performance evaluation of the Board, its members, and various Committees. In coordination with the Bank Compliance Division, the Committee pursues the continuing education of the Board members in consideration of required training as Directors and their respective memberships in Board committees. The Corporate Governance Committee held 10 regular meetings in Member Name Meetings Attended Danilo V. Pulido, Chairman 10 Jeronimo U. Kilayko 9 Mao K. Andong, Jr. 10 Jesus L. Arranza 9 Nilo T. Divina 9 Richard T. Amurao, Adviser 2 Cristina Q. Orbeta, Adviser 7

72 70 UCPB 2015 Annual Report Legal Oversight Committee Recommends to the Board policies and guidelines in legal case management, including the adoption of legal strategies in important cases for or against the Bank. It also renders oversight in the monitoring, supervision and handling of cases by the Bank s external counsels, as well as by its internal lawyers. The Legal Oversight Committee held 11 regular meetings in Member Name Meetings Attended Jesus L. Arranza 11 Nilo T. Divina 8 Karlo Marco P. Estavillo 10 Primitivo Y. Garcia III 11 J. Andres D. Bautista, Adviser* 4 Richard T. Amurao, Adviser 7 Jovencito R. Zuño, Adviser 10 *resigned from the Board effective May 4, 2015 Related Party Transactions Committee The Committee assists the Board in ensuring that direct and indirect non-credit transactions with related parties are handled in sound and prudent manner, at arm s-length, with transparency and integrity, and in compliance with applicable laws and regulations. Recognizing the importance of strengthening the Bank s corporate governance, a Related Party Transactions policy has been adopted by the Bank, consistent with BSP Circular No It expands the scope of coverage not only to loan transactions, but also investments, purchase or sale of goods, properties and other assets, rendering or receiving services, agency arrangements, leasing arrangements, transfer of technology, fund transfers and guarantees. The Committee oversees intra-group transactions between the Bank, its employees, subsidiaries and affiliated entities, including special purpose entities, and other entities that the Bank controls or have control over the Bank. The RPT Committee held 3 meetings in Member Name Meetings Attended Arthur A. Bautista, Chairman 3 Primitivo Y. Garcia III 3 Roberto M. Macasaet, Jr. 3 Risk Oversight Committee Primarily responsible for the development of the risk policies and oversight of the risk management program of the Bank, its subsidiaries, and its trust unit. It is composed of five Board members who possess varied range of knowledge and expertise in the Bank s risk exposures, its management and/ or avoidance. The Committee is also responsible for the development of the appropriate strategies in identifying, quantifying, managing, and controlling risk exposures, including preventing and/or minimizing the impact of losses as they occur. It oversees the implementation and review of the Bank s risk management system on an integrated enterprisewide basis to ensure that it remains effective, authority limits are observed, and immediate corrective actions are taken whenever limits are breached or risk events occur. It also develops and implements a written plan defining the strategies for managing and controlling the major risks. In 2015, the following were endorsed by the Risk Oversight Committee and consequently approved by the Board of Directors: Review of Risk Oversight Committee Charter Review of ICAAP Charter

73 Corporate Governance 71 Review of CAR Risk Calculator GAP Analysis BSP Cir. 855 vs. Existing Practice and Proposed Plan Amendment of the Credit Risk Policy Amendment of Internal Credit Risk Rating System Amendment of Stress Testing Guidelines Amendment of Key Credit Risk Indicator 2015 Market Risk Limits and Monitoring Review of Liquidity Risk Limits Maximum Cumulative Outflow Amendment of Market Risk Manual - Procedural Guidelines on Market Stress Testing Amendment of Market Risk Manual Policy on Breaches in Value-at-Risk Amendment of Market Risk Manual Preparation, Review And Approval of MCO & EAR Reports Amendment of Market Risk Manual - Contingency Funding Plan Amendment of Market Risk Manual Marking-to-Market Amendment of Market Risk Manual - VaR Procedure Amendment of Market Risk Manual Earnings-At-Risk Amendment of Market Risk Manual Maximum Cumulative Outflow Amendment of MCO and Earnings-At-Risk Assumptions Review of Key Market Risk Indicators Review of Market Risk Policy on Product Development, Implementation, and Revisions Review of Policy on Credit Monitoring of Treasury Investments 2015 Operational KRI and Loss Event Reporting Guidelines Business Specific Operational Risk Indicators (BS-ORIs) Guidelines Revised Operational Risk Self-Assessment (ORSA) Guidelines Amendment of the Key Risk Indicator AML Compliance Risk Revised Disaster Recovery Contingency Plan (DRCP) Manual Revised Operational Risk Self-Assessment Guidelines Operational Risk & Loss Data Collection Guidelines Revised Suspicious Transaction Reports (STR) Risk Sub-Indicator Operational Risk Management Training Program Information Security Management (ISM) Charter Ver. 3.0 Revised IS KRI Guidelines and Scoring Benchmark 2015 Trust Risk Limits and Monitoring Amendment of the Trust Risk Management Framework (RCSA to ORSA) Amendment of Trust Risk Manual Policy on Stop Loss Limit Amendment of Trust Risk Limits and Monitoring Stop Loss Amendment of Trust Risk Manual Credit Concentration Amendment of Procedural Guideline for ORSA Implementing Guidelines of Key Trust Risk Indicator Review of Key Trust Risk Indicator The Risk Oversight Committee held 11 meetings in Member Name Meetings Attended Menardo R. Jimenez, Chairman 10 Jeronimo U. Kilayko 11 Arthur A. Bautista* 6 Imelda S. Singzon 11 Oscar S. Solidor 2 Roberto M. Macasaet, Jr.** 4 Andres D. Bautista, Adviser*** 4 Cristina Q. Orbeta, Adviser 9 *resigned from ROC effective June 25, 2015 **appointed to ROC effective June 25, 2015 ***resigned from the Board effective May 4, 2015

74 72 UCPB 2015 Annual Report Trust Committee Manages the Bank s trust and fiduciary activities. It reviews and approves transactions between trust and/ or fiduciary accounts, the investment; reinvestment and disposition of funds or property, offering of new products and services; establishment and renewal of lines and limits with financial institutions, investment outlets and counterparties; and accepts and closes trust/other fiduciary accounts. In compliance with Sec. X of the MORB, no member of the Trust Committee sits concurrently as a member of the Audit Committee. The Committee consists of four members of the Board, including the Chairman and the President and CEO, and the Trust Officer. The Trust Committee held 11 meetings in Member Name Meetings Attended Menardo R. Jimenez, Chairman 11 Jeronimo U. Kilayko 11 Arthur A. Bautista, non-voting member* 4 Nilo T. Divina 5 Efren M. Villaseñor 11 J. Andres D. Bautista, Adviser** 5 Richard T. Amurao, Adviser 7 Cristina Q. Orbeta, Adviser 8 *appointed to the Trust committee effective June 25, 2015 ** resigned from the Board effective May 4, 2015 II. GOVERNANCE POLICIES AND MECHANISMS Among the policies of the Bank are the following: CUSTOMER WELFARE Customer welfare remains at the heart of our business. UCPB recognizes that more than offering innovative products, competitive rates, and wide network, clients need something more worthwhile - personal and proactive service. To ensure customer satisfaction, the Bank s Customer Relations Center was established. The unit handles the specific needs of different segments of the Bank s customer base with a sense of urgency to immediately respond to customers complaints, inquiries, and requests for assistance. The unit also monitors the satisfaction level and service gaps through surveys conducted from existing clients. The result of the surveys and feedback from customer engagement are disseminated to different bank units to help them in its service improvement efforts. ENVIRONMENTAL INITIATIVES The Bank promotes sustainable development through its 5S program which not only implements a safe, clean and wellorganized workplace but also corrects and eliminates waste which contributes to environmental conservation. The Bank practices energy conservation after it changed the lighting fixtures at the Head Office and branches to energy-saving lighting bulbs. It also recycles paper to help

75 Corporate Governance 73 save trees, and keeps close watch of its office inventory to eliminate wastefulness. The Bank also supports renewable energy initiatives which is friendlier to the environment by funding/ co-funding solar power generation projects. RELATED PARTY TRANSACTIONS The Related Party Transactions Committee oversees intra-group transactions between the Bank, its employees and entities that the Bank controls or exercise control over it. POLICY ON CONFLICT OF INTEREST Directors and officers must be loyal to the Bank at all times. They shall not directly or indirectly derive any personal and/or business profit or advantage by reason of their position in the Bank. The interest of the Bank must be promoted in all instances, and personal and business interests of Directors and officers should never prevail over it. They must also promote the common interest of all shareholders and the Bank without any regard for their own personal interest. PERSONAL INVESTMENT POLICY Associates of the UCPB Group may purchase and sell investments for their personal or family accounts and risk as long as these transactions are consistent with applicable laws and regulations. All investment decisions must be based solely upon publicly available information. Care should be exercised to avoid any conflict of interest or appearance of conflict with the activities of UCPB or its subsidiaries. As of December 31, 2015, total exposure of UCPB to related group of entities amounted to P92,206,430, Related Party Transactions as of December 31, 2015: Equity Investments 22,146,119, Investments in Government & Private Securities 99,261, Dividends Receivable 993,755, Loans & Receivables 1,153,113, Capital Account (Shareholder s Equity) 734,121, Trust Placements (Contingent) 67,080,058, Total 92,206,430, Associates in the UCPB Trust Banking Group, Treasury Banking Group, Corporate and Consumer Banking Group, UCPB Securities and all other units in the bank with similar business operations are covered by this Policy.

76 74 UCPB 2015 Annual Report UCPB ORGANIZATIONAL STRUCTURE As of March 2016 Board of Directors Office of the Corporate Secretary Trust Committee Audit Committee Risk Management Committee Executive Committee President & CEO Jeronimo U. Kilayko Trust Banking Group Internal Audit Division Risk Management Division UCPB Securities, Inc. UCPB Savings Bank UCPB Leasing and Finance Corporation Branch Banking Group Corporate & Consumer Banking Group Treasury Banking Group Operations Group

77 Corporate Governance 75 Corporate Governance Committee Anti-Money Laundering Oversight Committee Related Party Transactions Committee Compensation & Remuneration Committee Coconut Farmers Program Development Committee Legal Oversight Committee Bank Compliance Division Corporate Services Division Conglomerate Security Support Services Group Human Resources Group Legal Services Group Information Technology & Methods Group Marketing Group

78 76 UCPB 2015 Annual Report REMUNERATION AND INCENTIVE POLICY Incentive Program Description Compensation and Benefits UCPB provides rewarding careers by maintaining competitive compensation and benefits program for employees. The remuneration policy of UCPB applies to all employees, including its Senior Officers. The relative value of each job and corresponding pay levels are determined by a competency-based job evaluation system. Employees, including Senior Officers, receive annual merit increases based on a targets-based performance management system. HRG regularly reviews compensation policies and recommends changes through the Compensation and Remuneration Committee for endorsement to the Board of Directors for approval. On top of the salaries, UCPB employees, including its Senior Officers, also enjoy other compensation and benefits: Bonuses up to the 14th month for officers, and up to 15th month for rank-and-file employees Overtime pay Leaves (Vacation, Sick, Maternity, Paternity, Solo-Parent and Special Leave for Women) Medical benefits (Hospitalization and out-patient benefits for employees and dependents Financial Assistance Loans at affordable terms and other minor subsidies Retirement benefits, based on tenure and salary to provide financial security long after the employees dedicated service to the bank. For Senior Officers, additional benefits are given in the form of wellness allowance, and allowances for car repair/maintenance and gasoline. For the Bank s sales force, cash-based incentive programs are in place to reward those who exceed the quarterly and annual targets set by the Bank. Below is a summary of the incentive programs of the Bank: CASA Incentive Quarterly and annual incentive given to branches that exceed their CASA targets Fee Incentive Quarterly and annual incentive given to branches that exceed their fee targets Consumer Quarterly and annual incentive given to Banking branches and Consumer Banking associates that exceed their target for consumer loan products Treasury Quarterly and annual incentive given to branches and Treasury Banking associates that exceed their target for consumer loan products Trust Quarterly and annual incentive given to branches and Trust Banking associates that exceed their target for consumer loan products Customer Annual award given to branches, regions and Service head office units that receive the highest ratings in external customer surveys Service Annual award given to Bank units that receive Effectiveness the highest ratings in internal customer survey These incentive programs are reviewed and approved annually by the Management. CODE OF CONDUCT UCPB and its subsidiaries collectively called the UCPB Group (Group), is a financial services organization serving individuals, small and medium-sized enterprises, middle market companies, large foreign and domestic corporations, government agencies and other financial institutions across the country. As a financial services provider, the UCPB Group is engaged in a business vested with public trust. The UCPB Group is keenly aware that its relationships with its customers are founded on confidence. Any loss or even a slight erosion of customer confidence, however momentarily, not only impairs its ability to grow but also endangers its very existence. At all times therefore, the UCPB Group seeks to safeguard its reputation and protect

79 Corporate Governance 77 its integrity. It conducts its operation with transparency and in strict compliance with the law and regulatory requirements. All UCPB Group associates are expected to live up to these same stringent standards both inside and outside the workplace. As representatives of the institution, they carry the name of UCPB. Every action they take reflects on the entire institution. All employees are given a copy of the Code of Conduct and their compliance is monitored through the Annual Performance Management System of the Bank. The UCPB Group Code of Conduct serves as guide to the associates in their dealings with customers, trade partners, colleagues and the general public. It lays down the norms of conduct in accordance with UCPB Group s core values of fairness, accountability and transparency. COMPLIANCE SYSTEM UCPB is firmly committed to full compliance with applicable Philippine banking laws, rules and regulations and appropriate adherence to global standards. The Board has ultimate responsibility for setting and directing the Bank s compliance policy, overseeing implementation of its compliance program, and resolving compliance issues expeditiously and effectively. The Senior Management is directly responsible for managing bank compliance by: continuously assessing compliance effectiveness and appropriateness recommending changes in the Bank s compliance policy, as necessary taking immediate and appropriate mitigants and/or corrective actions if and when breaches occur. The compliance function is a shared responsibility among the Risk Management Division, the Internal Audit Division and the Bank Compliance Division. UCPB maintains a comprehensive Compliance Program reasonably designed to cover: Regulatory compliance risk management in the prevention and mitigation of failure to comply with banking laws, rules and regulations; Corporate governance risk management in upholding high ethical standards of business conduct; and Reputation risk management in sustaining UCPB s good market standing and public trust. The UCPB Compliance Program includes the Bank s Money Laundering and Terrorist Financing Prevention Program (MLPP) that manifests its commitment to ensure strict compliance with the Philippine Anti-Money Laundering Act as revised, and applicable international laws, prohibitions and restrictions. The MLPP provides for a risk-based approach to customer identification, gathering Know-Your-Customer information, due diligence and enhanced due diligence, assessment measures, internal controls, systems and procedures, record keeping and accountabilities. UCPB maintains a certified automated system that enables its business units to accurately and efficiently monitor customer accounts and transactions, and report unusual or potentially suspicious activities. AUDIT SYSTEM The Internal Audit Division is an independent unit that reports directly to the Board through the Board Audit Committee. The internal audit structure and processes are aimed at providing a reasonable assurance on the Bank s system of risk management, internal controls and governance processes, as well as ensuring that operating and business units adhere to internal processes and procedures and to regulatory and legal requirements. The independent review and assessment conducted by the Institute of Internal Auditors in 2013 showed that the Bank s internal audit structure and processes Generally Conforms with the International Standards for the Professional Practice of Internal Auditing (ISPPIA). As provided in the Standards, the evaluation is to be undertaken every five (5) years.

80 78 UCPB 2015 Annual Report Board of of Directors MENARDO R. JIMENEZ Chairman of the Board of Directors JERONIMO U. KILAYKO Director, President and Chief Executive Officer DATU MAO K. ANDONG, JR. Director JESUS L. ARRANZA Director HIGINIO O. MACADAEG, JR. Director ROBERTO M. MACASAET, JR. Director DANILO V. PULIDO Director IMELDA S. SINGZON Director

81 Board of Directors 79 ARTHUR A. BAUTISTA Director ATTY. NILO T. DIVINA Director ATTY. KARLO MARCO P. ESTAVILLO Director ATTY. PRIMITIVO Y. GARCIA III Director OSCAR C. SOLIDOR Director EFREN M. VILLASEÑOR Director JOHN M. YOUNG Director ILDEFONSO R. JIMENEZ Corporate Secretary

82 80 UCPB 2015 Annual Report Board of Directors Profile MENARDO R. JIMENEZ Chairman of the Board of Directors Age: 83 years old Date of Appointment: March 8, 2011 Chairman And Director Casa Europa, Inc. CBTL Holdings, Inc. Meedson Properties Corporation Modesto Philippines, Inc. Nuvoland Philippines Inc. Casa Europa, Inc. The Table Group, Inc. Chairman Dasoland Holdings, Inc. Majent Management & Development Corporation Menarco Holdings, Inc. Television International Corporation Director CMG Solutions, Inc. Magnolia Inc. Next Century Building Systems, Inc. San Miguel Corporation San Miguel Purefoods Company, Inc. Unicapital Equitable Ventures, Inc. Unicapital Finance and Investments, Inc. Unicapital Incorporated Member Of The Board Of Trustees Foundation for Crime Prevention Teodoro F. Valencia Foundation, Inc. Commissioner Patrol 117 Commission Member FEU Alumni Foundation, Inc. Manila Overseas Press Club National Prayer Breakfast Foundation, Inc. Philippine Chamber of Commerce & Industry Philippine Institute of Certified Public Accountants Philippine Constitution Association Former President and CEO GMA Network, Inc. Doctorate in Business Management (Honoris Causa) University of Pangasinan Pamantasan ng Lungsod ng Maynila Doctorate in Communications (Honoris Causa) Polytechnic University of the Philippines Bachelor of Science In Commerce Far Eastern University JERONIMO U. KILAYKO Director, President and Chief Executive Officer Age: 68 years old Date of Appointment: November 6, 2011 Chairman UCPB Savings Bank UCPB Leasing and Finance Corporation UCPB Securities, Inc. United Foreign Exchange Corporation Board and Exco Chairman Asean Finance Corporation Singapore Vice Chairman UCPB CIIF Finance and UCPB Foundation Director United Coconut Chemicals, Inc. 14 holding companies President K5 Distribution Treasurer Operation Smile, Philippines Former Director and Vice Chairman Bank of Commerce Former Director and President Central Visayas Finance Corporation Former Chairman and Chief Executive Officer UCPB

83 Board of Directors Profile 81 CIIF Oil Mills UCPB General Insurance Co. Inc. United Coconut Planters Life Assurance Corporation United Coconut Chemicals, Inc. Former Director and President San Miguel Properties, Inc. Held Various Executive Positions IBI Asia Merrill Lynch Bank of America Land Bank of the Philippines Bachelor of Science In Liberal Arts and Commerce De La Salle University DATU MAO K. ANDONG, JR. Director Age: 65 years old Date of Appointment: November 25, 2005 National Chairman Kaunlaran ng mga Magsasaka at Manggagawa ng Pilipinas (KAMMPIL) Chairman South & West Mindanao Coconut Farmers Congress (SOWESMINCOCO) Director Kaunlaran Magsasaka, Inc. (KMI) National President Coconut Peasants Reform Alliance (COPRA) Vice President Mindanao Pambansang Koalisyon ng mga Samahan ng Magsasaka at Manggagawa sa Niyugan (PKSMMN) Council Member Confederation of Coconut Farmers Organization of the Philippines Held Various Executive Positions In Government Bachelor of Arts In Economics Gregorio Araneta University Foundation JESUS L. ARRANZA Director Age: 74 years old Date of Appointment: April 25, 2013 Chairman Federation of Philippine Industries Anti-Smuggling Committee Coconut Oil Refiners Association Fight Illicit Trade (FIGHT-iT) Independent Director Philippine Electricity Market Corporation (PEMC) Consultant Dangerous Drugs Board National Bureau of Investigation Host and Radio Commentator Dito sa Bayan ni Juan DZAR 1026 Founding Chairman ASEAN Vegetable Oils Club Former Chairman United Coconut Association of the Philippines Former Director UCPB CIIF Foundation UCPB CIIF Finance Corporation Former President and Chief Executive Officer CIIF Oil Mills Group Former Professor University of the East Graduate School for Public Administration Held Executive Positions International Oil Factory Doctor of Humanities (Honoris Causa) University of the East Master in Public Administration University of the East Bachelor Of Arts In Economics University of the East

84 82 UCPB 2015 Annual Report Board of Directors Profile ARTHUR A. BAUTISTA Director Age: 66 years old Date of Appointment: March 8, 2011 Chairman of the Board, President and Chief Executive Officer Timebound Trading, Inc. Savoy Watches President and Founder Kuya s at the Fort Kuya s at Quezon City Jed and Julian s Former President and Founder First Federal Consultants Corporation Sorbetes Pinoy Senior Executive Positions Bank of the Philippine Islands Citytrust Banking Corporation Financial Transaction Corporation, USA Fil-Pride Philippines Candidate, Masters in Business Administration De La Salle Graduate School of Business Bachelor Of Science In Business Administration De La Salle University Held Senior Executive Positions Equitable-PCI Bank Philippine Charity Sweepstakes Office Recipient 2005 Most Outstanding Male Faculty Award Finalist Search for the Ten Most Outstanding Students of the Philippines Awardee Manuel Luis Quezon Award for Exemplary Leadership, University of Santo Tomas Dean, Law Professor and Bar Reviewer University of Santo Tomas Rector s Awardee For Academic Excellence University of Santo Tomas Member Philippine Bar Association International Tax Law Post-Graduate Diploma Robert Kennedy College, Switzerland Bachelor Of Laws (Magna Cum Laude) University of Santo Tomas Bachelor of Arts in Behavioral Science (Cum Laude) University of Santo Tomas ATTY. NILO T. DIVINA Director Age: 51 years old Date of Appointment: March 8, 2011 Author 2010 & 2005 Handbook on Commercial Law and various law articles 2016 Guidebook on Commercial Law Founder and Managing Partner Divina Law Offices CHAIRMAN Philippine Association of Law Schools ATTY. KARLO MARCO P. ESTAVILLO Director Age: 44 years old Date of Appointment: February 22, 2002 Director United Coconut Planters Life Assurance Corporation UCPB General Insurance, Inc. Legal Counsel and Corporate Secretary Various private corporations Bachelor of Laws, College of Law University of the Philippines Bachelor Of Science In Business Management Ateneo de Manila University

85 Board of Directors Profile 83 ATTY. PRIMITIVO Y. GARCIA III Director Age: 61 years old Date of Appointment: March 29, 2012 Director UCPB Savings Bank UCPB Securities, Inc. UCPB Leasing and Finance Corporation President Prince Group of Companies Administrator and General Counsel Zosima Incorporated Past President and Member Rotary Club of Makati South President La Salle Greenhills Lawyers League, Inc. Member Philippine Bar Association Bachelor of Laws Ateneo de Manila University Bachelor of Arts Major In Economics De La Salle University HIGINIO O. MACADAEG, JR. Director Age: 56 years old Date of Appointment: March 8, 2011 Executive Vice President and Head UCPB Corporate and Consumer Banking Group Director UCPB Properties, Inc. UCPB Leasing and Finance Corporation UCPB Securities, Inc. United Foreign Exchange Corporation Held Senior Executive Positions Equitable-PCI Bank Metropolitan Bank and Trust Company Solidbank Corporation Standard Chartered Bank Citytrust Banking Corporation Advanced Management Training Program Wharton School, University of Pennsylvania Bachelor Of Science In Management Ateneo de Manila University ROBERTO M. MACASAET, JR. Director Age: 57 years old Date of Appointment: October 30, 2014 President and Chief Executive Officer Associated Medical & Clinical Services, Inc. Board Director Maxicare Healthcare Corporation CIIF Oil Mills Group Former Director Philippine Bank of Communications Held Senior Executive Positions Citadel Holdings, Inc. Fil Hispano Ceramics, Inc. Master of Business Administration Kellogg School of Management, Northwestern University, Illinois, USA Bachelor Of Arts Tufts University, Massachusetts, USA DANILO V. PULIDO Director Age: 74 years old Date of Appointment: March 8, 2011 Chairman Emilia Properties, Inc. Director UCPB Savings Bank

86 84 UCPB 2015 Annual Report Board of Directors Profile Held Senior Executive Positions Philippine National Bank Philippine Exchange Company National Investment and Development Corporation Master of Business Administration University of the Philippines Bachelor of Science in Business Administration University of the Philippines IMELDA S. SINGZON Director Age: 65 years old Date of Appointment: October 30, 2014 Executive Vice President Philippine Deposit Insurance Corporation Past Member International Association of Deposit Insurers Executive Council and Standing Committees Former Director Philippine Bank of Communications Export & Industry Bank Held Senior Executive Positions Philippine National Bank PNB Retirement Fund, Inc. First Philippine Fund (New York) PNB Investment Limited Provident Fund Insurance Brokerage Co., Inc. PNB Republic Bank Ventures Capital Corporation PNB Republic Bank Former Chief Economic Development Specialist National Economic and Development Authority Candidate, Master of Arts - Demography University of the Philippines Certificate in Development Economics (With Distinction) University of the Philippines Bachelor of Science In Statistics University of the Philippines OSCAR C. SOLIDOR Director Age: 52 years old Date of Appointment: November 25, 2005 Secretary Confederation of Coconut Farmers Organizations of the Philippines (CCFOP), Inc. Council Member Pambansang Koalisyon ng mga Samahang Magsasaka at Manggagawa sa Niyugan (PKSMMN) Secretary-General Lakas ng Magsasakang Pilipino (LMP) Chairman Alyansa sa mga Timawang Mag-uugmad sa Amihanang Mindanao (ATIMAN-MINDANAO) Member Bishop-Ulama-Priest-Pastors-Farmers-Lumad Conference (BUPPFALUC) Caraga Conference for Peace and Development (CCPD) Council of Leaders, Pambansang Kilusan ng mga Samahang Magsasaka at Manggagawa sa Niyugan (PKSMMN) Bachelor Of Science In Agriculture Central Mindanao University EFREN M. VILLASEÑOR Director Age: 60 years old Date of Appointment: July 4, 2008 Chairman Confederation of Coconut Farmers Organization of the Philippines National President Pambansang Koalisyon ng mga Samahan ng mga Magsasaka at Manggagawa sa Niyugan President and Founding Member Coconut Farmers Federation for Rural Advancement

87 Board of Directors Profile 85 Founding Member Coconut Farmers Technology Center Southern Tagalog Region The Katipunan ng mga Magsasaka at Mangingisda ng Pilipinas Northern Samar Founder / Organizer Samar Island Peasant Alliance Group Municipal Development Assistant Municipality of Lopez in Quezon Community Affairs Officer Bondoc Development Program Former Alternate Commissioner Farmers Sector, Council of the National Anti-Poverty Commission JOHN M. YOUNG Director Age: 71 years old Date of Appointment: March 8, 2011 President and Ceo Ginza Restaurant Inc. President JEDCOR Inc. Wander Lanes Travel Co., Inc. Victor D. Young Enterprises Bachelor of Science in Commerce University of San Carlos ATTY. ILDEFONSO R. JIMENEZ Corporate Secretary Age: 59 years old Date of Appointment: February 1, 2012 Senior Vice President and Corporate Secretary UCPB Leasing and Finance Corporation UCPB Savings Bank UCPB Securities, Inc. United Foreign Exchange Corporation Professorial Lecturer College of Law, University of the Philippines Corporate Secretary University of the Philippines Foundation, Inc. Former Senior Counsel and Assistant Corporate Secretary International Rice Research Institute (IRRI) Managing Partner Padilla Jimenez Kintanar and Asuncion Law Offices Consultant Management Systems International - Challenge Account (USAID) University of the Philippines Bachelor of Laws University of the Philippines Bachelor of Science In Business Economics University of the Philippines

88 86 UCPB 2015 Annual Report Advisory Council ATTY. RICHARD R.T. AMURAO Adviser Age: 41 years old Date of Appointment: March 18, 2011 Commissioner (up to March 2015) Presidential Commission on Good Government Acting Chairman (April 2015 to Present) Presidential Commission on Good Government Board Director Independent Realty Corporation Group of Companies Chemfields Inc. Center for Drug Research, Evaluation and Studies, Inc. Piedras Petroleum Company, Inc. Adviser Intercontinental Broadcasting Corporation 13 Oil Mills Group UCPB-CIIF Finance and Development Corporation UCPB-CIIF Foundation Former Consultant Asian Development Bank Held Various Positions in the Government Office of the President of the Philippines Department of Justice Master of Laws (With Honors) London School of Economics and Political Science, United Kingdom British Chevening Scholarship Awardee Juris Doctor Ateneo de Manila University Evelio Javier Leadership Awardee Bachelor of Arts in Management Economics Ateneo de Manila University

89 Advisory Council 87 CRISTINA Q. ORBETA Adviser Age: 64 years old Date of Appointment: August 29, 2014 President Philippine Deposit Insurance Corporation Former Director Bangko Sentral ng Pilipinas UCPB UCPB Savings Bank UCPB Leasing and Finance Former Executive Director Central Bank Board of Liquidators Former Deputy Senior Country Officer Calyon Manila Offshore Branch Former Deputy General Manager Credit Lyonnais Manila Offshore Branch Former Consultant The United Kingdom s Department for International Development Asian Development Bank World Bank ATTY. JOVENCITO R. ZUÑO Adviser Age: 71 years old Date of Appointment: May 26, 2011 Associate Director Institute of Corporate Directors Member Melo Commission Rotary Club of Rosario, Batangas Lifetime Member / Adviser / Coordinator National Prosecutors League of the Philippines Former Chief State Prosecutor Department of Justice Outstanding Prosecutor Consumers Union of the Philippines Awardee for Judicial Excellence Guillermo B. Guevarra Award Bachelor of Laws University of the East Bachelor of Arts (OUTSTANDING ALUMNUS) Lipa City Colleges Master of Public Administration Harvard University Bachelor of Arts In Mathematics (MAGNA CUM LAUDE) University of the East

90 88 UCPB 2015 Annual Report Management Committee JERONIMO U. KILAYKO President and Chief Executive Officer EDMOND E. BERNARDO Executive Vice President and Head of Branch Banking Group EULOGIO V. CATABRAN III Executive Vice President and Head of Treasury Banking Group RAMON B. TAÑAFRANCA Executive Vice President and Head of Information Technology and Methods Group ATTY. JOSE A. BARCELON Senior Vice President and Head of Legal Services Group ATTY. ILDEFONSO R. JIMENEZ Senior Vice President and Corporate Secretary STELLA MA. A. FULGENCIO Vice President and Head of Human Resources Group ARTURO D. SAYAO, JR. Chief Compliance Officer, Vice President and Head of Bank Compliance Division CHARINA C. DE LA CRUZ-BALANQUIT Assistant Vice President 2 and Officer-in-Charge of Marketing Group

91 Management Committee 89 HIGINIO O. MACADAEG, JR. Executive Vice President and Head of Corporate and Consumer Banking Group CESAR A. RUBIO Chief Finance Officer, Executive Vice President and Head of Support Services Group EVANGELINA P. SAMONTE Executive Vice President and Head of Operations Group RYAN B. BUTALID First Vice President, Chief Risk Officer and Head of Risk Management Division PINKY S. DEREQUITO First Vice President and Head of Internal Audit Division (Management Committee Member in an Advisory Capacity) STEPHEN S. SEVIDAL Chief Investment Officer, First Vice President and Officer-in-Charge of Trust Banking Group VICENTE K. DE LEON President, UCPB Securities, Inc. FRANCO P. MAGALONG President, UCPB Leasing and Finance Corporation ANGEL H. MOJICA President, UCPB Savings Bank

92 90 UCPB 2015 Annual Report Senior Officers As of March 2016 OFFICE OF THE PRESIDENT JERONIMO U. KILAYKO Director, President and Chief Executive Officer ELPIDIO B. MISOLAS, JR. Vice President Security Officer ANA LENINA P. ESTAVILLO Assistant Vice President 1 Office of the President MARIA TERESA T. PALOMO Assistant Vice President 1 Office of the President BANK COMPLIANCE DIVISION ARTURO D. SAYAO, JR. Vice President, Chief Compliance Officer and Head Bank Compliance Division ESTER T. SALCEDO Assistant Vice President 2 and Head Liaison, Monitoring and Operations Department RAQUEL M. BURGOS Assistant Vice President 1 and Head Anti-Money Laundering Department ROBERTO V. FIESTA Assistant Vice President 1 Liaison, Monitoring and Operations Department BRANCH BANKING GROUP EDMOND E. BERNARDO Executive Vice President and Head Branch Banking Group FRANCISCO M. BASA, JR. Vice President and Head Visayas Region NOEL T. CALALANG Vice President and Head Branch Banking Support Division SUSAN C. DESAMERO Vice President and Head Metro Manila 3 Region RONALDO E. ELAMPARO Vice President and Head Metro Manila 6 Region GUILLERMA M. ESPIRITU Vice President and Head Metro Manila 2 Region NATIVIDAD R. FRANCISCO Vice President and Head Metro Manila 5 Region JOCELYN T. GOMEZ Vice President and Head South Luzon Region ANTHONY EVAN A. LLUCH Vice President and Head Metro Manila 1 Region MANUEL R. MACAM Vice President and Head Metro Manila 7 Region SAMUEL L. SANTOS Vice President and Head North-Central Luzon Region MONINA A. SUNGA Vice President and Head Metro Manila 4 Region ALEXANDER L. DIMACUHA Assistant Vice President 2 and Head Mindanao Region MA. ANA T. ABALA Assistant Vice President 2 Branch Manager San Andres Branch RENE A. ALIMAGNO Assistant Vice President 2 Branch Manager Batangas Branch CLARA JEAN F. ARCE Assistant Vice President 2 Branch Manager Ortigas Branch HERMILO A. BAGABALDO Assistant Vice President 2 Branch Manager Lacson-Galo Branch EVANGELINE R. BALASBAS Assistant Vice President 2 Branch Manager Boni Avenue Branch CRISPULO B. BALTAZAR, JR. Assistant Vice President 2 Branch Manager Solano Branch ROSITA A. CARREON Assistant Vice President 2 Branch Manager Mindanao Avenue Branch VOLTAIRE REX C. CASTRO Assistant Vice President 2 Branch Manager Bohol Avenue Branch ROWENA Z. CATOLOS Assistant Vice President 2 Branch Manager Pioneer Branch SOCORRO S. CHUA Assistant Vice President 2 Branch Manager T. M. Kalaw Branch ELIZABETH B. DEE Assistant Vice President 2 Branch Manager Elcano Branch MERLINE S. DELA CRUZ Assistant Vice President 2 Branch Manager Main Office Branch ROSALINDA T. DOMINGO Assistant Vice President 2 Branch Manager Salcedo Branch FLORENCE L. DORIA Assistant Vice President 2 and Head Operations Support Department ROSARIO L. FERNANDO Assistant Vice President 2 Branch Manager West Avenue Branch GLENDA V. GALLO Assistant Vice President 2 Branch Manager Robinsons Galleria Branch CHONA LESLIE R. GOCO Assistant Vice President 2 Branch Manager Calapan Branch JOSE JERIC E. GOMEZ Assistant Vice President 2 Branch Manager San Pablo Branch LOLITA A. GONZALES Assistant Vice President 2 Branch Manager BF Parañaque Branch NEBELLEE M. GUMBAN Assistant Vice President 2 Branch Manager San Pedro-Davao Branch JOEL VICTOR P. JAVIER Assistant Vice President 2 Branch Manager Ayala Avenue Branch

93 Senior Officers 91 CEZARIO B. LARIOS Assistant Vice President 2 Branch Manager Tanauan Branch NEPTALI F. RAMOS Assistant Vice President 2 Branch Manager Calamba Branch LEILA O. TERTE Assistant Vice President 2 Branch Manager Lucena - Guinto Branch CARNITA R. CHING Assistant Vice President 1 and Head Branch Automation Support Department MA. CECILIA V. LIM Assistant Vice President 2 Branch Manager Velez Branch EVA MARIE N. MAGNO Assistant Vice President 2 Branch Manager Cambridge Branch MERVYN NICASIO L. MAGNO, JR. Assistant Vice President 2 Branch Manager Butuan Branch GINA S. MERCADO Assistant Vice President 2 Branch Manager P. Ocampo Branch ROMEO G. MILLERA Assistant Vice President 2 Branch Manager Sucat Branch ELIZABETH D. ORBE Assistant Vice President 2 Branch Manager Caloocan Branch FIEL AMOR J. PACLEB Assistant Vice President 2 Branch Manager Tordesillas Branch JESSICA S. PANGILINAN Assistant Vice President 2 Branch Manager Tarlac Branch CRISANTIAGO T. PAROJINOG Assistant Vice President 2 Branch Manager Cogon Branch JOSE MARI V. REYES Assistant Vice President 2 and Head Branch Services Department ROLANDO V. ROBIÑOL Assistant Vice President 2 Branch Manager Laguna Branch CRISTINA B. ROBLEDO Assistant Vice President 2 Branch Manager Commonwealth Branch MA. DINAH V. SACRO Assistant Vice President 2 Branch Manager Puyat-Bautista Branch MARY ANN H. SALGADO Assistant Vice President 2 Branch Manager Libertad Branch RAYMUNDO A. SARANZA Assistant Vice President 2 Branch Manager Dumaguete Branch FERDINAND Y. SENO Assistant Vice President 2 Branch Manager Jones Avenue Branch DAISY B. SERNEO Assistant Vice President 2 Branch Manager Baclaran Branch MA. THERESA D. TAMAYO Assistant Vice President 2 Branch Manager F.B. Harrison Branch NATALIE R. VILLANUEVA Assistant Vice President 2 Branch Manager Tuguegarao Branch EDGAR V. YABES Assistant Vice President 2 Branch Manager Dagupan Branch DOREEN C. YAP Assistant Vice President 2 Branch Manager Clark Field Branch JAIME C. YU, JR. Assistant Vice President 2 Branch Manager Cauayan Branch GERARD D. ARANDA Assistant Vice President 1 Branch Manager Masbate Branch MARISSA D. AUYONG Assistant Vice President 1 Branch Manager P. Tuazon Branch LOURDELINO B. BALAO Assistant Vice President 1 Branch Manager United Nations Avenue YOUNG ALLANIEL O. BUMANGLAG Assistant Vice President 1 Branch Manager Surigao Branch CIELITO L. CELADA Assistant Vice President 1 Branch Manager Quirino Highway Branch CLARISSA R. DULATRE Assistant Vice President 1 Branch Manager Pasong Tamo Extension Branch LAURA T. ECHAVEZ Assistant Vice President 1 Branch Manager Blue Ridge Branch JESUS PROSPERO K. ESTARIS Assistant Vice President 1 Branch Manager Mandaluyong Branch MARITA A. GISON Assistant Vice President 1 Branch Manager Paniqui Branch MERCEDITAS ASUMPTION A. GUEVARA Assistant Vice President 1 Branch Manager Jaro Branch ROMANA M. HIZON Assistant Vice President 1 Branch Manager Paso de Blas Branch ARYM M. JINGCO Assistant Vice President 1 Branch Manager Angeles Branch HELENE JOY S. JOMANTOC Assistant Vice President 1 Branch Manager Mabini Branch SULPICIA A. LARA Assistant Vice President 1 Branch Manager Tacloban Branch

94 92 UCPB 2015 Annual Report Senior Officers MARY GRACE B. LOPEZ Assistant Vice President 1 Branch Manager Aquino Avenue Branch ARTURO A. MACAM, JR. Assistant Vice President 1 Branch Manager Banaue Branch JONATHAN M. MALIGAYA Assistant Vice President 1 Branch Manager Daet Branch RODRIGO H. PADA Assistant Vice President 1 Branch Manager Tektite Branch LORELEI P. PLETE Assistant Vice President 1 Branch Manager Vigan Branch MA. LOURDES CARIDAD B. PONCE Assistant Vice President 1 Branch Manager F. Ramos Branch JOSE ANTONIO J. ROSADO Assistant Vice President 1 Branch Manager Iznart Branch GRACE S. SABINO Assistant Vice President 1 Branch Manager Limay Branch RITA C. SAMBRANO Assistant Vice President 1 Branch Manager R. Magsaysay Branch GUILBERT P. SAMPEDRO Assistant Vice President 1 Branch Manager Global City Branch MARIA THERESA C. SANTOS Assistant Vice President 1 Branch Manager Sto. Tomas Branch LORNA D. SICAT Assistant Vice President 1 Branch Manager Lipa - Recto Branch ROSARIO T. VERGARA Assistant Vice President 1 Branch Manager San Miguel Branch CORPORATE AND CONSUMER BANKING GROUP HIGINIO O. MACADAEG, JR. Executive Vice President and Head Corporate and Consumer Banking Group Corporate and Commercial Banking Division MA. JOSEPHINA S. BAGAMASBAD Assistant Vice President 1 Financial Institutions Desk Officer Metro ManiIa 1 Team CARINA FRANCESCA C. UY First Vice President and Team Head ELIZA MARGARITA G. ABELLA Assistant Vice President 2 Relationship Manager MILAGROS A. CRUZ Assistant Vice President 2 Relationship Manager MARY JEAN A. GO Assistant Vice President 2 Relationship Manager MARIA CARLA L. PADUA Assistant Vice President 2 Relationship Manager DAYNARD V. GOMEZ Assistant Vice President 1 Relationship Manager MARIE ANGELA G. NG Assistant Vice President 1 Relationship Manager JOSE ENRIQUE L. SALVADOR Assistant Vice President 1 Relationship Manager Metro Manila 2 Team RAMON L. FERNANDEZ, JR. Vice President and Team Head CYNTHIA Q. CAMACHO Assistant Vice President 2 Relationship Manager JOSE JONAS M. COCHICO III Assistant Vice President 2 Relationship Manager MA. CARMELA G. FELICIDARIO Assistant Vice President 2 Relationship Manager ALBERTO C. COBANGBANG Assistant Vice President 1 Relationship Manager REGINA TERESA P. RODRIGUEZ Assistant Vice President 1 Relationship Manager Metro Manila 3 Team ALEXANDER M. BORJA Vice President and Team Head JOSE R. SEGUI, JR. Assistant Vice President 1 Relationship Manager Luzon Team RICHMOND U. TAN Vice President and Team Head PAOLO O. CALDERON Assistant Vice President 1 Relationship Manager MARIA CECILIA D. CALINGO Assistant Vice President 1 Relationship Manager CHARITY M. VERGARA Assistant Vice President 1 Relationship Manager Visayas / Mindanao Team ANGELITO S. ESTANISLAO Vice President and Team Head DINAH P. CENIZA Assistant Vice President 2 Relationship Manager MA. CRISTINA J. CORONA Assistant Vice President 2 Relationship Manager MANUEL RONALD G. MANGUBAT Assistant Vice President 2 Relationship Manager TERESITA F. SOLITARIA Assistant Vice President 2 Relationship Manager

95 Senior Officers 93 MA. FLOREBETH O. VILLAPAZ Assistant Vice President 2 Relationship Manager MA. CARMELA C. DELA VEGA Assistant Vice President 1 Relationship Manager MARK KENNY MACROHON Assistant Vice President 1 Relationship Manager Asset Management and Disposition Division RAYMOND C. ALONZO Vice President and Head Asset Management and Disposition Division Remittance Marketing Division VICTOR RUBEN L. TUASON Vice President and Head Remittance Marketing Division Consumer Banking Division PHILIP S. PABELICO First Vice President and Head Consumer Banking Division KRISTINE MARIE G. CUEVAS Vice President and Head Personal Loans Department LEONCIO M. ESTACION Vice President and Head Collection and Asset Recovery Department CHARON B. WAMBANGCO Vice President and Head Real Estate Loans Department CRISANTY JORGE L. DAVID Assistant Vice President 2 and Head Vehicle Financing Department VICTOR C. DELA CRUZ, JR. Assistant Vice President 2 and Head Metro Manila Business Center CAROLINA O. ZAVALA Assistant Vice President 2 and Head Consumer Finance Business Centers ANDREI G. CAOILE Assistant Vice President 2 and Account Officer Real Estate Loans Department REGINA A. CABLING Assistant Vice President 1 and Account Officer Real Estate Loans Department HUMAN RESOURCES GROUP STELLA MA. A. FULGENCIO Vice President and Head Human Resources Group FRANCO C. LOYOLA Assistant Vice President 2 and Head Recruitment and Engagement Department INFORMATION TECHNOLOGY AND METHODS GROUP RAMON B. TAÑAFRANCA Executive Vice President and Head Information Technology and Methods Group RAMONA E. CRUZ Vice President and Head Consulting and Development Services Department 2 GIL V. OBIAS Vice President and Head IT Support and Compliance Department MANUEL JOEY A. REGALA Vice President and Head Information Security Department IRMA C. SURTIDA Vice President and Head Productivity and Methods Department JANETTE L. TEMPONGKO Vice President and Head Consulting and Development Services Department 1 CARIDAD P. ABAD Assistant Vice President 2 and Head Trading Section JESSE EPHRAIM C. ALMONTE Assistant Vice President 2 and Systems Project Officer Product & Developers Pool Section JONES J. BALLESTEROS Assistant Vice President 2 and Head Telecoms Section DANILO U. CUA Assistant Vice President 2 and Head Programmers Pool Section ELENORA C. CUA Assistant Vice President 2 and Head Engineering Section IMELDA T. GONZALES Assistant Vice President 2 and Systems Project Officer Core Banking Section MA. ELISA D. IBANA Assistant Vice President 2 and Head Automation Project Oversight Section AUGUSTO M. JOCSON, JR. Assistant Vice President 2 and Head Planning Services Section JAIME D. LAMBINO Assistant Vice President 2 and Head Delivery Channel Section GERONIMO S. MANGUBAT II Assistant Vice President 2 and Head User Support Section JULIET D. PERIABRAS Assistant Vice President 2 and Systems Project Officer Trade Finance Project Team MICHAEL S. RABENA Assistant Vice President 2 and Head Computer Operations Section MA. ELENA I. REFULGENTE Assistant Vice President 2 and Head Automation Support Section WILLIAM P. BRILLANTES Assistant Vice President 1 and Head Network Management Unit ENRIQUETA U. BRIONES Assistant Vice President 1 Systems Project Officer General Ledger Project Team RUCEL F. JAVIER Assistant Vice President 1 and Head System Infrastructure Section ARACELI P. LIM Assistant Vice President 1 Information Security Department OMAR P. PINEDA Assistant Vice President 2 and Head Technical Services Department NINA LORIN S. REYES Assistant Vice President 1 Consulting and Development Services Department 1 AVEGALE GERTRUDE D. RIVERA Assistant Vice President 1 Consulting and Development Services Department 2 ALFREDO R. TORRES Assistant Vice President 1 and Head Shift Operations Unit

96 94 UCPB 2015 Annual Report Senior Officers INTERNAL AUDIT DIVISION PINKY S. DEREQUITO First Vice President and Head Internal Audit Division LILIA M. DIOKNO Vice President and Head Information Systems Audit Department MA. LUZ H. CANTORIA Assistant Vice President 2 and Head Head Office Audit Department ANNA RUTH F. MONTEMAYOR Assistant Vice President 2 and Head Loans Audit Services Department NELSON J. MONTEMAYOR Assistant Vice President 1 Audit Officer MA. ESTHER T. VERAN Assistant Vice President 1 and Head Branch Audit Services Department 1 OFFICE OF THE CORPORATE SECRETARY ATTY. ILDEFONSO R. JIMENEZ Senior Vice President and Corporate Secretary ATTY. MARGARITA MARIA A. NACPIL Vice President and Assistant Corporate Secretary ATTY. LEAH B. TINAZA Assistant Vice President and Assistant Corporate Secretary ATTY. HILDA B. GUZMAN First Vice President and Head Branch, Trust and Operations Department ATTY. MARIA ANGELICA L. RAYEL First Vice President and Head Lending, Investment and Marketing Department ATTY. JONATHAN M. ACOSTA Vice President and Head Consumer Loans, ROPA and Replevin Department ATTY. CESAR G. DAVID Vice President and Head Remedial and Enforcement Department ATTY. MIGNONETTE C. ALDAY Assistant Vice President 2 and Legal Officer Branch, Trust and Operations Department ATTY. CRISPIN V. AMORANTO Assistant Vice President 2 and Legal Officer Branch, Trust and Operations Department ATTY. JOSIEBETH P. BASA Assistant Vice President 2 and Legal Officer Lending, Investment and Marketing Department ATTY. ART BERNARD D. BERNALES Assistant Vice President 2 and Legal Officer Lending, Investment and Marketing Department ATTY. CECILIA M. CABATIT Assistant Vice President 2 and Legal Officer Branch, Trust and Operations Department ATTY. ISMAEL ANDREW P. ISIP Assistant Vice President 2 and Legal Officer Remedial and Enforcement Department ATTY. JASON ROBERT M. PAREDES Assistant Vice President 2 and Legal Officer Remedial and Enforcement Department ATTY. FRANCISCO BENITO A. SAAVEDRA Assistant Vice President 2 and Legal Officer Remedial and Enforcement Department ATTY. KABAITAN G. VALMONTE Assistant Vice President 2 and Legal Officer Remedial and Enforcement Department ATTY. MARIE CHRISTINE E. AVARICIO Assistant Vice President 1 and Legal Officer Lending, Investment and Marketing Department ATTY. JENNY MAE SOMBRITO- DE LEON Assistant Vice President 1 and Legal Officer Lending, Investment and Marketing Department ATTY. JONAS CESAR C. MANGROBANG III Assistant Vice President 1 and Legal Officer Consumer Loans, ROPA and Replevin Department ATTY. JAY Y. RODRIGUEZ Assistant Vice President 1 and Legal Officer Consumer Loans, ROPA and Replevin Department ATTY. ROSCOE J. ROSELL Assistant Vice President 1 and Legal Officer Lending, Investment and Marketing Department MARKETING GROUP CHARINA C. DE LA CRUZ-BALANQUIT Assistant Vice President 2 and Officer-in-Charge Marketing Group MARIA CARMEN D. AMBROSIO Assistant Vice President 2 and Business Development Officer Product Sales Department MARY ERICA RUTH VIVIANE C. DIAGO Assistant Vice President 2 and Head Product Management Department RONA LISA M. GORAYEB-VELASCO Assistant Vice President 1 and Head Marketing Services Department/ Senior Corporate Communications Officer OPERATIONS GROUP LEGAL SERVICES GROUP ATTY. JOSE A. BARCELON Senior Vice President and Head Legal Services Group ATTY. ROBERTO M. BUENAVENTURA Assistant Vice President 2 and Legal Officer Remedial and Enforcement Department ATTY. JESSICA R. VITUG-JURADO Assistant Vice President 1 and Legal Officer Consumer Loans, ROPA and Replevin Department EVANGELINA P. SAMONTE Executive Vice President and Head Operations Group

97 Senior Officers 95 JOJI S. NORICO First Vice President and Head Credit Administration Division ARNEL A. VALLES First Vice President and Head International Banking and Treasury Operations Division BENJAMIN P. APAN Vice President and Head Loans Operations Division JUSTINIANO M. BABATE Assistant Vice President 2 and Head Trade Services Department International Banking and Treasury Operations Division MARILOU C. DANNUG Assistant Vice President 1 and Head Loans Documentation Department- Corporate Credit Administration Division TEODORA B. GARCIA Assistant Vice President 1and Team Leader Credit Review and Evaluation Department Credit Administration Division PRECILA G. GRAMATA Assistant Vice President 1 and Head Commercial Loans Operations Department Loans Operations Division REBECCA M. LIM Vice President and Head Credit Risk Department JOY T. TAN Assistant Vice President 2 and Head Operational Risk Department JOANNA A. FLORES Assistant Vice President 1 and Head Information Technology Risk Section DAVID A. PERALTA, JR. Assistant Vice President 1 and Head Trust Risk Department SUPPORT SERVICES GROUP CARLITO I. SANTOS Assistant Vice President 2 Administrative Control Officer Corporate Services Division LORENA P. ALCOVER Assistant Vice President 1 and Head Budget and Planning Strategic Planning and Analysis Division LEMUEL J. DIMAANO Assistant Vice President 1 and Head Corporate Real Estate Department Corporate Services Division TREASURY BANKING GROUP MARIO A. GULLE Assistant Vice President 2 and Head Clearing Center RAMONITA C. MENDOZA Assistant Vice President 2 and Head Loans Documentation Department- Consumer Credit Administration Division ELZEBER O. MURALLOS Assistant Vice President 2 and Head Remittance Services Department International Banking and Treasury Operations Division REMIGIO T. VARGAS Assistant Vice President 2 and Head Credit Appraisal & Investigation Department Credit Administration Division AMIE F. BALAN Assistant Vice President 1 and Head Treasury Accounting Department International Banking and Treasury Operations Division NIDA C. LIM Assistant Vice President 1 and Head Local Operations Department International Banking and Treasury Operations Division GLORIA A. MAQUIRAN Assistant Vice President 1 and Head Consumer Loans and Acquired Assets Department Loans Operations Division SORAYA D. SERRANO Assistant Vice President 1 and Head Credit Review and Evaluation Department Credit Administration Division RISK MANAGEMENT DIVISION RYAN B. BUTALID First Vice President Chief Risk Officer and Head Risk Management Division CESAR A. RUBIO Chief Finance Officer Executive Vice President and Head Support Services Group CYNTHIA A. ALMIREZ First Vice President and Controller Controllership Division MARGARITA A. GUADINES First Vice President and Head Strategic Planning and Analysis Division ALEXANDER L. ANDRES Assistant Vice President 2 and Head Subsidiaries Financial Accounting Department Controllership Division LINDA S. ORTIZ Assistant Vice President 2 and Head General Services Department Corporate Services Division CRISOLOGO F. SAGNIP Assistant Vice President 2 and Head Financial Accounting Department Controllership Division EULOGIO V. CATABRAN III Executive Vice President and Head Treasury Banking Group VITTORIO RAOUL M. GOMEZ First Vice President and Head Trading Department ARTURO I. LIPIO, JR. First Vice President and Head Debt Capital Markets Department MANUEL C. MADRIDEJOS Vice President Trading Department ULYSSES G. MINA Vice President Debt Capital Markets Department Investment Banking Origination SHEILA S. ANG Assistant Vice President 2 and Head Fund Management Department SANDRA S. GO Assistant Vice President 2 Trading Department

98 96 UCPB 2015 Annual Report Senior Officers MA. CHRISTINE D. PAGKALINAWAN Assistant Vice President 2 Debt Capital Markets Department Institutional & Retail Fixed Income Sales MELIZA B. ZULUETA Assistant Vice President 2 Debt Capital Markets Department Institutional & Retail FX Sales DONNA LYN V. ABES Assistant Vice President 1 Debt Capital Markets Department APRIL HOPE J. BAUTISTA Assistant Vice President 1 Debt Capital Markets Department MA. THERESA G. COROS Assistant Vice President 1 Debt Capital Markets Department TRUST BANKING GROUP STEPHEN S. SEVIDAL First Vice President Chief Investment Officer and Head Trading and Execution Department Officer-in-Charge, Trust Banking Group RAMON ANTONIO C. TORRES First Vice President and Head Managed Portfolios Department MA. CATALINA M. CRUZ Vice President and Head Trust Sales Department DELIA E. MERLE Vice President and Head Trust Operations Division MARIA VICTORIA C. MENDOZA Assistant Vice President 2 and Head Investment Evaluation and Special Trust Department HUBERT C. CRUZ Assistant Vice President 1 and Head Portfolio Implementation Department Trust Operations Division MA. ISABEL G. LORENZO Assistant Vice President 1 Portfolio Manager CHRISTINE G. PEÑAFIEL Assistant Vice President 1 Portfolio Manager UCPB-CIIF FOUNDATION INC. UCPB-CIIF FINANCE AND DEVELOPMENT CORPORATION EDGARDO C. AMISTAD President SUBSIDIARIES UCPB LEASING & FINANCE CORPORATION FRANCO P. MAGALONG President MICHAEL ROBERT L. MENDOZA Vice President Marketing Head MERCY K. CHUA Assistant Vice President 2 Team Head MA. LUISA P. GOPICO Assistant Vice President 1 Compliance Officer IRMA E. JAPSON Assistant Vice President 1 Treasury Head MA. IVY T. MORALES Assistant Vice President 1 Team Head UCPB SAVINGS BANK ANGEL H. MOJICA President EMMANUEL L. ABESAMIS Vice President and Head Branch Banking Division WILMA L. DAVILA Vice President and Head Credit Administration Division CORAZON R. GUEVARRA Vice President and Head Commercial Lending Division NARISA BERLIN R. DURAN Assistant Vice President 2 and Head Risk Management Division MENCHIE E. LAGAC Assistant Vice President 2 and Head Treasury Division WILFREDO S. BAUTISTA Assistant Vice President and Head Information Technology Division ROSALINA A. GESLANI Assistant Vice President and Head Internal Audit Division DRONNEL A. ESPINA Assistant Vice President and Head Human Resources Division ATTY. ALEXANDER L. PAULINO Assistant Vice President and Head Legal Services Division MA. PAMELA V. SUAREZ Assistant Vice President and Head Consumer Lending Division UCPB SECURITIES INC. VINCENT K. DE LEON President

99 Products and Services 97 Products and Services Deposits Peso Accounts Multi-One ATM Peso Savings Account Passbook Peso Savings Account Regular Checking Account Kiddie Max Savings Account Pension Accounts for AFP, AFPSLAI, PVAO and SSS Foreign Currency Accounts US Dollar Savings Account Euro Savings Account Japanese Yen Savings Account British Pound Savings Account Australian Dollar Savings Account Time Deposits Peso Time Deposit High Yielder US Dollar Time Deposit Remittance Services U-Remit Accounts U-Remit ATM Savings Account U-Remit Passbook Savings Account U-Remit Peso Checking Account U-Remit US Dollar Savings Account Inward Remittances Through Tie-Ups and Correspondent Banks U-Remit System (Online Remittance System) Direct Credit to UCPB Accounts Direct Credit to Local Bank Accounts Cash Pick Up over UCPB Branches Payout Center for: - Uniteller, EzRemit, Cash Express, AFTAB, Maybank, Iremit, TransFast/ NewYork Bay Philippines Cash Management Collections Bills Payment - Over-the-Counter Collection Facility - Electronic Channels (ATM, Internet Banking, Telebanking and Mobile Phone Banking) - Automatic Debit Arrangement Point-of-Sale (POS) Collection Service Internet Payment Gateway Post-Dated Check Warehousing with Online Facility (PDC.Biz) Corporate Collection Service Deposit Pick-Up / Cash Delivery Service Night Depository Service National Government Collections Disbursements Checkwriter.Biz (Online Check Disbursement Facility) - MCWriter - Corporate Checkwriter Payroll Facilities - CM Payroll (Payroll Crediting Facility) - Payroll Max (Payroll Software for Salary Preparation and Crediting) UCPB emoney Card BIR-eFPS Account Management Automatic Transfer Arrangement Sweep Facility Customized Statement of Account Electronic Banking Facilities UCPB CM. biz (Corporate Internet Banking) UCPB Connect (Retail Internet Banking) UCPB Mobile Phone Banking Service (ios, Android and Java App) UCPB Telebanking UCPB Automated Teller Machines - On-site and Off-site Deployment - Mobile ATM Service Government Payments BIR SSS PhilHealth Bureau of Customs Special Services Conduit Clearing Arrangement with Online Facility (CCA.Biz) Depository and Custodianship Service SSS Pension Crediting SSS Sickness and Maternity Benefits Payment Thru the Bank Direct Deposit for US Pensioners Consumer Loans Auto Loans Brand New, Second Hand, Refinancing, Fleet Financing Home Loans Condominiums, Townhouses, Houses and Lots Refinancing, Construction/Renovation, Multi-Purpose Loans Personal Loans Your Easy Salary Loan (YES Loans) Salary Loans (Corporate Arrangements) Small Business Loans Term Loan Promissory Note (PN) Line Franchise Loan Domestic Standby Letter of Credit Commercial Credit Non-Trade Short-Term Credit Facilities Omnibus Line Promissory Note-Peso/Foreign Currency Promissory Note vs. Assignment of Trade Receivables Domestic/Foreign Bills Purchase Foreign Currency Settlement Short-Term Loan Non-Trade Long-Term Loan Term Loan-Peso/Foreign Currency Project Finance-Bilateral/ Syndicated-Peso/Foreign Currency Term Loan with Guarantee and LGUGC Trade Financing Documentary Credit-Foreign / Domestic Standby Letter of Credit Foreign / Domestic Trust Receipt Financing Shipside Bond/Bank Guarantee Documents Against Acceptance Documents Against Payment Open Account Arrangement Direct Remittance Advance Payment Collection of Custom Duties and Taxes (E2M) Export Documentary Credit Advising Export Advance Export Bills Purchase Export Bills for Collection

100 98 UCPB 2015 Annual Report Products and Services Treasury Peso-Denominated Investments Government Securities Treasury Bills Retail Treasury Bonds Fixed Rate Treasury Notes Prime Corporate Bonds Repurchase Agreement US Dollar-Denominated Investments Republic of the Philippines (ROP) Dollar Bonds Prime Corporate Bonds Foreign Exchange Spot Transactions Forward Transactions Trust Personal Trust Services Living Trust Account Individual Agency Accounts (IMA) Administratorship Executorship Guardianship Safekeeping Escrow - Buy and Sell, Capital Gains, POEA Corporate Trust Services Institutional Agency Account (IMA) Employee Benefit Fund Management Mortgage Trust Indenture Loan Agency Pre-Need Fund Management Safekeeping Escrow - Buy and Sell, POEA Unit Investment Trust Funds UCPB Cash Management Fund UCPB Peso Bond Fund UCPB Balanced Fund UCPB High Dividend Fund UCPB Equity Fund UCPB US$ Money Market Fund UCPB Philippine Index Equity Fund (UPIEF) UCPB US$ Bond Fund (US$BF) UCPB LEASING AND FINANCE CORPORATION Lease Financing Financial Lease Amortized Commercial Loan Receivable Financing UCPB SECURITIES, INC. Equities Trading Philippine Market - Traditional and Online Trading Lodgement of Securities Upliftment of Securities UCPB SAVINGS BANK, INC. Deposits Peso Accounts - Passbook Peso Savings Account - ATM Savings Account - My First Step - Stratified Savings Account - Savings Builder - Regular Current Account - Current Account with Automatic Transfer Arrangement (ATA) - Cheque Plus - Cheque Lite Time Deposits - Certificate of Peso Time Deposit - Long Term Time Deposit Cash Management Conduit Clearing Arrangement Deposit Pick up Service Cash Delivery Service Payroll Service Arrangement Consumer Loans Auto Loans - Brand New/Second-hand - Refinancing - Fleet Financing Real Estate Loans - Residential vacant lot, House and lot, Townhouse, Condominium - Acquisition, Construction, Refinancing, Multi-Purpose Loan Personal Loans - Cash Loan - Salary Loan Branch Originated Loans - Back-to-Back Loan - Domestic Bills Purchase - Salary Loans - Payroll Service Plan Loan (PSPL) - for public school teachers - Payroll Service Non-DepEd (PSND) for local government units - Time Plan Loan (TPL) for private entities - Cash Loan Commercial Loans Small Business Loans - Term Loan - Promissory Note (PN) Line Short-Term Loans - Promissory Note (PN) Line - Check Discounting - Invoice Discounting Long-Term Loan - Peso Term Loan - Contract-to-Sell (CTS) Financing - Purchase of Receivables Other Services - PhilHealth Payments / Collection Facility - Domestic Remittances - Safety Deposit Box - Manager s Check - ecash Card

101 Audited Financial Report 99 Statement of Management s Responsibility for Financial Statements The management or United Coconut Planters Bank and Subsidiaries (the Group ) is responsible for the preparation and fair presentation of the financial statements as of and for the years ended December 31, 2015 and 2014, including the additional components attached therein, in accordance with the prescribed financial reporting framework indicated therein. This responsibility includes designing and implementing internal controls relevant to the preparation and fair presentation of the unconsolidated financial statements that are free from material misstatement, whether due to fraud or error, selecting and applying appropriate accounting policies, and making accounting estimates that are reasonable in the circumstances. The Board of Directors reviews and approves the unconsolidated financial statements and submits the same to the stockholders. Punongbayan and Araullo, the independent auditors appointed by the stockholders, has audited the financial statements of the Group in accordance with Philippine Standards on Auditing, and in its report to the stockholders, has expressed its opinion on the fairness of presentation upon completion of such audit. MENARDO R. JIMENEZ Chairman of the Board JERONIMO U. KILAYKO President and Chief Executive Officer CESAR A. RUBIO Chief Finance Officer

102 100 UCPB 2015 Annual Report Report of Independent Auditors The Board of Directors and Stockholders United Coconut Planters Bank and Subsidiaries UCPB Building, Makati Avenue Makati City Report on the Financial Statements We have audited the accompanying financial statements of United Coconut Planters Bank and subsidiaries ( collectively referred hereinafter as the Group) and of United Coconut Planters Bank (the Parent Bank) which comprise the statement of financial position as at December 31, 2015, and the statement of income, statement of comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with Philippine Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Philippine Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Bases for Qualified Opinion As discussed in Note 1 to the financial statements, the Parent Bank embarked on a 10-year Rehabilitation Plan (the Rehabilitation Plan ) as part of the Financial Assistance Agreement entered into with the Philippine Deposit Insurance Corporation (PDIC) on July 7, The Rehabilitation Plan and subsequent amendments thereof allow the recording of certain items which, although allowed by the Bangko Sentral ng Pilipinas (BSP), are not in accordance with Philippine Financial Reporting Standards (PFRS). The Rehabilitation Plan was approved by the BSP on January 10, On May 15, 2008, as endorsed by the PDIC, the Monetary Board of the BSP, in its Resolution No. 590, approved the amended Rehabilitation Plan of the Parent Bank which involves the following: (a) issuance of P12.0 billion Capital Notes to PDIC; (b) authority to accept deposits from the National Government, Local Government Units and Government Owned and Controlled Corporations; (c) staggered booking of unbooked valuation reserves and deferred charges for 10 years starting January 2008; (d) waiver of certain monetary penalties; and, (e) continued access to the BSP rediscounting facility. Thereafter, on February 26, 2009, the Monetary Board of the BSP, in its Resolution No. 345, subsequently approved the deferral of the start of the staggered booking of the unbooked valuation reserves and deferred charges effective January 1, 2009 and exempt the Parent Bank from sanctions that may be imposed for its non-compliance with the 10% capital adequacy ratio and all the capitalbased regulatory ratios for the year 2008 until such time that the Parent Bank s amended Rehabilitation Plan is fully implemented or until such time that the Parent Bank is able to comply with the required 10.0% capital adequacy ratio, whichever comes earlier. As a result of the Parent Bank s request to BSP relative to its recapitalization plan, on May 23, 2014, the Monetary Board in its Resolution No. 822, approved additional regulatory relief including the updating of its remaining unbooked valuation reserves and deferred charges using the outstanding balance of P18.6 billion based on an independent valuation commissioned by the Parent Bank, to be amortized on a straight-line basis.

103 Audited Financial Report 101 In relation to (a) in the previous page, the Parent Bank issued P12.0 billion Capital Notes to PDIC in As discussed in Note 22 to the financial statements and as allowed by the BSP in keeping with the objectives of the Rehabilitation Plan, the Parent Bank presented the Capital Notes in the equity section of the statement of financial position instead of as a financial liability because of its contingent settlement provision in accordance with PFRS. Had the Parent Bank presented the Capital Notes as a financial liability, total liabilities would have increased and total equity would have decreased by P12.0 billion in the Group and Parent Bank s statement of financial position as at December 31, As discussed in item (c) in the previous page, as at December 31, 2008, the Parent Bank did not book the impairment losses (valuation reserves) on AFS financial assets, loans and other receivables, investment properties, and other resources totaling P13.4 billion and, deferred the recognition of losses on sale and dacion en pago settlement totaling P15.7 billion as provided under the amended Rehabilitation Plan. Pursuant to the amended Rehabilitation Plan, these P29.1 billion unbooked valuation reserves and deferred losses, which were determined using BSP rules and regulations on impairment provisioning as at December 31, 2008, are being booked by the Parent Bank on a staggered basis starting 2009 as allowed and approved by the BSP. Accordingly, as discussed in Notes 1, 16 and 17, the Parent Bank recognized P3.8 billion of this amount in 2015 by a direct charge to surplus (deficit) account. Moreover, the Parent Bank deferred the recognition of the losses on sale of certain investment properties in 2015 amounting to P0.5 billion as also allowed by the BSP as discussed in Note 1. PFRS requires the recognition of these valuation reserves and losses on sale and dacion en pago settlement in the periods these were incurred. Had the Parent Bank recognized in full the valuation reserves and the losses on dacion en pago settlement in the periods when these were incurred as required by PFRS, total resources and equity of the Group and the Parent Bank would have decreased by P1.1 billion as at December 31, 2015 and net income of the Group and Parent Bank for the year then ended would have decreased by P0.5 billion. As discussed in Note 11, on various dates in 2011, the Parent Bank sold held-to-maturity (HTM) investments with aggregate carrying amount of P3.2 billion thereby realizing gains of P0.3 billion. As a result of these disposals, HTM investments of the Parent Bank were tainted and, under PFRS, should be reclassified to available-for-sale (AFS) financial assets and the Parent Bank is prohibited from classifying any financial asset as HTM investments from 2011 until However, the Monetary Board, in its Resolution No dated December 20, 2012, approved the request of the Parent Bank to exempt its remaining P28.0 billion investments in government securities classified as HTM investments, which were funded from the P30.0 billion savings deposits maintained by the National Government with the Parent Bank as part of the concessions granted under the amended Rehabilitation Plan, as discussed in (b) above, from the tainting provision under Subsection x388.5(b) and Appendix 33 of the Manual of Regulations for Banks and retain classification of such securities under the HTM investments portfolio. At the end of the tainting period, these investments should be reclassified from AFS financial assets to HTM investments with the carrying value, i.e. the fair value of the AFS financial assets at the time of the reclassification as the new cost of the HTM investment. The net unrealized gain on the AFS financial assets during the tainting period should then be amortized using the effective interest method over the remaining term of the securities. As at December 31, 2015, these investments in government securities with aggregate carrying amount of P27.8 billion and fair value of P30.2 billion are continuously classified as HTM investments without reclassifying these assets as AFS financial assets during the tainting period. Had the Parent Bank reclassified these investments to AFS financial assets during the tainting period and reclassified the same to HTM investments once the tainting period lapsed in accordance with PFRS, total resources and equity would have increased by P1.5 billion as at December 31, 2015, and net income would have increased by P1.5 billion for the year then ended. Had the matters discussed in the preceding paragraphs been accounted for by the Parent Bank in accordance with PFRS, total resources, liabilities and equity in the Group and Parent Bank s statement of financial position would have decreased by P9.5 billion, increased by P12.0 billion and decreased by P21.5 billion, respectively, as at December 31, 2015 and net income in the Group and Parent Bank s statement of income would have increased by P1.0 billion in Qualified Opinion In our opinion, except for the effects of the matters described in the Bases for Qualified Opinion section, the financial statements of United Coconut Planters Bank and subsidiaries and of United Coconut Planters Bank present fairly, in all material respects, the financial position as at December 31, 2015, and their financial performance and their cash flows for the year then ended in accordance with Philippine Financial Reporting Standards.

104 102 UCPB 2015 Annual Report Report of Independent Auditors Emphasis of Matters Without further qualifying our opinion, we draw attention to Notes 1, 13, 22 and 27 to the financial statements which discuss the Supreme Court decision on two cases involving (a) the ownership of certain sequestered shares of the Parent Bank by the Presidential Commission on Good Government; and, (b) the ownership over the Coconut Industry Investment Fund (CIIF) companies, the 14 CIIF holding companies and the shares of stock in San Miguel Corporation held by the 14 CIIF Holding companies, together with all dividends declared, paid and issued thereon as well as any increments thereto arising from, but not limited to, exercise of pre-emptive rights, and the Executive Orders (EOs) issued by the President of the Republic of the Philippines regarding the inventory, reconveyance, utilization and privatization of coco levy assets. The EOs reference the Supreme Court decision that a majority of the sequestered shares of stock of the Parent Bank, which was paid from the Coconut Consumers Stabilization Fund, is owned by the Republic of the Philippines for the benefit of the coconut farmers, thus making it a part of the coco levy assets. It also discusses that the recapitalization plan by way of privatization was approved by the President of the Republic of the Philippines. On June 30, 2015, the Supreme Court issued a temporary restraining order enjoining the implementation of the EOs. While the implementation of the EOs and the Supreme Court decision, particularly the manner by which the reconveyance, utilization and privatization of the Coco Levy Assets will be undertaken, including the recapitalization by way of privatization of the Parent Bank, has not yet been implemented by authorities; hence, its impact on the financial statements of the Parent Bank cannot be fully assessed at this time, the Board of Directors and management believes that, as at December 31, 2015, it is reasonable to maintain the status quo and continue with the operations of the Parent Bank, its subsidiaries and its associates, including the manner of accounting and valuation of its investments in the CIIF Oil Mills companies. Other Matters The financial statements as of and for the year ended December 31, 2014 were audited by other auditors whose report dated March 31, 2015, expressed a qualified opinion on those statements on the same matters discussed under the Basis of Qualified Opinion section. Report on Other Legal and Regulatory Requirements Our audit was conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplementary information for the year ended December 31, 2015 required by the Bureau of Internal Revenue as disclosed in Note 31 to the financial statements is presented for purposes of additional analysis and is not a required part of the basic financial statements prepared in accordance with Philippine Financial Reporting Standards. Such supplementary information is the responsibility of the management. The supplementary information has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole. PUNONGBAYAN &ARAULLO By: Ramilito L. Nañola Partner CPA Reg. No TIN PTR No , January 4, 2016, Makati City SEC Group A Accreditation Partner -No AR-2 (until Apr. 30, 2016) Firm -No FR-4 (until Apr. 30, 2018) BIR AN (until March 18, 2018) Firm s BOA/PRC Cert. of Reg. No (until Dec. 31, 2018) April 4, 2016

105 Audited Financial Report 103 United Coconut Planters Bank and Subsidiaries Statement of Financial Position DECEMBER 31, 2015 (With Comparative Figures for 2014) (Amounts in Thousands of Philippine Pesos) GROUP PARENT BANK Notes R E S O U R C E S CASH AND OTHER CASH ITEMS 9 P 6,543,793 P 7,477,991 P 6,193,988 P 7,041,100 DUE FROM BANGKO SENTRAL NG PILIPINAS 9 47,524,537 39,502,248 45,772,123 38,244,884 DUE FROM OTHER BANKS 9 7,682,039 2,253,958 7,505,313 2,165,147 INTERBANK LOANS RECEIVABLE AND SECURITIES PURCHASED UNDER RESALE AGREEMENTS 10 9,009,986 11,808,804 8,309,986 11,308,804 TRADING AND INVESTMENT SECURITIES - NET 11 53,417,918 56,647,735 53,120,195 55,837,988 LOANS AND OTHER RECEIVABLES - NET ,713, ,953, ,908, ,713,602 INVESTMENTS IN SUBSIDIARIES AND ASSOCIATES - NET 13 8,756,347 8,755,071 3,376,121 3,376,121 BANK PREMISES, FURNITURE, FIXTURES AND EQUIPMENT - NET 14 1,859,327 1,960,134 1,602,816 1,725,918 INVESTMENT PROPERTIES - NET 15 2,266,645 2,501,920 3,076,860 3,294,630 DEFERRED TAX ASSETS - NET , , , ,767 INTANGIBLE AND OTHER RESOURCES - NET 16 20,132,974 23,147,834 16,976,855 19,977,102 TOTAL RESOURCES P 285,350,664 P 270,391,262 P 259,031,843 P 245,858,063 LIABILITIES AND EQUITY DEPOSIT LIABILITIES 18 P 239,101,280 P 220,541,539 P 229,436,913 P 211,403,079 BILLS PAYABLE AND SECURITIES SOLD UNDER REPURCHASE AGREEMENT 19 12,879,777 12,851,929 10,786,734 11,036,987 ACCRUED TAXES, INTERESTS AND OTHER EXPENSES , , , ,281 INCOME TAX PAYABLE 116,864 65,363 5,995 6,314 RETIREMENT LIABILITY , , , ,796 DEFERRED TAX LIABILITIES - NET 26 19,612 19, OTHER LIABILITIES 21 12,908,452 16,173,034 11,641,547 15,075,748 Total Liabilities 266,537, ,041, ,229, ,779,205 EQUITY 22 18,813,252 19,349,870 5,802,595 7,078,858 TOTAL LIABILITIES AND EQUITY P 285,350,664 P 270,391,262 P 259,031,843 P 245,858,063 See Notes to Financial Statements.

106 104 UCPB 2015 Annual Report United Coconut Planters Bank and Subsidiaries Statement of Income FOR THE YEAR ENDED DECEMBER 31, 2015 (With Comparative Figures for 2014) (Amounts in Thousands of Philippine Pesos) GROUP PARENT BANK Notes INTEREST INCOME Loans and other receivables 12 P 8,405,969 P 7,849,042 P 6,986,857 P 6,403,865 Trading and investment securities 11 3,335,774 3,542,147 3,317,464 3,500,010 Due from Bangko Sentral ng Pilipinas and other banks 9 101, ,148 89, ,794 Interbank loans receivable and securities purchased under resale agreements 10 55,752 32,178 4,183 3,759 11,898,815 11,733,515 10,397,649 10,213,428 INTEREST EXPENSE Deposit liabilities 18 2,345,743 2,430,832 2,201,912 2,301,944 Bills payable , , , ,860 2,726,887 2,831,029 2,484,645 2,601,804 NET INTEREST INCOME 9,171,928 8,902,486 7,913,004 7,611,624 IMPAIRMENT LOSSES , , ,816 - NET INTEREST INCOME AFTER IMPAIRMENT LOSSES 8,958,710 8,625,507 7,712,188 7,611,624 OTHER INCOME Service charges, fees and commissions 24 1,030, , , ,680 Trading and securities gains - net , , , ,481 Gains on assets sold 111, , , ,688 Gains on foreclosures - net 58,612 45,404 32,896 27,388 Income from trust operations 27 55, ,741 55, ,741 Foreign exchange gains - net 33, ,688 33, ,686 Miscellaneous , , , ,446 2,103,152 2,169,879 1,541,617 1,680,110 TOTAL OPERATING INCOME 11,061,862 10,795,386 9,253,805 9,291,734 OPERATING EXPENSES Compensation and fringe benefits 23 2,628,072 2,260,901 2,305,763 1,980,664 Taxes and licenses 1,055,751 1,193, ,213 1,038,208 Occupancy 609, , , ,534 Depreciation and amortization 14, 15, , , , ,161 Insurance 491, , , ,307 Security, clerical and messengerial 459, , , ,069 Litigation and assets acquired 15 42,282 74,484 25,592 62,610 Miscellaneous , , , ,209 6,708,741 6,688,190 5,874,649 5,941,762 INCOME BEFORE SHARE IN NET INCOME OF ASSOCIATES 4,353,121 4,107,196 3,379,156 3,349,972 SHARE IN NET INCOME OF ASSOCIATES 13 1, , INCOME BEFORE INCOME TAX 4,354,924 4,237,506 3,379,156 3,349,972 TAX EXPENSE 26 1,054,477 1,098, , ,334 NET INCOME P 3,300,447 P 3,139,404 P 2,560,062 P 2,464,638 ATTRIBUTABLE TO: EQUITY HOLDERS OF THE PARENT BANK P 3,288,944 P 3,130,021 P 2,560,062 P 2,464,638 NON-CONTROLLING INTERESTS 11,503 9, P 3,300,447 P 3,139,404 P 2,560,062 P 2,464,638 See Notes to Financial Statements.

107 Audited Financial Report 105 United Coconut Planters Bank and Subsidiaries Statement of Comprehensive Income FOR THE YEAR ENDED DECEMBER 31, 2015 (With Comparative Figures for 2014) (Amounts in Thousands of Philippine Pesos) GROUP PARENT BANK Notes NET INCOME P 3,300,447 P 3,139,404 P 2,560,062 P 2,464,638 OTHER COMPREHENSIVE INCOME (LOSS) Items that will not be reclassified subsequently to profit or loss: Remeasurement losses on retirement plan 23 ( 23,700 ) ( 335,429 ) ( 25,602 ) ( 311,002 ) Remeasurement gains (losses) on retirement plans of associates 13 ( 75 ) 2, ( 23,775 ) ( 332,802 ) ( 25,602 ) ( 311,002 ) Items that will be reclassified subsequently to profit or loss: Net unrealized gains (losses) on available-for-sale (AFS) financial assets 11 ( 62,042 ) 862,106 ( 59,927 ) 855,789 Equity in net unrealized losses on AFS financial assets 13 ( 452 ) ( 36 ) - - Translation adjustments ( 796 ) ( 17,494 ) ( 796 ) ( 17,494 ) Equity in translation adjustments of associates 13 - ( 131 ) - - ( 63,290 ) 844,445 ( 60,723 ) 838,295 Total Other Comprehensive Income (Loss) ( 87,065 ) 511,643 ( 86,325 ) 527,293 TOTAL COMPREHENSIVE INCOME FOR THE YEAR P 3,213,382 P 3,651,047 P 2,473,737 P 2,991,931 ATTRIBUTABLE TO: EQUITY HOLDERS OF THE PARENT BANK P 3,201,862 P 3,642,124 P 2,473,737 P 2,991,931 NON-CONTROLLING INTERESTS 11,520 8, P 3,213,382 P 3,651,047 P 2,473,737 P 2,991,931 See Notes to Financial Statements.

108 106 UCPB 2015 Annual Report United Coconut Planters Bank and Subsidiaries Statement of Changes in Equity FOR THE YEAR ENDED DECEMBER 31, 2015 (With Comparative Figures for 2014) (Amounts in Thousands of Philippine Pesos) ATTRIBUTABLE TO PARENT BANK SHAREHOLDERS COMMON CAPITAL SURPLUS Notes STOCK NOTES RESERVES Balance at January 1, 2015 P 1,484,843 P 12,000,000 P 155,006 Amortization of unbooked valuation reserves Transfer from surplus to reserve for trust business Total comprehensive income (loss) for the year Balance at December 31, 2015 P 1,484,843 P 12,000,000 P 155,042 Balance at January 1, 2014 P 1,484,843 P 12,000,000 P 154,139 Amortization of unbooked valuation reserves Transfer from surplus to reserve for trust business Total comprehensive income for the year Balance at December 31, 2014 P 1,484,843 P 12,000,000 P 155,006 PARENT BANK COMMON CAPITAL SURPLUS Notes STOCK NOTES RESERVES Balance at January 1, 2015 P 1,484,843 P 12,000,000 P 155,006 Amortization of unbooked valuation reserves Transfer from surplus to reserve for trust business Total comprehensive income (loss) for the year Balance at December 31, 2015 P 1,484,843 P 12,000,000 P 155,042 Balance at January 1, 2014 P 1,484,843 P 12,000,000 P 154,139 Amortization of unbooked valuation reserves Transfer from surplus to reserve for trust business Total comprehensive income for the year Balance at December 31, 2014 P 1,484,843 P 12,000,000 P 155,006 See Notes to Financial Statements.

109 Audited Financial Report 107 GROUP NON- SURPLUS REVALUATION CONTROLLING TOTAL (DEFICIT) RESERVES TOTAL INTERESTS EQUITY P 6,674,374 ( P 1,043,448 ) P 19,270,775 P 79,095 P 19,349,870 ( 3,750,000 ) - ( 3,750,000 ) - ( 3,750,000 ) ( 36 ) ,288,944 ( 87,082 ) 3,201,862 11,520 3,213,382 P 6,213,282 ( P 1,130,530 ) P 18,722,637 P 90,615 P 18,813,252 P 7,265,220 ( P 1,555,551 ) P 19,348,651 P 70,172 P 19,418,823 ( 3,720,000 ) - ( 3,720,000 ) - ( 3,720,000 ) ( 867 ) ,130, ,103 3,642,124 8,923 3,651,047 P 6,674,374 ( P 1,043,448 ) P 19,270,775 P 79,095 P 19,349,870 SURPLUS REVALUATION (DEFICIT) RESERVES TOTAL ( P 5,530,203 ) ( P 1,030,788 ) P 7,078,858 ( 3,750,000 ) - ( 3,750,000 ) ( 36 ) - - 2,560,062 ( 86,325 ) 2,473,737 ( P 6,720,177 ) ( P 1,117,113 ) P 5,802,595 ( P 4,273,974 ) ( P 1,558,081 ) P 7,806,927 ( 3,720,000 ) - ( 3,720,000 ) ( 867 ) - - 2,464, ,293 2,991,931 ( P 5,530,203 ) ( P 1,030,788 ) P 7,078,858

110 108 UCPB 2015 Annual Report United Coconut Planters Bank and Subsidiaries Statement of Cash Flows FOR THE YEAR ENDED DECEMBER 31, 2015 (With Comparative Figures for 2014) (Amounts in Thousands of Philippine Pesos) GROUP PARENT BANK Notes CASH FLOWS FROM OPERATING ACTIVITIES Income before tax P 4,354,924 P 4,237,506 P 3,379,156 P 3,349,972 Adjustments for: Interest income 9, 10, 11, 12 ( 11,898,815 ) 11,733,515 ( 10,397,649 ) ( 10,213,428 ) Interest received 11,898,757 11,681,418 10,396,287 10,163,761 Interest expense 18, 19 2,726,887 2,831,029 2,484,645 2,601,804 Interest paid ( 2,719,059 ) ( 2,851,135 ) ( 2,485,720 ) ( 2,666,287 ) Depreciation and amortization 14, 15, , , , ,161 Trading gains on available-for-sale financial assets 11 ( 229,312 ) ( 132,617 ) ( 229,331 ) ( 129,532 ) Retirement expense charged to profit or loss , , , ,667 Contributions to retirement fund 23 ( 223,110 ) ( 175,566 ) ( 203,714 ) ( 161,522 ) Impairment losses , , ,816 - Amortization of discounts on held-to-maturity investments 171,103 66,618 70,675 65,585 Gains on assets sold ( 111,048 ) ( 434,035 ) ( 106,144 ) ( 424,688 ) Mark-to-market (gains) losses on financial assets at fair value through profit or loss (FVTPL) 11 62,610 ( 53,454 ) 68,894 ( 38,698 ) Gains on foreclosures ( 58,612 ) ( 45,404 ) ( 32,896 ) ( 27,388 ) Amortization of discounts on long term negotiable certificates of deposits 18 20,106 20,106 20,106 20,106 Share in net income of associates 13 ( 1,803 ) ( 130,310 ) - - Operating income before working capital changes 5,017,116 27,836,997 3,877,819 3,270,513 Decrease (increase) in financial assets at FVTPL ( 1,513,490 ) 195,394 ( 1,868,713 ) 278,909 Increase in loans and other receivables ( 11,973,621 ) ( 34,068,203 ) ( 10,394,144 ) ( 8,076,953 ) Increase in investment properties ( 2,325,263 ) ( 4,001,108 ) ( 3,171,498 ) ( 2,992,489 ) Decrease (increase) in other resources ( 560,560 ) 5,993,800 ( 521,305 ) 4,726,141 Increase (decrease) in deposit liabilities 18,539,635 ( 12,102,649 ) 18,013,728 ( 12,946,338 ) Increase (decrease) in accrued taxes, interests and other expenses 80,369 ( 28,908 ) 65,484 ( 4,317 ) Increase (decrease) in other liabilities ( 3,264,582 ) 5,590,722 ( 3,434,201 ) 5,531,886 Cash generated from (used in) operations 3,999,604 ( 10,583,955 ) 2,567,170 ( 10,212,648 ) Cash paid for income taxes ( 1,002,976 ) ( 1,130,529 ) ( 819,413 ) ( 859,289 ) Net Cash From (Used in) Operating Activities 2,996,628 ( 11,714,484 ) 1,747,757 ( 11,071,937 ) CASH FLOWS FROM INVESTING ACTIVITIES Acquisitions of: Available-for-sale financial assets ( 5,373,471 ) ( 13,587,420 ) ( 5,342,786 ) ( 13,420,209 ) Bank premises, furniture, fixtures and equipment 14 ( 552,431 ) ( 437,549 ) ( 465,929 ) ( 339,807 ) Software 16 ( 55,056 ) ( 49,819 ) ( 47,082 ) ( 49,484 ) Additional investment in a subsidiary ( 125,000 ) Proceeds from disposals of: Available-for-sale financial assets 10,050,335 13,030,873 9,959,128 12,742,369 Bank premises, furniture, fixtures and equipment 247, , , ,070 Investment properties 2,376,609 1,122,489 3,181,920 1,164,662 Net Cash From Investing Activities 6,693, ,009 7,524, ,601 (Forward)

111 Audited Financial Report 109 GROUP PARENT BANK Notes CASH FLOWS FROM FINANCING ACTIVITIES Settlements of bills payable ( 12,670,583 ) ( 180,379,685 ) ( 11,036,987 ) ( 178,413,373 ) Availments of bills payable 12,698, ,330,306 10,786, ,594,546 Net Cash From (Used in) Financing Activities 27,848 ( 49,379 ) ( 250,253 ) ( 818,827 ) TRANSLATION ADJUSTMENTS ( 796 ) ( 17,624 ) ( 796 ) ( 17,494 ) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 9,717,354 ( 11,487,478 ) 9,021,475 ( 11,777,657 ) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR Cash and other cash items 9 7,477,991 6,478,104 7,041,100 6,228,587 Due from Bangko Sentral ng Pilipinas 9 39,502,248 62,906,968 38,244,884 61,266,293 Due from other banks 9 2,253,958 1,885,130 2,165,147 1,782,435 Interbank loans receivable and securities purchased under resale agreements 10 11,808,804 1,260,277 11,308,804 1,260,277 61,043,001 72,530,479 58,759,935 70,537,592 CASH AND CASH EQUIVALENTS AT END OF YEAR Cash and other cash items 9 6,543,793 7,477,991 6,193,988 7,041,100 Due from Bangko Sentral ng Pilipinas 9 47,524,537 39,502,248 45,772,123 38,244,884 Due from other banks 9 7,682,039 2,253,958 7,505,313 2,165,147 Interbank loans receivable and securities purchased under resale agreements 10 9,009,986 11,808,804 8,309,986 11,308,804 P 70,760,355 P 61,043,001 P 67,781,410 P 58,759,935 Supplemental Information on Non-cash Investing Activities: 1. The Group and the Parent Bank foreclosed real and other properties totalling to P558,214 and P492,728, respectively, in 2015, and P1,171,259 and P1,115,012, respectively, in 2014, in settlement of certain loan accounts (see Note 15). 2. In 2015 and 2014, the Group and the Parent Bank recognized an amortization of unbooked valuation reserves as a direct charge to deficit amounting to P3.8 billion and P3.7 billion, respectively (see Note 17). See Notes to Financial Statements.

112 110 UCPB 2015 Annual Report United Coconut Planters Bank and Subsidiaries Notes to Financial Statements DECEMBER 31, 2015 (With Comparative Figures for 2014) (Amounts in Thousands of Philippine Pesos, Except Par Value, Per Share Data, Exchange Rates and as Indicated) 1. CORPORATE INFORMATION 1.1 Incorporation United Coconut Planters Bank (the Bank, UCPB or the Parent Bank ) is a universal bank incorporated in the Philippines on May 10, On January 26, 2012, the Board of Directors (BOD) approved the calling of a stockholders meeting of the Parent Bank to approve the extension of its corporate life. On May 2, 2012, a resolution was unanimously approved and adopted at a special meeting of stockholders, extending the life of the Parent Bank for another 50 years from and after May 10, 2013, and for this purpose, amending the Parent Bank s Articles of Incorporation. On August 14, 2012, the Philippine Securities and Exchange Commission (SEC) approved the extension of the Parent Bank s corporate life for another 50 years up to As of December 31, 2015 and 2014, the Parent Bank holds ownership interests in the following subsidiaries and associates: Ownership Subsidiaries/Associates Interest Principal Activity Subsidiaries: Balmoral Resources Corporation (BRC) % Real estate development Green Homes Development, Inc. (GHDI) % Real estate development UCPB Properties Macaria Homes Corporation (UPI-MHC) % Real estate development UCPB Leasing and Finance Corp. (ULFC) % Leasing and financing United Foreign Exchange Corporation (UFEC) % Foreign exchange UCPB Securities, Inc. (USI) % Securities brokerage UCPB Savings Bank, Inc. (USB) 97.37% Thrift banking Associates: Legaspi Oil Company, Inc. (LOCI) 17.50% Oil Milling Southern Luzon Coconut Oil Mills Co. Inc., (SLCOMI) 17.48% Oil Milling San Pablo Manufacturing Corporation (SPMC) 12.77% Oil Milling UCPB-CIIF Finance and Development Corporation (UCFDC) 10.26% Financing Granexport Manufacturing Corporation (GMC) 2.84% Oil Milling All of the Parent Bank s subsidiaries and associates are incorporated and conducting their respective businesses in the Philippines. The Parent Bank and its subsidiaries (collectively referred herein as the Group ) are engaged in all aspects of financial services such as banking, financing, leasing, real estate and stock brokering. As a bank, the Parent Bank is organized to provide expanded commercial banking services such as deposit products, loans and trade finance, domestic and foreign fund transfers, treasury, foreign exchange, investment banking and trust services. In addition, the Parent Bank is allowed by the Bangko Sentral ng Pilipinas (BSP) to engage in generally-authorized plain vanilla derivatives. The Parent Bank was authorized to engage in trust operations in June 1963 and in foreign currency deposit operations in October As of December 31, 2015, the Parent Bank and USB have 188 and 43 branches, respectively, and 293 and 47 automated teller machines, respectively, located nationwide. As banking institutions, the Parent Bank s and USB s operations are regulated and supervised by the BSP. In this regard, the Parent Bank and USB are required to comply with the rules and regulations of the BSP such as those relating to maintenance of reserve requirements on deposit liabilities and deposit substitutes and those relating to the adoption and use of safe and sound banking practices as promulgated by the BSP. The Parent Bank and USB are subject to the provisions of Republic Act (RA) No. 8791, The General Banking Law of Rehabilitation Plan On July 7, 2003, the Parent Bank entered into a Financial Assistance Agreement (the Agreement or FAA) with the Philippine Deposit Insurance Corporation (PDIC). The financial assistance from PDIC amounting to P20.0 billion has three components: (a) (b) P8.0 billion direct purchase of non-performing loans; P7.0 billion in Tier 2 capital with a cost to the Parent Bank of 5.0% due in 2013; and, (c) P5.0 billion purchase of non-performing loans with buyback by 2013.

113 Audited Financial Report 111 On February 26, 2004, PDIC endorsed to the BSP for approval the Parent Bank s 10-year Business/Rehabilitation Plan (the Rehabilitation Plan ). Part of the Rehabilitation Plan is the Parent Bank s business strategy that has the following elements: (1) separation of the bad bank from the good bank ; (2) right-sizing and streamlining of operations to reduce costs; and, (3) capital-raising, which aims to withstand the limitation brought about by the unresolved ownership issues. The BSP approved the Rehabilitation Plan on January 10, 2005, including the following concessions: (a) temporary relief by reducing the risk-weighted capital ratio to 8.0% for a period of three years up to 2007 or until such time that the Parent Bank is able to comply with the required 10.0% capital adequacy ratio (CAR), whichever comes earlier; and, (b) staggered booking of required valuation reserves for 10 years. 1.3 Amendments to the Rehabilitation Plan and Conversion of PDIC Financial Assistance to Interim Tier 1 Capital Notes On May 15, 2008, the Monetary Board (MB) decided, in its Resolution No. 590, to: (a) Approve the amended 10-Year Rehabilitation/Business Plan ( ) of the Parent Bank and grant the Parent Bank (the Issuer ) the authority to issue P12.0 billion Interim Tier 1 Capital Notes (the Capital Notes or Notes ) to PDIC, which will qualify as Interim Tier 1 capital (Note 22), provided that: The Capital Notes to be issued meet the minimum features under BSP Circular No. 595 dated January 11, 2008; and, UCPB s Articles of Incorporation shall be amended to: (i) increase its authorized capital of P3.3 billion to an amount that will cover the amount of the Capital Notes; and, (ii) remove the ownership limitation in the Parent Bank, which is 1.0% of the issued and outstanding preferred and common shares, for a stockholder who is not a stockholder as at December 31, (b) Grant to UCPB the following concessions: Authority to accept deposits from the National Government (NG), Local Government Units (LGUs) and Government-Owned and Controlled Corporations (GOCCs), with the ceiling of P5.9 billion increased by the amount that the NG will deposit with the Parent Bank; Consider the government securities (GS) purchased out of the P30.0 billion deposit of the NG as alternative/eligible compliance with the liquidity reserves and liquidity floor requirement; Stagger the booking of the unbooked valuation reserves and deferred charges aggregating to P27.9 billion consistent with the Parent Bank s approved 10-year Business/Rehabilitation Plan, provided that subsequent valuation reserves to be required in excess of the P27.9 billion shall be immediately booked and no dividend shall be declared while the concession is in effect; Waiver of certain monetary penalties; and, Continued access to the BSP Rediscounting Facility, subject to a rediscount ceiling of P1.5 billion. The aforementioned MB approval was further clarified under MB Resolution No. 687 issued on June 17, 2008, which states that UCPB s Articles of Incorporation shall be amended prior to the conversion of the Capital Notes to capital stock. On May 15, 2008, the PDIC Board, in its Resolution No , approved the conversion of PDIC s P12.0 billion Financial Assistance into Capital Notes eligible as Interim Tier 1 capital. On July 25, 2008, the Republic of the Philippines (ROP), PDIC, Presidential Commission on Good Government (PCGG) and the Parent Bank executed a Memorandum of Agreement (MOA) for the strengthening of the Parent Bank s capital through the issuance of Capital Notes consistent with BSP rules and regulations, and subscription thereof by PDIC via the conversion of PDIC s outstanding 2003 Financial Assistance of P12.0 billion. In addition, the MOA provides for the maintenance by the ROP of at least P25.0 billion but not to exceed P30.0 billion of deposits in the Parent Bank. The government deposits shall be used to (i) establish and maintain a pool of GS; and, (ii) open, as part of UCPB s compliance with the statutory reserves on the government deposits, a demand deposit account (DDA) with the BSP. The aggregate of items (i) and (ii) shall at all times be in the same amount as the government deposits. On March 31, 2009, the 2003 FAA and the Subscription Agreement were amended and signed, respectively, by the PDIC, UCPB and PCGG (only for Amended 2003 FAA). On the same date, the Parent Bank issued the Capital Notes, which has no maturity date and has the following features: (a) Dividend/Coupon Rate. Dividend/Coupon rates as follows: (i) 2.0% from April 1, 2009 to March 31, 2011; (ii) 4.0% from April 1, 2011 to March 31, 2013; (iii) 8.0% from April 1, 2013 to March 31, 2015; (iv) 12.0% from April 1, 2015 to March 31, 2017; and, (v) 14.0% from April 1, 2017 onwards. The Issuer shall have full and absolute discretion: (i) whether or not to declare and pay coupons on the Notes, and (ii) over the amount and timing of coupon payments, in the event that, in the exercise of its discretion, the Issuer decides to declare and pay coupons. The Issuer shall, every time it declares and pays dividends on its common shares, likewise pay coupons on the Notes. Coupons on the Notes may be declared and paid only: (i) to the extent that the Issuer has sufficient profits and/or retained earnings distributable; and, (ii) if, after such declaration and payment, the Issuer shall be able to meet the capital adequacy and liquidity thresholds, determined in accordance with BSP regulations prevailing at the time of declaration and payment of coupons. Coupons on the Notes shall be non-cumulative. Moreover, the Issuer shall have full control and access to any waived coupon payments. The Notes have no step-up provisions in the coupon rate in conjunction with the redemption option. (b) Repayment/Redemption of the Capital Notes. Redemption of the Notes shall be subject to prior written BSP approval. The Capital Notes may be redeemed, in whole or in part, at the sole option of the Issuer, anytime after five years from the date of issuance of the Notes. However, the option granted to the Issuer may be exercised within five years from the date of issuance of the Notes upon the infusion of sufficient capital which is neither smaller in size nor lower in quality than the Notes, unless the Issuer s capital adequacy ratio remains more than adequate after redemption of the Notes. In the event of insolvency of the Issuer, the Holder shall be, immediately and without need for demand, entitled to repayment of the Notes.

114 112 UCPB 2015 Annual Report (c) (d) (e) Assignability. The Holder may assign or transfer the Capital Notes to any person or entity provided prior written notice of such assignment or transfer is given to the Issuer. Conversion Price. The Notes shall be convertible to Special Preferred Shares or Common Shares with an aggregate par value of P12.0 billion at the time of conversion. Failure to Comply with Obligations. In case the Issuer fails to perform any of its material obligations under the Notes, including the conversion of the Notes into Special Preferred Shares or Common Shares, then the Notes shall become due and demandable, and the Holder shall have the following rights: Collect the principal of the Notes in the amount of P12.0 billion and interest at the rate of 14.0%; and, Institute such proceedings to enforce any of the obligations of the Issuer if the Issuer continues to fail to perform its material obligation within 30 days from written notice of the Holder. The Subscription Agreement includes an Insolvency of the Issuer clause with the following consequences: (a) (b) If the Issuer becomes insolvent, PDIC shall, within fifteen days after it acquires knowledge of the occurrence of the Issuer s insolvency, give the Issuer a written notice declaring all the Notes then outstanding, including all accrued coupon thereon, to be due and payable immediately, and upon any such declaration the same shall be immediately due and payable, subject only to subordination. Paragraph (a) is further subject to the condition that PDIC may rescind and annul such declaration and its consequences, upon such terms, conditions, and agreements, if any, as it may determine, but no such rescission and annulment shall extend to or shall affect any subsequent default or shall impair any right of PDIC consequent thereto. The subordination mentioned under paragraph (a) means that the Notes are not deposits of the Issuer and are not guaranteed or insured by the Issuer or any party related to the Issuer or covered by any other arrangement that legally or economically enhances the priority of the claim of the Holder as against the depositors, other creditors and holders of Lower Tier 2 and Upper Tier 2 capital instruments, if any, of the Issuer. In order to accommodate the conversion of the Capital Notes to Special Preferred Shares or Common Shares, should the Holder of the Capital Notes decide to convert, the proposed amendment to the Parent Bank s Articles of Incorporation was approved at the regular BOD meeting on April 28, 2009 with the written assent of at least 2/3 of the Parent Bank s stockholders. The proposed amendments include: (a) (b) (c) Reclassifying (i) 1,002,829,769 unissued common shares of the Parent Bank; and, (ii) 750,000,000 unissued preferred shares of the Parent Bank, all with a par value of P1.00 per share, into 1,752,829,769 Special Preferred Shares; Denying pre-emptive right over the issuance of special preferred and common shares for the conversion of special preferred shares and the Capital Notes; and, Deletion of ownership limitation in the Parent Bank, which is 1.0% of the issued and outstanding preferred and common shares, for a stockholder who is not a stockholder as at December 31, In March 2011, the Parent Bank filed with the SEC the application for the amended Articles of Incorporation to address these proposed amendments. The SEC approved the said amendments on May 10, 2011 (Note 22). 1.4 Staggered Booking of Required Valuation Reserves and Deferred Charges On February 26, 2009, the MB, in its Resolution No. 345, decided to: (a) (b) (c) Approve the year 2009 as the start of the 10-year rehabilitation period ( ) of the Parent Bank instead of 2008 as contained in the Parent Bank s Rehabilitation Plan approved by the MB under Resolution No. 590 dated May 15, 2008; Exempt the Parent Bank from sanctions that may be imposed for its non-compliance with the 10.0% CAR and all the capital-based regulatory ratios for the year 2008 until such time that the Parent Bank s Rehabilitation Plan is fully implemented; and, Approve the following: Reversal of all previous staggered bookings of unbooked valuation reserves and amortization of deferred charges, based on the Special Purpose Vehicle (SPV) formula that the Parent Bank has been providing starting 2007 in accordance with the original rehabilitation program approved by the BSP on January 10, 2005 (the Parent Bank s Surplus as at January 1, 2008 was restated to consider the effect of the amortization of valuation reserves); Deferment of any staggered booking or amortization of unbooked valuation reserves and deferred charges (UVR/DC) until the Parent Bank s recapitalization is completely in place starting January 2009 and to accordingly revise the schedule of the staggered booking of unbooked valuation reserves and amortization of deferred charges following the concept of affordability per the latest approved business plan by the BSP; and, Temporary relief from full compliance with the required 10.0% CAR as provided under Section 34 of the General Banking Law of 2000 by reducing the Parent Bank s CAR to 8.0% for a period of three years up to 2011 or until such time that the Parent Bank is able to comply with the required 10.0% CAR, whichever comes first. As at December 31, 2008, the unbooked valuation reserves that the Parent Bank will recognize on a staggered basis starting January 2009, as allowed by the BSP, amounted to P29.1 billion. This consists of the (a) P27.9 billion unbooked valuation reserves and deferred charges allowed to be staggered in the MB Resolution No. 590 dated May 15, 2008, and (b) P1.2 billion additional unbooked valuation reserves that will be recognized on a staggered basis arising from the reversal of previously amortized valuation reserves due to the resetting of the start of amortization of the unbooked valuation reserves and deferred charges as allowed under MB Resolution No. 345 dated February 26, The unbooked valuation reserves and deferred charges were determined based on the criteria set by the BSP which differs from Philippine Financial Reporting Standards (PFRS) in certain respects.

115 Audited Financial Report 113 In 2013, UCPB set in motion its recapitalization plan by having, on December 18, 2013, a resolution unanimously approved and adopted at a special meeting of stockholders to increase its authorized capital stock within the range of P14.7 billion to P37.2 billion. UCPB also requested certain regulatory reliefs from the BSP relative to its recapitalization plan. On May 23, 2014, the MB, in its Resolution No. 822, approved the following effective until December 31, 2018: (a) (b) Exemption from compliance with Basel III capital requirements and to continue capital compliance under Basel II guidelines; Continue the following regulatory reliefs granted pursuant to UCPB s 10-year rehabilitation plan: Recognition as interim Tier 1 capital of the P12.0 billion Capital Notes issued to the PDIC as long as the notes are outstanding and held by the PDIC; Staggered booking of the remaining unbooked valuation reserves and deferred charges; To remain as a government depository bank, subject to compliance with applicable regulations of the Department of Finance; Allow updating of its remaining unbooked valuation reserves and deferred charges using the outstanding P18.6 billion balance based on an independent valuation by a professional firm, to be amortized on a straight-line basis; Exclusion from recapitalization transaction of UCPB s proprietary interest in the Coconut Industry Investment Fund Oil Mills Group (CIIF-OMG) valued at P8.6 billion as at December 31, 2013 and representing 11% equity participation by providing full provision for losses thereon; and, Exemption from the requirement, as a universal bank, to list its shares in the Philippine Stock Exchange (PSE). The MB further approved, in its resolution No. 823 dated May 22, 2014, the following additional regulatory reliefs: (a) (b) To allow UCPB to open new branches even with Basel II capital adequacy ratio of at least 10% until December 2016; and, To waive the licensing fees for additional 50 branches, subject to compliance with the provisions on branch establishment under Section X151 of the Manual of Regulations for Banks, including branch processing fees. In June 26, 2015, the MB further approved, in its resolution No. 1020, the following additional regulatory reliefs: (a) (b) (c) Exclusion of the risk free interest income, earned from the income support facility, from the calculation of gross income that is subject to operational risk capital charge; Extension up to 2018 of the MB approval under Resolution No. 759 dated May 9, 2013, allowing the bank to charge the amortization of unbooked valuation reserves and deferred charges against retained earnings, instead of current operations; and, Inclusion of loans of P3.8 billion returned by the PDIC as part of the Old Bank that allows re-allocation of excess valuation reserves from other assets within the pool of Old Bank assets to the assets returned by PDIC. The balance of deferred charges amounted P11.1 billion and P14.1 billion as at December 31, 2015 and 2014, respectively (see Note 16). 1.5 Executive Orders 179 (Providing the Administrative Guidelines for the Inventory and Privatization of Coco Levy Assets) and 180 (Providing the Administrative Guidelines for the Reconveyance and Utilization of Coco Levy Assets for the Benefit of the Coconut Farmers and the Development of the Coconut Industry, and for Other Purposes) A portion of the sequestered shares of the Parent Bank was the subject of legal cases on which the Supreme Court has issued its final decision in 2012 whereby such shares are declared conclusively owned by the ROP for the benefit of the coconut farmers (Notes 13 and 22). On March 18, 2015, President Benigno S. Aquino III of the ROP issued Executive Order Nos. 179 and No. 180, collectively referred to herein as the EOs. The EOs mandate the inventory, reconveyance, utilization and privatization of coco levy assets to ensure that the Coco Levy Fund and Coco Levy Assets will only be utilized for the benefit of the coconut farmers and the Philippine coconut industry. The EOs define coco levy funds as all funds created or sourced from the Coconut Levy imposed by the government, including the Coconut Industry Investment Fund (CIIF) and the Coconut Consumers Stabilization Fund (CCSF). The Parent Bank was appointed administrator of the CIIF under Presidential Decree (PD) No. 1468, s Revised Coconut Industry Code. Coco levy assets meanwhile refer to the money, assets or properties, whether real or personal, tangible or intangible, wherever situated, arising from or otherwise funded by or acquired through the use or by means of any of the coco levy funds, directly or indirectly, including but not limited to shares, rights, and interests, whether vested, contingent, expectant, choate or inchoate, and any and all fruits, income, interest, or profits derived from these assets including those acquired in exchange or substitution thereof. The EOs reference the Supreme Court decision that a majority of the sequestered shares of stock of the Parent Bank, which was paid from the CCSF, is owned by the ROP for the benefit of the coconut farmers, thus making it a part of the coco levy assets. Also, on March 18, 2015, the Office of the President approved the recapitalization of the Parent Bank, by way of privatization, to be implemented by a Committee composed of representatives from the Governance Commission for Government-Owned or Controlled Corporations (GCG), PDIC, PCGG, Privatization and Management Office (PMO), and the Parent Bank. On June 30, 2015, the Supreme Court issued a temporary restraining order enjoining the implementation of the EOs (Confederation of Coconut Farmers Organizations of the Philippines vs. His Excellency President Benigno S. Aquino III, et. Al., G.R. No ). While the implementation of the EOs and the Supreme Court decision, particularly the manner by which the reconveyance, utilization and privatization of the Coco Levy Assets will be undertaken, including the recapitalization by way of privatization of the Parent Bank, has not yet been implemented by authorities; hence, its impact on the financial statements of the Parent Bank cannot be fully assessed at this time, the BOD and management believes that, as at December 31, 2015, it is reasonable to maintain the status quo and continue with the operations of the Parent Bank, its subsidiaries and associates including the manner of accounting and valuation of its investments in CIIF Oil Mills companies (see Notes 3.1, 13, 22 and 27).

116 114 UCPB 2015 Annual Report 1.6 Approval of Financial Statements The consolidated financial statements of Parent Bank and subsidiaries and the financial statements of UCPB as of and for the year ended December 31, 2015 (including the comparative financial statements as of and for the year ended December 31, 2014) were approved and authorized for issue by the Parent Bank s BOD on April 4, SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The significant accounting policies that have been used in the preparation of these financial statements are summarized below and in the succeeding page. These policies have been consistently applied to all the years presented, unless otherwise stated. 2.1 Basis of Preparation of Financial Statements (a) Statement of Compliance with Philippine Financial Reporting Standards The financial statements of the Group have been prepared in accordance with PFRS except for the following accounting treatments which were allowed by the BSP for prudential reporting purposes: (i) staggered amortization of unbooked valuation reserves and deferred charges on sale and dacion en pago settlement (see Note 1.4); (ii) presentation of Interim Tier 1 Capital Notes as an equity instrument instead of as a financial liability in the statement of financial position (see Notes 1.2 and 22); and, (iii) non-reclassification of held-to-maturity (HTM) investments, comprising mainly of government securities bought using the P30.0 billion deposit of the NG with the Parent Bank, as HTM investments as at December 31, 2013 to Available-for-Sale (AFS) financial assets despite breaching the tainting rule of PAS 39, Financial Instruments: Recognition and Measurement in 2011 (see Note 11). PFRS are adopted by the Financial Reporting Standards Council (FRSC) from the pronouncements issued by the International Accounting Standards Board (IASB), and approved by the Philippine Board of Accountancy. Except for the accounting treatments mentioned above, the financial statements have been prepared using the measurement bases specified by PFRS for each type of asset, liability, income and expense. The measurement bases are more fully described in the accounting policies that follow. (b) Presentation of Financial Statements The financial statements are presented in accordance with Philippine Accounting Standards (PAS) 1, Presentation of Financial Statements. The Group presents all items of income and expenses in two statements: a statement of income and a statement of comprehensive income. The Group presents a third statement of financial position as at the beginning of the preceding period when it applies an accounting policy retrospectively, or makes a retrospective restatement or reclassification of items that have a material effect on the information in the statement of financial position at the beginning of the preceding period. The related notes to the third statement of financial position are not required to be disclosed. (c) Functional and Presentation Currency These financial statements are presented in Philippine pesos, the Parent Bank s functional and presentation currency, and all values represent absolute amounts except when otherwise indicated. Items included in the financial statements of the Group are measured using the functional currency of the Parent Bank. Functional currency is the currency of the primary economic environment in which the Group operates. 2.2 Adoption of New and Amended PFRS (a) Effective in 2015 that are Relevant to the Group In 2015, the Group adopted for the first time the following amendment and annual improvements to PFRS, which are mandatorily effective for annual periods beginning on or after July 1, 2014, for its annual reporting period beginning January 1, 2015: PAS 19 (Amendment) : Employee Benefits: Defined Benefit Plans Employee Contributions Annual Improvements : Annual Improvements to PFRS ( Cycle) and PFRS ( Cycle) Discussed below are the relevant information about these amendment and improvements. (i) (ii) PAS 19 (Amendment), Employee Benefits: Defined Benefit Plans Employee Contributions. The amendment clarifies that if the amount of the contributions to defined benefit plans from employees or third parties is dependent on the number of years of service, an entity shall attribute the contributions to periods of service using the same attribution method (i.e., either using the plan s contribution formula or on a straight-line basis) for the gross benefit. The amendment did not have a significant impact on the Group s financial statements since the Group s defined benefit plan does not require employees or third parties to contribute to the benefit plan. Annual Improvements to PFRS. Annual improvements to PFRS ( Cycle) and PFRS ( Cycle) made minor amendments to a number of PFRS. Among those improvements, the following amendments are relevant to the Group but had no material impact on the Group s financial statements as these amendments merely clarify the existing requirements:

117 Audited Financial Report 115 Annual Improvements to PFRS ( Cycle) PAS 16 (Amendment), Property, Plant and Equipment and PAS 38 (Amendment), Intangible Assets. The amendments clarify that when an item of property, plant and equipment and intangible assets is revalued, the gross carrying amount is adjusted in a manner that is consistent with a revaluation of the carrying amount of the asset. PAS 24 (Amendment), Related Party Disclosures. The amendment clarifies that an entity providing key management services to a reporting entity is deemed to be a related party of the latter. It also clarifies that the information required to be disclosed in the financial statements are the amounts incurred by the reporting entity for key management personnel services that are provided by a separate management entity and not the amounts of compensation paid or payable by the management entity to its employees or directors. PFRS 3 (Amendment), Business Combinations. This amendment clarifies that an obligation to pay contingent consideration which meets the definition of a financial instrument is classified as a financial liability or as equity in accordance with PAS 32, Financial Instruments: Presentation. It also clarifies that all non-equity contingent consideration should be measured at fair value at the end of each reporting period, with changes in fair value recognized in profit or loss. PFRS 8 (Amendment), Operating Segments. This amendment requires disclosure of the judgments made by management in applying the aggregation criteria to operating segments. This includes a description of the segments which have been aggregated and the economic indicators which have been assessed in determining that the aggregated segments share similar economic characteristics. It further clarifies the requirement to disclose for the reconciliations of segment assets to the entity s assets if that amount is regularly provided to the chief operating decision maker. Annual Improvements to PFRS ( Cycle) PFRS 13 (Amendment), Fair Value Measurement. The amendment clarifies that the scope of the exception for measuring the fair value of a group of financial assets and financial liabilities on a net basis (the portfolio exception) applies to all contracts within the scope of and accounted for in accordance with PAS 39, Financial Instruments: Recognition and Measurement, or PFRS 9, Financial Instruments, regardless of whether they meet the definition of financial assets or financial liabilities as defined in PAS 32. PAS 40 (Amendment), Investment Property. The amendment clarifies the interrelationship of PFRS 3 and PAS 40 in determining the classification of property as an investment property or owner-occupied property, and explicitly requires an entity to use judgment in determining whether the acquisition of an investment property is an acquisition of an asset or a group of asset in accordance with PAS 40 or a business combination in accordance with PFRS 3. PFRS 3 (Amendment), Business Combinations. It clarifies that PFRS 3 does not apply to the accounting for the formation of any joint arrangement under PFRS 11, Joint Arrangement, in the financial statements of the joint arrangement itself. (b) Effective in 2015 but not Relevant to the Group The annual improvements to PFRS 2 (Amendment), Share-based Payments Definition of Vesting Conditions, are mandatory for accounting periods beginning on or after July 1, 2014 but is not relevant to the Group s financial statements. (c) Effective Subsequent to 2015 but not Adopted Early There are new PFRS, amendments and annual improvements to existing standards effective for annual periods subsequent to 2015 which are adopted by the FRSC. Management will adopt the following relevant pronouncements in accordance with their transitional provisions; and, unless otherwise stated, none of these are expected to have significant impact on the Group s financial statements: (i) (ii) PAS 1 (Amendment), Presentation of Financial Statements Disclosure Initiative (effective from January 1, 2016). The amendment encourages entities to apply professional judgment in presenting and disclosing information in the financial statements. Accordingly, it clarifies that materiality applies to the whole financial statements and an entity shall not reduce the understandability of the financial statements by obscuring material information with immaterial information or by aggregating material items that have different natures or functions. Moreover, the amendment clarifies that an entity s share of other comprehensive income of associates and joint ventures accounted for using equity method should be presented based on whether or not such other comprehensive income item will subsequently be reclassified to profit or loss. It further clarifies that in determining the order of presenting the notes and disclosures, an entity shall consider the understandability and comparability of the financial statements. PAS 16 (Amendment), Property, Plant and Equipment, and PAS 38 (Amendment), Intangible Assets Clarification of Acceptable Methods of Depreciation and Amortization (effective from January 1, 2016). The amendment in PAS 16 clarifies that a depreciation method that is based on revenue that is generated by an activity that includes the use of an asset is not appropriate for property, plant and equipment. In addition, amendment to PAS 38 introduces a rebuttable presumption that an amortization method that is based on the revenue generated by an activity that includes the use of an intangible asset is not appropriate, which can only be overcome in limited circumstances where the intangible asset is expressed as a measure of revenue, or when it can be demonstrated that revenue and the consumption of the economic benefits of an intangible asset are highly correlated. The amendment also provides guidance that the expected future reductions in the selling price of an item that was produced using the asset could indicate an expectation of technological or commercial obsolescence of an asset, which may reflect a reduction of the future economic benefits embodied in the asset. (iii) PAS 16 (Amendment), Property, Plant and Equipment, and PAS 41 (Amendment), Agriculture Bearer Plants (effective from January 1, 2016). The amendment defines a bearer plant as a living plant that is used in the production or supply of agricultural produce, is expected to bear produce for more than one period and has a remote likelihood of being sold as agricultural produce, except for incidental scrap sales. On this basis, bearer plant is now included within the scope of PAS 16 rather than PAS 41, allowing such assets to be accounted for as property, plant and equipment and to be measured after initial recognition at cost or revaluation basis in accordance with PAS 16. The amendment further clarifies that produce growing on bearer plants remains within the scope of PAS 41.

118 116 UCPB 2015 Annual Report (iv) PAS 27 (Amendment), Separate Financial Statements Equity Method in Separate Financial Statements (effective from January 1, 2016). This amendment introduces a third option which permits an entity to account for its investments in subsidiaries, joint ventures and associates under the equity method in its separate financial statements in addition to the current options of accounting those investments at cost or in accordance with PAS 39 or PFRS 9. As of the end of the reporting period, the Group has no plan to change the accounting policy for its investments in its subsidiaries and associates. (v) (vi) PFRS 10 (Amendment), Consolidated Financial Statements, PFRS 12, Disclosure of Interests in Other Entities, and PAS 28 (Amendment), Investments in Associates and Joint Ventures Investment Entities Applying the Consolidation Exception (effective from January 1, 2016). This amendment addresses the concerns that have arisen in the context of applying the consolidation exception for investment entities. It clarifies which subsidiaries of an investment entity are consolidated in accordance with paragraph 32 of PFRS 10 and clarifies whether the exemption to present consolidated financial statements, set out in paragraph 4 of PFRS 10, is available to a parent entity that is a subsidiary of an investment entity. This amendment also permits a non-investment entity investor, when applying the equity method of accounting for an associate or joint venture that is an investment entity, to retain the fair value measurement applied by that investment entity associate or joint venture to its interests in subsidiaries. PFRS 10 (Amendment), Consolidated Financial Statements, and PAS 28 (Amendment), Investments in Associates and Joint Ventures Sale or Contribution of Assets between an Investor and its Associates or Joint Venture (effective date deferred indefinitely). The amendment to PFRS 10 requires full recognition in the investor s financial statements of gains or losses arising on the sale or contribution of assets that constitute a business as defined in PFRS 3 between an investor and its associate or joint venture. Accordingly, the partial recognition of gains or losses (i.e., to the extent of the unrelated investor s interests in an associate or joint venture) only applies to those sale of contribution of assets that do not constitute a business. Corresponding amendment has been made to PAS 28 to reflect these changes. In addition, PAS 28 has been amended to clarify that when determining whether assets that are sold or contributed constitute a business, an entity shall consider whether the sale or contribution of those assets is part of multiple arrangements that should be accounted for as a single transaction. In December 2015, the IASB deferred the mandatory effective date of these amendments (i.e., from January 1, 2016) indefinitely. (vii) PFRS 11 (Amendment), Joint Arrangements. This amendment requires the acquirer of an interest in a joint operation in which the activity constitutes a business as defined in PFRS 3 to apply all accounting principles and disclosure requirements on business combinations under PFRS 3 and other PFRSs, except for those principles that conflict with the guidance in PFRS 11. (viii) PFRS 9 (2014), Financial Instruments (effective from January 1, 2018). This new standard on financial instruments will eventually replace PAS 39 and PFRS 9 (2009, 2010 and 2013 versions). This standard contains, among others, the following: three principal classification categories for financial assets based on the business model on how an entity is managing its financial instruments; an expected loss model in determining impairment of all financial assets that are not measured at fair value through profit or loss (FVTPL), which generally depends on whether there has been a significant increase in credit risk since initial recognition of a financial asset; and, a new model on hedge accounting that provides significant improvements principally by aligning hedge accounting more closely with the risk management activities undertaken by entities when hedging their financial and non-financial risk exposures. In accordance with the financial asset classification principle of PFRS 9 (2014), a financial asset is classified and measured at amortized cost if the asset is held within a business model whose objective is to hold financial assets in order to collect the contractual cash flows that represent solely payments of principal and interest (SPPI) on the principal outstanding. Moreover, a financial asset is classified and subsequently measured at fair value through other comprehensive income if it meets the SPPI criterion and is held in a business model whose objective is achieved by both collecting contractual cash flows and selling the financial assets. All other financial assets are measured at FVTPL. In addition, PFRS 9 (2014) allows entities to make an irrevocable election to present subsequent changes in the fair value of an equity instrument that is not held for trading in other comprehensive income. The accounting for embedded derivatives in host contracts that are financial assets is simplified by removing the requirement to consider whether or not they are closely related, and, in most arrangements, does not require separation from the host contract. For liabilities, the standard retains most of the PAS 39 requirements, which include amortized cost accounting for most financial liabilities, with bifurcation of embedded derivatives. The amendment also requires changes in the fair value of an entity s own debt instruments caused by changes in its own credit quality to be recognized in other comprehensive income rather than in profit or loss. The Group does not expect to implement and adopt PFRS 9 (2014) until its effective date. In addition, management is currently assessing the impact of PFRS 9 (2014) on the financial statements of the Group and it will conduct a comprehensive study of the potential impact of this standard prior to its mandatory adoption date to assess the impact of all changes. (ix) Annual Improvements to PFRS ( Cycle) (effective from January 1, 2016). Among the improvements, the following amendments are relevant to the Group but management does not expect these to have material impact on the Group s financial statements: PFRS 5 (Amendment), Non-current Assets Held for Sale and Discontinued Operations. The amendment clarifies that when an entity reclassifies an asset (or disposal group) directly from being held for sale to being held for distribution (or vice-versa), the accounting guidance in paragraphs of PFRS 5 does not apply. It also states that when an entity determines that the asset (or disposal group) is no longer available for immediate distribution or that the distribution is no longer highly probable, it should cease held-for-distribution accounting and apply the guidance in paragraphs of PFRS 5. PFRS 7 (Amendment), Financial Instruments: Disclosures. The amendment provides additional guidance to help entities identify the circumstances under which a contract to service financial assets is considered to be a continuing involvement in those assets for the purposes of applying the disclosure requirements of PFRS 7. Such circumstances commonly arise when, for example, the servicing is dependent on the amount or timing of cash flows collected from the transferred asset or when a fixed fee is not paid in full due to non-performance of that asset.

119 Audited Financial Report 117 PAS 19 (Amendment), Employee Benefits. The amendment clarifies that the currency and term of the high quality corporate bonds which were used to determine the discount rate for post-employment benefit obligations shall be made consistent with the currency and estimated term of the post-employment benefit obligations. 2.3 Basis of Consolidated and Separate Financial Statements The Group s consolidated financial statements comprise the accounts of the Parent Bank, and its subsidiaries as enumerated in Note 1.1, after the elimination of intercompany transactions. All intercompany assets and liabilities, equity, income, expenses and cash flows relating to transactions between entities under the Group, are eliminated in full on consolidation. Unrealized profits and losses from intercompany transactions that are recognized in assets are also eliminated in full. Intercompany losses that indicate impairment are recognized in the Group s financial statements. The financial statements of subsidiaries are prepared for the same reporting period as the Parent Bank, using consistent accounting principles. In the Parent Bank s separate financial statements, investments in subsidiaries and associates are carried at cost, less any impairment in value (see Note 2.20). The Parent Bank accounts for its investments in subsidiaries, associates, jointly controlled operations and non-controlling interests as follows: (a) Investments in Subsidiaries Subsidiaries are entities (including structured entities) over which the Group has control. The Group controls an entity when it is exposed, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. Subsidiaries are consolidated from the date the Group obtains control. The Parent Bank reassesses whether or not it controls an entity if facts and circumstances indicate that there are changes to one or more of the three elements of controls indicated above. Accordingly, entities are deconsolidated from the date that control ceases. The acquisition method is applied to account for acquired subsidiaries. This requires recognizing and measuring the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree. The consideration transferred for the acquisition of a subsidiary is the fair values of the assets transferred, the liabilities incurred to the former owners of the acquiree and the equity interests issued by the Group, if any. The consideration transferred also includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Acquisition-related costs are expensed as incurred and subsequent change in the fair value of contingent consideration is recognized directly in profit or loss. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. On an acquisition-by-acquisition basis, the Group recognizes any non-controlling interest in the acquiree, either at fair value or at the non-controlling interest s proportionate share of the recognized amounts of acquiree s identifiable net assets. The excess of the consideration transferred, the amount of any non-controlling interests in the acquiree and the acquisition-date fair value of any existing equity interest in the acquiree over the acquisition-date fair value of identifiable net assets acquired is recognized as goodwill. If the consideration transferred is less than the fair value of the net assets of the subsidiary acquired in the case of a bargain purchase, the difference is recognized directly as gain in profit or loss (see Note 2.14). (b) Investments in Associates Associates are those entities over which the Group is able to exert significant influence but which are neither subsidiaries nor interests in a joint venture. Investments in associates and joint ventures are initially recognized at cost and subsequently accounted for using the equity method. Acquired investments in associates are subject to the purchase method. The purchase method involves the recognition of the acquiree s identifiable assets and liabilities, including contingent liabilities, regardless of whether they were recorded in the financial statements prior to acquisition. Goodwill represents the excess of acquisition cost over the fair value of the Group s share of the identifiable net assets of the acquiree at the date of acquisition. Any goodwill or fair value adjustment attributable to the Group s share in the associate is included in the amount recognized as investments in associates. All subsequent changes to the ownership interest in the equity of the associates are recognized in the Group s carrying amount of the investments. Changes resulting from the profit or loss generated by the associates are credited or charged against the Share in Net Income of Associates account in the statement of income. Impairment loss is provided when there is objective evidence that the investment in an associate will not be recovered (see Note 2.20). Changes resulting from other comprehensive income of the associate or items recognized directly in the associate s equity are recognized in other comprehensive income or equity of the Group, as applicable. However, when the Group s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Group does not recognize further losses, unless it has incurred obligations or made payments on behalf of the associate. If the associate subsequently reports profits, the investor resumes recognizing its share of those profits only after its share of the profits exceeds the accumulated share of losses that has previously not been recognized. Distributions received from the associates are accounted for as a reduction of the carrying value of the investments. (c) Jointly Controlled Operations A jointly-controlled operations involves the use of assets and other resources of the Group and other venturers rather than the establishment of a corporation, partnership, or other entity. The Group accounts for the assets it controls and the liabilities and expenses it incurs, and the share of the income that it earns from the sale of goods or services by the joint venture.

120 118 UCPB 2015 Annual Report (d) Transactions with Non-controlling Interests The Group s transactions with non-controlling interests that do not result in loss of control are accounted for as equity transactions that is, as transaction with the owners of the Group in their capacity as owners. The difference between the fair value of any consideration paid and the relevant share acquired of the carrying value of the net assets of the subsidiary is recognized in equity. Disposals of equity investments to non-controlling interests result in gains and losses for the Group that are also recognized in equity. When the Group ceases to have control over a subsidiary, any retained interest in the entity is remeasured to its fair value at the date when control is lost, with the change in carrying amount recognized in profit or loss. The fair value is the initial carrying amount for the purposes of subsequently accounting for the retained interest as an associate, joint venture or financial asset. In addition, any amounts previously recognized in other comprehensive income in respect of that entity are accounted for as if the Group had directly disposed of the related assets or liabilities. This may mean that amounts previously recognized in other comprehensive income are reclassified to profit or loss. The Parent Bank holds interests in various subsidiaries and associates as presented in Note Financial Assets Financial assets are recognized when the Group becomes a party to the contractual terms of the financial instrument. For purposes of classifying financial assets, an instrument is considered as an equity instrument if it is non-derivative and meets the definition of equity for the issuer in accordance with the criteria of PAS 32. All other non-derivative financial instruments are treated as debt instruments. (a) Classification and Measurement of Financial Assets Financial assets other than those designated and effective as hedging instruments are classified into the following categories: financial assets at FVTPL, loans and receivables, HTM investments and AFS financial assets. Financial assets are assigned to the different categories by management on initial recognition, depending on the purpose for which the investments were acquired. Regular purchases and sales of financial assets are recognized on their trade date. All financial assets that are not classified as at FVTPL are initially recognized at fair value plus any directly attributable transaction costs. Financial assets carried at FVTPL are initially recorded at fair value and the related transaction costs are recognized in profit or loss. A more detailed description of the four categories of financial assets is as follows: (i) Financial Assets at FVTPL This category includes financial assets that are either classified as held for trading or that meets certain conditions and are designated by the entity to be carried at fair value through profit or loss upon initial recognition. All derivatives fall into this category, except for those designated and effective as hedging instruments. Assets in this category are classified as current if they are either held for trading or are expected to be realized within 12 months from the end of each reporting period. Financial assets at FVTPL are measured at fair value, and changes therein are recognized in profit or loss. Financial assets (except derivatives and financial instruments originally designated as financial assets at fair value through profit or loss) may be reclassified out of FVTPL category if they are no longer held for the purpose of being sold or repurchased in the near term. (ii) Loans and Receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the Group provides money, goods or services directly to a debtor with no intention of trading the receivables. Included in this category are those arising from direct loans to customers, interbank loans, sales contract receivables, and all receivables from customers and other banks. The Group s financial assets categorized as loans and receivables are presented as Cash and Other Cash Items, Due from BSP, Due from Other Banks, Interbank Loans Receivables and Securities Purchased Under Repurchase Agreements, and Loans and Other Receivables in the statement of financial position. For purposes of cash flows reporting and presentation, cash and cash equivalents including Cash and Other Cash Items, Due from BSP, Due from Other Banks and Interbank Loans Receivable, include cash on hand, demand deposits and short-term, highly liquid investments with original maturities of three months or less, readily convertible to known amounts of cash and which are subject to insignificant risk of changes in value. Also included in this category are securities purchased under repurchase agreements wherein the Group enters into short-term purchases of securities under reverse repurchase agreements of substantially identical securities with the BSP. The difference between the sale and repurchase price is recognized as interest and accrued over the life of the agreements using the effective interest method. Loans and receivables are subsequently measured at amortized cost using the effective interest method, less impairment loss, if any. (iii) HTM Investments This category includes non-derivative financial assets with fixed or determinable payments and a fixed date of maturity that the Group has the positive intention and ability to hold to maturity. Investments intended to be held for an undefined period are not included in this category. Subsequent to initial recognition, HTM investments are measured at amortized cost using the effective interest method, less impairment losses, if any. If the Group sells other than an insignificant amount of HTM investments, the whole category would be tainted and reclassified to AFS financial assets, except as may be allowed by the BSP (as discussed in Note 2.1) and the SEC. Furthermore, the Group would be prohibited to classify any financial assets as HTM investments for the following two years. The tainting provision, however, will not apply if the sales or reclassifications of HTM investments are: (i) so close to maturity or the financial assets call date that changes in the market rate of interest would not have a significant effect on its fair value; (ii) occur after the Group has collected substantially all of the financial assets original principal through scheduled payments or prepayments; or, (iii) attributable to an isolated event that is beyond the control of the Group, is non-recurring and could have been reasonably anticipated by the Group.

121 Audited Financial Report 119 If the tainting period (i.e. two full financial years) has already passed, it becomes appropriate to reclassify the AFS financial assets back to HTM investments. The fair value of the AFS financial asset on the date of reclassification becomes its new cost. Any previous gain or loss on that asset that has been recognized in other comprehensive income shall be amortized to profit or loss over the remaining life of the HTM investment using the effective interest method. Any difference between the new cost and maturity amount shall also be amortized over the remaining life of the financial asset using the effective interest method, similar to the amortization of a premium and a discount. If the financial asset is subsequently impaired, any gain or loss that has been recognized in other comprehensive income is reclassified from equity to profit or loss. (iv) AFS Financial Assets This category includes non-derivative financial assets that are either designated to this category or do not qualify for inclusion in any of the other categories of financial assets. The Group s AFS financial assets include government and corporate bonds and equity securities. All financial assets within this category are subsequently measured at fair value, except for equity instruments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured, which are measured at cost, less impairment loss, if any. Gains and losses are recognized in other comprehensive income, net of any income tax effects, and are reported as part of the Revaluation Reserves account in equity, except for interest and dividend income, impairment losses and foreign exchange differences on monetary assets, which are recognized in profit or loss. When the financial asset is disposed of or is determined to be impaired, that is, when there is a significant or prolonged decline in the fair value of the security below its cost, the cumulative fair value gains or losses recognized in other comprehensive income is reclassified from equity to profit or loss and is presented as reclassification adjustment within other comprehensive income even though the financial asset has not been derecognized. (b) Impairment of Financial Assets The Group assesses at the end of each reporting period whether there is objective evidence that a financial asset or group of financial assets is impaired. The Group recognizes impairment loss based on the category of financial assets as follows: (i) Carried at Amortized Cost Loans and Receivables and HTM Investments If there is objective evidence that an impairment loss on loans and receivables or HTM investments carried at cost has been incurred, the amount of the impairment loss is determined as the difference between the assets carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred), discounted at the financial asset s original effective interest rate or current effective interest rate determined under the contract if the loan has a variable interest rate. The carrying amount of the asset shall be reduced either directly or through the use of an allowance account. The amount of the loss shall be recognized in profit or loss. If in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized (such as an improvement in the debtor s credit rating), the previously recognized impairment loss is reversed by adjusting the allowance account. The reversal shall not result in a carrying amount of the financial asset that exceeds what the amortized cost would have been had the impairment not been recognized at the date of the impairment is reversed. The amount of the reversal is recognized in the profit or loss. (ii) Carried at Cost AFS Financial Assets If there is objective evidence of impairment for any of the unquoted equity instruments that is not carried at fair value because its fair value cannot be reliably measured, or on a derivative asset that is linked to and required to be settled by delivery of such an unquoted equity instrument, impairment loss is recognized. The amount of impairment loss is the difference between the carrying amount of the financial asset and the present value of estimated future cash flows discounted at the current market rate of return for a similar financial asset. Such impairment losses are not reversed. (iii) Carried at Fair Value AFS Financial Assets When a decline in the fair value of an AFS financial asset has been recognized in other comprehensive income and there is objective evidence that the asset is impaired, the cumulative loss measured as the difference between the acquisition cost (net of any principal repayment and amortization) and current fair value, less any impairment loss on that financial asset previously recognized in profit or loss is reclassified from Revaluation Reserves to profit or loss as a reclassification adjustment even though the financial asset has not been derecognized. Impairment losses recognized in profit or loss on equity instruments are not reversed through profit or loss. Reversal of impairment losses are recognized in other comprehensive income, except for financial assets that are debt securities which are recognized in profit or loss only if the reversal can be objectively related to an event occurring after the impairment loss was recognized. (c) Items of Income and Expenses Related to Financial Assets All income relating to financial assets that are recognized in profit or loss are presented as part of Interest Income in the statement of income. Impairment Losses are presented as a separate line item in the statement of income. Non-compounding interest, dividend income and other cash flows resulting from holding financial assets are recognized in profit or loss when earned, regardless of how the related carrying amount of financial assets is measured.

122 120 UCPB 2015 Annual Report (d) Derecognition of Financial Assets The financial assets (or where applicable, a part of a financial asset or part of a group of financial assets) are derecognized when the contractual rights to receive cash flows from the financial instruments expire, or when the financial assets and all substantial risks and rewards of ownership have been transferred to another party. If the Group neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Group recognizes its retained interest in the asset and an associated liability for amounts it may have to pay. If the Group retains substantially all the risks and rewards of ownership of a transferred financial asset, the Group continues to recognize the financial asset and also recognizes a collateralized borrowing for the proceeds received. 2.5 Derivative Financial Instruments The Parent Bank is a counterparty to derivative contracts, such as foreign exchange forward contracts. These contracts are entered into as a means of reducing or managing the customers respective foreign exchange exposures and for the Group s trading purposes. Derivative financial instruments are initially recognized at fair value on the date on which the derivative contract is entered into and are subsequently measured at their fair values. Fair market values are obtained from quoted market prices in active markets, including recent market transactions. All derivatives are carried as resources when fair value is positive and as liabilities when fair value is negative. The best evidence of fair value of a derivative financial instrument at initial recognition is the transaction price (the fair value of the consideration given or received) unless the fair value of the instrument is evidenced by comparison with other observable current market transactions in the same instrument. When such evidence exists, which indicates a fair value different from the transaction price, the Group recognizes a gain or loss at initial recognition. Any gains or losses arising from changes in fair values of derivatives, except those accounted for as accounting cash flow hedges and hedges in net investment in foreign operation, are recognized in profit or loss. 2.6 Real Estate Inventories Real estate inventories are stated at the lower of cost and net realizable value. Cost shall comprise all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. 2.7 Bank Premises, Furniture, Fixtures and Equipment Land is stated at cost less any impairment loss. As no finite useful life for land can be determined, related carrying amount is not depreciated. All other bank premises, furniture, fixtures and equipment are carried at acquisition costs less accumulated depreciation and amortization and any impairment in value. The cost of an asset comprises its purchase price and directly attributable costs of bringing the asset to working condition for its intended use. Expenditures for additions, major improvements and renewals are capitalized while expenditures for repairs and maintenance are charged to expense as incurred. Depreciation and amortization is computed on the straight-line basis over the estimated useful lives of the assets as follows: Buildings and improvements Leasehold improvements Furniture, fixtures and equipment years 5-10 years 3-10 years An asset s carrying amount is written down immediately to its recoverable amount if the asset s carrying amount is greater than its estimated recoverable amount (see Note 2.20). The residual values, estimated useful lives and method of depreciation and amortization of property, plant and equipment are reviewed, and adjusted if appropriate, at the end of each reporting period. Fully depreciated and fully amortized assets are retained in the accounts until these are no longer in use and no further charge for depreciation and amortization is made in respect of those assets. An item of bank premises, furniture, fixtures and equipment, including the related accumulated depreciation, accumulated amortization and impairment losses, is derecognized upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the item) is included in profit or loss in the year the item is derecognized. 2.8 Assets Held-for-Sale Assets held-for- sale include real and other properties acquired through repossession or foreclosure that the Group intends to sell within one year from the date of classification as held-for-sale and is committed to immediately dispose the assets through an active marketing program. The Group classifies an asset as held-for-sale if its carrying amount will be recovered principally through a sale transaction rather than through continuing use. In the event that the sale of the asset is extended beyond one year, the extension of the period required to complete the sale does not preclude an asset from being classified as held-for-sale if the delay is caused by events or circumstances beyond the Group s control and there is sufficient evidence that the Group remains committed to its plan to sell the asset.

123 Audited Financial Report 121 Assets held-for-sale are measured at the lower of their carrying amounts, immediately prior to their classification as held-for-sale and their fair values less costs to sell. Assets held-for-sale are not subject to depreciation. The Group recognizes an impairment loss for any initial or subsequent write-down of the asset to fair value less cost to sell. Gain for any subsequent increase in fair value less cost to sell of an asset is recognized to the extent of the cumulative impairment losses previously recognized. If the Group has classified an asset as held-for-sale, but the criteria for it to be recognized as held-for-sale are no longer satisfied, the Group shall cease to classify the asset as held-for-sale. Any gain or loss arising from the sale or remeasurement of assets held-for-sale is recognized in profit or loss. 2.9 Investment Properties Investment properties represent properties held either to earn rental income or for capital appreciation or for both, but not for sale in the ordinary course of business, use in providing services or for administrative purposes. The Group measures investment properties, which include land and building acquired by the Bank from defaulting borrowers, under the cost model. The cost of an investment property comprises its purchase price and directly attributable costs incurred. Cost is initially recognized at fair value of the investment properties unless: (i) the exchange transaction lacks commercial substance; or, (ii) neither the fair value of the asset received nor the asset given up can be reliably measured. The difference between the fair value of the asset received, as determined by professional appraisers, and the carrying amount of the loan settled through foreclosure is recognized as Gains on Foreclosure under the Other Income account in the statement of income. Investment properties, except land, are depreciated using the straight line basis over the estimated useful life of the asset of ten years. Investment properties are derecognized upon disposal or when permanently withdrawn from use and no future economic benefit is expected from their disposal. Any gain or loss on the retirement or disposal of an investment property is recognized in profit or loss is presented as part of Gains on assets sold under the Other Income account in the year of retirement or disposal Intangible Assets Intangible assets include acquired software costs and exchange trading rights, which are accounted for under the cost model. The cost of the asset is the amount of cash or cash equivalents paid or the fair value of the other considerations given up to acquire an asset at the time of its acquisition or production. Acquired computer software licenses are capitalized on the basis of the costs incurred to acquire and install the specific software. Costs associated with maintaining computer software and those costs associated with research activities are recognized as expense in profit or loss as incurred. Capitalized costs are amortized on a straight-line basis over the estimated useful lives (ranging from three to ten years) as the lives of these intangible assets are considered finite. In addition, intangible assets are subject to impairment testing as described in Note Exchange trading rights, on the other hand, is regarded as having an indefinite useful life as there is no foreseeable limit to the period over which this asset is expected to generate net cash inflow for the Group. Exchange trading rights are carried at the amount allocated from the original cost of the exchange membership seat of USI (after a corresponding allocation was made to the value of the PSE shares) less impairment in value, which are recognized in the same manner as acquired software licenses. USI does not intend to sell the exchange trading right in the near future Other Resources Other resources pertain to other resources controlled by the Group as a result of past events. They are recognized in the financial statements when it is probable that the future economic benefits will flow to the Group and the asset has a cost or value that can be measured reliably Financial Liabilities Financial liabilities, which include deposit liabilities, bills payable and securities sold under repurchase agreements, accrued interests and other expenses and other liabilities (other than tax-related liabilities) are recognized when the Group becomes a party to the contractual terms of the instrument. All interestrelated charges incurred on a financial liability are recognized as an expense in profit or loss under the caption Interest Expense in the statement of income. Deposit liabilities are recorded or stated at amounts in which they are to be paid, which approximate their fair values. Bills payable are recognized initially at fair value, which is the issue proceeds (fair value of consideration received), net of direct issue costs. Bills payables are subsequently stated at amortized cost; any difference between the proceeds, net of transaction costs, and the redemption value is recognized in profit or loss over the period of the borrowing using the effective interest method. Other liabilities are recognized initially at their fair values and subsequently measured at amortized cost, using effective interest method for maturities beyond one year, less settlement payments. Dividend distributions to shareholders are recognized when the dividends are declared by the Bank s BOD and subject to the requirements of BSP Circular 888. Financial liabilities are derecognized from the statement of financial position only when the obligations are extinguished either through discharge, cancellation or expiration. The difference between the carrying amount of the financial liability derecognized and the consideration paid or payable is recognized in profit or loss Offsetting Financial Instruments Financial resources and financial liabilities are offset and the resulting net amount, considered as a single financial asset or financial liability, is reported in the statement of financial position when the Group currently has legally enforceable right to set-off the recognized amounts and there is an intention to settle on a net basis, or realize the asset and settle the liability simultaneously. The right of set-off must be available at the end of the reporting period, that is, it is not contingent on future event. It must also be enforceable in the normal course of business, in the event of default, and in the event of insolvency or bankruptcy; and, must be legally enforceable for both entity and all counterparties to the financial instruments.

124 122 UCPB 2015 Annual Report 2.14 Business Combinations Business acquisitions are accounted for using the acquisition method of accounting. Goodwill represents the excess of the cost of an acquisition over the fair value of the Group s share of the net identifiable assets of the acquired subsidiary at the date of acquisition. Subsequent to initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. Impairment losses on goodwill are not reversed (see Note 2.20). Negative goodwill, which is the excess of the Group s interest in the net fair value of net identifiable assets acquired over acquisition cost is charged directly to income. For the purpose of impairment testing, goodwill is allocated to cash-generating units or groups of cash-generating units that are expected to benefit from the business combination in which the goodwill arose. The cash-generating units or groups of cash-generating units are identified according to operating segment. Gains and losses on the disposal of an interest in a subsidiary include the carrying amount of goodwill relating to it. If the business combination is achieved in stages, the acquirer is required to remeasure its previously held equity interest in the acquiree at its acquisition-date fair value and recognize the resulting gain or loss, if any, in the profit or loss or other comprehensive income, as appropriate. Any contingent consideration to be transferred by the Group is recognized at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration that is deemed to be an asset or liability is recognized in accordance with PAS 37, Provisions, Contingent Liabilities and Contingent Assets, either in profit or loss or as a change to other comprehensive income. Contingent consideration that is classified as equity is not remeasured, and its subsequent settlement is accounted for within equity Provisions and Contingencies Provisions are recognized when present obligations will probably lead to an outflow of economic resources and they can be estimated reliably even if the timing or amount of the outflow may still be uncertain. A present obligation arises from the presence of a legal or constructive obligation that has resulted from past events. Provisions are measured at the estimated expenditure required to settle the present obligation, based on the most reliable evidence available at the end of the reporting period, including the risks and uncertainties associated with the present obligation. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. When time value of money is material, long-term provisions are discounted to their present values using a pretax rate that reflects market assessments and the risks specific to the obligation. The increase in the provision due to passage of time is recognized as interest expense. Provisions are reviewed at the end of each reporting period and adjusted to reflect the current best estimate. In those cases where the possible outflow of economic resource as a result of present obligations is considered improbable or remote, or the amount to be provided for cannot be measured reliably, no liability is recognized in the financial statements. Similarly, possible inflows of economic benefits to the Group that do not yet meet the recognition criteria of an asset are considered contingent assets, hence, are not recognized in the financial statements. On the other hand, any reimbursement that the Group can be virtually certain to collect from a third party with respect to the obligation is recognized as a separate asset not exceeding the amount of the related provision Equity Capital stock represents the nominal value of shares that have been issued. Surplus reserves pertain to the following: (a) (b) (c) Portion of the Group s income from trust operations set-up on a yearly basis in compliance with BSP regulations. The surplus set-up is equal to 10% of the net profit accruing from the trust business until the surplus shall amount to 20% of the Parent Bank s regulatory net worth. The reserve shall not be paid out as dividends, but losses accruing in the course of the trust business may be charged against this account. Amounts set aside to cover losses due to fire, defalcation by and other unlawful acts of the Parent Bank s personnel or third parties. Accumulated amount set aside for possible or unforeseen losses, decrease of shrinkage in the book value of the bank s assets or for undeterminable liabilities not otherwise recorded such as those arising from lawsuits, defaults on obligations and unexpected differences. Surplus free includes all current and prior period results of operations as reported in the statement of income and which are available and not restricted for use by the Group, reduced by the amounts of dividends declared, if any. Revaluation reserves consist of: (a) (b) (c) (d) Net unrealized fair value gains (losses) arising from the revaluation of AFS financial assets; Equity in net unrealized fair value gains (losses) arising from the revaluation of AFS financial assets of associates; Remeasurements of post-employment defined benefit plan comprising of net accumulated actuarial gains or losses arising from experience adjustments and other changes in actuarial assumptions and actual return on plan assets (excluding amounts included in net interest); Equity in remeasurements of post-employment defined benefit plan comprising of net accumulated actuarial gains or losses arising from experience adjustments and other changes in actuarial assumptions and actual return on plan assets (excluding amounts included in net interest);

125 Audited Financial Report 123 (e) (f) Accumulated translation adjustments related to the cumulative gains from the translation of foreign currency denominated monetary assets and liabilities into their respective functional currencies based on a closing rate prevailing at the reporting date and weighted average rate for the reporting period for income and expenses and, Equity in the accumulated translation adjustments related to the cumulative gains from the translation of foreign currency denominated monetary assets and liabilities of associates into their respective functional currencies based on a closing rate prevailing at the reporting date and weighted average rate for the reporting period for income and expenses. Non-controlling interests represent the portion of the net assets and profit or loss not attributable to the Group and are presented separately in the consolidated statement of income and comprehensive income and within equity in the consolidated statement of financial position and changes in equity Revenue and Expense Recognition Revenue is recognized to the extent that the revenue can be reliably measured; it is probable that future economic benefits will flow to the Group; and, the costs incurred or to be incurred can be measured reliably. The following specific recognition criteria must also be met before revenue is recognized: (a) Interest Income and Expenses These are recognized in the statement of income for all financial instruments measured at amortized cost and interest-bearing financial assets at FVTPL and AFS financial assets using the effective interest method. The effective interest method is a method of calculating the amortized cost of a financial asset or a financial liability and 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 foreign currency deposit unit (FCDU) estimates cash flows considering all contractual terms of the financial instrument (for example, prepayment options) but does not consider future credit losses. The calculation includes all fees and points paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts. Once a financial asset or a group of similar financial assets has been written down as a result of an impairment loss, interest income is recognized using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. (b) Trading Gains and Losses These are recognized when the ownership of the securities is transferred to the buyer and is computed at the difference between the selling price and the carrying amount of the securities disposed of. These also include gains and losses arising from the changes in fair value of financial assets at FVTPL and derivative instruments. (c) Service Fees and Commissions These are recognized as follows: (i) (ii) Service charges and penalties are recognized upon collection or accrued when there is reasonable degree of certainty as to its collectability. Loan syndication fees are recognized upon completion of all syndication activities and where there are no further obligations to perform under the syndication agreement. (iii) Loan commitment fees are recognized for loans where the Group allows drawdown on committed lines subject to fulfillment of conditions. These fees, together with any incremental costs, are deferred and recognized as an adjustment to the effective interest rate on the loan. (iv) Underwriting fees and commissions are recorded when services for underwriting, arranging or brokering has been rendered. (v) Other fees earned in relation to the rendering of services over a period of time are accrued and recognized over the period. These include, among others, investment fund fees, custodian fees, fiduciary fees, asset management fees and advisory fees. (d) Gains and Losses on Foreclosed Assets Gains or losses on foreclosed assets is recognized upon derecognition of existing receivables through foreclosure of assets used as collateral and is determined as the difference between the fair value of the foreclosed asset and the net carrying amount of the receivable settled. (e) Gains on Assets Sold Gains on assets sold arises from the disposals of investment properties and assets held-for-sale. Revenue is recognized when the risks and rewards of ownership of the assets is transferred to the buyer and when the collectability of the entire sales price is reasonably assured. (f) Trust Income These are recognized as compensation for services rendered by the Parent Bank as investment manager of the funds entrusted by the trustor.

126 124 UCPB 2015 Annual Report Costs and expenses are recognized in the statement of income upon utilization of the resources and/or services or at the date they are incurred. All finance costs are reported on an accrual basis, except capitalized borrowing costs which are included as part of the cost of the related qualifying asset, if any (see Note 2.22) Leases The Group accounts for its leases as follows: (a) Group as Lessee Leases, which do not transfer to the Group substantially all the risks and benefits of ownership of the asset are classified as operating leases. Operating lease payments (net of any incentive received from the lessor) are recognized as expense in profit or loss on a straight-line basis over the lease term. Associated costs, such as repairs and maintenance and insurance, are expensed as incurred. (b) Group as Lessor Leases wherein the Group substantially transfers to the lessee all risks and benefits incidental to ownership of the leased item are classified as finance leases and are presented as receivable at an amount equal to the Group s net investment in the lease. Finance income is recognized based on the pattern reflecting a constant periodic rate of return on the Group s net investment outstanding in respect of the finance lease. Leases which do not transfer to the lessee substantially all the risks and benefits of ownership of the asset are classified as operating leases. Lease income from operating leases is recognized in profit or loss on a straight-line basis over the lease term. The Group determines whether an arrangement is, or contains, a lease based on the substance of the arrangement. It makes an assessment of whether the fulfillment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset. A reassessment is made after the inception of the lease only if one of the following applies: (a) (b) (c) (d) There is a change in the contractual terms, other than a renewal or extension of the arrangement; A renewal option is exercised or extension granted, unless that term of the renewal or extension was initially included in the lease term; There is a change in the determination of whether the fulfillment is depended on a specified asset; or, There is substantial change in the asset Foreign Currency Transactions and Translations Except for the accounts of the Group s FCDU, the accounting records of the Group are maintained in Philippine pesos. Foreign currency transactions during the year are translated into the functional currency at exchange rates which approximate those prevailing on transaction dates. Resources and liabilities denominated in foreign currencies are translated to Philippine pesos at the prevailing exchange rates at the end of the reporting period. Foreign currency gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary resources and liabilities denominated in foreign currencies are recognized in profit or loss; except when recognized in other comprehensive income and deferred in equity as qualifying cash flow hedges and qualifying net investment hedges. Translation differences on non-monetary items, such as equity securities classified as financial assets at FVTPL, are reported as part of fair value gains or losses. For financial reporting purposes, the accounts of FCDU are translated into their equivalents in Philippine pesos based on the Philippine Dealing System Closing Rates (PDSCR) prevailing at the end of each reporting period for resources and liabilities and at the average PDSCR for the period for income and expenses. Any foreign exchange difference is recognized in profit or loss. Changes in the fair value of monetary financial assets denominated in foreign currency classified as AFS financial assets are analyzed between translation differences resulting from changes in the amortized cost of the security and other changes in the carrying amount of the security. Translation differences related to changes in amortized cost are recognized in profit or loss, and other changes in the carrying amount are recognized in other comprehensive income Impairment of Non-financial Assets Investments in subsidiaries and associates, bank premises, furniture, fixtures and equipment, investment properties, intangible assets and other resources are subject to impairment testing. Intangible assets with an indefinite useful life or those not yet available for use are tested for impairment at least annually. All other individual assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount of those assets may not be recoverable. For purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). As a result, assets are tested for impairment either individually or at the cash-generating unit level. Impairment loss is recognized in profit or loss for the amount by which the asset s or cash-generating unit s carrying amount exceeds its recoverable amounts which is the higher of its fair value less costs to sell and its value in use. In determining value in use, management estimates the expected future cash flows from each cash-generating unit and determines the suitable interest rate in order to calculate the present value of those cash flows. The data used for impairment testing procedures are directly linked to the Group s latest approved budget, adjusted as necessary to exclude the effects of asset enhancements. Discount factors are determined individually for each cash-generating unit and reflect management s assessment of respective risk profiles, such as market and asset-specific risk factors. All assets are subsequently reassessed for indications that an impairment loss previously recognized may no longer exist. An impairment loss is reversed if the asset s or cash generating unit s recoverable amount exceeds its carrying amount.

127 Audited Financial Report Employee Benefits The Group provides post-employment benefits to employees through a defined benefit plan and defined contribution plans, and other employee benefits which are recognized as follows: (a) Post-employment Defined Benefit Plan A defined benefit plan is a post-employment plan that defines an amount of post-employment benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and salary. The legal obligation for any benefits from this kind of postemployment plan remains with the Group, even if plan assets for funding the defined benefit plan have been acquired. Plan assets may include assets specifically designated to a long-term benefit fund, as well as qualifying insurance policies. The Group s defined benefit post-employment plan covers all regular full-time employees. The pension plan is tax-qualified, noncontributory and administered by a trustee. The liability recognized in the statement of financial position for a defined benefit plan is the present value of the defined benefit obligation at the end of the reporting period less the fair value of plan assets. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows for expected benefit payments using a discount rate derived from the interest rates of a zero coupon government bond as published by Philippine Dealing & Exchange Corp. (PDEx), 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 post-employment liability. Remeasurements, comprising of actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions and the return on plan assets (excluding amount included in net interest) are reflected immediately in the statement of financial position with a charge or credit recognized in other comprehensive income in the period in which they arise. Net interest is calculated by applying the discount rate at the beginning of the period, taking account of any changes in the net defined benefit liability or asset during the period as a result of contributions and benefit payments. Past-service costs are recognized immediately in profit or loss in the period of a plan amendment or curtailment. (b) Post-employment Defined Contribution Plan A defined contribution plan is a post-employment plan under which the Group pays fixed contributions into an independent entity. The Group has no legal or constructive obligations to pay further contributions after payment of the fixed contribution. The contributions recognized in respect of defined contribution plans are expensed as they fall due. Liabilities or assets may be recognized if underpayment or prepayment has occurred and are included in current liabilities or current assets as they are normally of a short-term nature. (c) Compensated Absences Compensated absences are recognized for the number of paid leave days (including holiday entitlement) remaining at the end of each reporting period. They are included in Accrued Taxes, Interests and Other Expenses account in the statement of financial position at the undiscounted amount that the Group expects to pay as a result of the unused entitlement Borrowing Costs Borrowing costs are recognized as expenses in the period in which they are incurred, except to the extent that they are capitalized. Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset (i.e., an asset that takes a substantial period of time to get ready for its intended use or sale) are capitalized as part of cost of such asset. The capitalization of borrowing costs commences when expenditures for the asset and borrowing costs are being incurred and activities that are necessary to prepare the asset for its intended use or sale are in progress. Capitalization ceases when substantially all such activities are complete. Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalization Income Taxes Tax expense recognized in profit or loss comprises the sum of deferred tax and current tax not recognized in other comprehensive income or directly in equity, if any. Current tax assets or liabilities comprise those claims from, or obligations to, fiscal authorities relating to the current or prior reporting period, that are uncollected or unpaid at the end of the reporting period. They are calculated using the tax rates and tax laws applicable to the fiscal periods to which they relate, based on the taxable profit for the year. All changes to current tax assets or liabilities are recognized as a component of tax expense in profit or loss. Deferred tax is accounted for using the liability method, on temporary differences at the end of each reporting period between the tax base of assets and liabilities and their carrying amounts for financial reporting purposes. Under the liability method, with certain exceptions, deferred tax liabilities are recognized for all taxable temporary differences and deferred tax assets are recognized for all deductible temporary differences and the carryforward of unused tax losses and unused tax credits to the extent that it is probable that taxable profit will be available against which the deductible temporary differences can be utilized. Unrecognized deferred tax assets are reassessed at the end of each reporting period and are recognized to the extent that it has become probable that future taxable profit will be available to allow such deferred tax assets to be recovered. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period when the asset is realized or the liability is settled provided such tax rates have been enacted or substantively enacted at the end of the reporting period.

128 126 UCPB 2015 Annual Report The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilized. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Group expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities. Most changes in deferred tax assets or liabilities are recognized as a component of tax expense in profit or loss, except to the extent that it relates to items recognized in other comprehensive income or directly in equity. In this case, the tax is also recognized in other comprehensive income or directly in equity, respectively. Deferred tax assets and deferred tax liabilities are offset if the Group has a legally enforceable right to set off current tax assets against current tax liabilities and the deferred taxes relate to the same entity and the same taxation authority Related Party Transactions and Relationships Related party transactions are transfers of resources, services or obligations between the Group and its related parties, regardless whether a price is charged. Parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial and operating decisions. These parties include: (a) individuals owning, directly or indirectly through one or more intermediaries, control or are controlled by, or under common control with the Group; (b) associates; (c) individuals owning, directly or indirectly, an interest in the voting power of the Group that gives them significant influence over the Group and close members of the family of any such individual; and, (d) the Group s funded retirement plan. In considering each possible related party relationship, attention is directed to the substance of the relationship and not merely on the legal form Trust and Fiduciary Activities The Group commonly acts as trustee and in other fiduciary capacities that result in the holding or placing of assets on behalf of individuals, trusts, retirement benefit plans and other institutions. The resources, liabilities and income or loss arising thereon are excluded from these financial statements as these are neither resources nor income of the Group Segment Reporting Operating segments are reported in a manner consistent with the internal reporting provided to the Group s chief operating decision-maker. The chief operating decision-maker is responsible for allocating resources and assessing performance of the operating segments. In identifying its operating segments, management generally follows the Group s products and service lines as disclosed in Note 8, which represent the main products and services provided by the Group. Each of these operating segments is managed separately as each of these service lines requires different technologies and other resources as well as marketing approaches. All inter-segment transfers are carried out at arm s length prices. The measurement policies the Group uses for segment reporting under PFRS 8 are the same as those used in its consolidated financial statements, except that the post-employment benefit expenses are not included in arriving at the operating profit of the operating segments. In addition, corporate assets which are not directly attributable to the business activities of any operating segment are not allocated to any segment. There have been no changes from prior periods in the measurement methods used to determine reported segment profit or loss Events After the End of the Reporting Period Any post-year-end event that provides additional information about the Group s financial position at the end of the reporting period (adjusting event) is reflected in the financial statements. Post-year-end events that are not adjusting events, if any, are disclosed when material to the financial statements. 3. SIGNIFICANT ACCOUNTING JUDGMENTS AND ESTIMATES The preparation of the Group s financial statements in accordance with PFRS requires management to make judgments and estimates that affect the amounts reported in the financial statements and related notes. Judgments and estimates are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Actual results may ultimately differ from these estimates. 3.1 Critical Management Judgments in Applying Accounting Policies In the process of applying the Group s accounting policies, management has made the following judgments, apart from those involving estimation, which have the most significant effect on the amounts recognized in the financial statements: (i) Classification of Financial Assets as HTM Investments In classifying non-derivative financial assets with fixed or determinable payments and fixed maturity, such as bonds, as HTM investments, the Group evaluates its intention and ability to hold such investments up to maturity. Management has confirmed its intention and determined its ability to hold the investments up to maturity. If the Group fails to keep these investments to maturity other than for specific circumstances as allowed under the standard, it will be required to reclassify the whole class as AFS financial assets. In such a case, the investments would, therefore, be measured at fair value, not at amortized cost.

129 Audited Financial Report 127 (ii) Impairment of AFS Financial Assets The determination when an investment is other-than-temporarily impaired requires significant judgment. In making this judgment, the Group evaluates, among other factors, the duration and extent to which the fair value of an investment is less than its cost, and the financial health of and near-term business outlook for the investee, including factors such as industry and sector performance, changes in technology and operational and financing cash flows. Based on the recent evaluation of information and circumstances affecting the Group s AFS financial assets, management has recognized impairment loss on certain AFS financial assets in 2015 and 2014 as disclosed in Note Future changes in those information and circumstances might significantly affect the carrying amount of the assets. (iii) Distinction Between Investment Properties and Owner-Managed Properties The Group determines whether a property qualifies as investment property. In making its judgment, the Group considers whether the property generates cash flows largely independent of the other assets held by an entity. Owner-occupied properties generate cash flows that are attributable not only to the property but also to other assets used in the production or supply process. (iv) Distinction Between Operating and Finance Leases The Group has entered into various lease agreements. Critical judgment was exercised by management to distinguish each lease agreement as either an operating or a finance lease by looking at the transfer or retention of significant risk and rewards of ownership of the properties covered by the agreements. Failure to make the right judgment will result in either overstatement or understatement of assets and liabilities. (v) Classification of Acquired Properties The Group classifies its acquired properties as Bank Premises, Furniture, Fixtures and Equipment if used in operations, as Assets held-for-sale under Intangible and Other Assets if the Group expects that the properties will be recovered principally through sale rather than continuing use of the asset, as Investment Properties if held for currently undetermined future use and is regarded as held for capital appreciation or as Financial Assets in accordance with PAS 39. (vi) Recognition of Provisions and Contingencies Judgment is exercised by management to distinguish between provisions and contingencies. Policies on recognition of provisions and contingencies are discussed in Note 2.15 and disclosures on relevant provisions and contingencies are presented in Note 30. (vii) Accounting for the Sequestered Shares of the Parent Bank and the CIIF Oil Mills by the Republic of the Philippines While the implementation of the EOs and the Supreme Court decision has not yet been defined by the implementing authorities, the BOD and Management believes that, as at December 31, 2015, it is reasonable to maintain the status quo and continue with the normal business operations of the Parent Bank, its subsidiaries and associates and, accordingly, with the accounting for its investments in the four of the six Oil Mills Companies accounted for under investments in associates based on the legal opinion rendered by the Parent Bank s external counsel (see Notes 1.5, 13, 22 and 27). 3.2 Key Sources of Estimation Uncertainty The following are the key assumptions concerning the future, and other key sources of estimation uncertainty at the end of the reporting period, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next reporting period: (a) Impairment of Loans and Receivables and Investment Securities Measured at Amortized Costs The Group reviews its loans and receivables portfolio to assess impairment at least on an annual basis. In determining whether an impairment loss should be recognized in profit or loss, the Group makes judgment as to whether there is any observable data indicating that there is a measurable decrease in the estimated future cash flows from the portfolio before the decrease can be identified with an individual item in that portfolio. This evidence may include observable data indicating that there has been an adverse change in the payment status of borrowers or issuers in a group, or national or local economic conditions that correlates with defaults on assets in the group. Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the portfolio when scheduling its future cash flows. The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. (b) Fair Value Measurements of Financial Assets and Financial Liabilities The Group carries certain financial assets at fair value which requires the extensive use of accounting estimates and judgments. In cases when active markets are not available, fair value is determined by reference to the current market value of another instrument which is substantially the same or is calculated based on the expected cash flows of the underlying net base of the instrument (see Note 7.2). The amount of changes in fair value of financial assets and financial liabilities would affect profit or loss and other comprehensive income. The fair value of derivative financial instruments that are not quoted in an active market is determined through valuation techniques using the net present value computation. Where active quotes are not available, valuation techniques are used to determine fair values, which are validated and periodically reviewed. To the extent practicable, models use observable data, however, areas such as credit risk (both own and counterparty), volatilities and correlations require management to make estimates. Changes in assumptions could affect fair value of financial instruments. The Group uses judgment to select a variety of methods and make assumptions that are mainly based on conditions existing at the end of each reporting period. The fair values of financial assets and financial liabilities measured at fair value are grouped in fair value hierarchy disclosed in Note 7. Further, the carrying values of the Group s financial assets at FVTPL and AFS financial assets and the amounts of fair value changes recognized on those assets are disclosed in Note 11.

130 128 UCPB 2015 Annual Report (c) Estimating Useful Lives of Bank Premises, Furniture, Fixtures and Equipment, Investment Properties and Intangible Assets The Group estimates the useful lives of bank premises, furniture, fixtures and equipment, investment properties and intangible assets based on the period over which the assets are expected to be available for use. The estimated useful lives of bank premises, furniture, fixtures and equipment, investment properties and intangible assets are reviewed periodically and are updated if expectations differ from previous estimates due to physical wear and tear, technical or commercial obsolescence and legal or other limits on the use of the assets. The carrying amounts of bank premises, furniture, fixtures and equipment, investment properties and intangible assets are analyzed in Notes 14, 15 and 16, respectively. Based on management s assessment as at December 31, 2015 and 2014, there is no change in estimated useful lives of those assets during those years. Actual results, however, may vary due to changes in estimates brought about by changes in factors mentioned above. (d) Fair Value Measurements of Investment Properties The Group s investment properties consist of parcels of land and buildings which are held for capital appreciation or held under operating lease agreements, and are measured using the cost model. The estimated fair value of the investment properties disclosed in Note 7.4 is determined on the basis of appraisals conducted by professional appraisers applying the relevant valuation methodologies as discussed therein. For investment properties with appraisal conducted prior to the end of the current reporting period, management determines whether there are significant circumstances during the intervening period that may require adjustments or changes in the disclosure of fair value of those properties. A significant change in key inputs and sources of information used in the determination of the fair value disclosed for those assets may result in an adjustment in the carrying amount of the assets reported in the financial statements if their fair value will indicate evidence of impairment. (e) Determining Realizable Amounts Deferred Taxes The Group reviews its deferred tax assets at the end of each reporting period and reduces the carrying amount to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilized. Management assessed that the deferred tax assets recognized as at December 31, 2015 and 2014 will be fully utilized in the coming years. The carrying value of deferred tax assets as of those dates is disclosed in Note 26. (f) Impairment of Non-financial Assets In assessing impairment, management estimates the recoverable amount of each asset or a cash-generating unit based on expected future cash flows and uses an interest rate to calculate the present value of those cash flows. Estimation uncertainty relates to assumptions about future operating results and the determination of a suitable discount rate (see Note 2.20). Though management believes that the assumptions used in the estimation of fair values reflected in the financial statements are appropriate and reasonable, significant changes in those assumptions may materially affect the assessment of recoverable values and any resulting impairment loss could have a material adverse effect on the results of operations. Impairment losses recognized on the Group s non-financial assets are disclosed in Note 17. (g) Valuation of Post-Employment Defined Benefits The determination of the Group s obligation and cost of post-employment defined benefit is dependent on the selection of certain assumptions used by actuaries in calculating such amounts. Those assumptions include, among others, discount rates and expected rate of salary increase. A significant change in any of these actuarial assumptions may generally affect the recognized expense, other comprehensive income or losses and the carrying amount of the post-employment benefit obligation in the next reporting period. The amounts of post-employment benefit obligation and expense and an analysis of the movements in the estimated present value of post-employment benefit, as well as the significant assumptions used in estimating such obligation are presented in Note RISK MANAGEMENT OBJECTIVES AND POLICIES The Group is exposed to risks in relation to its operating, investing and financing activities, and the business in which it operates. The entities within the Group manage their respective financial risks separately. The subsidiaries have their own risk management procedures but are structured similar to that of the Parent Bank. To a certain extent, the respective risk management programs and objectives are the same across the Group. The Parent Bank s activities are principally related to the use of financial instruments. The Parent Bank accepts deposits from customers at rates set by the Treasury Group depending on the volume of placements, and for various periods, and seeks to earn above-average interest margins by investing these funds. The Parent Bank 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 Parent Bank also trades in financial instruments where it takes positions to take advantage of short-term market movements in bonds and shares of stocks. The Parent Bank is exposed to credit risk, liquidity risk and market risk from its use of financial instruments. There has been no change in the Parent Bank s exposure to financial risks (i.e. credit risk, liquidity risk and market risk) or the manner in which it manages and measures the risks since prior financial year. 4.1 Risk Management Framework To manage the financial risks for holding financial assets and financial liabilities, the Parent Bank operates an integrated risk management system to address the risks it faces in its banking activities, including credit, liquidity and market risks. The Parent Bank s risk management objective is to adequately and consistently identify measure, control and monitor the risk profile inherent in the Parent Bank s activities. The Parent Bank s Risk Oversight Committee (ROC) has the overall responsibility for the creation and oversight of the Parent Bank s corporate risk policy and is actively involved in the assessment, planning, review, approval, and monitoring of risk areas and measures taken to manage these risks in the Parent Bank s organization. The Parent Bank also has in place an authorization structure that defines and sets limits on the type and value of transactions that each position can approve.

131 Audited Financial Report 129 Within the Parent Bank s overall risk management system, the Risk Management Division (RMD) is responsible for managing these risks in a more detailed and proactive fashion on a continuing basis through performance of risk and return analysis. 4.2 Credit Risk Credit risk is the risk of financial loss to the Group if a counterparty to a financial instrument may fail to meet its contractual obligations. The Group manages and controls credit risk by setting limits on the amount of risk it is willing to accept for individual counterparties and for geographical and industry concentrations, and by monitoring exposures in relation to such limits. (a) Credit Risk Management The Parent Bank manages its credit risk and loan portfolio through a stringent process of loan approval. The screening process is directed by the senior officers of the Parent Bank s Corporate and Consumer Banking Group (CCBG). The process establishes the creditworthiness of the loan applicant based on best credit practices, and takes into consideration the current business condition and medium-term potential of the industry in which the loan applicant operates in. In compliance with BSP requirements, the Parent Bank established in December 2004 an Internal Credit Risk Rating (ICRR) system for the purpose of measuring credit risk for corporate borrowers in a consistent manner, as accurately as possible, and thereafter uses the risk information for business and financial decision making. The ICRR system covers corporate borrowers with asset size of above P15.0 million, requiring three-year historical financial information obtained from financial statements audited by SEC-accredited auditing firms. On a continuing basis, the Parent Bank generates credit risk ratings for existing loan accounts to assess their performance and to determine which account will be retained, expanded, or phased out. A separate review of the loan portfolio is conducted by the Risk Management Division to assess the quality of individual accounts and the concentration of the Parent Bank s credit exposures. (b) Maximum Exposure to Credit Risk After Collateral Held or Other Credit Enhancements The Group s maximum exposure to credit risk is equal to the carrying value of its financial assets except for certain secured loans and receivables from customers shown below. Group 2015 Gross Fair Financial Maximum Value of Net Effect of Exposure Collaterals Exposure Collaterals Loans and receivables: Receivables from customers: Corporate loans P 75,328,206 P 43,995,999 P 31,332,207 P 43,995,999 Consumer loans 49,526,632 10,801,352 38,725,280 10,801,352 Sales contracts receivables 2,087, ,103 1,987, ,103 P 126,942,032 P 54,897,454 P 72,044,578 P 54,897, Gross Fair Financial Maximum Value of Net Effect of Exposure Collaterals Exposure Collaterals Loans and receivables: Receivables from customers: Corporate loans P 73,629,087 P 44,174,073 P 29,455,014 P 44,174,073 Consumer loans 38,459,146 10,285,081 28,174,065 10,285,081 Sales contracts receivables 1,834,961 22,355 1,812,606 22,355 Parent Bank P 113,923,194 P 54,481,509 P 59,441,685 P 54,481, Gross Fair Financial Maximum Value of Net Effect of Exposure Collaterals Exposure Collaterals Loans and receivables: Receivables from customers: Corporate loans P 67,198,544 P 43,457,446 P 23,741,098 P 43,457,446 Consumer loans 42,979,679 10,287,846 32,691,833 10,287,846 Sales contracts receivables 2,007, ,103 1,907, ,103 P 112,186,026 P 53,845,395 P 58,340,631 P 53,845,395

132 130 UCPB 2015 Annual Report 2014 Gross Fair Financial Maximum Value of Net Effect of Exposure Collaterals Exposure Collaterals Loans and receivables: Receivables from customers: Corporate loans P 65,478,326 P 38,215,065 P 27,263,261 P 38,215,065 Consumer loans 33,538,935 8,243,893 25,295,042 8,243,893 Sales contracts receivables 1,744,602 22,355 1,722,247 22,355 P 100,761,863 P 46,481,313 P 54,280,550 P 46,481,313 The fair values of collaterals include the fair values of hold-out deposits, real estate and chattel mortgages. The Group holds collateral against loans and receivables to customers in the form of hold-out on deposits, real estate mortgage, chattel mortgage, mortgage trust indenture, standby letters of credit or bank guaranty, government guaranty, assignment of receivables, pledge of shares, personal and corporate guaranty and other forms of security. Fair market value is based on the value of the collateral assessed at the time of borrowing and are updated upon renewal of the loan. Collateral is generally not held over loans and advances to banks, except when securities are held as part of reverse repurchase and securities borrowing activity. On the disposal of the Group s foreclosed assets, the policy is to dispose these at the earliest possible time. Sale is facilitated by offering incentives to the Parent Bank s accredited brokers and through negotiated terms. (c) Excessive Risk Concentrations Credit risk concentrations can arise whenever a significant number of borrowers have similar characteristics and are affected similarly by changes in economic or other conditions. The Parent Bank analyzes the credit risk concentration to an individual borrower, related group of accounts, industry, geographic, internal rating buckets, currency, term and security. For risk concentration monitoring purposes, the financial assets are broadly categorized into: (1) loans and receivables; (2) trading and investment securities, consist of financial assets at FVTPL, AFS financial assets and HTM investments; (3) loans and advances to banks, which consist of amounts due from BSP, other banks and interbank loans and SPURA; and, (4) others, primarily relating to letters of credit. To mitigate risk concentration, the Group has established a regular monitoring system to spot breaches in regulatory and internal limits. An analysis of concentration of credit risk at the reporting date is shown below. Group 2015 Trading and Loans and Loans and Investment Advances Receivables Securities to Banks Others Total Real estate, renting and business activities P 36,002,811 P 2,356,931 P - P - P 38,359,742 Wholesale and retail trade, repair of motorcycles, personal and household goods 19,544, ,544,625 Manufacturing 13,576, , ,800,127 Financial intermediaries 6,805,179 6,679,950 16,692,025-30,177,154 Transport, storage and communication 10,045,407 1,815, ,861,065 Government - 41,339,388 47,524,537 2,403,449 91,267,374 Construction 4,491,109 93, ,584,194 Agriculture, hunting and forestry and fishing 3,765, ,765,613 Other community, social and personal services 39,277, ,168-3,869,053 43,652, ,508,918 53,014,478 64,216,562 6,272, ,012,460 Less: Unearned interests and discounts 275, ,592 Allowance for credit and Impairment losses 5,519, , ,391,598 P 127,713,989 P 52,142,217 P 64,216,562 P 6,272,502 P 250,345,270

133 Audited Financial Report Trading and Loans and Loans and Investment Advances Receivables Securities to Banks Others Total Real estate, renting and business activities P 37,139,850 P 2,422,713 P - P - P 39,562,563 Wholesale and retail trade, repair of motorcycles, personal and household goods 15,974, ,974,840 Manufacturing 16,014, , ,268,353 Financial intermediaries 9,415,654 6,673,372 14,062,762-30,151,788 Transport, storage and communication 6,915,854 1,779, ,695,208 Government 1,580,864 43,577,328 39,502,248 2,405,949 87,066,389 Construction 2,860,134 85, ,946,068 Agriculture, hunting and forestry and fishing 1,517, ,517,619 Other community, social and personal services 30,146,994 1,239,451-3,080,032 34,466, ,566,804 56,031,510 53,565,010 5,485, ,649,305 Less: Unearned interests and discounts 296, ,330 Allowance for credit and impairment losses 5,316, , ,193,102 Parent Bank P 115,953,528 P 55,155,354 P 53,565,010 P 5,485,981 P 230,159, Trading and Loans and Loans and Investment Advances Receivables Securities to Banks Others Total Real estate, renting and business activities P 34,244,975 P 2,356,931 P - P - P 36,601,906 Wholesale and retail trade, repair of motorcycles, personal and household goods 16,987, ,987,021 Manufacturing 11,994, , ,218,112 Financial intermediaries 9,575,663 6,679,950 15,815,299-32,070,912 Transport, storage and communication 6,970,721 1,815, ,786,379 Government 724,786 41,165,724 45,772,123 2,400,949 90,063,582 Construction 2,617,642 93, ,710,727 Agriculture, hunting and forestry and fishing 5,714, ,714,166 Other community, social and personal services 29,266, ,167-3,869,053 33,641, ,096,484 52,840,813 61,587,422 6,270, ,794,721 Less: Unearned interests and discounts 35, ,527 Allowance for credit and impairment losses 5,152, , ,024,851 P 112,908,292 P 51,968,627 P 61,587,422 P 6,270,002 P 232,734,343

134 132 UCPB 2015 Annual Report 2014 Trading and Loans and Loans and Investment Advances Receivables Securities to Banks Others Total Real estate, renting and business activities P 33,780,672 P 2,422,713 P - P - P 36,203,385 Wholesale and retail trade, repair of motorcycles, personal and household goods 15,974, ,974,840 Manufacturing 15,097, , ,350,894 Financial intermediaries 8,113,558 6,673,372 13,473,951-28,260,881 Transport, storage and communication 6,915,854 1,779, ,695,208 Construction 2,860,134 85, ,946,068 Government 1,580,864-38,244,884 2,400,949 42,226,697 Agriculture, hunting and forestry and fishing 1,406,669 43,150, ,557,106 Other community, social and personal services 21,993,082 1,048,061-3,080,032 26,121, ,723,209 55,413,229 51,718,835 5,480, ,336,254 Less: Unearned interests and discounts 31, ,892 Allowance for credit and impairment losses 4,977, , ,853,871 P 102,713,602 P 54,537,073 P 51,718,835 P 5,480,981 P 214,450,491 (d) Credit Quality Per Class of Financial Assets The credit quality of financial assets is assessed and managed using external and internal ratings. (i) Carried at Amortized Cost Loans and Receivables and HTM Investments The credit quality is generally monitored using the 10-grade ICRR system which is aligned with BSP s rating system and integrated in the credit process particularly in loan pricing and provision for credit losses. The model on risk ratings is assessed and updated regularly. Validation of the risk rating is performed by the RMD to maintain accurate and consistent risk ratings across the credit portfolio. The following table shows the description of credit quality of commercial loans: Credit Quality ICRR System Grade Description High grade 1 Excellent 2 Strong 3 Good Standard grade 4 Satisfactory 5 Acceptable 6 Watchlist 7 Especially mentioned Substandard grade 8 Substandard 9 Doubtful Impaired 10 Loss (1) Excellent The rating is given to a borrower with a very low probability of going into default in the coming year. The borrower has a high degree of stability, substance and diversity and has access to public markets to raise substantial amounts of funds at any time; has a very strong debt service capacity and has conservative balance sheet leverage. The track record of the borrower in terms of profit is very good and exhibits highest quality under virtually all economic conditions. (2) Strong This rating is given to borrowers with low probability of going into default in the coming year. Normally has a comfortable degree of stability, substance and diversity. Under normal market conditions, borrower has good access to public markets to raise funds. Borrower has a strong market and financial position with a history of successful performance. Overall debt service capacity is deemed very strong; critical balance sheet ratios are conservative. (3) Good This rating is given to smaller corporations with limited access to public capital markets or to alternative financial markets. Probability of default is quite low and it bears some degree of stability and substance. However, borrower may be susceptible to cyclical changes and more concentration of business risk, by product or by market. Typical for this type of borrower is the combination of comfortable asset protection and an acceptable balance sheet structure. The debt service capacity of the borrower is strong and has reported profits for the past three years and is expected to be profitable again in the current year.

135 Audited Financial Report 133 (4) Satisfactory This rating is given to a borrower where clear risk elements exist, the probability of default is somewhat greater and normally has limited access to public markets. The probability is reflected in volatility of earnings and overall performance. The borrower should be able to withstand normal business cycles, but any prolonged unfavorable economic period would create deterioration beyond acceptable levels. The borrower has the combination of reasonably sound asset and cash flow protection with adequate debt service capacity and has reported profits in the past year and is expected to report a profit in the current year. (5) Acceptable This rating is given to a borrower whose risk elements are sufficiently pronounced to withstand normal business cycles but any prolonged unfavorable economic and/or market period would create an immediate deterioration beyond acceptable levels. The risk to this borrower is still acceptable as there is sufficient cash flow either historically or expected for the future; new business or projected finance transaction; an existing borrower where the nature of the exposure represents a higher risk because of extraordinary developments but for which a decreasing risk within an acceptable period can be expected. (6) Watchlist This rating is given to a borrower which incurs net losses and has salient financial weaknesses, specifically in profitability, reflected on its financial statements. Credit exposure is not at risk of loss at the moment but performance of the borrower has weakened and unless present trends are reversed, could lead to losses. (7) Especially Mentioned This rating is given to a borrower that exhibits potential weaknesses that deserve management s close attention. No immediate threat to the repayment of the loan exists through normal course of business but factors may exist that could adversely affect the credit worthiness of the borrower. (8) Substandard This rating is given to a borrower where repayment of the loan, through normal course of business, may be in jeopardy due to adverse events. There exists the possibility of future losses to the institution unless given closer supervision. (9) Doubtful This rating is given to a borrower who is unable or unwilling to service debt over an extended period of time and near future prospects of orderly debt service is doubtful. Existing facts, conditions, and values make full collection or liquidation highly improbable and in which substantial loss is probable. (10) Loss This rating is given to a borrower whose loans or portions thereof are considered uncollectible. The collectible amount, with no collateral or which collateral is of little value, is difficult to measure and more practical to write-off than to defer even though partial recovery may be obtained in the future. The Parent Bank only subjects commercial loans with ICRR of 8 to 10 to specific impairment testing. Due from BSP, due from other banks and interbank loans receivable and SPURA are classified as high grade since these are deposited in/or transacted with reputable banks which have low probability of insolvency. Unquoted debt securities classified as loans are classified as high grade based on external credit ratings. The table below shows credit quality per class of financial assets, based on the Parent Bank s rating system (gross of allowance for credit and impairment losses and unearned discount). Group 2015 Neither Past Due Nor Impaired Past Due High Standard Substandard But Not Grade Grade Grade Unrated Impaired Impaired Total Due from BSP P 47,524,537 P - P - P - P - P - P 47,524,537 Due from other banks 7,682, ,682,039 Interbank loans and SPURA 9,009, ,009,986 64,216, ,216,562 Loans and receivables Receivables from customers: Corporate loans 40,314,643 24,163,808 2,904,946 3,043,045 1,370,315 3,531,449 75,328,206 Consumer loans 47,918, ,190-12, ,972 1,250,785 49,526,632 Unquoted debt securities 3,707, ,707,405 Sales contract receivables 7,448 4,495-1,913,827 22, ,535 2,087,194 Accrued interest receivables 481, ,895 30,871 1,070,929 9,323 53,997 1,861,714 Accounts receivables 40, , , ,657 Other receivables 292, ,907-31, ,110 Other assets 2,400,949 2, ,403,449 95,164,514 24,536,200 2,935,817 6,305,833 1,597,499 5,372, ,912,367 P159,381,076 P 24,536,200 P 2,935,817 P 6,305,833 P 1,597,499 P 5,372,504 P200,128,929

136 134 UCPB 2015 Annual Report 2014 Neither Past Due Nor Impaired Past Due High Standard Substandard But Not Grade Grade Grade Unrated Impaired Impaired Total Due from BSP P 39,502,248 P - P - P - P - P - P 39,502,248 Due from other banks 2,253, ,253,958 Interbank loans and SPURA 11,808, ,808,804 53,565, ,565,010 Loans and receivables Receivables from customers: Corporate loans 39,083,478 22,867,573 2,423,852 3,966,529 1,993,255 3,294,400 73,629,087 Consumer loans 36,778, , , ,488 38,459,146 Unquoted debt securities 4,508, ,508,253 Sales contract receivables 28,723 42, ,465,685 4, ,979 1,834,961 Accrued interest receivables 397, ,876 22,079 1,122,831 18,580 76,792 1,861,656 Accounts receivables 34,675 11, , , ,871 Other receivables , ,830 Other assets: Statutory reserves 2,400, ,400,949 Security deposits with Philippine Clearing House Corporation (PCHC) 45, ,784 83,277,606 23,692,670 2,445,938 7,099,806 2,971,820 4,525, ,013,537 P 136,842,616 P 23,692,670 P 2,445,938 P 7,099,806 P 2,971,820 P 4,525,697 P177,578,547 Parent Bank 2015 Neither Past Due Nor Impaired Past Due High Standard Substandard But Not Grade Grade Grade Unrated Impaired Impaired Total Due from BSP P 45,772,123 P - P - P - P - P - P 45,772,123 Due from other banks 7,505, ,505,313 Interbank loans and SPURA 8,309, ,309,986 61,587, ,587,422 Loans and receivables Receivables from customers: Corporate loans 33,341,613 24,119,853 1,879,402 3,042,500 1,343,013 3,472,163 67,198,544 Consumer loans 41,796, ,042 1,038,345 42,979,679 Unquoted debt securities 3,455, ,455,083 Sales contract receivables ,869, ,535 2,007,803 Accrued interest receivables 481, ,759 30,871 1,066,844 8,929 53,836 1,797,938 Accounts receivables , , ,778 Other receivables , ,659 Other assets 2,400, ,400,949 81,475,636 24,275,612 1,910,273 6,285,881 1,496,984 5,053, ,497,433 P 143,063,058 P 24,275,612 P 1,910,273 P 6,285,881 P 1,496,984 P 5,053,047 P182,084,855

137 Audited Financial Report Neither Past Due Nor Impaired Past Due High Standard Substandard But Not Grade Grade Grade Unrated Impaired Impaired Total Due from BSP P 38,244,884 P - P - P - P - P - P 38,244,884 Due from other banks 2,165, ,165,147 Interbank loans and SPURA 11,308, ,308,804 51,718, ,718,835 Loans and receivables Receivables from customers: Corporate loans 31,514,336 22,734,367 2,412,949 3,966,529 1,895,179 2,954,966 65,478,326 Consumer loans 32,369, , ,138 33,538,935 Unquoted debt securities 4,250, ,250,629 Sales contract receivables ,465, ,917 1,744,602 Accrued interest receivables 394, ,589 22,077 1,122,831 18,488 76,749 1,796,626 Accounts receivables , , ,141 Other assets 2,400, ,400,949 70,930,351 22,895,956 2,435,026 7,237,297 2,555,919 4,069, ,124,208 P 122,649,186 P 22,895,956 P 2,435,026 P 7,237,297 P 2,555,919 P 4,069,659 P161,843,043 The aging analysis of past due but not impaired loans and receivables is broken down as follows: Group Within More than Within More than One Year One Year Total One Year One Year Total Receivables from customers: Corporate loans P 631,385 P 738,930 P 1,370,315 P 1,608,712 P 384,543 P 1,993,255 Consumer loans 128,909 66, , , , ,600 Accrued interest receivables 5,222 4,101 9,323 17,215 1,365 18,580 Sales contract receivables 7,873 15,016 22, ,833 4,603 Accounts receivables P 773,389 P 824,110 P 1,597,499 P 1,997,356 P 974,464 P 2,971,820 Parent Bank Within More than Within More than One Year One Year Total One Year One Year Total Receivables from customers: Corporate loans P 618,805 P 724,208 P 1,343,013 P 1,549,625 P 345,554 P 1,895,179 Consumer loans 95,897 49, , , , ,252 Accrued interest receivables 5,001 3,928 8,929 17,215 1,273 18,488 P 719,703 P 777,281 P 1,496,984 P 1,818,072 P 737,847 P 2,555,919 (ii) Trading and Investment Securities In ensuring the quality of its trading and investment portfolio, the Parent Bank uses the credit risk rating from published data providers like Moody s, Standard & Poor s, Fitch, and such other rating agencies as may be approved by the MB of the BSP.

138 136 UCPB 2015 Annual Report The table below shows the credit risk rating of trading and investment securities (gross of allowance for credit and impairment losses): Group 2015 CCC to D AAA to BBB- BB+ to BB- and Unrated Total Financial assets at FVTPL: Debt securities: Government P 2,264,588 P - P - P 2,264,588 Corporate 18, ,020 Equity securities quoted 120, ,698 Derivative assets 42,520-1,104 43,624 2,445,826-1,104 2,446,930 AFS Financial assets: Debt securities: Government 11,215, ,215,146 Corporate 10,167, ,274 1,064,788 11,613,446 Equity securities: Quoted 109, , ,040 Unquoted , ,964 21,492, ,274 2,110,269 23,983,596 HTM Investments Government debt securities 27,859, ,859,653 P 51,797,532 P 381,274 P 2,111,373 P 54,290, CCC to D AAA to BBB- BB+ to BB- and Unrated Total Financial assets at FVTPL: Debt securities: Government P 471,919 P - P - P 471,919 Corporate 192,193-22, ,267 Equity securities quoted 240,007-35, ,084 Derivative assets 34, , ,658-57, ,050 AFS Financial assets: Debt securities: Government 16,560, ,560,516 Corporate 9,810, ,973 10,719,346 Equity securities: Quoted 169, , ,771 Unquoted , ,526 26,540,143-1,957,016 28,497,159 HTM Investments Government debt securities 28,030, ,030,756 P 55,509,557 P - P 2,014,408 P 57,523,965 Parent Bank 2015 CCC to D AAA to BBB- BB+ to BB- and Unrated Total Financial assets at FVTPL: Debt securities: Government P 2,198,081 P - P - P 2,198,081 Corporate 18, ,020 Equity securities quoted 106, ,088 Derivative assets 42,520-1,104 43,624 Forward 2,364,709-1,104 2,365,813

139 Audited Financial Report Liquidity Risk 2015 CCC to D AAA to BBB- BB+ to BB- and Unrated Total AFS Financial assets: Debt securities: Government 11,147, ,147,989 Corporate 10,167, ,274 1,064,788 11,613,446 Equity securities Quoted , ,517 Unquoted , ,963 21,315, ,274 2,110,268 23,806,915 HTM Investments Government debt securities 27,819, ,819,653 P 51,499,735 P 381,274 P 2,111,372 P 53,992, CCC to D AAA to BBB- BB+ to BB- and Unrated Total Financial assets at FVTPL: Debt securities: Government P 63,558 P - P - P 63,558 Corporate 192,193-22, ,267 Equity securities quoted 218,312-35, ,389 Derivative assets 34, , ,602-57, ,994 AFS Financial assets: Debt securities: Government 16,490, ,490,949 Corporate 9,810, ,973 10,719,346 Equity securities: Quoted , ,517 Unquoted , ,010 26,301,322-1,956,500 28,257,822 HTM Investments Government debt securities 27,890, ,890,328 P 54,700,252 P - P 2,013,892 P 56,714,144 Liquidity risk is generally defined as the current and prospective risk to earnings or capital arising from the Group s inability to meet its obligations when they become due. The Parent Bank closely monitors the current and prospective maturity structure of its resources and liabilities and the market condition to guide pricing and asset/liability allocation strategies to manage its liquidity risks. Liquidity risks are monitored and managed by using the Maximum Cumulative Outflow limits and funding diversification/concentration limits. In addition, the Parent Bank manages liquidity risk by holding sufficient liquid assets of appropriate quality to ensure short-term funding requirements are met and by maintaining a balanced loan portfolio which is repriced on a regular basis. In addition, the Parent Bank seeks to maintain sufficient liquidity to take advantage of interest rate and exchange rate opportunities when they arise. The table in the succeeding page shows the maturity profile of the financial assets used for liquidity management and the maturity profile of financial liabilities based on contractual undiscounted cash flows. Group 2015 Within Beyond On Demand One Year One Year Total Financial resources: Cash and other cash items P 6,543,793 P - P - P 6,543,793 Due from BSP 47,524, ,524,537 Due from other banks 7,682, ,682,039 Interbank loan receivable - 9,009,986-9,009,986 Financial assets at FVTPL 2,446, ,446,930 AFS financial assets 23,111, ,111,335 HTM investments - 12,540 27,847,113 27,859,653 Loans and receivables 997,767 44,927,202 87,583, ,508,918 Other assets - 2,400,949-2,400,949 88,306,401 56,350, ,431, ,088,140 Forward

140 138 UCPB 2015 Annual Report 2015 Within Beyond On Demand One Year One Year Total Financial liabilities: Deposit liabilities: Demand 36,552, ,552,333 Savings 127,796, ,796,125 Time - 57,644,608 7,601,907 65,246,515 LTNCD - - 9,506,307 9,506,307 Bills payable and SSURA - 11,225,620 1,654,157 12,879,777 Accrued interest, taxes and other expenses 623, ,780 Other liabilities: Bills purchased contra - 3,752,750-3,752,750 Cash letters of credit 3,869, ,869,053 Accounts payable - 2,086,908-2,086,908 Margin deposits Managers check - 1,278,552-1,278,552 Deposits on lease contracts 56,731 87, , ,306 Outstanding acceptances 85, ,905 Due to PDIC - 218, ,162 Due to Treasury of the Philippines - 101, ,915 Derivative liabilities - 39,980-39,980 Miscellaneous - 329, , ,983,927 76,765,295 18,987, ,736,936 On-book gap ( 80,677,526) ( 20,414,618) 96,443,348 ( 4,648,796) Cumulative on-book total gap ( 80,677,526) ( 101,092,144) ( 4,648,796) - Contingent resources 29,603 8,121,138-8,150,741 Contingent liabilities 80,858,118 8,500, ,678 90,116,562 Off-book gap ( 80,828,515) ( 379,628) ( 757,678) ( 81,965,821 Cumulative off-book gap ( 80,828,515) ( 81,208,143) ( 81,965,821) - Cumulative total gap (P 161,506,041) (P 182,300,287) (P 86,614,617) P Within Beyond On Demand One Year One Year Total Financial resources: Cash and other cash items P 7,477,991 P - P - P 7,477,991 Due from BSP 39,502, ,502,248 Due from other banks 2,253, ,253,958 Interbank loan receivables and SPURA - 11,808,804-11,808,804 Financial assets at FVTPL 464, , ,050 AFS financial assets 1,262,457 17,513,653 8,844,819 27,620,929 HTM investments ,030,756 28,030,756 Loans and receivables 4,537,627 45,922,154 71,107, ,566,804 Other assets - 2,400,949-2,400,949 55,499,117 78,176, ,982, ,658,489 Financial liabilities: Deposit liabilities: Demand 29,483, ,483,489 Savings 130,065, ,065,581 Time 9,968,051 35,541,063 5,999,276 51,508,390 LTNCD - - 9,484,079 9,484,079 Bills payable and SSURA 1,321,659 10,217,946 1,312,324 12,851,929 Accrued interest, taxes and other expenses 21, , ,477 Other liabilities: Bills purchased contra - 5,025,556-5,025,556 Cash letters of credit 302,752 5,890,180-6,192,932 Accounts payable 64,109 1,909,563 78,021 2,051,693 Margin deposits - 53,942-53,942 Managers check 32,066 1,075,078-1,107,144 Deposits on lease contracts 67, , , ,289 Outstanding acceptances 20,353 67,086-87,439 Due to PDIC - 207, ,139 Due to Treasury of the Philippines - 75,379-75,379 Derivative liabilities - 13,759-13,759 Miscellaneous - 340, , ,346,852 61,035,186 17,142, ,524,393 Forward

141 Audited Financial Report Within Beyond On Demand One Year One Year Total On-book gap ( 115,847,735) 17,141,588 90,840,243 ( 7,865,904) Cumulative on-book gap ( 115,847,735) ( 98,706,147) ( 7,865,904) - Contingent resources 72,380 4,705,159-4,777,539 Contingent liabilities 92,362,171 3,047, ,001 96,207,936 Off-book gap ( 92,289,791) 1,657,395 ( 798,001) ( 91,430,397) Cumulative off-book gap ( 92,289,791) ( 90,632,396) ( 91,430,397) - Cumulative total gap (P 208,137,526) (P 189,338,543) (P 99,296,301) P - Parent Bank 2015 Within Beyond On Demand One Year One Year Total Financial resources: Cash and other cash items P 6,193,988 P - P - P 6,193,988 Due from BSP 45,772, ,772,123 Due from other banks 7,505, ,505,313 Interbank loan receivables and SPURA - 8,309,986-8,309,986 Financial assets at FVTPL 2,365, ,365,813 AFS financial assets 22,934, ,934,729 HTM investments ,819,653 27,819,653 Loans and receivables 655,778 39,817,648 77,623, ,096,484 Other assets - 2,400,949-2,400,949 85,427,744 50,528, ,442, ,399,038 Financial liabilities: Deposit liabilities: Demand 35,619, ,619,202 Savings 124,680, ,680,975 Time - 53,277,498 6,352,931 59,630,429 LTNCD - - 9,506,307 9,506,307 Bills payable and SSURA - 9,654,018 1,132,716 10,786,734 Accrued interest, taxes and other expenses - 563, ,594 Other liabilities: Bills purchased contra - 3,752,750-3,752,750 Cash letters of credit 3,869, ,869,053 Accounts payable - 1,675,894-1,675,894 Margin deposits Managers check - 1,159,698-1,159,698 Deposits on lease contracts Outstanding acceptances 85, ,905 Due to PDIC - 218, ,162 Due to Treasury of the Philippines - 96,658-96,658 Derivative liabilities - 39,980-39,980 Miscellaneous - 32,337-32, ,255,135 70,470,589 16,991, ,717,678 On-book gap ( 78,827,391) ( 19,942,006) 88,450,757 ( 10,318,640) Cumulative total gap ( 78,827,391) ( 98,769,397) ( 10,318,640) - Contingent resources 29,603 8,121,138-8,150,741 Contingent liabilities 80,838,232 8,500, ,678 90,096,676 Off-book gap ( 80,808,629) ( 379,628) ( 757,678) ( 81,945,935) Cumulative off-book gap ( 80,808,629) ( 81,188,257) ( 81,945,935) - Cumulative total gap (P 159,636,020) (P 179,957,654) (P 92,264,575) P -

142 140 UCPB 2015 Annual Report 2014 Within Beyond On Demand One Year One Year Total Financial resources: Cash and other cash items P 7,041,100 P - P - P 7,041,100 Due from BSP 38,244, ,244,884 Due from other banks 2,165, ,165,147 Interbank loan receivables and SPURA - 11,308,804-11,308,804 Financial assets at FVTPL 34, , ,994 AFS financial assets 1,260,390 17,565,843 8,555,433 27,381,666 HTM investments ,890,328 27,890,328 Loans and receivables 1,135,615 41,998,392 64,589, ,723,209 Other assets - 2,400,949-2,400,949 49,881,916 73,805, ,034, ,722,081 Financial liabilities: Deposit liabilities: Demand 28,749, ,749,990 Savings 127,364, ,364,039 Time 6,355,739 34,354,968 5,094,265 45,804,972 LTNCD - - 9,484,078 9,484,078 Bills payable and SSURA 1,321,659 8,575,921 1,139,407 11,036,987 Accrued interest, taxes and other expenses - 493, ,360 Other liabilities: Bills purchased contra - 5,025,556-5,025,556 Cash letters of credit 302,752 5,890,180-6,192,932 Accounts payable - 1,751,460 78,021 1,829,481 Margin deposits - 53,942-53,942 Managers check - 1,075,078-1,075,078 Deposits on lease contracts Outstanding acceptances 20,353 67,086-87,439 Due to PDIC - 207, ,139 Due to Treasury of the Philippines - 71,630-71,630 Derivative liabilities - 13,759-13,759 Miscellaneous - 28,892-28, ,114,532 57,608,971 15,795, ,519,274 On-book gap ( 114,232,616) 16,196,231 85,239,192 ( 12,797,193) Cumulative on-book gap ( 114,232,616) ( 98,036,385) ( 12,797,193) - Contingent resources 72,380 4,705,159-4,777,539 Contingent liabilities 92,344,891 3,047, ,001 96,190,656 Off-book gap ( 92,272,511) 1,657,395 ( 798,001) ( 91,413,117) Cumulative off-book gap ( 92,272,511) ( 90,615,116) ( 91,413,117) - Cumulative total gap (P 206,505,127) (P 188,651,501) (P 104,210,310) P Market Risk Market risk is the risk of loss to future earnings, fair values or future cash flows that may result from changes in the market rates and prices of a financial instrument. Trading portfolios are exposed to market risk because the values of trading positions are sensitive to changes in market prices. Assets and liabilities portfolios are affected by market risks because the revenues derived from these activities, such as securities gains and losses and net interest income are sensitive to changes in interest and foreign exchange rates. The Parent Bank s market risk originates from its holdings of foreign exchange instruments, debt securities, equity securities and derivatives. Market risks are monitored on a daily basis by the RMD, which functions independently from the business units. The Group uses various loss limits and risk measurement methodologies as follows such as (a) Stop loss limits; (b) loss alert limits; (c) position limits; (d) mark-to-market valuation; (e) value-at-risk (VaR); and, (f) earnings-at-risk (EaR). (a) VaR Methodology Assumptions and Parameters The Parent Bank computes the statistical VaR to estimate the maximum potential loss that can be incurred in its trading books under normal market conditions given a specified confidence level and holding period. VaR is one of the key measures in the Parent Bank s management of market risk. The Parent Bank uses a 1-day and a 10-day holding period for its foreign exchange VaR and interest rate VaR, respectively. The Parent Bank adopts a historical simulation approach using a 99.0% confidence level and a one year observation period in its VaR calculation. The Parent Bank s VaR limit is agreed annually by the Treasury Group and RMD. This is presented to the ROC and the Board based on the tolerable risk appetite of the Parent Bank. Monitoring reports, which include the VaR figures and exposures to VaR limits are sent to the risk-taking units on a daily basis. These are also reported monthly to the ROC.

143 Audited Financial Report 141 The VaR figures are backtested against actual and unrealized profit and loss of the trading book to validate the robustness of the VaR model. While VaR measures risk during times of normality, it is supplemented with stress testing, which is used to measure the potential effect of a crisis or low probability event. The RMD conducts stress testing to measure and monitor market risks in extreme market conditions. Results of backtesting and stress testing are reported to the ROC on a monthly basis. Although VaR is an important tool for measuring market risk, the assumptions on which the model is based do give rise to the following limitations: The holding period assumes that it is possible to hedge or dispose of positions within that period. This is considered to be a realistic assumption in almost all cases but may not be the case in situations in which there is severe market illiquidity for a prolonged period; A 99.0% confidence level does not reflect losses that may occur beyond this level. Even within the model used, there is a one percent probability that losses could exceed the VaR; VaR is calculated on an end-of-day basis and does not reflect exposures that may arise on positions during the trading day; The use of historical data as a basis for determining the possible range of future outcomes may not always cover all possible scenarios, especially those of an exceptional nature; The VaR measure is dependent upon the Parent Bank s position and the volatility of market prices; and, The VaR of an unchanged position reduces if the market price volatility declines and vice versa. (b) EaR Methodology Assumptions and Parameters The Bank uses gap analysis to measure the sensitivity of its assets and liabilities to interest rate fluctuations, specifically by the EaR or the risk of deterioration in interest income over the next 12 months due to unfavorable movements in interest rates. It also subjects the EaR values to various interest rate shocks to determine the impact on earnings in the banking book. This analysis allows the Bank to measure the impact of changes in interest rates on the accrual portfolio or reported earnings. The repricing gap for a particular time bucket is calculated by subtracting the interest rate sensitive liabilities in each time bucket from interest rate sensitive assets. The difference in the amount of maturing assets and liabilities will provide the Bank with an indication of its exposure to the risk of potential changes in net interest income. Among the assumptions used for the computation of EaR are: (a) annual re-pricing on amortized loans; (b) maturity of bullet payments; (c) payment date based on farthest maturity; and, (d) behavior of non-maturing deposits. A summary of the VaR position of the trading portfolios of the Parent Bank as at December 31, 2015 and 2014 is as follows (in millions): 2015 Outstanding Balance Average Maximum Minimum 2015 Foreign currency risk P 8,488 P 4,029 P 17,592 P 1 Interest rate risk 33,440 25,585 78,385 3, Foreign currency risk P 6,419 P 5,689 P 18,609 P 34 Interest rate risk 1,821 9,213 45,743 1,248 The total interest rate risk VaR of the fixed income instruments in the portfolios of the Parent Bank as at December 31, 2015 and 2014 is as follows: Outstanding Balance Average Maximum Minimum 2015 P 242,675 P 231,871 P 419,093 P 99, P 222,134 P 495,020 P 843,799 P 194,175 The limitations of the VaR methodology are recognized by supplementing VaR limits with other position and sensitivity limit structures, including limits to address potential concentration risks within each trading portfolio. In addition, the Parent Bank conducts stress tests to determine the financial impact of a variety of exceptional market scenarios on individual trading portfolios and the Parent Bank s overall position. 4.5 Interest Rate Risk Interest rate risk arises from the possibility that changes in interest rates will affect future cash flows or fair values of financial instruments. The Parent Bank measures the sensitivity of its assets and liabilities to interest rate fluctuations by way of gap analysis. The analysis provides the Parent Bank with a measure of the impact of changes in interest rates on the accrual portfolio or reported earnings (the risk exposure of future accounting income). The repricing gap is calculated by subtracting the interest rate sensitive liabilities in each time bucket from interest rate sensitive assets to produce repricing gap for that particular time bucket. The difference in the amount of assets and liabilities maturing would then give the Parent Bank an indication of its exposure to the risk of potential changes in net interest income. A positive gap occurs when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities and is favorable to the Parent Bank during a period of rising interest rates since it is in a better position to invest in higher yielding assets more quickly than it would need to refinance its interest bearing liabilities. Conversely, during a period of falling interest rates, a positively gapped position could result in a restrained growth for or even declining net interest income.

144 142 UCPB 2015 Annual Report A negative gap occurs when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets and this is unfavorable to the Parent Bank during a period of rising interest rates. It is a disadvantageous position because it would need to refinance its maturing interest bearing liabilities at a higher level. Conversely, during a period of falling interest rates, a negatively gapped position is favorable to the Parent Bank because it can take advantage of lower repricing and refunding cost leading to improved net interest income. The Group also monitors its exposure to fluctuations in interest rates by measuring the impact of interest rate movements on its interest income. This is done by modeling the impact and doing a sensitivity scenario analysis of various changes in interest rates to the Group s interest-related income and expenses. The following table sets forth the repricing gap position of the Parent Bank as at December 31, 2015 and 2014 (in millions): 2015 Up to One One to Three Three to Six Six to 12 Month Months Months Months Total Financial Resources: Due from BSP P 5,650 P - P - P - P 5,650 Due from other bank ,373 7,373 Interbank loans receivable 7, ,835 Loans and receivables 1,000 28,106 6, ,037 AFS financial assets 7, ,415 21,795 29,059 6,405 8,051 65,310 Financial Liabilities Deposit liabilities: Demand 4, ,365 Savings 124, ,495 Time 43,914 8,039 4, ,578 Bills Payable 8, , ,310 8,946 4, ,026 Repricing gap (P 159,515) P 20,113 P 2,230 P 7,456 (P 129,716) Cumulative gap (P 159,515) (P 139,402) (P 137,172) (P 129,716) P Up to One One to Three Three to Six Six to 12 Month Months Months Months Total Financial Resources Due from BSP P 4,200 P - P - P - P 4,200 Due from other bank ,986 1,986 Interbank loans receivable 5, ,308 Loans and receivables ,442 6, ,487 AFS financial assets 8,302 1, ,338 18,608 27,478 6,539 2,694 55,319 Financial Liabilities Deposit liabilities: Demand 3, ,463 Savings 127, ,078 Time 33,688 4, ,566 40,733 Bills Payable 8,783 1, , ,012 5, , ,172 Repricing gap (P 154,404) P 21,701 P 5,722 P 1,128 (P 125,853) Cumulative gap (P 154,404) (P 132,703) (P 126,981) (P 125,853) P - To address the negative gap, the Parent Bank continually assesses various options such as fixing liabilities to five years and beyond by offering a more attractive high yielder. Simultaneously, the Parent Bank could also go underweight on long duration investments to narrow the gap. It also continues to implement previous strategies such as issuing LTNCD. The Group also monitors its exposure to fluctuations in interest rates by measuring the impact of interest rate movements on its interest income. The following table sets forth, the potential impact of changes in interest rates on the Parent Bank s net interest income: PHP P 515,891 (P 515,891) P 208,383 (P 208,383) USD 72,961 ( 72,961) 93,807 ( 93,807) P 588,852 (P 588,852) P 302,190 (P 302,190)

145 Audited Financial Report PHP P 36,273 (P 36,273) P 44,624 (P 44,624) USD 5,272 ( 5,272) 7,029 ( 7,029) P 41,545 (P 41,545) P 51,653 (P 51,653) Given the repricing position of the Parent Bank s financial assets and financial liabilities of the Parent Bank as at December 31, 2015 and 2014, if interest rates increased by 100 basis points, the Parent Bank s net interest income will increase by P million in 2015 and P51.65 million in The EaR computation is being prepared monthly. The following tables demonstrate the sensitivity to a reasonably possible change in interest rates, with all other variables held constant, of the Bank s mark-to-market gain/loss on financial assets at FVTPL and equity arising from mark-to-market gain/loss on AFS financial assets (amounts in millions). Group Impact of Changes in Interest Rates on Mark-to-Market Gain/Loss on Financial Assets at FVTPL* Change on mark-to-market gain/loss on financial assets at FVTPL (P 113,635) P 113,635 (P 227,269) P 227,269 (P 9,083) P 9,083 (P 18,156) P 18,156 * There is no other impact on the Bank s equity other than those already affecting the statements of income. Impact of Changes in Interest Rates on Equity** Change on mark-to-market gain/loss on AFS financial assets (P 405,332) P 405,332 (P 810,664) P 810,664 (P 598,865) P 599,045 (P 1,197,559) P 1,198,289 ** The impact on the Bank s equity already excludes the impact on transactions affecting the statements of income. Parent Bank Impact of Changes in Interest Rates on Mark-to-Market Gain/Loss on Financial Assets at FVTPL* Change on mark-to-market gain/loss on financial assets at FVTPL (P ) P 90,885 (P 181,769) P 181,769 (P 9,073) P 9,073 (P 18,146) P 18,146 *There is no other impact on the Bank s equity other than those already affecting the statements of income Impact of Changes in Interest Rates on Equity** Change on mark-to-market gain/loss on AFS financial assets (P 284,707) P 284,707 (P 569,414) P 569,414 (P 595,815) P 595,815 (P 1,191,629) P 1,191,629 ** The impact on the Bank s equity already excludes the impact on transactions affecting the statements of income. 4.6 Foreign Currency Risk Foreign currency risk is the probability of loss to earnings or capital arising from changes in foreign exchange rates. The Group takes on exposure to effects of fluctuations in the current foreign currency exchange rates on its financial performance and cash flows. The Parent Bank actively manages its exposure to effects of fluctuations in foreign currency exchange rates. Foremost among its guidelines is maintaining foreign currency exposure within the existing regulatory guidelines. This is a level believed to be relatively conservative for a financial institution engaged in that type of business. Banks are required by the BSP to match the foreign currency liabilities with the foreign currency assets held in the FCDU. In addition, the BSP requires a 30.0% liquidity reserve on all foreign currency liabilities held in the FCDU. The Parent Bank s policy is to maintain foreign currency exposure within acceptable limits and within existing regulatory guidelines. The Parent Bank believes that its foreign currency exposure on its assets and liabilities is within conservative limits for a financial institution engaged in this type of business. The Group does not present a sensitivity analysis on the impact on profit and loss and equity based on the reasonably possible change of foreign currency since its subsidiaries exposure to foreign currency risk is minimal.

146 144 UCPB 2015 Annual Report The breakdown of the financial resources and liabilities as to foreign and Philippine peso-denominated balances (after elimination of intercompany accounts/ transactions) as of December 31 follows: 2015 Foreign Philippine Currencies Pesos Total Resources: Cash and other cash items P 637,252 P 5,556,736 P 6,193,988 Due from BSP - 45,772,123 45,772,123 Due from other banks 96,171 7,409,142 7,505,313 Interbank loans and SPURA 1,746,689 6,563,297 8,309,986 Financial assets at FVTPL 761,903 1,603,910 2,365,813 AFS financial assets 6,532,654 16,402,075 22,934,729 HTM investments - 27,819,653 27,819,653 Loans and receivables 2,983, ,924, ,908,292 Statutory reserves - 2,400,949 2,400,949 P 12,758,263 P 223,452,583 P 236,210,846 Liabilities: Deposit liabilities P 15,814,497 P 204,116,109 P 219,930,606 Bills payable and SSURA 2,760,610 8,026,124 10,786,734 LTNCD - 9,506,307 9,506,307 Accrued interest and other expenses 15, , ,690 Other liabilities 4,002,968 7,638,579 11,641,547 P 22,593,493 P 229,870,391 P 252,463, Foreign Philippine Currencies Pesos Total Resources: Cash and other cash items P 618,193 P 6,422,907 P 7,041,100 Due from BSP - 38,244,884 38,244,884 Due from other banks 2,030, ,323 2,165,147 Interbank loans and SPURA 5,307,804 6,001,000 11,308,804 Financial assets at FVTPL 245, , ,994 AFS financial assets 9,466,073 17,915,593 27,381,666 HTM investments - 27,890,328 27,890,328 Loans and receivables 2,043, ,670, ,713,602 Statutory reserves - 2,400,949 2,400,949 P 19,711,935 P 200,000,539 P 219,712,474 Liabilities: Deposit liabilities P 16,580,560 P 185,338,440 P 201,919,000 Bills payable and SSURA 1,139,407 9,897,580 11,036,987 LTNCD - 9,484,078 9,484,078 Accrued interest and other expenses 21, , ,281 Other liabilities 84,892 14,990,856 15,075, Equity Price Risk P 17,826,368 P 220,223,726 P 238,050,094 Equity price risk is the risk of loss arising from movements in equity prices. The Parent Bank manages its exposures to equity prices by way of stop loss limits. The BOD approves limits on the amount of potential loss that may be undertaken, which is monitored daily by the RMD and reported to the ROC. The Group and the Parent Bank s equity price risk emanates from its securities which are financial instruments classified as financial assets at FVTPL and AFS financial assets. The Group and the Parent Bank measures the sensitivity of its investment securities by using PSE index (PSEi) fluctuations. Given the repricing position of the HFT quoted equity securities of the Parent Bank, if PSEi increased by 5%, the Parent Bank would expect the net unrealized gains on HFT securities to increase by P5.30 million in 2015 and P12.67 million in Conversely, if PSEi decreased by 5%, the Parent Bank would expect the unrealized gains on HFT securities to decrease by P5.30 million in 2015 and P12.67 million in As at December 31, 2015 and 2014, given the repricing position of the AFS quoted equity securities of the Group, if PSEi increased by 5%, the Group would expect the net unrealized loss on AFS financial assets to decrease by P19.83 million and P8.06 million, respectively. Conversely, if PSEi decreased by 5%, respectively, the Group would expect the net unrealized loss on AFS financial assets to increase P19.83 million and P8.06 million, respectively. The effect of equity price fluctuations on AFS financial assets of the Parent Bank is insignificant, therefore, the Parent Bank s sensitivity analysis was not included in the above discussion. Changes in prices of AFS financial assets do not affect the statements of income until sale or disposal of such assets or if there are indications of impairment.

147 Audited Financial Report CAPITAL MANAGEMENT OBJECTIVES, POLICIES AND PROCEDURES The primary objectives of the Group s capital management are to ensure that it complies with externally imposed capital requirements and it maintains strong credit ratings and healthy capital ratios in order to support its business and to maximize shareholders value. The Group manages its capital structure and makes adjustments to it in the light of changes in economic conditions and the risk characteristics of its activities. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividend payment to shareholders, return capital structure, or issue capital securities. No changes were made in the objectives, policies and processes from the previous years. The breakdown of the Group s risk-weighted assets as of December 31, 2015 and 2014 as reported to the BSP follows (amounts in millions): Group Parent Bank Credit risk-weighted assets P 167,393 P 163,300 P 153,815 P 149,920 Market risk-weighted assets 2,951 1,793 2,906 1,520 Operational risk-weighted assets 13,251 15,940 10,574 13,669 Total risk-weighted assets P 183,595 P 181,033 P 167,295 P 165,109 On October 29, 2014, BSP issued Circular No. 854 amending Subsection X111.1 of the MORB regarding the minimum capitalization requirement applicable for the Bank (universal banks with more than 100 branches) from P2.4 billion and P20.0 billion effective November 13, Banks which comply with the new capital levels shall submit to the BSP a certification to this effect within 30 calendar days from the date of the effectivity of the circular while banks which are not meeting the required minimum capital must submit to the BSP an acceptable capital build-up program within 1 year from the date of effectivity of the circular. 5.1 Regulatory Qualifying Capital Under existing BSP regulations, the determination of the Parent Bank s compliance with regulatory requirements and ratios is based on the amount of the Parent Bank s unimpaired capital (regulatory net worth) as reported to the BSP, which is determined on the basis of regulatory accounting policies which differ from PFRSs in some respects. The amount of surplus funds available for dividend declaration is also determined on the basis of regulatory net worth after considering certain adjustments. The BSP sets and monitors compliance to minimum capital requirements for the Parent Bank. In implementing current capital requirements, BSP issued Circular No. 538 which implemented the Revised Risk-Based Capital Adequacy Framework under Basel II effective July 1, It requires the Parent Bank to maintain a prescribed risk-based capital adequacy ratio (expressed as a percentage of qualifying capital to risk-weighted assets) of not less than 10.0%. The Parent Bank is also required to maintain a minimum Tier 1 capital ratio of 6.0%. The Parent Bank s RBCAR, as submitted to the BSP as at December 31, 2015 and 2014 are shown in the table below (amounts in millions): Group Parent Bank Tier 1 capital P 18,923 P 19,619 P 18,861 P 19,566 Tier 2 capital 1,555 1,549 1,437 1,437 Gross qualifying capital 20,478 21,168 20,298 21,003 Required deductions 1, ,771 4,230 Total qualifying capital P 19,391 P 20,261 P 15,527 P 16,773 Total risk-weighted assets P 183,595 P 181,033 P 167,295 P 165,109 Tier 1 capital ratio 9.89% 10.52% 9.28% 10.16% Total capital ratio 10.56% 11.19% 9.28% 10.16% The regulatory qualifying capital of the Group and of the Parent Bank consists of Tier 1 (core) and Tier 2 (supplementary) capital. Tier 1 capital is comprised of common stock, Capital Notes and surplus (deficit) including current year profit and surplus reserves less required deductions such as UVR (except for the P11.1 billion DC as at December 31, 2014 as discussed in Notes 1 and 17). Tier 2 composed upper tier 2 and lower tier 2. Upper Tier 2 consists of preferred stock, revaluation increment reserve, general loan loss provision and deposit for common stock subscription. Lower tier 2 consists of the unsecured subordinated debt. BSP Circular 560 dated January 31, 2007, which took effect on February 22, 2007, requires the deduction of unsecured loans, other credit accommodations and guarantees granted to subsidiaries and affiliates from capital accounts for purposes of computing CAR. As at December 31, 2015 and 2014, considering the regulatory relief mentioned in Note 1, the Parent Bank had already complied with the required RBCAR. Also, as discussed in Note 1, on February 26, 2009, the MB of the BSP exempted the Parent Bank from sanctions that may be imposed for its non-compliance with the 10.0% CAR and all capital-based regulatory ratios for the year 2008 until such time that the Parent Bank s Rehabilitation Plan is fully implemented and approved the Parent Bank s request for temporary relief by reducing the Parent Bank s CAR to 8.0% for a period of three years up to 2011 or until such time that the Parent Bank is able to comply with the required 10.0% CAR, whichever comes first.

148 146 UCPB 2015 Annual Report 5.2 BASEL III On January 15, 2013, the BSP issued Circular 781 which contains the revised risk-based capital adequacy framework for the Philippine Banking system in accordance with the Basel III standards. The said Circular took effect on January 1, The following are the revised minimum capital requirements for UBs and KBs and their subsidiary banks and quasi-banks (QBs): 6.0% Common Equity Tier 1 (CET1)/Risk-Weighted Assets (RWAs); 7.5% Tier 1 Capital/RWAs; and, 10.0% Total Qualifying Capital (Tier1 plus Tier2)/RWAs The Qualifying Capital must consist of the sum of the following elements, net of required deductions: Tier 1- going concern [(CET1) plus Additional Tier 1 (ATI)] and Tier 2- gone concern. A bank/quasi-bank must ensure that any component of capital included in qualifying capital complies with all the eligibility criteria for the particular category of capital in which it is included. The Circular further describes the elements/criteria that a domestic bank should meet for each capital category. Regulatory adjustments and calculation guidelines for each capital category are also discussed. In conformity with the Basel III standards, a Capital Conservation Buffer (CCB) of 2.5% of RWAs, comprised of CET1 capital, has been required of U/KBs and their subsidiary banks and quasi-banks. This buffer is meant to promote the conservation of capital and build up of adequate cushion that can be drawn down by banks to absorb losses during financial and economic stress. The restrictions on distribution that a bank must meet at various levels of CET1 capital ratios are established, as shown in below table. Restrictions will be imposed if a bank has no positive earnings, has CET1 of not more than 8.5% [Common Equity Tier (CET) Ratio of 6% plus conservation buffer of 2.5%] and has not complied with the minimum 10% CAR. Level of CET 1 capital Restriction on Distributions <6.0 No distribution 6.0%-7.25% No distribution until more than 7.25% CET1 capital is met >7.25%-8.5% 50% of earnings may be distributed >8.5% No restriction on the distribution On April 14, 2014, the Parent Bank requested confirmation from the BSP that compliance by UCPB on CAR requirements will be consistent with the rehabilitation parameters until On May 23, 2014, the MB in its Resolution No. 822 approved the following until 2018: (a) (b) Exemption from compliance with the Basel III capital requirement and to continue capital compliance under the Basel II guidelines; Continue the following regulatory reliefs granted pursuant to UCPB s 10-year rehabilitation plan: Recognition of interim TIER 1 capital of the P12 billion Capital Notes issued to the PDIC as long as the notes are outstanding and held by PDIC; Staggered booking of the remaining UVR/DL; and, To remain as a government depository bank, subject to compliance with applicable regulations of the Department of Finance. (c) (d) Allow updating of its remaining UVR/DL using the outstanding P18.6 billion balance based on independent valuation by a professional firm, to be amortized on a straight line basis (2014 to 2018); and, Exemption from the requirement, as a universal bank, to list its shares in the PSE. In June 26, 2015, the MB further approved, in its resolution No. 1020, the following additional regulatory reliefs: (e) (f) (g) Exclusion of the risk free interest income, earned from the income support facility, from the calculation of gross income that is subject to operational risk capital charge; Extension up to 2018 of the MB approval under Resolution No. 759 dated May 9, 2013, allowing the bank to charge the amortization of unbooked valuation reserves and deferred charges against retained earnings, instead of current operations; and, Inclusion of loans of P3.8 billion returned by the PDIC as part of the Old Bank that allows re-allocation of excess valuation reserves from other assets within the pool of Old Bank assets to the assets returned by PDIC. On June 27, 2014, the BSP issued Circular No. 839, Real Estate Stress Test (REST) Limit for Real Estate Exposures, which provides the implementing guidelines on the prudential REST limit for universal, commercial, and thrift banks on their aggregate real estate exposures. The prudential REST limits, which shall be complied with at all times are 6.0% of CET 1 and 10% risk-based capital adequacy ratio, on a solo and consolidated basis, under a prescribed write-off rate.

149 Audited Financial Report CATEGORIES AND OFFSETTING OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES 6.1 Carrying Amounts and Fair Value by Category The carrying amounts and fair values of the categories of financial assets and financial liabilities presented in the statements of financial position are shown below. Group Carrying Carrying Notes Amount Fair Values Amount Fair Values Financial Resources: Loans and Receivables: Cash and other cash items 9 P 6,543,793 P 6,543,793 P 7,477,991 P 7,477,991 Due from BSP 9 47,524,537 47,524,537 39,502,248 39,502,248 Due from other banks 9 7,682,039 7,682,039 2,253,958 2,253,958 Interbank loan receivables and SPURA 10 9,009,986 9,009,986 11,808,804 11,808,804 Loans and receivables ,508, ,508, ,566, ,566,804 Other assets 16 2,400,949 2,400,949 2,400,949 2,400,949 Financial assets at FVTPL 11 2,446,930 2,446, , ,050 AFS financial assets 11 23,111,335 23,111,335 27,620,929 27,620,929 HTM investments 11 27,859,653 27,897,709 28,030,756 28,030,756 P 260,088,140 P 260,126,196 P 241,658,489 P 241,658,489 Financial Liabilities: Deposit liabilities: 18 Demand P 36,552,333 P 36,552,333 P 29,483,489 P 29,483,489 Savings 127,796, ,796, ,065, ,065,581 Time 65,246,515 65,246,515 51,508,390 50,164,836 LTNCD 9,506,307 9,519,289 9,484,079 9,951,377 Bills payable and SSURA 19 12,879,777 12,879,777 12,851,929 12,851,929 Accrued interests and other expenses , , , ,477 Other liabilities: 21 Bills purchased contra 3,752,750 3,752,750 5,025,556 5,025,556 Cash letters of credit 3,869,053 3,869,053 6,192,932 6,192,932 Accounts payable 2,086,908 2,086,908 2,051,693 2,051,693 Margin deposits ,942 53,942 Managers check 1,278,552 1,278,552 1,107,144 1,107,144 Deposits on lease contracts 369, , , ,289 Outstanding acceptances 85,905 85,905 87,439 87,439 Due to PDIC 218, , , ,139 Due to Treasury of the Philippines 101, ,915 75,379 75,379 Derivative liabilities 39,980 39,980 13,759 13,759 Miscellaneous 329, , , ,176 P 264,736,936 P 264,749,918 P 249,524,393 P 248,648,137 Parent Bank Carrying Carrying Notes Amount Fair Values Amount Fair Values Financial Resources: Loans and Receivables: Cash and other cash items 9 P 6,193,988 P 6,193,988 P 7,041,100 P 7,041,100 Due from BSP 9 45,772,123 45,772,123 38,244,884 38,244,884 Due from other banks 9 7,505,313 7,505,313 2,165,147 2,165,147 Interbank loan receivables and SPURA 10 8,309,986 8,309,986 11,308,804 11,308,804 Loans and receivables ,096, ,096, ,723, ,723,209 Other assets 16 2,400,949 2,400,949 2,400,949 2,400,949 Financial assets at FVTPL 11 2,365,813 2,365, , ,994 AFS financial assets 11 22,934,729 22,934,729 27,381,666 27,381,666 HTM investments 11 27,819,653 27,819,653 27,890,328 27,890,328 Forward P 241,399,038 P 241,399,038 P 224,722,081 P 224,722,081

150 148 UCPB 2015 Annual Report Parent Bank Carrying Carrying Notes Amount Fair Values Amount Fair Values Financial Liabilities: Deposit liabilities: 18 Demand P 35,619,202 P 35,619,202 P 28,749,990 P 28,749,990 Savings 124,680, ,680, ,364, ,364,039 Time 59,630,429 59,630,429 45,804,972 44,455,233 LTNCD 9,506,307 9,519,289 9,484,078 9,951,377 Bills payable and SSURA 19 10,786,734 10,786,734 11,036,987 11,036,987 Accrued interest and other expenses , , , ,360 Other liabilities: 21 Bills purchased contra 3,752,750 3,752,750 5,025,556 5,025,556 Cash letters of credit 3,869,053 3,869,053 6,192,932 6,192,932 Accounts payable 1,675,894 1,675,894 1,829,481 1,829,481 Margin deposits ,942 53,942 Managers check 1,159,698 1,159,698 1,075,078 1,075,078 Outstanding acceptances 85,905 85,905 87,439 87,439 Due to PDIC 218, , , ,139 Due to Treasury of the Philippines 96,658 96,658 71,630 71,630 Derivative liabilities 39,980 39,980 13,759 13,759 Miscellaneous 32,337 32,337 28,892 28,892 P 251,717,678 P 251,730,660 P 237,519,274 P 236,636,834 See Notes 2.4 and 2.12 for the description of the accounting policies for each category of financial instruments including the determination of fair values. A description of the Group s risk management objectives and policies for financial instruments is provided in Note FAIR VALUE MEASUREMENTS AND DISCLOSURES 7.1 Fair Value Hierarchy In accordance with PFRS 13, the fair value of financial assets and financial liabilities and non-financial assets, which are measured at fair value on a recurring or non-recurring basis and those assets and liabilities not measured at fair value but for which fair value is disclosed in accordance with other relevant PFRS, are categorized into three levels based on the significance of inputs used to measure the fair value. The fair value hierarchy has the following levels: Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities that an entity can access at the measurement date; Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e., as prices) or indirectly (i.e., derived from prices); and, Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs). The level within which the asset or liability is classified is determined based on the lowest level of significant input to the fair value measurement. For purposes of determining the market value at Level 1, a market is regarded as active if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service, or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm s length basis. For investments which do not have quoted market price, the fair value is determined by using generally acceptable pricing models and valuation techniques or by reference to the current market of another instrument which is substantially the same after taking into account the related credit risk of counterparties, or is calculated based on the expected cash flows of the underlying net asset base of the instrument. When the Group uses valuation technique, it maximizes the use of observable market data where it is available and relies as little as possible on entity specific estimates. If all significant inputs required to determine the fair value of an instrument are observable, the instrument is included in Level 2. Otherwise, it is included in Level 3.

151 Audited Financial Report Financial Instruments Measurement at Fair Value The table below shows the fair value hierarchy of the Group s classes of financial assets and financial liabilities measured at fair value in the statements of financial position on a recurring basis as of December 31, 2015 and Group Fair Value Hierarchy As At December 31, 2015 Level 1 Level 2 Level 3 Total Financial Resources: Financial assets at FVTPL: Equity securities P 120,698 P - P - P 120,698 Debt securities 2,282, ,282,608 Derivative assets - 43,624-43,624 AFS financial assets: Equity securities 506, ,963-1,155,003 Debt securities 22,828, ,828,592 Total Resources at Fair Value P 25,737,938 P 692,587 P - P 26,430,525 Financial Liabilities: Liability for short position P - P 473,375 P - P 473,375 Derivative liability - 39,980-39,980 Total Liabilities at Fair Value P - P 513,355 P - P 513,355 Fair Value Hierarchy As At December 31, 2014 Level 1 Level 2 Level 3 Total Financial Resources: Financial assets at FVTPL: Equity securities P 275,084 P - P - P 275,084 Debt securities 686, ,186 Derivative assets - 34,780-34,780 AFS financial assets: Equity securities 565, ,526-1,217,297 Debt securities 27,279, ,279,862 Total Resources at Fair Value P 28,806,903 P 686,306 P - P 29,493,209 Financial Liability Derivative liability P - P 13,759 P - P 13,759 Parent Bank Fair Value Hierarchy As At December 31, 2015 Level 1 Level 2 Level 3 Total Financial Resources: Financial assets at FVTPL: Equity securities P 106,088 P - P - P 106,088 Debt securities 2,216, ,216,101 Derivative assets - 43,624-43,624 AFS financial assets: Equity securities 396, ,963-1,045,480 Debt securities 22,761, ,761,435 Total Resources at Fair Value P 25,480,141 P 692,587 P - P 26,172,728 Financial Liabilities: Liability for short position P - P 473,375 P - P 473,375 Derivative liability - 39,980-39,980 Total Liabilities at Fair Value P - P 513,355 P - P 513,355

152 150 UCPB 2015 Annual Report Fair Value Hierarchy As At December 31, 2014 Level 1 Level 2 Level 3 Total Financial Resources: Financial assets at FVTPL: Equity securities P 253,389 P - P - P 253,389 Debt securities 277, ,825 Derivative assets - 34,780-34,780 AFS financial assets: Equity securities 396, ,009-1,047,526 Debt securities 27,210, ,210,296 Total Resources at Fair Value P 28,138,027 P 685,789 P - P 28,823,816 Financial Liability Derivative liability P - P 13,759 P - P 13,759 Described below is the information about how the fair values of the Group s classes of financial assets are determined. (a) Equity Securities As of December 31, 2015 and 2014, instruments included in Level 1 comprise equity securities classified as financial assets at FVTPL or AFS financial assets. These securities were valued based on their market prices quoted in the Philippines, HK and U.S. stock exchanges at the end of each reporting period. On the other hand, the fair value unquoted equity securities within Level 2 are determined based on prices of relative benchmark securities which are quoted in PDEx and/or Bloomberg. (b) Debt Securities The fair value of the Group s debt securities which consist of corporate bonds is estimated by reference to quoted bid price in active market at the end of the reporting period and is categorized within Level 1. (c) Derivative Instruments The fair values of derivative financial instruments were based on quoted market prices. Where quoted market prices are not readily available, fair values are determined through valuation techniques using the net present value computation. (d) Liability for Short Position The fair value of the liability for short position was the estimated fair value of sold collateral pledged under the reverse repurchase agreement and is categorized within Level Financial Instruments Measured at Amortized Cost for which Fair Value is Disclosed The tables in succeeding pages summarize the fair value hierarchy of the Group s and Parent Bank s financial assets and financial liabilities which are not measured at fair value in the statements of financial position but for which fair value is disclosed. Group Fair Value Hierarchy As At December 31, 2015 Level 1 Level 2 Level 3 Total Financial Resources: Loans and Receivables: Cash and other cash items P 6,543,793 P - P - P 6,543,793 Due from BSP 47,524, ,524,537 Due from other banks 7,682, ,682,039 Interbank loan receivables and SPURA - - 9,009,986 9,009,986 HTM investments 27,819,653 78,056-27,897,709 Loans and receivables ,508, ,508,918 Other assets 2,400, ,400,949 P 91,970,971 P 78,056 P 142,518,904 P 234,567,931

153 Audited Financial Report 151 Fair Value Hierarchy As At December 31, 2015 Level 1 Level 2 Level 3 Total Financial Liabilities: Deposit liabilities: Demand P 36,552,333 P - P - P 36,552,333 Savings 127,796, ,796,125 Time - 65,246,515-65,246,515 LTNCD 9,519, ,519,289 Bills payable and SSURA - 12,879,777-12,879,777 Accrued interests and other expenses , ,780 Other liabilities: Bills purchased contra - - 3,752,750 3,752,750 Cash letters of credit - - 3,869,053 3,869,053 Accounts payable - - 2,086,919 2,086,919 Margin deposits Managers check - - 1,278,552 1,278,552 Deposits on lease contracts , ,306 Outstanding acceptances ,905 85,905 Due to PDIC , ,162 Due to Treasury of the Philippines , ,915 Miscellaneous , ,568 P 173,867,747 P 78,126,292 P 12,715,910 P 264,709,949 Fair Value Hierarchy As At December 31, 2014 Level 1 Level 2 Level 3 Total Financial Resources: Loans and Receivables: Cash and other cash items P 7,477,991 P - P - P 7,477,991 Due from BSP 39,502, ,502,248 Due from other banks 2,253, ,253,958 Interbank loan receivables and SPURA ,808,804 11,808,804 HTM 28,030, ,030,756 Loans and receivables ,271, ,271,318 Other assets 2,400, ,400,949 P 79,665,902 P - P 131,080,122 P 210,746,024 Financial Liabilities: Deposit liabilities: Demand P 29,483,489 P - P - P 29,483,489 Savings 130,065, ,065,581 Time - 50,164,836-50,164,836 LTNCD 9,951, ,951,377 Bills payable and SSURA - 5,025,556-5,025,556 Accrued interests and other expenses , ,477 Other liabilities: Bills purchased contra - - 5,025,556 5,025,556 Cash letters of credit - - 6,192,932 6,192,932 Accounts payable - - 2,015,693 2,015,693 Margin deposits ,942 53,942 Managers check - - 1,107,144 1,107,144 Deposits on lease contracts , ,289 Outstanding acceptances ,439 87,439 Due to PDIC , ,139 Due to Treasury of the Philippines ,379 75,379 Miscellaneous , ,176 P 169,500,447 P 55,190,392 P 16,081,166 P 240,772,005

154 152 UCPB 2015 Annual Report Parent Bank Fair Value Hierarchy As At December 31, 2015 Level 1 Level 2 Level 3 Total Financial Resources: Loans and Receivables: Cash and other cash items P 6,193,988 P - P - P 6,193,988 Due from BSP 45,772, ,772,123 Due from other banks 7,505, ,505,313 Interbank loan receivables and SPURA - - 8,309,986 8,309,986 HTM investments 27,819, ,819,653 Loans and receivables ,096, ,096,484 Other assets 2,400, ,400,949 P 89,692,026 P - P 126,406,470 P 216,098,496 Financial Liabilities: Deposit liabilities: Demand P 35,619,202 P - P - P 35,619,202 Savings 124,680, ,680,975 Time - 59,630,429-59,630,429 LTNCD 9,519, ,519,289 Bills payable and SSURA - 10,786,734-10,786,734 Accrued interests and other expenses , ,594 Other liabilities: Bills purchased contra - - 3,752,750 3,752,750 Cash letters of credit - - 3,869,053 3,869,053 Accounts payable - - 1,675,894 1,675,894 Margin deposits Managers check - - 1,159,698 1,159,698 Deposits on lease contracts Outstanding acceptances ,905 85,905 Due to PDIC , ,162 Due to Treasury of the Philippines ,658 96,658 Miscellaneous ,337 32,337 P 169,819,466 P 70,417,163 P 11,454,051 P 251,690,680 Fair Value Hierarchy As At December 31, 2014 Level 1 Level 2 Level 3 Total Financial Resources: Loans and Receivables: Cash and other cash items P 7,041,100 P - P - P 7,041,100 Due from BSP 38,244, ,244,884 Due from other banks 2,165, ,165,147 Interbank loan receivables and SPURA ,308,804 11,308,804 HTM investments 27,890, ,890,328 Loans and receivables ,723, ,723,209 Other assets 2,400, ,400,949 P 77,742,408 P - P 119,032,013 P 196,774,421 Financial Liabilities: Deposit liabilities: Demand P 28,749,990 P - P - P 28,749,990 Savings 127,364, ,364,039 Time - 44,455,233-44,455,233 LTNCD 9,951, ,951,377 Bills payable and SSURA - 11,036,987-11,036,987 Accrued interests and other expenses , ,360 Other liabilities: Bills purchased contra - - 5,025,556 5,025,556 Cash letters of credit - - 6,192,932 6,192,932 Accounts payable - - 1,829,481 1,829,481 Margin deposits ,942 53,942 Managers check - - 1,075,078 1,075,078 Deposits on lease contracts Outstanding acceptances ,439 87,439 Due to PDIC , ,139 Due to Treasury of the Philippines ,630 71,630 Miscellaneous ,892 28,892 P 166,065,406 P 55,492,220 P 15,065,449 P 236,623,075

155 Audited Financial Report 153 For financial assets and financial liabilities whose fair values are included in Level 1, management considers that the carrying amounts of those short-term financial instruments approximate their fair values. The fair values of the Group s financial assets and financial liabilities included in Level 2 and Level 3, which are not traded in an active market, is determined by using generally acceptable pricing models and valuation techniques or by reference to the current market value of another instrument which is substantially the same after taking into account the related credit risk of counterparties, or is calculated based on the expected cash flows of the underlying net asset base of the instrument. When the Group uses valuation technique, it maximizes the use of observable market data where it is available and rely as little as possible on entity specific estimates. If all significant inputs required to determine the fair value of an instrument are observable, the instrument is included in Level 2. Otherwise, it is included in Level Fair Value Measurement for Non-financial Assets (a) Determining Fair Value of Investment Properties The table below shows the Levels within the hierarchy of non-financial assets measured at fair value on a recurring basis as of December 31. Group 2015 Level 1 Level 2 Level 3 Total Land P - P 3,283,895 P 78,319 P 3,362,214 Building - - 4,048,001 4,048,001 P - P 3,283,895 P 4,126,320 P 7,410, Level 1 Level 2 Level 3 Total Land P - P 2,777,702 P 120,862 P 2,898,564 Building - - 2,877,222 2,877,222 Parent Bank P - P 2,777,702 P 2,998,084 P 5,775, Level 1 Level 2 Level 3 Total Land P - P 3,136,750 P - P 3,136,750 Building - - 3,972,852 3,972,852 P - P 3,136,750 P 3,972,852 P 7,109, Level 1 Level 2 Level 3 Total Land P - P 2,609,543 P - P 2,609,543 Building - - 2,829,243 2,829,243 P - P 2,609,543 P 2,829,243 P 5,438,786 The fair value of the Bank s investment properties are determined on the basis of the appraisals performed by various internal and external appraiser with appropriate qualifications and recent experience in the valuation of similar properties in the relevant locations. To some extent, the valuation process was conducted by the appraiser in discussion with the Bank s management with respect to the determination of the inputs such as the size, age, and condition of the land and buildings, and the comparable prices in the corresponding property location. In estimating the fair value of these properties, management takes into account the market participant s ability to generate economic benefits by using the assets in their highest and best use. Based on management assessment, the best use of the Bank s non-financial assets indicated above is their current use. The fair value of these non-financial assets were determined based on the following approaches: (i) Fair Value Measurement for Land The Level 2 fair value of land was derived using the market comparable approach that reflects the recent transaction prices for similar properties in nearby locations. Under this approach, when sales prices of comparable land in close proximity are used in the valuation of the subject property with no adjustment on the price, fair value is included in Level 2. On the other hand, if the observable recent prices of the reference properties were adjusted for differences in key attributes such as property size, zoning, and accessibility, the fair value is included in Level 3. The most significant input into this valuation approach is the price per square foot, hence, the higher the price per square foot, the higher the fair value.

156 154 UCPB 2015 Annual Report (ii) Fair Value Measurement for Buildings The Level 3 fair value of the buildings under Investment Properties account was determined using the cost approach that reflects the cost to a market participant to construct an asset of comparable usage, construction standards, design and layout, adjusted for obsolescence. The more significant inputs used in the valuation include direct and indirect costs of construction such as but not limited to, labor and contractor s profit, materials and equipment, surveying and permit costs, electricity and utility costs, architectural and engineering fees, insurance and legal fees. These inputs were derived from various suppliers and contractor s quotes, price catalogues, and construction price indices. Under this approach, higher estimated costs used in the valuation will result in higher fair value of the properties. (b) Other Fair Value Information The reconciliation of the carrying amount of investment property included in Level 3 is presented in Note 15. There has been no change to the valuation techniques used by the Bank during the year for its non-financial assets. Also, there were no transfers into or out of Level 3 fair value hierarchy in 2015 and SEGMENT INFORMATION 8.1 Business Segments The Group s operating businesses are recognized 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 derives revenues from the following main operating business segments: (a) Branch Banking Group The Branch Banking Group (BBG) oversees the operation of the Group s branches and ATM networks, which are the primary sales and distribution platforms for products and services. Its primary tasks are to: solicit deposits; cross-sell and distribute all of the Group s products and services, as allowed by regulation; generate sales leads for specialized products; and manage customer relationships. (b) Corporate and Consumer Banking Group The Corporate and Consumer Banking Group (CCBG) manages the Group s loan portfolio. It has a Consumer Banking Division to handle the consumer loan market, a Corporate and Commercial Banking Division to handle the corporate and institutional loan markets, and a Remittance Marketing Division for the overseas remittance market. Apart from credit lines, the Corporate and Commercial Banking Division also provides transactional banking, trade finance, foreign exchange, trust banking, financial advisory and capital markets solutions to its corporate and institutional clients. The CCBG also oversees the Group s equity brokerage business through USI and the Group s lease financing business through ULFC. (c) Treasury Group The Treasury Group (TG) manages the Group s assets and liabilities. Working with the Asset and Liability Committee, TG recommends the pricing strategy for deposits and loans to ensure that deposit-taking units offer competitive yields to generate the funding requirements of the Group, and the lending units, in turn, offer rates that will attract the targeted borrowers. In addition, TG manages the regulatory reserve requirements of the Group as well as ensures its liquidity position. The TG also engages in fixed income securities and foreign exchange trading. (d) USB The Group considers USB as one operating business segment. USB manages the Group s consumer loan market particularly focusing on public school teachers and employees of local government units. USB also provides services such as deposit-taking, domestic fund transfers and treasury. (e) Other Segments This segment includes other segments that provide support to its core activities. Management monitors the operating results of its business units separately for the purpose of making decisions about resource allocation and performance assessment. Segment performance is evaluated based on net income before income tax, which is measured in a manner consistent with that in the statement of income. Segment assets are those operating assets that are employed by a segment in its operating activities and that either directly attributable to the segment or can be allocated to the segment on a reasonable basis. Segment liabilities are those operating liabilities that result from the operating activities of a segment and that are either directly attributable to the segment or can be allocated to the segment on a reasonable basis. The Group s assets producing revenues are located in the Philippines (i.e., one geographical location), therefore, geographical segment information is no longer presented. The Group has no significant customers which contribute 10.0% or more of the consolidated revenue, net of interest expense. Funds are ordinarily allocated between segments, resulting in funding cost transfers disclosed in operating income. Interest charged for these funds is based on the Group s cost of capital. There are no other material items of income or expense between business segments.

157 Audited Financial Report Analysis of Segment Information Segment information as at and for the year ended December 31, 2015 and 2014 as follows: 2015 Other BBG CCBG Treasury Segments USB Total Interest income P 29,218 P 6,423,706 P 3,924,083 P 358,104 P 1,163,704 P 11,898,815 Interest expense ( 1,528,745) - ( 955,900) ( 100,955) ( 141,287) ( 2,726,887) Net interest (expense) income ( 1,499,527) 6,423,706 2,968, ,149 1,022,417 9,171,928 Depreciation and amortization ( 227,983) - - ( 297,996) ( 61,918) ( 587,897) Provision for impairment loss ( 206,669) ( 6,549) ( 213,218) Net interest (expense) income after depreciation and amortization ( 1,727,510) 6,423,706 2,968,183 ( 247,516) 953,950 8,370,813 Other income 585, , , , ,525 2,104,955 Other expenses ( 1,007,383) ( 221,346) ( 260,651) ( 4,037,232) ( 594,232) ( 6,120,844) Net income (loss) before income tax ( 2,149,877) 6,717,553 2,869,285 ( 3,689,280) 607,243 4,354,924 Income tax expense ( 30) ( 5,411) ( 706,848) ( 160,821) ( 181,367) ( 1,054,477) Net income (loss) for the year (P 2,149,907) P 6,712,142 P 2,162,437 (P 3,850,101) P 425,876 P 3,300,447 Total assets P 217,368,878 P 11,992,497 P 28,274,044 P 12,849,994 P 14,865,251 P 285,350,664 Total liabilities P219,518,786 P 5,280,354 P 26,688,779 P 2,629,668 P 12,419,825 P 266,537, Other BBG CCBG Treasury Segments USB Total Interest income P 35,292 P 5,974,155 P 4,183,780 P 300,368 P 1,239,920 P 11,733,515 Interest expense ( 1,617,196) - ( 984,608) ( 85,245) ( 143,980) ( 2,831,029) Net interest (expense) income ( 1,581,904) 5,974,155 3,199, ,123 1,095,940 8,902,486 Depreciation and amortization ( 230,006) - - ( 369,566) ( 53,477) ( 653,049) Provision for impairment loss ( 41,207) ( 235,772) ( 276,979) Net interest (expense) income after depreciation and amortization ( 1,811,910) 5,974,155 3,199,172 ( 195,650) 806,691 7,972,458 Other income 884, ,565 ( 269,412) 982, ,373 2,300,189 Other expenses ( 1,016,779) ( 282,482) ( 158,247) ( 4,013,317) ( 564,316) ( 6,035,141) Net income (loss) before income tax ( 1,943,954) 6,124,238 2,771,513 ( 3,226,039) 511,748 4,237,506 Income tax expense ( 53) ( 22,512) ( 711,258) ( 209,294) ( 154,985) ( 1,098,102) Net income (loss) for the year (P 1,944,007) P 6,101,726 P 2,060,255 (P 3,435,333) P 356,763 P 3,139,404 Total assets P 201,552,343 P 14,134,679 P 26,894,824 P 14,467,292 P 13,342,124 P270,391,262 Total liabilities P 203,496,350 P 8,032,953 P 25,355,815 P 2,821,569 P 11,334,705 P 251,041, CASH AND CASH EQUIVALENTS The components of Cash and Cash Equivalents follow: Group Parent Bank Cash and other cash items P 6,543,793 P 7,477,991 P 6,193,988 P 7,041,100 Due from BSP 47,524,537 39,502,248 45,772,123 38,244,884 Due from other banks 7,682,039 2,253,958 7,505,313 2,165,147 P 61,750,369 P 49,234,197 P 59,471,424 P 47,451,131 Cash consists primarily of funds in the form of Philippine currency notes and coins and includes foreign currencies acceptable to form part of the international reserves in the Parent Bank s vault and those in the possession of tellers, including ATMs. Other cash items include cash items (other than currency and coins on hand), such as checks drawn on other banks or other branches after the clearing cut-off time until the close of the regular banking hours.

158 156 UCPB 2015 Annual Report Due from BSP consists of: Group Parent Bank Demand deposit P 41,874,537 P 35,302,248 P 40,122,123 P 34,044,884 Special deposit 5,650,000 4,200,000 5,650,000 4,200,000 P 47,524,537 P 39,502,248 P 45,772,123 P 38,244,884 Due from BSP represents the aggregate balance of deposit accounts maintained with the BSP primarily to meet reserve requirements (see Note 18), to serve as clearing account for interbank claims and to comply with existing trust regulations. The BSP demand deposit account is interest-free while the special deposit account earned average annual interest of 2.50% and 2.21% in 2015 and 2014, respectively. The balance of Due from Other Banks account represents regular deposits with the following: Group Parent Bank Local banks P 4,563,852 P 1,492,543 P 4,387,126 P 1,403,732 Foreign banks 3,118, ,415 3,118, ,415 The breakdown of Due from Other Banks by currency is shown below. P 7,682,039 P 2,253,958 P 7,505,313 P 2,165,147 Group Parent Bank Local currency P 272,789 P 223,031 P 96,171 P 134,323 Foreign currency 7,409,250 2,030,927 7,409,142 2,030,824 P 7,682,039 P 2,253,958 P 7,505,313 P 2,165,147 Due from other banks earned average annual interest of 0.25% to 1.50% in 2015 and 0.01% to 0.25% in 2014 for local currency and 0.01% to 0.12% in 2015 and 0.01% to 0.13% in 2014 for foreign currency. Interest income on placement with BSP and other banks consist of: Group Parent Bank BSP P 65,964 P 299,596 P 54,085 P 281,445 Other banks 35,356 10,552 35,060 24,349 P 101,320 P 310,148 P 89,145 P 305, INTERBANK LOANS RECEIVABLE AND SECURITIES PURCHASED UNDER RESALE AGREEMENTS This account consists of: Group Parent Bank Interbank loans receivable P 2,222,986 P 5,308,804 P 2,222,986 P 5,308,804 SPURA 6,787,000 6,500,000 6,087,000 6,000,000 P 9,009,986 P 11,808,804 P 8,309,986 P 11,308,804 Interbank loans receivable have original maturities from respective placement dates of one day to three months and earn annual interest of 0.35% and ranging from 2.0% to 2.5% for Philippine peso-denominated receivables and from 0.10% to 0.20% and from 0.05% to 0.12% for US dollar-denominated receivables in 2015 and 2014, respectively. Interest income on interbank loans receivable amounted to P55.75 million in 2015 and P32.18 million in 2014, for the Group, and P4.18 million in 2015 and P3.76 million in 2014, for the Parent Bank. 11. TRADING AND INVESTMENT SECURITIES This account is comprised of: Group Parent Bank Financial assets at FVTPL P 2,446,930 P 996,050 P 2,365,813 P 565,994 AFS financial assets net 23,111,335 27,620,929 22,934,729 27,381,666 HTM Investments 27,859,653 28,030,756 27,819,653 27,890,328 P 53,417,918 P 56,647,735 P 53,120,195 P 55,837,988

159 Audited Financial Report Financial Assets at FVTPL This account consists of the following: Group Parent Bank Held-for-trading: Debt securities: Government P 2,264,588 P 471,919 P 2,198,081 P 63,558 Corporate 18, ,267 18, ,267 2,282, ,186 2,216, ,825 Quoted equity securities 120, , , ,389 2,403, ,270 2,322, ,214 Derivative assets 43,624 34,780 43,624 34,780 P 2,446,930 P 996,050 P 2,365,813 P 565,994 Philippine peso-denominated debt securities classified as financial assets at FVTPL earn annual interest ranging from 3.3% to 8.0% and from 1.6% to 10.1% in 2015 and 2014, respectively. US dollar-denominated debt securities classified as financial assets at FVTPL earn annual interest ranging from 2.0% to 8.0% and 2.8% to 9.5% in 2015 and 2014, respectively. The Group is a counterparty to derivative contracts, such as interest rate swaps. These derivatives are entered into as a service to customers, as a means of reducing or managing their respective interest rate exposures and for trading purposes. Such derivative financial instruments are initially recorded at fair value on the date when 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 liabilities when the fair value is negative. The notional amount is the amount of a derivative s underlying asset, reference rate or index and is the basis upon which changes in the value of the derivative are measured. The aggregate contractual or notional amount of derivative financial instruments and the aggregative fair values of derivative financial assets and financial liabilities as of December 31 both in the Group s and Parent Bank s financial statements are shown below Notional Fair Values Amount Assets Liabilities Freestanding derivatives: Forward exchange bought $ 160,000 P 76 P 39,980 Forward exchange sold 120,000 10,046 - Warrants 68 33,502 - P 43,624 P 39, Notional Fair Values Amount Assets Liabilities Freestanding derivatives: Forward exchange bought $ 105,000 P 2,944 P 13,759 Warrants 68 31,836 - The movements in the fair values of the derivative assets and liabilities follow: P 34,780 P 13, Balance at beginning of year P 21,021 P 38,752 Changes in fair value during the year 64,777 ( 5,061) Fair value of settled contracts ( 82,154) ( 12,670) Balance at end of year P 3,644 P 21,021 The derivative liabilities amounting to P39,980 and P13,759 as of December 31, 2015 and 2014, respectively, are shown as Derivative liabilities as part of Other Liabilities account in the statement of financial position (see Note 21). The Group recognized the change in value of financial assets at FVTPL resulting in an decrease of P0.05 million in 2015 and increase of P0.02 million in 2014 in the Group s and Parent Bank s financial statements, which were included as part of Trading and Securities Gains account in the statement of income. Other information about the fair value measurement of the Group s financial assets at FVTPL are presented in Note 7.2.

160 158 UCPB 2015 Annual Report 11.2 Available-for-sale Financial Assets This account consists of the following: Group Parent Bank Debt securities: Government P 11,215,147 P 16,560,516 P 11,147,989 P 16,490,950 Private 11,613,446 10,719,346 11,613,446 10,719,346 22,828,593 27,279,862 22,761,435 27,210,296 Equity securities: Quoted 506, , , ,517 Unquoted 648, , , ,009 1,155,003 1,217,297 1,045,480 1,047,526 Allowance for credit and impairment losses ( 872,261) ( 876,230) ( 872,186) ( 876,156) P 23,111,335 P P27,620,929 P 22,934,729 P 27,381,666 Philippine peso-denominated debt securities classified as AFS financial assets earn annual interest ranging from 1.6% to 10.1% both in 2015 and US dollardenominated debt securities classified as AFS financial assets earn annual interest ranging from 2.8% to 8.6% both in 2015 and The Group and the Parent Bank s investment in quoted equity securities are all quoted through the PSE. These include investments in public utilities and other private companies. Unquoted equity securities represent long-term investments of the Group and the Parent Bank and are not actively traded in the market. The Group and the Parent Bank do not intend to sell these securities in the near future. The Group s and the Parent Bank s investments in unquoted equity shares include shares of stock of ASEAN Finance Corporation, with acquisition cost of SGD5.0 million (P million and P million as at December 31, 2015 and 2014, respectively). As at December 31, 2015 and 2014, the related allowance for impairment losses on such equity securities amounted to P31.24 million and P35.21 million, respectively. Investments in unquoted equity securities also include investments in public utilities and other private companies. The movements of net unrealized losses on AFS financial assets are as follows: Group Parent Bank Balance at beginning of year (P 474,240) (P 1,336,170) (P 516,728) (P 1,372,517) Unrealized gains during the year 167, , , ,321 Amounts realized in the statement of income ( 229,312) ( 135,647) ( 229,331) ( 129,532) Balance at end of year (P 536,245) (P 474,240) (P 576,653) (P 516,728) As at December 31, 2015 and 2014, the net unrealized gains on AFS financial assets presented in equity attributable to AFS financial assets of USI, is net of deferred tax liabilities amounting to P19.73 million and P20.12 million, respectively, for the Group. The Parent Bank did not recognize DTA on the net unrealized losses on AFS financial assets for both years (see Note 26) Held-to-maturity Investments HTM investments as at December 31, 2015 and 2014 are composed of Philippine peso-denominated government securities, which earn annual interest ranging from 7.8% to 8.9% both in 2015 and On various dates in 2011, the Parent Bank sold HTM investments with aggregate carrying amount of P3.2 billion thereby realizing gains of P0.3 billion. As a result of these disposals, the Parent Bank is prohibited under PFRS from classifying any financial asset as HTM from 2011 until However,on December 20, 2012, the BSP approved the exemption of the remaining HTM investments from the tainting rule as required per MORB Subsection X388.5 (b), however, the Parent Bank is prohibited from using the HTM account for other debt securities investments from 2011 to PFRS require that tainted HTM investments be reclassified to AFS financial assets. At the end of the tainting period, these investments should be reclassified from AFS financial assets to HTM investments with the carrying value (i.e., the fair value) of the AFS financial assets at the time of the reclassification as the new cost of the HTM investment. The net unrealized gain on the AFS financial assets during the tainting period should then be amortized using the effective interest method over the remaining term of the securities. Accordingly, as at December 31, 2015 and 2014, the Parent Bank continues to classify government securities as HTM investments with an aggregate carrying amount of P27.82 billion and P27.89 billion, respectively, and with fair value of P30.2 billion and P31.52 billion, respectively. The Parent Bank s remaining HTM investments were funded from the P30.00 billion savings deposits maintained by the National Government with the Parent Bank as part of the concessions granted by the MB, in its resolution No. 590, in the Amended Rehabilitation Plan (see Note 1.3). Had the Parent Bank reclassified these HTM investments to AFS financial assets, total resources and net unrealized gain on AFS financial assets, which are included in the equity section of the statement of financial position, of the Parent Bank, would have increased by P1.5 billion and P3.6 billion as at December 31, 2015 and 2014, respectively, income would have increased by P1.5 billion in 2015 and P million in 2014.

161 Audited Financial Report 159 Interest income on trading and investment securities as at December 31 follows: Group Parent Bank Financial assets at FVTPL Government securities P 72,252 P 39,611 P 67,179 P 19,832 Corporate debt 11,502 9,007 11,502 9,007 AFS financial assets net Government securities 432, , , ,510 Corporate debt 661, , , ,691 HTM Investments Government securities 2,157,850 2,167,612 2,147,675 2,152,970 Trading and securities gains net as at December 31 consist of the following: P 3,335,774 P 3,542,147 P 3,317,464 P 3,500,010 Group Parent Bank Financial assets at FVTPL HFT securities Realized P 35,293 (P 15,651) P 33,361 (P 27,563) Unrealized ( 62,610) 53,454 ( 68,894) 38,698 Derivatives ( 45) 23 ( 45) 23 ( 27,362) 37,826 ( 35,578) 11,158 AFS financial assets net 229, , , ,532 Unquoted debt securities classified as loans - 3,791-3,791 P 201,950 P 174,234 P 193,753 P 144, LOANS AND OTHER RECEIVABLES This account consists of: Group Parent Bank Receivable from customers: Corporate loans P 75,328,206 P 73,629,087 P 67,198,544 P 65,478,326 Consumer loans 49,526,632 38,459,146 42,979,679 33,538, ,854, ,088, ,178,223 99,017,261 Unearned discounts ( 275,592) ( 296,330) ( 35,527) ( 31,892) 124,579, ,791, ,142,696 98,985,369 Unquoted debt securities 3,707,405 4,508,253 3,455,083 4,250,629 Accrued interest receivable 1,861,714 1,861,656 1,797,938 1,796,576 Sales contracts receivable 2,087,194 1,834,961 2,007,803 1,744,602 Accounts receivable 660, , , ,141 Other receivables 337, ,830 1, ,233, ,270, ,060, ,691,317 Allowance for credit and impairment losses ( 5,519,337) ( 5,316,946) ( 5,152,665) ( 4,977,715) P 127,713,989 P 115,953,528 P 112,908,292 P 102,713,602 Unquoted debt securities consist of private securities with EIR ranging from 2.13% to 12.58% both in 2015 and In 2008, the Parent Bank entered into a sale agreement covering its zero coupon-bearing bonds with total face amount of US$44.7 million (P2.1 billion). The objective of this sale agreement was to convert the zero coupon-bearing bonds into a coupon-earning instrument. Based on the derecognition principles of PAS 39, the sale did not qualify for derecognition because the significant risks and rewards on the bonds remained with the Parent Bank. The remaining unquoted debt securities as at December 31, 2013 amounting to US$12.2. million (P million) were sold in Sales contracts receivable arise mainly from the sale of foreclosed properties booked under the Investment Properties account. Accounts receivable mainly consists of amounts due from customers and other parties under open-account arrangements, claims such as tax refund and insurance proceeds, receivables from employees, receivable from BSP and other miscellaneous receivables. Other receivables include residual value of lease contracts receivable and advances to subsidiaries.

162 160 UCPB 2015 Annual Report Accrued interest receivable consists of accrued interest on: Group Parent Bank Receivable from customers P 991,779 P 912,341 P 937,539 P 861,961 HTM investments 541, , , ,014 AFS financial assets 254, , , ,603 Unquoted debt securities 35,614 52,232 30,449 47,066 Financial assets at FVTPL 27,911 9,044 26,475 2,564 Sales contract receivables 1,376 2,458 1,376 2,458 Due from BSP Others 8,570 14,646 7,725 14,254 Interest income on loans and receivables consist of: P 1,861,714 P 1,861,656 P 1,797,938 P 1,796,576 Group Parent Bank Receivable from customers P 8,066,221 P 7,423,156 P 6,676,191 P 6,007,058 Unquoted debt securities 281, , , ,553 Restructured loans 32,450 42,304 25,873 37,849 Sales contract receivables 25,716 40,994 22,506 35,405 P 8,405,969 P 7,849,042 P 6,986,857 P 6,403,865 As at December 31, 2015 and 2014, the breakdown of receivables from customers by type of security is as follows: Group Parent Bank Amount % Amount % Amount % Amount % Secured by: Real estate mortgage P 24,756, P 21,070, P 21,732, P 18,932, Chattel mortgage 12,392, ,697, ,033, ,962, Assignment of deposits 968, , , , Rights other than above - - 1,564, , Others* 4,101, ,788, ,935, ,704, ,218, ,191, ,642, ,639, Unsecured 82,636, ,896, ,535, ,377, * Others include Parent bank and third-party guarantees. P 124,854, P 112,088, P 110,178, P 99,017, The maturity profile of the receivable from customers portfolio follows: Group Parent Bank Due within one year P 41,230,139 P 50,077,303 P 36,418,329 P 37,006,331 Due beyond one year 83,624,699 62,010,930 73,759,894 62,010,930 P 124,854,838 P 112,088,233 P 110,178,223 P 99,017,261 As at December 31, 2015 and 2014, information on the concentration of credit as to industry of receivables from customers follows: Group Parent Bank Amount % Amount % Amount % Amount % Real estate, renting and business activities P 36,002, P 31,048, P 33,909, P 30,734, Wholesale and retail trade, repair of motor vehicles, motorcycles, personal and household goods 19,544, ,012, ,922, ,902, Manufacturing 13,576, ,837, ,882, ,024, Transport, storage and, communication 10,045, ,484, ,099, ,330, Financial intermediaries 6,805, ,538, ,811, ,281, Agriculture, hunting and forestry, fishing 3,765, ,599, ,602, ,400, Construction 4,491, ,867, ,771, ,845, Government , , Other community, social and personal services activities 30,277, ,347, ,094, ,410, ,509, ,791, ,094, ,985, Unearned discounts 345, , , , P 124,854, P 112,088, P 110,178, P 99,017,

163 Audited Financial Report 161 The BSP considers that loan concentration exists when the total loan exposure to a particular industry exceeds 30.0% of the total loan portfolio. The Group s RMD constantly monitors the credit risk concentration of the Parent Bank. Current banking regulations allow banks with no unbooked valuation reserves and capital adjustments to exclude from nonperforming classification those receivables from customers classified as Loss in the latest examination of the BSP which are fully covered by allowance for credit losses, provided that interest on said receivables shall not be accrued. As at December 31, 2015 and 2014, nonperforming loans (NPLs) not fully covered by allowance for credit losses follow: Group Parent Bank Total NPLs P 6,480,691 P 5,959,638 P 5,384,831 P 5,416,218 NPLs fully covered by allowance for credit and impairment losses ( 3,437,117) ( 2,940,450) ( 3,003,270) ( 2,850,604) P 3,043,574 P 3,019,188 P 2,381,561 P 2,565,614 Under banking regulations, NPLs shall, as a general rule, refer to loan accounts whose principal and/or interest remain unpaid for 30 days or more after due date or after they have become past due in accordance with existing rules and regulations. This shall apply to loans payable in lump sum and loans payable in quarterly, semi-annual or annual installments, in which case, the total outstanding balance thereof shall be considered nonperforming. In the case of receivables that are payable in monthly installments, the total outstanding balance thereof shall be considered nonperforming when three or more installments are in arrears. In the case of receivables that are payable in daily, weekly or semi-monthly installments, the total outstanding balance thereof shall be considered nonperforming at the same time that they become past due in accordance with existing BSP regulations (i.e., the entire outstanding balance of the receivable shall be considered as past due when the total amount of arrearages reaches ten percent (10.0% of the total receivable balance.) Restructured receivables which do not meet the requirements to be treated as performing receivables shall also be considered as NPLs. The breakdown of restructured receivables from customers follows: Group Parent Bank Corporate loans P 893,714 P 1,011,633 P 739,441 P 858,234 Consumer loans 94,749 70,586 12,955 11,363 P 988,463 P 1,082,219 P 752,396 P 869, INVESTMENTS IN SUBSIDIARIES AND ASSOCIATES The components of the carrying values of investments in subsidiaries and associates are as follows (refer to Note 1.1 for the ownership interest, principal activity, and country of incorporation of subsidiaries and associates): Group Acquisition costs of associates: UCFDC P 100,000 P 100,000 LOCI 56,000 56,000 SPMC 25,000 25,000 SLCOMI 24,950 24,950 GMC 6,250 6, , ,200 Accumulated equity in net earnings: Balance at beginning of year 8,540,342 8,410,032 Share in net income for the year 1, ,310 Balance at end of year 8,542,145 8,540,342 Accumulated share in OCI: Share in net unrealized losses on AFS financial assets ( 721) ( 269) Share in net remeasurement arising from retirement plan 2,817 2,892 Equity translation adjustments ( 94) ( 94) 8,544,147 8,542,871 P 8,756,347 P 8,755,071

164 162 UCPB 2015 Annual Report Parent Bank Subsidiaries: BRC P 2,970,130 P 2,970,130 ULFC 525, ,000 GHDI 287, ,489 USI 35,000 35,000 UPI-MHC 14,451 14,451 USB 370, ,781 4,202,851 4,202,851 Associates: UCFDC P 100,000 P 100,000 LOCI 56,000 56,000 SPMC 25,000 25,000 SLCOMI 24,950 24,950 GMC 6,250 6, , ,200 4,415,051 4,415,051 Allowance for impairment (see Note 17) ( 1,038,930) ( 1,038,930) P 3,376,121 P 3,376,121 The following tables present the separate financial information of significant associates of the Parent Bank as at and for the years ended December 31, 2015 and 2014: 2015 Statement Financial Position Statement of Income Country of Total Gross Operating Net Incorporation Total Assets Liabilities Income* Income (Loss) Income LOCI Philippines P 1,622,372 P 956,999 P 99,905 P 14,334 P 4,200 GMC Philippines 2,813,343 1,543,546 92,835 27,490 21,698 SPMC Philippines 2,046, , ,406 21,844 40,028 UCFDC Philippines 1,193,843 7,256 73,313 21,859 17,574 SLCOMI Philippines 8,318, ( 231) ( 231) 2014 Statement Financial Position Statement of Income Country of Total Gross Operating Net Incorporation Total Assets Liabilities Income* Income (Loss) Income LOCI Philippines P 28,112,291 P P893,326 ( P 173,114) P 334,443 P 327,123 GMC Philippines 16,719,905 1,555,152 54, , ,979 SPMC Philippines 16,123, , , , ,599 UCFDC Philippines 1,181,510 7,995 87,501 36,473 34,116 SLCOMI Philippines 8,318, , , ,652 *Represents sales less cost of sales. No income was recognized in 2015 as the Parent Bank s management has assessed that its share in net income of OMG is not material to the 2015 financial statements and may be recognized in the next reporting period. The Parent Bank established significant influence over UCFDC, LOCI, SPMC, SLCOMI and GMC through its direct ownership in such investee companies and through the exercise of its fiduciary functions as administrator of the CIIF through the Trust Banking Group. In addition, the Parent Bank has indirect investments in Cagayan de Oro Oil Co., Inc. (CDOOCI) and Iligan Coconut Industries, Inc. (ICII). LOCI, SPMC, SLCOMI, GMC, CDOOCI and ICII, herein referred to as the CIIF Companies, were established from the CIIF. The CIIF formed part of the CCSF, otherwise known as the coconut levy fund, which was created in 1973 by PD No. 276: Establishing a Coconut Consumers Stabilization Fund. The CIIF Companies wholly own, collectively, the fourteen CIIF Holding Companies whose funds were invested in 33,133,266 common shares of SMC (the CIIF block of SMC shares) as of 1983 that were sequestered by the PCGG in May Following sequestration, the ownership of the CIIF block of SMC shares, as well as the CIIF Companies, became the subject of legal proceedings before the Sandiganbayan and Supreme Court (Note 27). As discussed in Notes 3.1(vii) and 27 to the financial statements, the Group is involved in legal proceedings on the ownership shares of the Parent Bank (Civil Case No A) and CIIF Oil Mills (Civil Case No F), which were subject of the January 2012 decision issued by the Supreme Court in the Philippine Coconut Producers Federation, Inc. (COCOFED), et al. case. The motion for the reconsideration of the January 24, 2012 decision has been denied with finality on September 4, The Supreme Court decision became final and executory and has been recorded in the Book of Entries of Judgment on December 10, In April 2016, the Office of the Solicitor General filed before the Sandiganbayan a Motion for the Partial Execution of of the Partial Summary Judgment issued in Civil Case No F.

165 Audited Financial Report 163 CIIF Oil Mills pertain to GMC, LOCI, COOCI, SPMC, SLCOMI and ICII. On December 28, 2012, the Parent Bank filed a Special Civil Action for Declaratory Relief seeking clarification on the Parent Bank s proportionate right, title and interest in the CIIF Companies as stockholder, as well as the Parent Bank s indirect equity in the fourteen CIIF Holding Companies and the SMC shares. The case, docketed as Civil Case No before Regional Trial Court of Makati Branch 59, was consolidated with Civil Case No , which is a similar action filed by United Coconut Planters Life Assurance Corporation (Cocolife) with respect to its proportionate right, title and interest in the CIIF Companies on September 25, In summary, the Parent Bank sought a declaration that the shares of stock acquired by the Bank using its own corporate funds and not coco levy funds, and which are recorded in the stock and transfer books of the CIIF Oil Mills under the name UCPB as Universal Bank are not covered by the Supreme Court Decision of On August 11, 2015, the Supreme Court granted the PCGG s petition and dismissed the petitions for declaratory relief of the Parent Bank and Cocolife (Presidential Commission on Good Government v. Hon. Winlove Dumayas, UCPB and Cocolife, G.R. Nos and ). From the adverse decision, the Bank and Cocolife filed Motions for Reconsideration. The Motions were denied by the Supreme Court in its Resolution on October 20, The Motions for Leave to Admit Second Motion for Reconsideration filed by the Bank and Cocolife were likewise denied on February 9, CIIF Companies pertain to the following companies: CIIF Oil Mills; CIIF 14 Holding Companies; UCFCDC; UCPB-CIIF Foundation, Inc. (UCFI); and, United Coconut Planters International (UCPI) The decision of the Sandiganbayan on June 5, 2007, which was affirmed by the Supreme Court on Civil Case No F on January 24, 2012, was based on the principle that, since coco levy funds are public funds, any funds that are derived from, or any property that is acquired using, coco levy funds is owned by the Government. Therefore, only those shares of the CIIF Oil Mills Companies that are in the name of UCPB as Administrator of the CIIF should be cancelled and transferred to the Republic of the Philippines. Necessarily, those shares which were not acquired using coco levy funds and are recorded in the name of UCPB as a Universal Bank should remain valid. As the owner on record, the Bank is pursuing its claim on its investment in the CIIF Oil Mills Companies for the proper implementation of the Sandiganbayan and Supreme Court decisions on June 5, 2007 and January 24, 2012, respectively. The shares in the name of UCPB as Universal Bank are not to be included among the assets to be transferred to the government. 14. BANK PREMISES, FURNITURE, FIXTURES AND EQUIPMENT The gross carrying amounts and accumulated depreciation and amortization of bank premises, furniture, fixtures and equipment at the beginning and end of 2015 and 2014 are shown below. Group Furniture, Buildings and Fixtures and Leasehold Land Improvements Equipment Improvements Total December 31, 2015 Cost P 92,098 P 1,466,500 P 2,893,423 P 1,065,423 P 5,517,444 Accumulated depreciation and amortization - ( 882,165) ( 2,223,485) ( 552,467) ( 3,658,117) Net carrying amount P 92,098 P 584,335 P 669,938 P 512,956 P 1,859,327 December 31, 2014 Cost P 95,869 P 1,346,923 P 2,757,062 P 1,011,763 P 5,211,617 Accumulated depreciation and amortization - ( 814,361) ( 1,988,243) ( 448,879) ( 3,251,483) Net carrying amount P 95,869 P 532,562 P 768,819 P 562,884 P 1,960,134 January 1, 2014 Cost P 154,015 P 1,304,534 P 2,628,324 P 968,417 P 5,055,290 Accumulated depreciation and amortization - ( 737,202) ( 1,764,463) ( 361,185) ( 2,862,850) Net carrying amount P 154,015 P 567,332 P 863,861 P 607,232 P 2,192,440 Parent Bank Furniture, Buildings and Fixtures and Leasehold Land Improvements Equipment Improvements Total December 31, 2015 Cost P 91,067 P 1,431,060 P 2,592,457 P 889,010 P 5,003,594 Accumulated depreciation and amortization - ( 871,295) ( 2,031,982) ( 497,501) ( 3,400,778) Net carrying amount P 91,067 P 559,765 P 560,475 P 391,509 P 1,602,816

166 164 UCPB 2015 Annual Report Parent Bank Furniture, Buildings and Fixtures and Leasehold Land Improvements Equipment Improvements Total December 31, 2014 Cost P 90,028 P 1,312,532 P 2,505,566 P 867,971 P 4,776,097 Accumulated depreciation and amortization - ( 805,272) ( 1,835,079) ( 409,828) ( 3,050,179) Net carrying amount P 90,028 P 507,260 P 670,487 P 458,143 P 1,725,918 January 1, 2014 Cost P 90,888 P 1,279,465 P 2,410,689 P 859,761 P 4,640,803 Accumulated depreciation and amortization - ( 729,814) ( 1,630,280) ( 335,294) ( 2,695,388) Net carrying amount P 90,888 P 549,651 P 780,409 P 524,467 P 1,945,415 A reconciliation of the carrying amounts of property and equipment at the beginning and end of 2015 and 2014 is shown below. Group Furniture, Buildings and Fixtures and Leasehold Land Improvements Equipment Improvements Total Balance at January 1, 2015 net of accumulated depreciation and amortization P 95,869 P 532,562 P 768,819 P 562,884 P 1,960,134 Additions 1, , ,470 55, ,431 Disposals ( 4,809) ( 11,207) ( 229,111) ( 1,479) ( 246,604) Depreciation and amortization charges for the year - ( 67,804) ( 235,242) ( 103,588 ) ( 406,634) Balance at December 31, 2015, net of accumulated depreciation and amortization P 92,098 P 584,335 P 669,938 P 512,956 P 1,859,327 Balance at January 1, 2014, net of accumulated depreciation and amortization carrying amount P 154,015 P 567,332 P 863,861 P 607,232 P 2,192,440 Additions 2,540 47, , , ,549 Disposals ( 60,686) ( 5,582) ( 70,307) ( 76,429) ( 213,004) Depreciation and amortization charges for the year - ( 77,173) ( 290,595) ( 89,083) ( 456,851) Balance at December 31, 2014, net of accumulated depreciation and amortization P 95,869 P 532,562 P 768,819 P 562,884 P 1,960,134 Parent Bank Furniture, Buildings and Fixtures and Leasehold Land Improvements Equipment Improvements Total Balance at January 1, 2015 net of accumulated depreciation and amortization P 90,028 P 507,260 P 670,487 P 458,143 P 1,725,918 Additions 1, , ,720 21, ,929 Disposals - ( 11,204) ( 226,829) ( 399) ( 238,432) Depreciation and amortization charges for the year - ( 66,023) ( 196,903) ( 87,673) ( 350,599) Balance at December 31, 2015, net of accumulated depreciation and amortization P 91,067 P 559,765 P 560,475 P 391,509 P 1,602,816 Balance at January 1, 2014, net of accumulated depreciation and amortization carrying amount P 90,888 P 549,651 P 780,409 P 524,467 P 1,945,415 Additions 2,540 38, ,652 83, ,807 Disposals ( 3,400) ( 5,583) ( 68,386) ( 75,741) ( 153,110) Depreciation and amortization charges for the year - ( 75,472) ( 256,188) ( 74,534) ( 406,194) Balance at December 31, 2014, net of accumulated depreciation and amortization P 90,028 P 507,260 P 670,487 P 458,143 P 1,725,918

167 Audited Financial Report 165 As at December 31, 2015 and 2014, the cost of fully depreciated property and equipment still in use amounted to P2.7 billion and P2.4 billion, respectively, for the Group and P1.7 billion and P1.5 billion, respectively, for the Parent Bank. Under BSP rules, investments in bank premises, furniture, fixtures and equipment should not exceed 50% of the respective unimpaired capital of the Parent Bank and USB. As of December 31, 2015 and 2014, the Parent Bank and USB have complied with this BSP requirement. 15. INVESTMENT PROPERTIES Investment properties consist of various land and buildings acquired through foreclosure or dacion as payment of outstanding loans by the borrowers. The difference between the fair value of the asset upon foreclosure and the carrying value of the loan is recognized as Gains on Foreclosures in the statement of income. The reconciliations of the carrying amounts of investment properties at the beginning and end of 2015 and 2014 are presented in the succeeding page. Group Buildings and Buildings and Land Improvements Total Land Improvements Total Cost Balance at beginning of year P 2,679,459 P 3,305,181 P 5,984,640 P 3,269,382 P 3,501,670 P 6,771,052 Additions 249, , , , ,992 1,171,259 Disposals ( 485,170) ( 60,949) ( 546,119) ( 662,935) ( 201,001) ( 863,936) Reclassifications Prior year PFRS adjustments - - ( 157,255) ( 936,480) ( 1,093,735) Balance at end of year 2,443,568 3,553,167 5,996,735 2,679,459 3,305,181 5,984,640 Accumulated depreciation Balance at beginning of year - 1,404,731 P 1,404,731-41,297 41,297 Depreciation - 66,498 66,498-79,658 79,658 Disposals - ( 18,636) ( 18,636) - ( 112,934) ( 112,934) Prior year PFRS adjustments ,396,710 1,396,710 Balance at end of year - 1,452,593 1,452,593-1,404,731 1,404,731 Allowance for impairment and losses Balance at beginning of year 1,885, ,988 2,077, , ,335 1,249,128 Provision for impairment 47, , , Amortization of UVR charged directly to deficit ,287,414 2,177,399 3,464,813 Disposals ( 113,119) ( 16,386) ( 129,505) ( 43,774) ( 6,428) ( 50,202) Reclassifications 29,223-29,223 76,568 ( 2,662,318) ( 2,585,750) Balance at end of year 1,848, ,608 2,277,497 1,885, ,988 2,077,989 Book value at the end of year P 594,679 P 1,671,966 P 2,266,645 P 794,458 P 1,707,462 P 2,501,920 Parent Bank Buildings and Buildings and Land Improvements Total Land Improvements Total Cost Balance at beginning of year P 2,437,160 P 3,234,766 P 5,671,926 P 3,029,679 P 3,445,577 P 6,475,256 Additions 210, , , , ,256 1,115,012 Disposals ( 335,128) ( 131,837) ( 466,965) ( 635,020) ( 189,587) ( 824,607) Prior year PFRS adjustments ( 157,255) ( 936,480) ( 1,093,735) Balance at end of year 2,312,995 3,384,694 5,697,689 2,437,160 3,234,766 5,671,926 Accumulated depreciation Balance at beginning of year - 1,391,099 P 1,391,099-27,853 27,853 Depreciation - 59,300 59,300-76,125 76,125 Disposals - ( 13,806) ( 13,806) - ( 109,589) ( 109,589) Prior year PFRS adjustments ,396,710 1,396,710 Balance at end of year - 1,436,593 1,436,593-1,391,099 1,391,099 Allowance for impairment and losses Balance at beginning of year 775, , , , ,048 1,266,703 Provision for impairment 44, , , Amortization of UVR charged directly to deficit ,287,414 2,177,399 3,464,813 Disposals ( 110,708) ( 14,740) ( 125,448) ( 42,315) ( 2,701) ( 45,016) Reallocation 29,223-29,223 ( 1,030,535) ( 2,669,768) ( 3,700,303) Balance at end of year 737, ,483 1,184, , , ,197 Book value at the end of year P 1,575,242 P 1,501,618 P 3,076,860 P 1,661,941 P 1,632,689 P 3,294,630

168 166 UCPB 2015 Annual Report The aggregate market value of Investment Properties as at December 31, 2015 and 2014 amounted to P7.4 billion and P5.8 billion, respectively, for the Group, and P7.1 billion and P5.4 billion, respectively, for the Parent Bank (see Note 7.4). The investment properties are measured at fair value on a recurring manner, based on valuations made by independent and/or in-house appraisers. Valuations were derived on the basis of recent sales of similar properties in the same area as the investment properties and taking into account the economic conditions prevailing at the time the valuations were made and are classified as Level 2 in the fair value hierarchy. The Group is exerting continuing efforts to dispose these properties. Direct operating expenses on investment property for the Group and the Parent Bank amounted to P42.28 million and P74.48 million in 2015, and P25.59 million and P62.61 million in 2014, respectively, and is presented as Litigation and Assets Acquired under Operating Expenses in the statement of income. 16. INTANGIBLE AND OTHER RESOURCES This account consists of: Group Parent Bank Notes Deferred charges P 11,053,418 P 14,110,442 P 11,053,418 P 14,110,442 Real estate inventories 3,051,000 3,062, Statutory reserve 2,400,949 2,400,949 2,400,949 2,400,949 Land held-for-sale 1,396,679 1,654,995 1,339,393 1,568,110 Creditable withholding tax 744, , , ,932 Interoffice float items 650, , , ,076 Chattel properties acquired 377, , , ,464 Software costs 320, , , ,915 Prepaid expenses 110,461 68,854 81,702 62,480 Sundry debit 52,954 16,678 49,062 9,049 Documentary stamps on hand 22,265 27,618 22,265 15,394 Retirement asset ,963 3, Exchange trading right 1,500 1, Others 1,350, ,291 1,267, ,008 21,535,780 24,542,753 18,254,011 21,269,819 Allowance for impairment 17 ( 1,402,806) ( 1,394,919) ( 1,277,156) ( 1,292,717) P 20,132,974 P 23,147,834 P 16,976,855 P 19,977,102 Statutory reserve pertains to the demand deposit account which is being used by the Parent Bank to comply with reserve requirements of the BSP under the amended rehabilitation plan (see Note 18). Sundry debit includes suspense accounts for inward clearing of checks and other deposit related charges. Others include deposits on rentals, and power and water meters, and restricted cash held by a foreign financial institution. Interoffice float items include interoffice accounts classified as loss and are part of bad bank assets. These accounts are fully provided for as at December 31, 2015 and As at December 31, 2015 and 2014, the latest transacted price of the exchange trading right (as provided by the PSE) amounted to P8.5 million. The composition of and movements in deferred charges of the Group and the Parent Bank follow: 2015 Loss on Loss on Loss on sale of Investment sale of Land of NPLs Properties Held-for-Sale Others* Total Balance at January 1 P 9,605,861 P 3,148,370 P 97,015 P 1,259,196 P 14,110,442 Additions - 536, ,976 Amortizations ( 3,594,000) ( 3,594,000) Balance at December 31 P 6,011,861 P 3,685,346 P 97,015 P 1,259,196 P 11,053, Loss on Loss on Loss on sale of Investment sale of Land of NPLs Properties Held-for-Sale Others* Total Balance at January 1 P 10,952,911 P 3,479,029 P 106,056 P 1,435,776 P 15,973,772 Additions - 97,211 4, ,213 Amortizations ( 1,347,050) ( 427,870) ( 13,043) ( 176,580) ( 1,964,543) Balance at December 31 P 9,605,861 P 3,148,370 P 97,015 P 1,259,196 P 14,110,442 *Includes loss on sale of investments in AFS financial assets.

169 Audited Financial Report 167 Deferred charges pertain to losses incurred from sale of NPLs, investment properties, land held-for-sale and investment securities. As discussed in Note 1 to the financial statements, the BSP has allowed the Parent Bank to defer the losses on sale and dacion en pago settlement of up to P15.7 billion and to start amortization in Any additional losses on the sale of investment properties pertaining to the bad bank were allowed by the BSP to be deferred provided that the losses deferred do not exceed the approved UVR and deferred losses of P29.1 billion. Had the Parent Bank recognized in full the valuation reserves and the losses on dacion en pago settlement in the periods when these were incurred as required by PFRS, total resources and equity of the Group and the Parent Bank would have decreased by P11.1 billion as at December 31, 2015 and net income of the Group and Parent Bank for the year then ended would have decreased by P0.5 billion. Real estate inventories pertain mainly to the real estate inventories of BRC, GHDI and UPI-MHC. The carrying value of the real estate inventories as at December 31, 2015 and 2014 amounted to P3.1 billion. Movements in software costs of the Group and the Parent Bank follow: Group Parent Bank Balance at beginning of year P 367,407 P 422,110 P 364,915 P 418,273 Additions 55,056 49,819 47,082 49,484 Amortization ( 101,515) ( 104,522) ( 99,081) ( 102,842) Balance at end of year P 320,948 P 367,407 P 312,916 P 364,915 Details of depreciation and amortization recognized in the statement of income follow: Group Parent Bank Notes Bank premises, furniture, fixtures and equipment 14 P 406,634 P 456,851 P 350,599 P 406,194 Investment properties 15 66,498 79,658 59,300 76,125 Intangible and other resources: Software 101, ,522 99, ,842 Others 13,250 12, Others include depreciation on other resources acquired by the Group. The Parent Bank entered into various MOA for the development of various parcels of land as follows: P 587,897 P 653,049 P 508,980 P 585,161 (a) (b) In 2005, the Parent Bank entered into a MOA with a third party individual (as co-landowner) and Sta. Lucia Realty and Development, Inc. (SLRD - as the developer) for the development of land located in Alfonso, Cavite into a subdivision. The parties agreed that the Parent Bank and the third party individual will contribute the land and SLRD shall contribute its expertise as a developer. In consideration of the services to be rendered, SLRD is entitled to receive 47.0% of the saleable lots, while the Parent Bank and the third party individual are entitled to 35.0% and 18.0% of the saleable lots, respectively. The construction has been completed and selling activities are actively being performed by the Parent Bank s accredited marketing agency. In 2006, the Parent Bank entered into a MOA with Tagaytay Grasslands Company, Inc. (TGCI) for the development of land located in Nasugbu, Batangas into a hotel and beach club, parking spaces and condominiums. The parties agreed that the Parent Bank will contribute the land and TGCI shall contribute its expertise as a developer and financial capital by way of funding the development and all related expenses of the hotel and beach club, parking spaces and condominiums, and related site development and improvements. In consideration of the services to be rendered by TGCI, the Parent Bank shall transfer/convey to TGCI 62.0% of the saleable units of the hotel and beach club and condominiums and 50% of the parking spaces. As at December 31, 2015 the construction of several sites are still in progress. Units from completed sites are marketed by the Parent Bank s accredited marketing agency. In addition to the items above, UPI-MHC reclassified its remaining landholdings amounting to P57.29 million as Land held-for-sale which will be used as payment for the cash advances made by UCPB on behalf of UPI-MHC. As at December 31, 2015 and 2014, the Parent Bank recognized advances from customers (included in Accounts payable under Other Liabilities in the statement of financial position) amounting to P million and P million, respectively, representing collections from units sold.

170 168 UCPB 2015 Annual Report 17. ALLOWANCE FOR IMPAIRMENT LOSSES Changes in the amounts of allowance for impairment are summarized as follows: Group Parent Bank Notes Balance at beginning of year: AFS financial assets Quoted equity securities P 394,298 P 396,010 P 394,298 P 396,010 Unquoted equity securities 481, , , , , , , ,220 Loans and receivables Receivable from customers: Corporate loans 3,237,608 3,293,572 3,294,413 3,174,604 Consumer loans 911,907 1,522, ,379 1,244,388 Sales contract receivable 227,618 72, ,478 70,050 Accounts receivable 698, , , ,717 Accrued interest receivable 241, , , , ,316,946 5,481,713 4,977,715 5,066,743 Investments in subsidiaries and associates ,038, ,511 Investment properties 15 2,077,989 1,249, ,197 1,266,703 Other resources: Land held-for-sale 535, , , ,985 Real estate inventories Chattel properties acquired 16,344 40,459 13,275 35,452 Others 843,575 1,539, ,836 1,417, ,394,919 2,449,803 1,292,717 2,225,210 P 9,666,084 P 9,821,938 P 9,171,715 P 9,401,387 Credit and impairment losses 213, , ,816 - Disposals ( 175,617 ) ( 57,597) ( 175,607) ( 49,649) Amortization of unbooked valuation reserves directly charged to deficit 3,750,000 3,720,000 3,750,000 3,720,000 Foreign currency revaluation ( 5,239) ( 1,386) ( 5,239) ( 1,386) Reclassifications/reallocation ( 2,712,961) ( 3,411,103) ( 2,752,959) ( 3,293,325) Accounts written-off ( 663,584) ( 682,747) ( 663,553) ( 605,311) 405,817 ( 155,854) 353,458 ( 229,671) Balance at end of year: AFS financial assets Quoted equity securities 394, , , ,298 Unquoted equity securities 477, , , , , , , ,156 Loans and receivables Receivable from customers: Corporate loans 3,611,502 3,237,608 3,714,915 3,294,413 Consumer loans 1,067, , , ,379 Sales contract receivable 263, , , ,478 Accounts receivable 356, , , ,252 Accrued interest receivable 220, , , , ,519,337 5,316,946 5,152,665 4,977,715 Investments in subsidiaries and associates ,038,930 1,038,930 Investment properties 15 2,277,497 2,077,989 1,184, ,197 Other resources: Land held-for-sale 437, , , ,606 Chattel properties acquired 49,872 16,344 46,174 13,275 Others 915, , , , ,402,806 1,394,919 1,277,156 1,292,717 P 10,071,901 P 9,666,084 P 9,525,173 P 9,171,715

171 Audited Financial Report 169 Below is the breakdown of provision for impairment losses: Group Parent Bank Loans and Receivables: Receivables from customers: Corporate loans P 154,141 P 232,894 P 150,816 P - Consumer loans 31,700 28,843 31,000 - Accounts receivables 19,000 19, , , ,816 - Investment properties 5,526 11, Other resources 2,851 3, P 213,218 P 276,979 P 200,816 P - As discussed in Note 1, the BSP allowed the Parent Bank to defer recognition of impairment losses on AFS financial assets, loans and receivables, investment properties and other resources amounting to P13.4 billion as at December 31, BSP also allowed the deferral of losses on sale and dacion en pago settlement amounting to P15.7 billion as at December 31, As allowed by the BSP, the Parent Bank is to amortize the unbooked valuation reserves and deferred losses over 10 years starting in 2009 based on the affordability plan approved by the BSP. On May 9, 2013, the MB, through Resolution No. 759, approved the direct charge to surplus (deficit) of the amortization of the UVR/DL. On May 23, 2014, the MB in its Resolution No. 822 approved to update the remaining UVR/DL based on independent valuation by a professional firm amounting to P18.6 billion, to be amortized on a straight line basis (2014 to 2018). In 2015 and 2014, amortization recognized by the Parent Bank as a direct charge to deficit amounted to P3.8 billion and P3.7 billion, respectively. Had the Parent Bank recognized in full the credit and impairment losses in the years they were incurred, net of losses on sale of investment properties pertaining to the bad bank, total resources and equity of both the Group and the Parent Bank would have decreased by P3.8 billion and P3.7 billion in 2015 and The Parent Bank submits to the BSP quarterly impairment assessments based on the ICRR system on assets pertaining to the bad bank from 2009 to December The table in succeeding page shows the comparative information in terms of carrying amount and unbooked valuation reserves as per the Rehabilitation Plan against balances as at 2015 and As at December 31, 2015, the Bank implemented impairment assessments on old bank assets under PFRS: Per Rehabilitation Plan* As at December 31, 2015 Carrying UVR and Carrying UVR and Amount DC Amount DC Loans and other receivables P 13,460,000 P 2,978,000 P 2,807,513 P 2,104,682 Investment properties**, Land held-for-sale, real estate inventories, INMES 24,188,040 8,725,000 10,207,374 3,988,312 Other resources 1,771,000 1,375,000 1,003, ,730 AFS financial assets - 397, , ,298 Deferred Charges, net 9,809,000 15,694,000 11,053,418 11,053,418 49,228,040 29,169,000 25,468,091 18,540,440 Booked valuation reserves ( 7,487,022) Balance at end of year P 49,228,040 P 29,169,000 P 25,468,091 P 11,053,418 Per Rehabilitation Plan* As at December 31, 2014 Carrying UVR and Carrying UVR and Amount DC Amount DC Loans and other receivables P 13,460,000 P 2,978,000 P 898,541 P 156,773 Investment properties**, Land held-for-sale, real estate inventories, INMES 24,188,040 8,725,000 10,685,423 4,104,995 Other resources 1,771,000 1,375,000 1,346,219 1,346,219 AFS financial assets - 397, , ,298 Deferred Charges, net 9,809,000 15,694,000 14,110,442 14,110,442 49,228,040 29,169,000 27,437,142 20,112,727 Booked valuation reserves ( 6,002,285) Balance at end of year P 49,228,040 P 29,169,000 P 27,437,142 P 14,110,442 *as per 2008 BSP approved Rehabilitation Plan **includes depreciation

172 170 UCPB 2015 Annual Report As at December 31, 2015 and 2014, the carrying amount of the assets assessed for impairment amounted to P25.5 billion and P27.4 billion, respectively, and the unbooked valuation reserves and deferred charges amounted to P11.1 billion and P14.1 billion, respectively. The decrease in carrying amount, from P49.2 billion to P25.5 billion, resulted from collections of loans and receivables, sales of investment properties, foreclosures, redemptions and amortization of deferred charges. In 2015 and 2014, the Parent Bank was in compliance with the amount of allowance required per PFRS. Amortization of UVR for the year follows: AFS Financial assets P - P 235,539 Loans and receivables 156,000 - Investment properties - 3,464,813 Other resources 3,594,000 19,648 P 3,750,000 P 3,720, DEPOSIT LIABILITIES The following is the breakdown of deposit liabilities: Group Parent Bank Demand P 36,552,333 P 29,483,489 P 35,619,202 P 28,749,990 Savings 127,796, ,065, ,680, ,364,039 Time 65,246,515 51,508,390 59,630,429 45,804,972 LTNCD 9,506,307 9,484,079 9,506,307 9,484,078 P 239,101,280 P 220,541,539 P 229,436,913 P 211,403,079 Philippine peso-denominated deposit liabilities bear annual interest rates ranging from 0.3% to 6.3% both in 2015 and 2014; 0.3% to 1.0% and 0.3% to 1.0% in 2015 and 2014, respectively, for US dollar-denominated deposit liabilities. On May 27, 2014, BSP issued Circular No. 832 implementing the rates of required reserves against deposit and deposit substitute liabilities in local currency of the Parent Bank and USB equivalent to 20.0% and 8.0%. The Parent Bank and USB were in compliance with such regulations as at December 31, 2015 and The total liquidity and statutory reserves as reported to the BSP follows: Group Parent Bank Note Demand deposit account P 41,874,537 P 35,302,248 P 40,122,123 P 34,044,884 Statutory reserves 16 2,400,949 2,400,949 2,400,949 2,400, LTNCD Due 2016 (LTNCD Series 1) P 44,275,486 P 37,703,197 P 42,523,072 P 36,445,833 On November 25, 2010, the Parent Bank issued 6.3% fixed coupon rate (EIR of 6.5%) Unsecured LTNCD at par value of P4.5 billion. The LTNCD matures on February 25, 2016, subject to pre-termination by the Parent Bank in whole, but not in part, in accordance with BSP rules. The fair value of LTNCD Series 1 amounted to P4.5 billion as at December 31, 2015 and The issuance of the foregoing LTNCD under the terms approved by the BOD was approved by the BSP on October 19, On February 26, 2016, the Parent Bank paid-off the LTNCD Series LTNCD Due 2016 (LTNCD Series 2) On August 19, 2011, the Parent Bank issued 6.0% fixed coupon rate (EIR of 6.3%) Unsecured LTNCD at par value of P3.2 billion. The LTNCD matures on November 19, 2016, subject to pre-termination by the Parent Bank in whole, but not in part, in accordance with BSP rules. The fair value of LTNCD Series 2 amounted to P3.1 billion as at December 31, 2015 and LTNCD Due 2017 (LTNCD Series 3) On May 21, 2012, the Parent Bank issued 5.9% fixed coupon rate (EIR of 6.1%) unsecured LTNCD at par value of P1.9 billion. The LTNCD matures on August 21, 2017, subject to pre-termination by the Parent Bank in whole, but not in part, in accordance with BSP rules. The fair value of LTNCD Series 3 amounted to P1.8 billion as at December 31, 2015 and The issuance of series 2 and 3 of the foregoing LTNCD under the terms approved by the BOD was approved by the BSP on May 20, 2011.

173 Audited Financial Report 171 On February 3, 2011, November 11, 2011 and May 21, 2012 the Parent Bank listed its P4.5 billion LTNCD Series 1 due 2016, P3.2 billion LTNCD Series 2 due 2016 and P1.9 billion LTNCD Series 3 due 2017, respectively, in the PDEx subject to its Trading and Settlement Operating Guidelines. The Parent Bank s LTNCD Series 1, 2 and 3 are traded and settled in accordance with PDEx rules, procedures and guidelines. Interest expense on deposit liabilities as at December 31 follow: Group Parent Bank Demand P 54,643 P 44,461 P 51,351 P 42,341 Savings 694, , , ,626 Time 994,237 1,185, ,109 1,059,710 LTNCD 601, , , ,267 P 2,345,743 P 2,430,832 P 2,201,912 P 2,301,944 The Parent Bank incurred debt issue costs amounting to P53.4 million, P33.5 million and P18.9 million on the LTNCD Series 1, 2 and 3, respectively. The movements in unamortized debt issue costs in 2015 and 2014 follow: Balance at beginning of year P 35,210 P 55,316 Amortization ( 20,106) ( 20,106) Balance at end of year P 15,104 P 35, BILLS PAYABLES AND SECURITIES SOLD UNDER REPURCHASE AGREEMENTS This account consists of the following: Group Parent Bank SSURA P 10,786,734 P 11,036,987 P 10,786,734 P 11,036,987 Borrowings from local banks 2,093,043 1,814, The maturity profile of bills payable follows: P 12,879,777 P 12,851,929 P 10,786,734 P 11,036,987 Group Parent Bank Within one year P 11,747,062 P 12,851,929 P 9,654,019 P 11,036,987 Beyond one year 1,132,715-1,132,715 - P 12,879,777 P 12,851,929 P 10,786,734 P 11,036,987 Bills payable bear annual interest rates ranging from 1.0% to 2.6% and 0.4% to 2.9% in 2015 and 2014, respectively. Interest expense on bills payable amounted to P million and P million in 2015 and 2014, respectively, for the Group, and P million and P million in 2015 and 2014, respectively, for the Parent Bank. 20. ACCRUED TAXES, INTERESTS AND OTHER EXPENSES This account consists of: Group Parent Bank Accrued benefits to employees P 229,577 P 201,139 P 227,899 P 199,964 Accrued interest payable 187, , , ,621 Accrued taxes payable 59,400 59,516 35,096 40,921 Accrued rent payable 44,689 39,908 42,554 38,816 Accrued security and janitorial services 25,140 16,247 22,105 15,296 Accrued insurance 22,987 10,707 12,118 10,707 Accrued bonus 22,448-22,448 - Accrued utilities 7,346 11,646 3,891 8,893 Accrued repairs and maintenance 1,403 9, ,015 Accrued other expenses 82,746 87,006 66,955 65,048 P 683,190 P 594,993 P 598,690 P 534,281 Accrued other expenses include accruals for various operating expenses such as advertising and publicity, armored car and contractual services.

174 172 UCPB 2015 Annual Report 21. OTHER LIABILITIES This account consists of: Group Parent Bank Note Bills purchased - contra P 3,752,750 P 5,025,556 P 3,752,750 P 5,025,556 Cash letters of credit 3,869,053 6,192,932 3,869,053 6,192,932 Accounts payable 2,086,908 2,051,693 1,675,894 1,829,481 Manager s checks 1,278,552 1,107,144 1,159,698 1,075,078 Liability for short position 473, ,375 - Deposit on lease contract 369, , Due to PDIC 218, , , ,139 Other credits 171, , , ,424 Withholding tax payable 108, ,622 98, ,026 Due to Treasury of the Philippines 101,915 75,379 96,658 71,630 Outstanding acceptances 85,905 87,439 85,905 87,439 Derivative liabilities ,980 13,759 39,980 13,759 Sundry credit 22,827 34,178 22,791 28,450 Margin deposits - 53,942-53,942 Miscellaneous 329, ,176 32,337 28,892 P 12,908,452 P 16,173,034 P 11,641,547 P 15,075, EQUITY As at December 31, 2015 and 2014, the Parent Bank s common stock and capital notes consists of: Common stock - P1 par value: P 1,484,843 P 1,484,843 Authorized shares 1,497,170,231 shares Subscribed 1,497,170,231 shares (net of Subscription receivable of P12,327) Capital Notes 12,000,000 12,000, Common Shares P 13,484,843 P 13,484,843 A substantial portion of the outstanding common shares of the Parent Bank were sequestered as a result of the sequestration orders issued by the PCGG on June 26, 1986 (Civil Case No A). Court proceedings on the ownership issue have gone on since then with the Sandiganbayan and the Supreme Court. Since then, the PCGG exercises the right to vote on the sequestered shares of the Parent Bank. On July 11, 2003, the Sandiganbayan promulgated its Partial Summary Judgment granting the ROP s Motions for Partial Summary Judgment and declared that 64.98% of the Parent Bank s shares of stock, which form part of the 72.2% charged by the Philippine Coconut Authority (PCA) to the Coconut Consumers Stabilization Fund (CCSF), are conclusively owned by the ROP. In the same decision, the Sandiganbayan also declared 7.2% of the Parent Bank s shares registered in the name of Eduardo M. Cojuangco, Jr., and those of his dummies and nominees, to belong to the ROP as the true and beneficial owner. On May 11, 2007, the Sandiganbayan issued a resolution denying the COCOFED s motion to set the case for trial and declared its July 2003 Partial Summary Judgment as final and appealable, there being no more triable issues that needed to be addressed that would necessitate the presentation of evidence by the parties. On May 28, 2007, COCOFED, et. al., filed a Class Action Petition for Review on Certiorari praying that the Supreme Court: (i) annul and set aside the Partial Summary Judgment dated July 11, 2003; (ii) annul and set aside the Partial Summary Judgment dated May 7, 2004 (see Note 1.5), and Resolution dated May 11, 2007, of the Sandiganbayan; (iii) dismiss with prejudice, the two cases in so far as COCOFED, et. al., and the more than one million coconut farmers who are similarly situated are concerned; and, (iv) lift the sequestration orders of the PCGG issued and levied over the sequestered assets. However, in its Resolution dated June 5, 2007, the Sandiganbayan declared that in view of its judgment declaring ownership in favor of the government of the subject UCPB shares, the Partial Summary Judgment is now considered a final and appealable judgment. On January 24, 2012, the Supreme Court denied the petition of COCOFED, et. al., and affirmed the resolutions issued by the Sandiganbayan on June 5, 2007, that there is no more necessity of further trial with respect to the issue of ownership of: (i) the sequestered UCPB shares, (ii) the CIIF block of SMC shares, and, (iii) the CIIF Companies as they have been finally adjudicated in the Partial Summary Judgment dated July 11, 2003 and May 7, On February 14, 2012, COCOFED et. al., filed a Motion for Reconsideration (the Motion) of the decision rendered by the Supreme Court on January 24, 2012, citing certain substantial and grave errors of fact. The Motion was denied with finality by the Supreme Court on September 4, On December 18, 2013, a resolution was unanimously approved and adopted at a special meeting of stockholders to increase the Parent Bank s authorized capital stock within the range of P14.7 billion to P37.2 billion. The Supreme Court decision on Civil Case No A became final and executory and has been recorded in the Book of Entries of Judgment on December 10, A writ of execution has yet to be issued by the Sandiganbayan.

175 Audited Financial Report 173 On March 18, 2015, President Benigno S. Aquino III of the Republic of the Philippines issued Executive Orders No. 179 and 180, together referred to as the EOs (see Note 1.5). On June 30, 2015, however, the Supreme Court issued a TRO enjoining the implementation of the EOs (Confederation of Coconut Farmer Organizations of the Philippines v. Aquino, et al. G.R. No ) Special Preferred Shares On May 10, 2011, the SEC approved the amendments on the Articles of Incorporation of the Parent Bank including the reclassification of 1,002,829,769 unissued common shares and 750,000,000 unissued preferred shares of the Parent Bank, all with par value of P1.0 per share into 1,752,829,769 perpetual, noncumulative, special preferred shares. In the event of winding up, the holder(s) of Special Preferred Shares shall have no priority claim in respect of principal and dividends on the Special Preferred Shares, which is higher than or equal to that of the depositors, other creditors and holders of Lower Tier 2 and Upper Tier 2 capital instruments, if any, of the Parent Bank. However, the rights and claims of such holder(s) of the Special Preferred Shares, in the event of winding up, are superior to the rights and claims of holder(s) of Common Stock. No stockholder of the Parent Bank shall have any pre-emptive right or preferential right to purchase or subscribe to: (i) the 1,752,829,769 Special Preferred Shares stated above; (ii) any additional Special Preferred Shares; (iii) any unissued Common Stock upon conversion of Special Preferred Shares; and, (iv) any unissued Common Stock upon conversion of the Interim Capital Notes of the Parent Bank, with (ii), (iii) and (iv) becoming operative upon an increase in the authorized capital stock of the Parent Bank. As at December 31, 2015 and 2014, the Parent Bank has 66 stockholders, owning 100 or more shares each of the Parent Bank s capital stock Capital Notes As fully discussed in Note 1, the Parent Bank originally obtained P12.0 billion financial assistance from PDIC on July 7, 2003 consisting of a P7.0 billion 5.0% Unsecured Subordinated debt due in 2013 and P5.0 billion proceeds from sale of NPLs with buyback by However, on March 31, 2009, the ROP, PDIC, PCGG and the Parent Bank agreed to convert the PDIC financial assistance into Capital Notes. On the same date, the Parent Bank issued P12.0 billion Interim Tier 1 Capital Notes (the Capital Notes or Notes) to PDIC, which will qualify as Interim Tier 1 capital. As discussed also in Note 1, the Capital Notes has no maturity date but shall become due and demandable if the Parent Bank fails to perform any of its material obligations under the Notes; hence, the Capital Notes does not qualify as an equity instrument under PAS 32. Under PAS 32, the Capital Notes should be presented as a financial liability in the statement of financial position. However, as allowed by the BSP and in keeping with the objectives of the Rehabilitation Plan, the Parent Bank has presented the Capital Notes in the equity section of the statement of financial position Revaluation Reserves The components and reconciliation of items of other comprehensive income presented in the statement of changes in equity at their aggregate amount under Revaluation Reserves account are shown below. Group AFS Financial Translation Retirement Assets Adjustment Plan Total Balance at January 1, 2015 (P 474,509) (P 3,394) (P 565,545) (P 1,043,448) Fair value losses on AFS financial assets ( 62,457) - - ( 62,457) Translation adjustments - ( 796) - ( 796) Actuarial losses on retirement plan - - ( 23,829) ( 23,829) Balance as of December 31, 2015 (P 536,966) (P 4,190) (P 589,374) (P 1,130,530) Balance at January 1, 2014 (P 1,336,403) P 14,231 (P 233,379) (P 1,555,551) Fair value gains on AFS financial assets 861, ,894 Translation adjustments - ( 17,625) - ( 17,625) Actuarial losses on retirement plan - - ( 332,166) ( 332,166) Balance as of December 31, 2014 (P 474,509) (P 3,394) (P 565,545) (P 1,043,448) Parent Bank AFS Financial Translation Retirement Assets Adjustment Plan Total Balance at January 1, 2015 (P 516,728) (P 3,300) (P 510,760) (P 1,030,788) Fair value losses on AFS financial assets ( 59,927) - - ( 59,927) Translation adjustments - ( 796) - ( 796) Actuarial losses on retirement plan - - ( 25,602) ( 25,602) Balance as of December 31, 2015 (P 576,655) (P 4,096) (P 536,362) (P 1,117,113) Balance at January 1, 2014 (P 1,372,517) P 14,194 (P 199,758) (P 1,558,081) Fair value gains on AFS financial assets 855, ,789 Translation adjustments - ( 17,494) - ( 17,494) Actuarial losses on retirement plan - - ( 311,002) ( 311,002) Balance as of December 31, 2014 (P 516,728) (P 3,300) (P 510,760) (P 1,030,788)

176 174 UCPB 2015 Annual Report 22.5 Surplus Reserves This account consists of the following: Trust business P 123,042 P 123,006 Self-insurance 26,000 26,000 Contingencies 6,000 6,000 P 155,042 P 155,006 In compliance with existing BSP regulations, 10.0% of the Parent Bank s income from trust business is appropriated to surplus reserves. This yearly appropriation is required until the surplus reserve for trust business equals 20.0% of the Parent Bank s regulatory net worth (see Note 27). In 2015 and 2014, the amount of P0.04 million and P0.87 million was added to Reserve for trust business, respectively. Reserve for self-insurance represents the amount set aside to cover losses due to fire, defalcation by and other unlawful acts of the Parent Bank s personnel or third parties. Reserve for contingencies represents the accumulated amount set aside for possible or unforeseen losses, decrease of shrinkage in the book value of the bank s assets, or for undeterminable liabilities not otherwise recorded such as those arising from lawsuits, defaults on obligations and unexpected differences. 23. EMPLOYEE BENEFITS 23.1 Salaries and Employee Benefits Expense Expenses recognized for salaries and employee benefits are presented below: Group Parent Bank Salaries and wages P 1,367,723 P 1,256,104 P 1,127,375 P 1,051,707 Other fringe benefits 607, , , ,727 Bonus 248, , , ,948 Retirement expense defined benefit plan 223, , , ,667 Short-term medical benefits 108, ,022 99,668 92,475 Compulsory social security and other contributions 72,669 67,947 61,666 58,140 P 2,628,072 P 2,260,901 P 2,305,763 P 1,980, Post-employment Defined Benefit Plan (a) Characteristics of the Defined Benefit Plan The Parent Bank and its significant subsidiaries have funded noncontributory defined benefit retirement plans (the Plans) covering its regular and permanent employees. Contributions and costs are determined in accordance with the actuarial studies made for the Plans. Annual cost is determined using projected unit credit method. The retirement plans of the Parent Bank, USB and USI comply with the minimum retirement benefit specified under RA No. 7641: New Retirement Law. All officers and employees of the Parent Bank, including those assigned in subsidiaries but excluding those hired on a temporary, seasonal, consulting, and contractual basis are eligible for membership in the Plans. Retiring members shall be entitled to retirement benefits equivalent to a certain percentage of the final Effective Gross Monthly Compensation as defined in the Plans multiplied by the number of years of service, with one complete month treated as 1/12 of a year. Claims for settlement of benefits shall be filed with the Board of Trustees (BOT) in a prescribed form to be accomplished by the Member, in case of retirement, separation, or disability, or by his designated beneficiaries in case of death. The control, administration of the retirement plan and management of the fund is vested in the BOT. The retirement plan s accounting and administrative functions are undertaken by the Operations Department under the Trust Banking Group. (b) Explanation of Amounts Presented in the Financial Statements The Parent Bank s latest actuarial valuation date is December 31, Valuations are obtained on a periodic basis. The fair value of plan assets in the actuarial valuation was calculated using projected December 31, 2015 balances based on the December 31, 2015 Fund Report.

177 Audited Financial Report 175 The net retirement liability recognized in the statement of financial position are as follows: Group Parent Bank Fair value of plan assets P 1,876,948 P 1,867,786 P 1,812,655 P 1,820,333 Present value of the obligation 2,702,222 2,658,940 2,572,024 2,543,129 Deficiency of plan asset (P 825,274) (P 791,154) (P 759,369) (P 722,796) The retirement (assets) liabilities are recognized in the following accounts in the Group s and Parent s statement of financial position. Group Parent Bank Note Retirement Liability P 828,237 P 794,573 P 759,369 P 722,796 Intangible and other resources 16 ( 2,963) ( 3,419) - - Deficiency of plan asset (P 825,274) (P 791,154) (P 759,369) (P 722,796) The movements in the present value of defined benefit retirement obligation are as follows: Group Parent Bank Balance at beginning of year P 2,658,940 P 2,056,529 P 2,543,129 P 1,973,605 Current service cost 186, , , ,183 Interest expense 122, , , ,522 Benefits paid ( 214,799) ( 206,024) ( 211,008) ( 199,180) Remeasurements actuarial losses (gains) arising from: Changes in: experience adjustments 84, ,824 83, ,811 financial assumptions ( 135,496) 419,845 ( 131,392) 416,188 demographic assumptions ( 257) 20, Balance at end of year P 2,702,222 P 2,658,940 P 2,572,024 P 2,543,129 The movements in the fair value of plan assets follow: Group Parent Bank Balance at beginning of year P 1,867,786 P 1,717,934 P 1,820,333 P P1,679,244 Interest income 86,006 96,360 83,735 94,037 Contributions 223, , , ,522 Benefits paid ( 214,799) ( 206,024) ( 211,008) ( 199,180) Remeasurements actuarial (losses) gains on retirement plan ( 85,155) 83,950 ( 84,119) 84,710 Balance at end of year P 1,876,948 P 1,867,786 P 1,812,655 P 1,820,33 The composition of the fair value of plan assets at the end of each reporting period by category and risk characteristics is shown below. Group Parent Bank AFS securities: Government and other debt securities P 534,072 P 516,932 P 509,817 P 491,757 Quoted equity securities 778, , , ,485 Unquoted equity securities 66,905 66,905 66,405 66,405 Cash and other assets 500, , , ,713 1,879,812 1,871,878 1,815,438 1,824,360 Liabilities ( 2,864) ( 4,092) ( 2,783) ( 4,027) P 1,876,948 P 1,867,786 P 1,812,655 P 1,820,333

178 176 UCPB 2015 Annual Report The returns (losses) on plan assets are as follows: Group Parent Bank Interest income P 86,006 P 96,360 P 83,735 P 94,038 Actuarial gains (losses) ( 85,155) 83,950 ( 84,119) 84,709 Actual returns P 851 P 180,310 (P 384) P 178,747 The amounts of retirement benefit liability recognized in the statement of income under Compensation and fringe benefits account and statement of comprehensive income under Remeasurement losses on retirement plan follow: Group Parent Bank Reported in statement of income: Current service cost P 186,839 P 140,161 P 170,465 P P129,183 Net interest expense 36,534 19,139 33,248 16,484 P 223,373 P 159,300 P 203,713 P 145,667 Reported in other comprehensive income: Remeasurement gains (losses) on defined benefit obligation P 51,191 (P 559,381) P 47,546 (P 529,000) Remeasurement gains (losses) on plan assets ( 85,155) 83,950 ( 84,119) 84,710 (P 33,964) (P 475,431) (P 36,573) (P 444,290 ) As at December 31, 2015 and 2014, the principal actuarial assumptions used in determining net retirement liability for the USB s, USI s and the Parent Bank s retirement plans are shown below: Parent Parent Bank USB USI Bank USB USI Discount rate 5.00% 5.00% 4.70% 4.60% 4.80% 4.70% Future salary increases 5.00% 6.00% 5.00% 5.00% 6.00% 5.00% Assumptions regarding future mortality are based on published statistics and mortality tables. The average life expectancy of an individual retiring at the Group s normal retiring age of 60 is based on the 1985 Unisex Annuity Table which was derived from the experience of the Government Service Insurance System from January 1, 1977 to December 31, 1981, a period of five years. These assumptions were developed by management with the assistance of an independent actuary. Discount factors are determined close to the end of each reporting period by reference to the interest rates of a zero coupon government bonds with terms to maturity approximating to the terms of the post-employment obligation. Other assumptions are based on current actuarial benchmarks and management s historical experience. (c) Risks Associated with the Retirement Plan The plan exposes the Group to actuarial risks such as investment risk, interest rate risk, longevity risk and salary risk. (i) Investment and Interest Risks The present value of the defined benefit obligation is calculated using a discount rate determined by reference to market yields of government bonds. Generally, a decrease in the interest rate of a reference government bonds will increase the plan obligation. However, this will be partially offset by an increase in the return on the plan s investments in debt securities and if the return on plan asset falls below this rate, it will create a deficit in the plan. Currently, the plan assets of the Group are significantly invested in equity and debt securities. Due to the long-term nature of the plan obligation, a level of continuing equity investments is an appropriate element of the Group s long-term strategy to manage the plan efficiently. (ii) Longevity and Salary Risks The present value of the defined benefit obligation is calculated by reference to the best estimate of the mortality of the plan participants both during and after their employment, and to their future salaries. Consequently, increases in the life expectancy and salary of the plan participants will result in an increase in the plan obligation. (d) Other Information The information on the sensitivity analysis for certain significant actuarial assumptions, the Group s asset-liability matching strategy, and the timing and uncertainty of future cash flows related to the post-employment plan are described below and in succeeding pages.

179 Audited Financial Report 177 (i) Sensitivity Analysis The succeeding table summarizes the effects of changes in the significant actuarial assumptions used in the determination of the defined benefit obligation as of December 31, 2015 and 2014: December 31, 2015 Group Impact on Post-Employment Defined Benefit Obligation Change in Increase in Decrease in Assumption Assumption Assumption Discount rate +/- 0.50% (P 161,475) P 177,225 Salary growth rate +/- 0.50% 164,461 ( 151,470) December 31, 2014 Discount rate +/- 0.50% (P 163,609) P 179,138 Salary growth rate +/- 0.50% 167,253 ( 153,163) December 31, 2015 Parent Bank Impact on Post-Employment Defined Benefit Obligation Change in Increase in Decrease in Assumption Assumption Assumption Discount rate +/- 0.50% (P 151,300) P 165,790 Salary growth rate +/- 0.50% 153,833 ( 141,901) December 31, 2014 Discount rate +/- 0.50% (P 154,283) P 169,373 Salary growth rate +/- 0.50% 156,771 ( 144,398) The sensitivity analysis is based on a change in an assumption while holding all other assumptions constant. This analysis may not be representative of the actual change in the defined benefit obligation as it is unlikely that the change in assumptions would occur in isolation of one another as some of the assumptions may be correlated. Furthermore, in presenting the sensitivity analysis, the present value of the defined benefit obligation at the end of each reporting period has been calculated using the projected unit credit method, which is the same as that applied in calculating the defined benefit obligation recognized in the statement of financial position. (ii) Asset-liability Matching Strategies The overall investment policy and strategy of the retirement plan is based on the suitability assessment, as provided by the Trust Banking Group, in compliance with the BSP requirements. A large portion of the plan assets as of December 31, 2015 and 2014 consists of equity securities with the balance invested in fixed income securities. The Group believes that equity securities offer the best returns over the long term with an acceptable level of risk. (iii) Funding Arrangements and Expected Contributions The plan is currently unfunded by P825,274 for the Group and by P759,369 for the Parent Bank based on the latest funding actuarial valuations in The maturity profile of undiscounted expected benefit payments from the plan from the end of each reporting period follows: Group Parent Bank One to five years P 643,478 P 594,731 P 610,550 P 567,975 More than five years to 10 years 1,361,608 1,255,855 1,309,051 1,210,241 More than 10 years to 15 years 1,642,900 1,648,063 1,539,126 1,579,125 More than 15 years 12,698,203 11,434,669 11,026,441 10,009,567 P 16,346,189 P 14,933,318 P 14,485,168 P 13,366,908 The Group and the Parent Bank expects to contribute P million and P million, respectively, to the plan in 2015.

180 178 UCPB 2015 Annual Report 24. OTHER INCOME 24.1 Service Charges, Fees and Commissions Service charges, fees and commissions consist of the following: Group Parent Bank Service charges P 717,119 P 715,256 P 498,572 P 478,287 Fees and other commissions 172, , ,796 99,075 Bank commissions 140, , , ,318 Fees and other commissions include loan servicing fees and underwriting fees Miscellaneous Income Miscellaneous income consists of the following: P 1,030,913 P 968,412 P 788,154 P 708,680 Group Parent Bank Income from assets acquired P 172,046 P 27,474 P 170,118 P 27,022 Transaction fees 59,387 52,740 59,309 52,740 Rent income 26,738 24,981 35,253 33,514 Dividends 23,224 12,677 14,746 3,327 Recovery of written-off accounts 10,470 10,037 4,248 6,308 Others 319, ,456 47,588 9,535 P 611,216 P 305,365 P 331,262 P 132,446 Others include net income from real estate sales, referral fees, income from customer s forfeitures, penalty charges and overages. 25. MISCELLANEOUS EXPENSES This account consists of the following: Group Parent Bank Postage, telephone, cable and telegram P 129,034 P 137,090 P 111,656 P 119,874 Management and other professional fees 95,988 81,716 55,853 67,681 Travelling expense 94,664 97,983 83,301 88,140 Representation and entertainment 74, ,975 65, ,786 Stationery and supplies used 74,328 73,202 63,628 63,342 Computer-related expense 65,195 65,627 61,401 61,429 Supervision and examination fees 58, ,197 52, ,095 Fees and commission 52,737 31,708 50,321 30,339 Advertising 51,502 46,572 50,346 45,247 Fuel and lubricant 27,822 43,415 19,850 34,966 Freight expense 13,532 12,122 10,126 8,366 Membership fees 9,477 9,772 8,954 9,338 Fines, penalties and other charges 4,692 25, ,123 Miscellaneous 81,979 65,434 59,691 39,483 P 833,983 P 975,868 P 694,656 P 866, TAXES Under Philippine tax laws, the Parent Bank and its domestic subsidiaries are subject to percentage and other taxes (presented as Taxes and Licenses in the statement of income), as well as income taxes. Percentage and other taxes paid consist principally of the gross receipts tax (GRT) and documentary stamp tax (DST). The recognition of liability of the Parent Bank and certain subsidiaries for GRT is based on the related regulations issued by the tax authorities. Income taxes include the regular corporate income tax (RCIT) of 30%, and final tax paid at the rate of 20%, which represents the final withholding tax on gross interest income from government securities and other deposit substitutes. Interest allowed as a deductible expense is reduced by an amount equivalent to certain percentage of interest income subjected to final tax. Minimum corporate income tax (MCIT) of 2% on modified gross income is computed and compared with the RCIT. Any excess of the MCIT over the RCIT is deferred and can be used as a tax credit against regular income tax liability in the next three consecutive years. In addition, the Group s net operating loss carry over (NOLCO) is allowed as a deduction from taxable income in the next three consecutive years.

181 Audited Financial Report 179 Effective May 2004, RA No restored the tax exemption of FCDUs and offshore banking units (OBUs). Under such law, the income derived by the FCDU from foreign currency transactions with 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% gross income tax. Interest income on deposits with other FCDUs and offshore banking units is subject to 7.5% final tax. In 2015 and 2014, the Group opted to continue claiming itemized deductions. Income tax expense consists of: Group Parent Bank Current: Final tax P 750,312 P 785,392 P 730,244 P 763,617 RCIT 260, , MCIT 105, , , ,188 1,116,319 1,136, , ,805 Deferred ( 61,842) ( 37,997) ( 16,527) 21,529 P 1,054,477 P 1,098,102 P 819,094 P 885,334 A reconciliation of tax on pretax profit computed at the applicable statutory rates to tax expense reported in profit or loss is as follows: Group Parent Bank Tax on pretax profit at 30% P 1,306,477 P 1,271,252 P 1,013,747 P 1,004,991 Tax effects of: Non-deductible expenses 391, , , ,507 Tax paid and tax-exempt income ( 285,753) ( 250,213) ( 276,152) ( 250,148) Movement on unrecognized DTA ( 151,198) 86,408 ( 107,616) 78,819 FCDU income ( 138,423) ( 185,606) ( 138,423) ( 185,606) Non-taxable income ( 69,062) ( 270,754) ( 47,969) ( 181,229) Expired NOLCO 569 1, Tax expense P 1,054,477 P 1,098,102 P 819,094 P 885,334 Components of net deferred tax assets shown in the statement of financial position follow: Group Parent Bank Deferred tax asset on: Retirement liability P 248,471 P 240,479 P 227,811 P 216,838 Allowance for credit and impairment losses 217, , Accumulated depreciation on investment properties 12,076 12, Unrealized loss on foreclosures 2,419 4, Provision for accrual of expenses 1, MCIT Others 19,173 10,678 11,791 5, , , , ,238 Deferred tax liability on: Unrealized gain on FVPL 17,883 16,402 16,402 16,402 Lease income differential 6,318 41, Expense on LTNCD 5,036 7,653 5,036 7,653 Unrealized gain on foreclosure 182 1, Others 28,868 25,416 28,870 25,416 58,287 91,616 50,308 49,471 Net deferred tax assets P 443,109 P 382,039 P 189,294 P 172,767 Deferred tax charged to other comprehensive income Remeasurement loss on retirement plan (P 229,870) (P 231,479) (P 229,870) (P 218,898) Deferred tax (charged) credited to profit or loss P 213,239 P 150,560 (P 40,576) (P 46,131)

182 180 UCPB 2015 Annual Report Components of net deferred tax liabilities as at December 31 are as follows: Group Deferred tax asset on: Remeasurement loss on retirement plan P 1,090 P 333 Allowance for credit and impairment losses Others 885 1,044 2,097 1,517 Deferred tax liability on: Unrealized gain on AFS financial assets 19,728 20,118 Retirement asset 1,979 1,359 Others ,709 21,478 Net deferred tax liabilities P 19,612 P 19,961 Deferred tax (charged) credited to other comprehensive income Remeasurement loss on retirement plan P 1,090 P 333 Unrealized gain on AFS financial assets ( 19,728) ( 20,118) (P 18,638) (P 19,785) Deferred tax charged to profit or loss (P 974) (P 176) The Parent Bank and certain subsidiaries have not recognized deferred tax assets on certain temporary differences since management believes that the Parent Bank and certain subsidiaries may not be able to generate sufficient taxable profit in the future against which the tax benefits arising from those deductible temporary differences, NOLCO, MCIT and other tax credits can be utilized. The Group and the Parent Bank did not set up deferred tax asset on the following temporary differences: Group Parent Bank Allowance for credit and impairment losses P 9,545,206 P 9,191,748 P 9,525,175 P 9,171,715 Accumulated depreciation on investment properties 1,441,391 1,395,855 1,436,591 1,391,098 Unrealized loss on AFS financial assets 576, , , ,728 MCIT 283, , , ,523 Unrealized loss on foreclosures at FVTPL 146, , , ,663 Unrealized loss on financial assets 132,832 72, ,832 72,641 Accrued expense 65,518 63,040 65,516 63,040 Remeasurement loss on retirement plan 24,171 24, NOLCO 6,022 4, P 12,221,462 P 11,652,499 P 12,166,905 P 11,599,408 Management believes that the future income tax benefits arising from these temporary differences are not likely to be realized in the coming years. The breakdown of Group NOLCO with the corresponding validity periods follow: Inception Expiry Year Amount Utilized Expired Balance Year 2015 P 6,763 P - P - P 6, , , ,896 - ( 1,896) - P 10,883 P - (P 1,896) P 8,987

183 Audited Financial Report 181 As at December 31, 2015, the Parent Bank has no unutilized NOLCO. The breakdown of Group s MCIT with the corresponding validity periods follow: Inception Expiry Year Amount Utilized Expired Balance Year 2015 P 105,582 P - P - P 105, , , , , ,009 - ( 75,009) - P 359,113 P - (P 75,009) P 284,104 The breakdown of Parent Bank s MCIT with the corresponding validity periods follow: Inception Expiry Year Amount Utilized Expired Balance Year 2015 P 105,377 P - P - P 105, , , , , ,009 - ( 75,009) - P 358,900 P - (P 75,009) P 283, TRUST OPERATIONS Securities and other properties amounting to P80.6 billion and P92.0 billion as at December 31, 2015 and 2014, respectively, held by the Parent Bank in fiduciary or agency capacity for its customers, are not included in the statement of financial position since these are not properties of the Parent Bank. In compliance with the requirements of the General Banking Law of 2000 relative to the Parent Bank s trust functions: (a) Investments in government securities with total face value of P0.8 billion and P1.0 billion (included under AFS financial assets) as at December 31, 2015 and 2014 are deposited with the BSP as security for the Parent Bank s faithful compliance with its fiduciary obligations; and, (b) 10.0% of the Parent Bank s trust income is transferred to surplus reserve. This yearly transfer is required until the surplus reserve for trust function is equivalent to 20.0% of the Parent Bank s authorized capital stock. Income from trust operations is reported net of the related expenses. As at December 31, 2015 and 2014, the reserve for trust business amounted to P million and is shown as part of Surplus Reserves in the statement of financial position (see Note 22.5). The amount of surplus for appropriation recognized by the Parent Bank in 2015 and 2014 in compliance with BSP requirement amounted to P0.04 million and P0.87 million, respectively. As at December 31, 2015, the cumulative unrecognized appropriation amounted to P million. Income from trust operations of the Group and the Parent Bank amounted to P55.84 million and P million, respectively in 2015 and 2014, and presented under Other Income in the statement of income. On March 5, 1981, the BSP directed the Parent Bank to record in its Trust Banking Group the investments made by the Bank out of CIDF/CIIF as part of the Bank s trust assets subject to Section 65 of RA No. 337, as amended, and Memorandum to All banks - DSE dated February 17, 1970 as to the amount of securities to be deposited to the BSP for the faithful performance of its trust duties. The investment should be properly supported and documented for the Parent Bank s continuing evaluation and analysis in terms of profitability and viability as well as to provide BSP with a concrete date to evaluate the Parent Bank s compliance with PD 1468 and Letter of Instructions No. 926 Rationalization of the Coconut Oil Milling Industry. The Parent Bank has investments in LOCI, SPMC, SLCOMI and GMC. The CIIF forms part of the CCSF, otherwise known as the coconut levy fund, which was created in 1973 by PD No These CIIF companies have investments in 14 Holding Companies whose funds were invested in SMC shares that were sequestered by the PCGG in May Following sequestration, the ownership of the CIIF block of SMC shares, as well as the CIIF companies, became the subject of legal proceedings before the Sandiganbayan and Supreme Court. On January 24, 2012, the Supreme Court declared that the CIIF block of SMC shares of stock totaling 33,133,266 shares as of 1983 together with all the dividends declared, paid and issued thereon as well as any increments thereto arising from, but not limited to, exercise of preemptive rights are declared owned by the government to be used only for the benefit of all coconut farmers and for the development of the coconut industry and ordered reconveyed to the government. The Supreme Court affirmed the resolution issued by the Sandiganbayan on June 5, 2007, that there is no more necessity of further trial with respect to the issue of ownership of the CIIF block of SMC shares, and the CIIF Companies as they have been finally adjudicated in the Partial Summary Judgment dated July 11, 2003 and May 7, On February 14, 2012, COCOFED et. al., filed a Motion for Reconsideration on the decision rendered by the Supreme Court on January 24, 2012, citing certain substantial and grave errors of fact. The Motion for Reconsideration was denied with finality by the Supreme Court on September 4, The Supreme Court decision became final and executory and has been recorded in the Book of Entries of Judgment on December 10, In April 2016, the Office of the Solicitor General filed before the Sandiganbayan a Motion for the Partial Execution of the Partial Summary Judgment issued in Civil Case No F. On December 28, 2012, the Parent Bank filed a Special Civil Action for Declaratory Relief seeking clarification on the Parent Bank s proportionate right, title and interest in the CIIF Companies, as well as the Parent Bank s indirect equity in the 14 Holding Companies and the CIIF block of SMC shares. The case, docketed as Civil Case No before Regional Trial Court of Makati Branch 59, was consolidated with Civil Case No , which is a similar action filed by Cocolife with respect to its proportionate right, title and interest in the CIIF Companies on September 25, The PCGG, through the Office of the Solicitor General, has sought the dismissal of the cases, but failed to obtain a favorable ruling from the trial court. Consequently, the PCGG elevated the matter to the Supreme Court via a Petition for Certiorari with a prayer for a TRO.

184 182 UCPB 2015 Annual Report On August 11, 2015, the Supreme Court granted the PCGG s petition and dismissed the petitions for declaratory relief of the Parent Bank and Cocolife (Presidential Commission on Good Government v. Hon. Winlove Dumayas, UCPB and Cocolife, G.R. Nos and ). From the adverse decision, the Bank and Cocolife filed Motions for Reconsideration. The Motions were denied by the Supreme Court in its Resolution on October 20, The Motions for Leave to Admit Second Motion for Reconsideration filed by the Bank and Cocolife were likewise denied on February 9, As discussed in Note 1.5, EOs were issued by the Republic of the Philippines along with the approval of the recapitalization of the Parent Bank in The EOs relate to the decision about the ownership of and the inventory, reconveyance, utilization and privatization of coco levy assets including the CIIF companies. Their implementation has been enjoined by a TRO issued by the Supreme Court. 28. RELATED PARTY OPERATIONS The Group and Parent Bank s related parties include its subsidiaries, associates, key management personnel and others. A summary of the Group s and Parent Bank s transactions and outstanding balances of such transactions with its related parties as of and for the years ended December 31, 2015 and 2014 is presented below Related Party Amount of Outstanding Category Note Transaction Balance Terms and Conditions Subsidiaries USB: Accounts receivable P 588 P 588 On-demand; unsecured Deposit liabilities 28.2 ( 59,542) 106,501 On-demand; 0.25% Interest expense Rent income ,688-3 years ULFC: Accounts receivable On-demand; unsecured Deposit liabilities , ,230 On-demand; 0.25% Interest expense Rent income ,377-3 years USI: Accounts receivable (P 149) P 64 On-demand; unsecured Deposit liabilities , ,169 On-demand; 0.125% % Interest expense Rent income years BRC: Deposit liabilities , ,190 On-demand; 35 days 0.25% % Interest expense GHDI: Deposit liabilities , ,443 On-demand; 0.00% UPI-MHC: Advances 14, ,550 On-demand; unsecured Deposit liabilities On-demand; 0.25% UFEC: Deposit liabilities 28.2 ( 292) 1,165 On-demand; 0.25% Interest expense 3 - Associates LOCI: Loans and receivable , , days; 4%; unsecured Deposit liabilities ,920 27,724 On-demand; 0.125% % Interest income 3,518 - Interest expense 44 - SPMC: Loans and receivable ,903 46, days; non-interest bearing; unsecured Deposit liabilities ,731 62,693 On-demand; 0.125% % Interest expense 74 -

185 Audited Financial Report Related Party Amount of Outstanding Category Note Transaction Balance Terms and Conditions SLCOM: Deposit liabilities 28.2 ( 1,169) 143 On-demand; 0.25% Interest expense 1 - GMC: Loans and receivable 28.1 ( 202,003) 344, days; 4%; unsecured Deposit liabilities ,603 34,966 On-demand; 0.125% % Interest income 19,657 - Interest expense 80 - UCFDC: Deposit liabilities 28.2 ( 47,227) 75,603 On-demand; 0.25% Interest expense Rent income ,568-3 years 2014 Related Party Amount of Outstanding Category Note Transaction Balance Terms and Conditions Subsidiaries USB: Loans and receivable 28.1 (P 4,000) P - On-demand; unsecured Accounts receivable - 53,545 On-demand; unsecured Deposit liabilities , ,043 On-demand; 0.25% Interest income Interest expense Rent income ,674-3 years ULFC: Loans and receivable 28.1 (P 870,250) P - 30, 31 and 33 days; 4.75%; unsecured Accounts receivable On-demand; unsecured Accrued interest income 28.2 ( 1,493) 1,493 Deposit liabilities , ,018 On-demand; 0.25% Interest income 11,001 - Interest expense Rent income ,343-3 years USI: Loans and receivable 28.1 ( 111) - On-demand; unsecured Accounts receivable On-demand; unsecured Deposit liabilities 28.2 ( 14,097) 40,461 On-demand; 0.25% % Interest expense Rent income years BRC: Loans and receivable 28.1 ( 98,468) - 35 days; 6%; unsecured Accrued interest income 28.2 ( 4,325) - Deposit liabilities ,414 70,461 On-demand; 35 days 0.25% % Interest income Interest expense GHDI: Deposit liabilities ,280 67,404 On-demand; 0.00% UPI-MHC: Advances - 96,084 On-demand; unsecured Deposit liabilities 28.2 ( 564) 38 On-demand; 0.25% UFEC: Deposit liabilities ,457 On-demand; 0.25%

186 184 UCPB 2015 Annual Report 2014 Related Party Amount of Outstanding Category Note Transaction Balance Terms and Conditions Associates LOCI: Loans and receivable 28.1 ( 387,441) days; 3.80% and 4%; unsecured Accrued interest income 28.2 ( 589) - Deposit liabilities 28.2 ( 16,728) 5,804 On-demand; 0.25% Interest expense 64 - SPMC: Loans and receivable ,705 36, days; non-interest bearing; unsecured Deposit liabilities ,330 56,962 On-demand; 0.25% Interest expense 71 - SLCOM: Deposit liabilities ,312 On-demand; 0.25% Interest expense 2 - GMC: Loans and receivable , , days; 4%; unsecured Deposit liabilities 28.2 ( 15,437) 27,363 On-demand; 0.25% Interest income 5,779 - Interest expense UCFDC: Deposit liabilities , ,830 On-demand; 0.25% Interest expense 77 - Rent income ,544-3 years 28.1 Loans and Receivables In the ordinary course of business, the Group has loan transactions with each other, their other affiliates, and with certain DOSRIs. Under existing policies of the Group, these loans are made substantially on the same terms as loans to other individuals and businesses of comparable risks. Under current BSP regulations, the amount of individual loans to a DOSRI, 70% of which must be secured, should not exceed the amount of the encumbered deposit and book value of the investment in the Group and Parent Bank and/or any of its lending and nonbank financial subsidiaries. In the aggregate, loans to DOSRIs, generally, should not exceed the total equity or 15% of the total loan portfolio of the Group and Parent Bank. However, non-risk loans are excluded in both individual and aggregate ceiling computation. As of December 31, 2015 and 2014, the Group and the Parent Bank is in compliance with these regulatory requirements. The following table shows the other information relating to the loans, other credit accommodations and guarantees granted to DOSRI as of December 31 in accordance with BSP reporting guidelines: Group Parent Bank Total outstanding DOSRI loans P 506,134 P 254,200 P 501,621 P 249,304 Unsecured DOSRI 45,239 42,927 43,872 41,480 Percent of DOSRI loans to total loan portfolio 0.38% 0.21% 0.42% 0.23% Percent of unsecured DOSRI loans to total DOSRI loans 8.94% 16.89% 8.75% 16.64% Percent of past due DOSRI loans to total DOSRI 0.40% 1.23% 0.40% 1.26% Percent of non-accruing DOSRI loans to total DOSRI loans 0.40% 1.23% 0.40% 1.26% The Group and Parent Bank did not recognize any impairment loss on these loans in 2015 and Banking Transactions In the ordinary course of business, the Parent Bank transacts with its subsidiaries and associates. The major related party transactions include deposits, borrowings and other banking transactions. These transactions are made substantially on the same terms as transactions entered into with other third party individuals and businesses of comparable risks.

187 Audited Financial Report Lease of Office Space The Parent Bank has lease agreements with some of its subsidiaries and associates in 2015 and 2014 with monthly rental of P0.60 million for both years, for periods ranging from one to three years. The lease agreements include the share of the subsidiaries and associates in the maintenance of the building. The income related to these agreements, is included as rent income under Miscellaneous income in the Parent Bank s statement of income Securities Trading Transactions In 2014, transactions of the Parent Bank with its subsidiaries involving financial assets at FVTPL and AFS financial assets include outright sales totaling and P0.9 billion and outright purchases totaling P0.9 billion. Combined gains (losses) on sale of financial assets at FVTPL and AFS financial assets included as part of Trading and securities gains account in the Parent Bank s statement of income in 2014 amounting to P10.50 million. There were no similar securities trading transactions in Purchase of Receivables In 2015 and 2014, the Parent Bank purchased lease contracts and other loans receivables from ULFC, on a without recourse basis, with a total price of P2.0 billion and P1.9 billion, respectively Reimbursements Accounts receivable from UPI-MHC pertains to expenses paid by the Parent Bank, which were subsequently billed for reimbursement by the Parent Bank Key Management Personnel Compensation The compensation of the key management personnel of the Group and Parent Bank in 2015 and 2014 presented as part of Compensation and fringe benefits account in the statement of income: Group Parent Bank Short-term employee benefits P 568,514 P P357,715 P 543,501 P 339,928 Post-employment benefits 108,648 81,377 90,470 79, Retirement Plan P 677,162 P 439,092 P 633,971 P 419,814 The Parent Bank s and certain subsidiaries retirement funds covered under their defined benefit post-employment plan maintained for qualified employees are administered and managed by the Parent Bank s Trust Banking Group in accordance with the respective trust agreements covering the plan. The retirement funds have transactions with the Group and Parent Bank as of December 31, 2015 and 2014 as follows: 2015 Group Parent Bank Net Amount Outstanding Net Amount Outstanding Nature of Transactions of Transaction Balance of Transaction Balance Investment in securities: Government and other debt P 17,140 P 534,072 P 18,060 P 509,817 Quoted equity ( 126,668) 778,172 ( 126,055) 772,430 Unquoted equity - 66,905-66,905 Cash and other assets 117, ,663 99, ,786 Interest income 33,045-32,739 - Dividend income 23,323-23,323 - Other income 41,702-41, Group Parent Bank Net Amount Outstanding Net Amount Outstanding Nature of Transactions of Transaction Balance of Transaction Balance Investment in securities: Government and other debt (P 52,592) P 516,932 (P 52,950) P 491,757 Quoted equity 157, , , ,485 Unquoted equity - 66,905-66,405 Cash and other assets 35, ,201 30, ,713 Interest income 36,294-36,036 - Dividend income 24,031-24,031 - Other income 43,598-43,598 - The carrying amount and the composition of the plan assets as of December 31, 2015 and 2014 are disclosed in Note 23.2.

188 186 UCPB 2015 Annual Report The Parent Bank s retirement plan assets are invested in various debt and equity instruments, such as government securities, corporate papers, and equity securities traded in PSE, and investment in BSP s special deposit account and placements with other banks. As at December 31, 2015 and 2014, the plan includes investment in 2,500 shares of Mastercaterers, Inc., an affiliate, classified under unquoted equity securities. Investment properties include 193 parking slots located at Forbes Tower Condominium which are currently under various lease agreements. As at December 31, 2015 and 2014, Due from banks includes Time Certificate of Deposit amounting to P million and P82.97 million, respectively, from the Parent Bank. These are short-term time deposits with maturities ranging from five to 23 days and with interest rates ranging from 0.25% to 2.0%. Total interest income on deposits amounted to P2.31 million in 2015 and P0.20 million in Other than savings and time deposits with the Parent Bank, the Parent Bank s retirement plan does not have investments in securities, whether debt or equity, issued by the Parent Bank as at December 31, 2015 and 2014 The information on the Group s and Parent Bank s contributions to the retirement fund and benefit payments through the fund are disclosed in Note The retirement fund neither provides any guarantee or surety for any obligation of the Group nor its investments in its own shares of stocks covered by any restriction and liens. 29. SELECTED FINANCIAL PERFORMANCE INDICATORS The following basic ratios measure the financial performance of the Group and the Parent Bank before the effects of the adjustments related to the exceptions discussed in the Statement of Compliance under Note 1 to the financial statements for the years ended December 31, 2015 and 2014: Group Parent Bank Return on average equity 17.30% 16.20% 39.75% 31.10% Return on average assets 1.19% 1.15% 1.01% 0.99% Net interest margin 4.54% 4.49% 4.24% 4.12% The Group s and the Parent Bank s financial performance are computed based on regulatory capital submitted to the BSP as required by Subsection X190.4, Disclosure Requirement in the Notes to the Audited Financial Statements, of the Manual of Regulations for Banks. 30. COMMITMENTS AND CONTINGENCIES In the normal course of operations of the Group, there are various outstanding commitments and contingent liabilities such as guarantees, commitments to extend credit, tax assessments, etc., with amounts not reflected in the financial statements. As of December 31, 2015, management does not anticipate losses from these transactions that will adversely affect the Group s operations. In the opinion of management, the suits and claims arising from the normal course of operations of the Group that remain unsettled, if decided adversely, will not involve sums that would have material effect on the Group s financial position or operating results Contingent Accounts, Guarantees and Other Commitments The following is a summary of contingencies and commitments arising from off-statement of financial position items at their equivalent peso contractual amounts as of December 31, 2015 and 2014: Group Parent Bank Trust department accounts* P 80,600,823 P 91,997,192 P 80,600,823 P 91,997,192 Standby letters of credit 1,851,920 1,764,350 1,851,920 1,764,350 Sight import letters of credit outstanding 720,106 1,035, ,106 1,035,688 Spot exchange sold 141, ,180 - Sport exchange bought 517, ,660 - Usance import letters of credit outstanding 152, , , ,994 Outward bills for collection 7,248 24,692 7,248 24,692 Others 14,275,397 5,883,558 14,255,510 5,866,279 P 98,267,304 P 100,985,474 P 98,247,417 P 100,968,195 * In 2015, fund balance under Escrow Account No representing SMC dividends was transferred to the Bureau of Treasury under the account name PCGG in Trust for the CIIF 14 Holding Companies.

189 Audited Financial Report Deficiency Tax Assessments and Tax Cases The Group received various letter notices and preliminary assessment notices from the Bureau of Internal Revenue (BIR) for taxable years 1998 to The Group, and all other banks with FCDU operations, was assessed for the FCDU s GRT and DST. The assessments were protested on the basis of their legality. Compromise settlements were made with the BIR and the Group is still waiting for the issuance of the tax clearance. The Group is defendant in various cases pending in courts for alleged claims against the Group, the outcome of which are not fully determinable at present. However, in the opinion of the Group s management, the liabilities or losses, if any, arising from these claims is not material and should be recorded upon their final determination The BIR has issued a Final Assessment Notice (FAN) for the 2011 taxable year pursuant to Cost Allocation under RR No The noted tax deficiencies amounted to P million. On April 28, 2015, the Makati Regional Trial Court issued a Writ of Preliminary Injunction enjoining the BIR from enforcing RR As at December 31, 2015, the Parent Bank has an ongoing case with the Supreme Court on FCDU GRT for the year 2001, and with Court of Tax Appeals on FCDU GRT and Income Tax Covering Year Lease Commitments The Group leases the premises of most of its offices and branches for periods ranging from one to 20 years from the date of the contracts, which terms are renewable upon the mutual agreement of the parties. Rent expense charged to operations (included under Occupancy expense account in the statement of income) amounted to P million and P million in 2015 and 2014, respectively, for the Group and P million and P million in 2015 and 2014, respectively, for the Parent Bank. Future minimum rentals payable under non-cancelable operating leases are as follows: Group Parent Bank Within one year P 295,571 P 284,941 P 256,446 P 247,223 After one year but not more than five years 571, , , ,123 After more than five years 185, , , ,517 P 1,052,212 P 1,108,167 P 904,933 P 950, SUPPLEMENTARY INFORMATION REQUIRED BY THE BUREAU OF INTERNAL REVENUE Presented below is the supplementary information which is required by the Bureau of Internal Revenue (BIR) under its existing revenue regulations (RR) to be disclosed as part of the notes to financial statements. This supplementary information is not a required disclosure under Financial Reporting Standards in the Philippines for Banks (FRSPB) and Philippine Securities and Exchange Commission s rules and regulations covering the form and content of financial statements under the Securities Regulation Code Rule Requirements under RR The information on taxes, duties and licenses fees paid or accrued during the taxable year required under RR follows: (a) Gross Receipts Tax In lieu of the value-added tax, the Bank is subject to the gross receipts tax (GRT) imposed on all banks and non-bank financial intermediaries performing quasi-banking functions pursuant to Section 121 of the Tax Code, as amended. In 2015, the Bank reported total GRT amounting to P million as shown under Taxes and Licenses account [see Item (e)] broken down, as follows: Taxable Transactions Tax Base GRT Interest, commissions and discounts from lending activities, remaining maturity is 5 years or less 5% P 6,632,339,757 P 331,616,988 Royalties, rentals of property (real or personal), profits from exchange and all other gross income 7% 1,333,754,300 93,362,801 Interest, commissions and discounts from lending activities, remaining maturity is more than 5 years 1% 2,530,732,257 25,307,322 P 10,496,826,314 P 450,287,111 (b) Excise Tax The Bank did not pay any excise tax in 2015 since it did not have any transaction which is subject to excise tax during the year. (c) Landed Costs, Customs Duties and Tariff Fees on Importation The Bank did not pay any customs duties and tariff fees to the Bureau of Customs since it did not have any importation during the year.

190 188 UCPB 2015 Annual Report (d) Documentary Stamp Tax In general, the Bank s documentary stamp tax (DST) transactions arise from the execution of debt instruments, security documents, certificates of deposits and bills of exchange. For the year ended December 31, 2015, DST affixed amounted to P million, representing documentary stamps imposed mainly on debt instruments documents issued during the year, of which P million were charged to the Bank s clients, hence, not reported as part of Taxes and licenses. (e) Taxes and Licenses The details of Taxes and Licenses account are broken down as follows: GRT P 450,287 DST 245,843 Fringe benefit tax 160,022 Local taxes 51,830 Others 1,231 P 909,213 (f) Withholding Taxes The details of total withholding taxes for the year ended December 31, 2015 are shown below. Final P 287,527 Compensation and benefits 221,426 Expanded 62,324 P 571,277 (g) Deficiency Tax Assessment and Tax Cases The BIR has issued a FAN for the 2011 taxable year pursuant to Cost Allocation under RR The noted tax deficiencies amounted to P934.9 million. On April 28, 2015, the Makati Regional Trial Court issued a Writ of Preliminary Injunction enjoining the BIR from enforcing RR As at December 31, 2015, the Parent Bank has an ongoing case with the Supreme Court on FCDU GRT for the Year 2001, and with Court of Tax Appeals on FCDU GRT and Income Tax Covering Year Requirements under RR RR requires schedules of taxable revenue and other non-operating income, costs of sales and services, and itemized deductions, to be disclosed in the notes to financial statements. The Parent Bank s Regular Banking Unit (RBU) is taxed separately from its FCDU. The amounts of taxable revenues and income and deductible costs and expenses of the FCDU are presented in the separate supplementary information to be filed with the separate financial statements of the FCDU for which its corresponding income tax return is also separately filed with the BIR. The amounts of taxable revenues and income, and deductible costs and expenses of the RBU are presented in the succeeding pages. (a) Taxable Revenues The amounts of taxable revenues, under the regular tax regime, for the year ended December 31, 2015 are as follows: Interest on loans and receivables P 6,624,426,844 Interest on interbank loans and receivables 298,408 Other interest income 426,789 P 6,625,152,041 (b) Taxable Non-operating and Other Income The amounts of taxable non-operating and other income, under the regular tax regime, for the year ended December 31, 2015 are as follows: Commissions and service fees P 753,316,372 Net trading gains and profit from sale of asset 52,829,556 Others 373,671,304 P 1,179,817,232

191 Audited Financial Report 189 (c) Deductible Cost of Sales and Services The amount of deductible cost of sales and services, under the regular tax regime, for the year ended December 31, 2015 are as follows: Interest expense P 1,229,431,792 Compensation and fringe benefits 896,081,773 Outside services 432,919,679 (d) Itemized Deductions P 2,558,433,244 The amounts of itemized deductions, under the regular tax regime, for the year ended December 31, 2015 are as follows: Taxes and licenses P 890,433,165 Salaries and allowances 822,562,034 Bad debts 667,238,220 Fringe benefits 394,747,660 Rental 341,766,878 Depreciation 327,294,158 Security services 292,432,269 Communication, light and water 230,844,030 Loss on sale of acquired assets 148,661,895 Amortization various software 91,260,370 Janitorial and messengerial services 80,819,517 Transportation and travel 77,610,398 Representation and entertainment 62,520,898 Office supplies 59,047,739 Information technology expense 56,554,172 Repairs and maintenance labor & materials 49,861,926 Advertising and promotions 47,802,885 Insurance 38,851,523 Other services 27,539,572 Litigation expense 25,592,151 Professional fees 23,619,302 Fuel and oil 18,483,048 SSS, GSIS, Philhealth, HDMF and other contributions 15,544,663 Director s fees 13,923,436 Management and consultancy fee 13,216,165 Miscellaneous expenses 83,780,442 P 4,902,008,516

192 190 UCPB 2015 Annual Report Branches and Subsidiaries METRO MANILA CALOOCAN / MALABON / NAVOTAS / VALENZUELA CITIES 10 th Avenue Caloocan 10 th Avenue corner A. Mabini Street Caloocan City (02) ; (02) (fax) 10thavenue@ucpb.com Caloocan 283 EDSA corner Gen. Tinio Street Morning Breeze Subdivision Caloocan City (02) ; (02) (fax) caloocan@ucpb.com Grace Park Solid Tech Services Building 205 Rizal Avenue Extension corner 6 th Avenue, Grace Park, Caloocan City (02) to 07 (02) (fax) gracepark@ucpb.com Karuhatan 246 McArthur Highway Karuhatan, Valenzuela City (02) to 25 (02) (fax) karuhatan@ucpb.com Malabon 153 M.H. Del Pilar corner Gov. A Pascual Avenue Tinajeros, Malabon City (02) ; (02) (fax) malabon@ucpb.com Malanday UCPB Building, McArthur Highway corner P. Adriano Street, Malanday Valenzuela City (02) ; (02) (fax) malanday@ucpb.com Navotas Vedia Building, Lapu-Lapu Avenue corner North Bay Boulevard Navotas City (02) ; (02) (fax) navotas@ucpb.com Paso de Blas Servando Building Barangay Paso de Blas, Valenzuela City (02) ; (02) (fax) pasodeblas@ucpb.com QUEZON CITY Acropolis The Village Center 187 E. Rodriguez, Jr. Avenue Bagumbayan (Libis), Quezon City (02) ; (02) (fax) acropolis@ucpb.com Anonas Hi-Top Supermart, Aurora Boulevard corner F. Castillo Street, Project 4, Quezon City (02) to 54 (02) (fax) anonas@ucpb.com Araneta Avenue Doňa Nena Building 425 Araneta Avenue corner Bayani Street, Quezon City (02) ; (02) (fax) araneta@ucpb.com Aurora Boulevard UCPB Building 725 Aurora Boulevard New Manila, Quezon City (02) to 55 (02) (fax) aurorablvd@ucpb.com Banaue PPSTA Dormitory Building 245 Banaue Street, Quezon City (02) ; (02) (fax) banaue@ucpb.com Batasan Sweet Haven Building Commonwealth Avenue corner Villongco Street, Quezon City (02) ; (02) (fax) batasan@ucpb.com Blue Ridge 190 Katipunan Avenue corner Raja Matanda Street, Blue Ridge Quezon City (02) ; (02) (fax) blueridge@ucpb.com Bohol Avenue UCPB Building, Sgt. Esguerra Street corner Quezon Avenue South Triangle, Quezon City (02) ; (02) (fax) boholavenue@ucpb.com Cambridge Coronet Building, Cambridge Street corner Aurora Boulevard, Cubao, Quezon City (02) to 40 (02) (fax) cambridge@ucpb.com Commonwealth Avenue UCPB Building 125 Commonwealth Avenue Quezon City (02) to 96 (02) (fax) commonwealth@ucpb.com Del Monte-Bonifacio 161 Del Monte Avenue Quezon City (02) ; (02) (fax) delmonte-bonifacio@upcb.com Diliman J & L Building, 23 Matalino Street Quezon City (02) ; (02) (fax) diliman@ucpb.com E. Rodriguez 2 Judge Jimenez Street corner E. Rodriguez Sr. Avenue Barangay Pinagkaisahan, Cubao, Quezon City (02) ; (02) (fax) erodriguez@ucpb.com Lagro Saint Andrew Building Quirino Highway, Lagro Novaliches, Quezon City (02) ; (02) (fax) lagro@ucpb.com Loyola Heights SMRC Building, 331 Katipunan Avenue Loyola Heights, Quezon City (02) to 75 (02) (fax) loyolaheights@ucpb.com Mindanao Avenue UCPB Building, 14 Mindanao Avenue Dominic Subdivision, Tandang Sora Quezon City (02) ; (02) (fax) mindanaoave@ucpb.com Muñoz 304 Roosevelt Avenue corner M.H. del Pilar Street San Francisco del Monte Quezon City (02) ; (02) (fax) munoz@ucpb.com New Manila Cortes Building 958 E. Rodriguez, Sr. Avenue, Quezon City (02) ; (02) (fax) newmanila@ucpb.com

193 Branches and Subsidiaries 191 Branches And Subsidiaries Novaliches UCPB Building, 937 Quirino Highway Novaliches, Quezon City (02) ; (02) (fax) P. Tuazon STG Building, 190 P. Tuazon Street corner 10 th Avenue Cubao, Quezon City (02) ; (02) Quirino Highway 380 Oeshram Building Sangandaan, Quirino Highway Novaliches, Quezon City (02) to 64 (02) (fax) Roosevelt Avenue Tres Hermanas, Inc. Building Roosevelt Avenue corner Quezon Avenue, Quezon City (02) to 41 (02) (fax) Tomas Morato F.C. Building 290 Tomas Morato Avenue Quezon City (02) ; (02) (fax) Visayas Avenue Far East Asia Commercial Complex 282 Visayas Avenue corner Congressional Avenue, Quezon City (02) ; (02) (fax) Welcome Rotonda 299 E. Rodriguez Avenue, Quezon City (02) to 64 (02) (fax) West Avenue CBT Building, 60 West Avenue Quezon City (02) ; (02) (fax) SAN JUAN CITY Annapolis Atlanta Centre Building Annapolis Street, Greenhills, San Juan City (02) ; (02) (fax) Greenhills A&E Building, Ortigas Avenue Greenhills, San Juan City (02) to 62 (02) (fax) N. Domingo UCPB Building, 120 N. Domingo Street San Juan City (02) ; (02) (fax) PASIG / ORTIGAS CENTER Hanston Square Hanston Square Building 17 San Miguel Avenue Ortigas Center, Pasig City (02) to 39 (02) (fax) hanstonsquare@ucpb.com Ortigas Emerald Building 14 F. Ortigas Jr. Avenue Ortigas Center, Pasig City (02) ; (02) (fax) ortigas@ucpb.com Pasig UCPB Building 12 Dr. Sixto Antonio Avenue Kapasigan, Pasig City (02) ; (02) (fax) pasig@ucpb.com Pioneer San Buena Building 9 Shaw Boulevard corner Pioneer Street, Pasig City (02) to 62 (02) (fax) pioneer@ucpb.com Robinsons Galleria Galleria Corporate Center EDSA corner Ortigas Avenue Quezon City (02) ; (02) (fax) robinsongalleria@ucpb.com San Miguel San Miguel Properties Center Saint Francis Avenue, Ortigas Center Mandaluyong City (02) to 57 (02) (fax) sanmiguel@ucpb.com Shaw-Escriva Tune Hotel Lot 5 Block 4 Shaw Boulevard Barangay San Antonio, Pasig City (02) to 78 (02) shaw-escriva@ucpb.com Tektite West Tower Philippine Stock Exchange Center Exchange Road, Ortigas Center Pasig City (02) ; (02) (fax) tektite@ucpb.com MANDALUYONG CITY Boni Avenue Jemtee Building, 677 Boni Avenue corner Aliw Street, Mandaluyong City (02) ; (02) (fax) boniavenue@ucpb.com Kalentong 214 Romualdez Street corner Kalentong Street Mandaluyong City (02) ; (02) (fax) kalentong@ucpb.com Mandaluyong 358 Shaw Boulevard Mandaluyong City (02) ; (02) (fax) mandaluyong@ucpb.com MARIKINA CITY Concepcion David Building Bayan-Bayanan Avenue Concepcion, Marikina City (02) to 29 (02) (fax) concepcion@ucpb.com Marikina Sumulong Highway Sto. Niño, Marikina City (02) ; (02) (fax) marikina@ucpb.com RIZAL Antipolo Circumferential Road Barangay San Roque, Antipolo City (02) ; (02) (fax) antipolo@ucpb.com

194 192 UCPB 2015 Annual Report Branches and Subsidiaries Cainta UCPB Building, Felix Avenue Junction, Cainta, Rizal (02) to 52 (02) (fax) Masinag Silicone Valley Building Sumulong Highway, Antipolo City (02) ; (02) (fax) Q. Plaza Q. Plaza Commercial Complex Imelda Avenue corner Marcos Highway Cainta, Rizal (02) ; (02) (fax) Taytay Fortunil Building, National Road San Juan, Taytay, Rizal (02) to 89 (02) (fax) MANILA Binondo Q. Paredes Street Binondo, Manila (02) to 62 (02) (fax) Elcano Elcano corner San Nicolas Sts., Binondo, Manila (02) to 53 (02) (fax) Escolta FUB Building, David Street Escolta, Manila (02) to 29 (02) (fax) Juan Luna First Binondo Centre Building 524 Juan Luna Street Binondo, Manila (02) ; (02) (fax) Malate Golden Empire Tower 1322 Roxas Boulevard corner Padre Faura, Ermita, Manila (02) ; (02) (fax) P. Ocampo Torre Lorenzo Building Taft Avenue corner P. Ocampo Malate, Manila (02) ; (02) (fax) P. Paterno 713 P. Paterno Street Quiapo, Manila (02) ; (02) (fax) San Andres Marc 2000 Tower, 1973 Taft Avenue corner San Andres Street Malate, Manila (02) ; (02) (fax) Soler Aceada Building Soler Street Binondo, Manila (02) ; (02) (fax) T.M. Kalaw Traveller s Life Building 490 T.M. Kalaw corner Cortada Street, Ermita, Manila (02) ; (02) (fax) tmkalaw@ucpb.com Tomas Mapua Han Chiong Building 725 Tomas Mapua Street Sta. Cruz, Manila (02) ; (02) (fax) tomasmapua@ucpb.com United Nations Avenue Medical Center Manila Building U.N. Avenue corner General Luna Street Ermita, Manila (02) ; (02) (fax) unitednations@ucpb.com MAKATI CITY Main Office Branch UCPB Corporate Offices 7909 Makati Avenue, Makati City (02) ; (02) (fax) mob-boo@ucpb.com Aguirre PET Building, 114 Aguirre Street Legaspi Village, Makati City (02) ; (02) (fax) aguirre@ucpb.com Ayala Avenue Ayala Life - FGU Center 6811 Ayala Avenue, Makati City (02) ; (02) (fax) ayala@ucpb.com Chino Roces Alegria Building 2299 Don Chino Roces Avenue Makati City (02) ; (02) (fax) chinoroces@ucpb.com Dela Rosa Asian Mansion I Building 109 Dela Rosa Street Legaspi Village, Makati City (02) ; (02) (fax) delarosa@ucpb.com Guadalupe Tan Hock Building P. Burgos corner EDSA Guadalupe Nuevo, Makati City (02) ; (02) (fax) guadalupe@ucpb.com Herrera Coherco Corporate Center 116 V.A. Rufino Street Legaspi Village, Makati City (02) ; (02) (fax) herrera@ucpb.com J.P. Rizal 905 J.P. Rizal corner Santiago Street Barangay Poblacion, Makati City (02) ; (02) (fax) jprizal@ucpb.com Makati Avenue Somerset Olympia Condominium Makati Avenue corner Sto. Tomas Street, Urdaneta Village Makati City (02) to 14 (02) (fax) makatiavenue@ucpb.com Marvin Plaza Marvin Plaza Building Don Chino Roces Avenue, Makati City (02) ; (02) (fax) marvinplaza@ucpb.com

195 Branches and Subsidiaries 193 Metropolitan Avenue Bormaheco Condominium Metropolitan Avenue corner Zapote Street, Makati City (02) ; (02) (fax) Pasay Road Ginbo Building, 824 Arnaiz Avenue San Lorenzo Village, Makati City (02) ; (02) (fax) Pasong Tamo Extension OPVI Building (formerly Jannov Plaza) 2295 Pasong Tamo Extension Makati City (02) ; (02) (fax) Puyat Bautista Majalco Building, Sen. Gil Puyat Avenue corner Bautista Street Palanan, Makati City (02) to 26 (02) (fax) Salcedo Philcox Building, 172 Salcedo Street Legaspi Village, Makati City (02) ; (02) (fax) Tordesillas Three Salcedo Place Condominium 102 Tordesillas Street Salcedo Village, Makati City (02) to 23 (02) (fax) Valero Antel 2000 Corporate Center 121 Valero Street Salcedo Village, Makati City (02) to 57 (02) (fax) TAGUIG CITY 32 nd Street BGC F1 Building, 32 nd Street Bonifacio Global City, Taguig City (02) ; (02) (fax) Global City Fort Palm Spring Building 30 th Street corner 1 st Avenue Bonifacio Global City, Taguig City (02) ; (02) (fax) globalcity@ucpb.com McKinley Hill IPC Building Upper McKinley Road Fort Bonifacio, Taguig City (02) ; (02) (fax) mckinleyhill@ucpb.com The Fort Forbes Wood Heights Condominium Rizal Drive, Bonifacio Global City, Taguig City (02) to 48 (02) (fax) thefort@ucpb.com PASAY CITY Coral Way Fly Ace Corporate Center 13 Coral Way, Central Business Park Pasay City (02) ; (02) (fax) coralway@ucpb.com F.B. Harrison AIMS Building, A. Arnaiz Avenue corner F.B. Harrison Street Pasay City (02) ; (02) (fax) fbharrison@ucpb.com Malibay 715 EDSA, Malibay, Pasay City (02) to 69 (02) (fax) malibay@ucpb.com MUNTINLUPA / PARAÑAQUE / LAS PIÑAS Aseana City Sole Mare Parksuites, Bradco Avenue Aseana Business Park Parañaque City (02) ; (02) (fax) aseanacity@ucpb.com Alabang Civic Prime Building 2501 Civic corner Market Drive Filinvest Corporate City Alabang, Muntinlupa City (02) to 46 (02) (fax) alabang@ucpb.com Aquino Avenue Sky Freight Building Aquino Avenue, Parañaque City (02) ; (02) (fax) aquino@ucpb.com Baclaran UCPB Building, 4010 Airport Road Baclaran, Parañaque City (02) to 47 (02) (fax) baclaran@ucpb.com BF Parañaque EJV Building 21 Aguirre Avenue BF Homes, Parañaque City (02) ; (02) (fax) paranaque@ucpb.com Bicutan J&M Mendoza Building Doña Soledad Avenue corner Argentina Street Better Living Subdivision, Parañaque City (02) ; (02) (fax) bicutan@ucpb.com Las Piñas URCI Townhomes, Alabang Zapote Road Pamplona 3, Las Piñas City (02) ; (02) (fax) laspinas@ucpb.com Madrigal Richville Corporate Center 1314 Commerce Avenue Extension Madrigal Business Park Ayala Alabang, Muntinlupa City (02) to 28 (02) (fax) madrigal@ucpb.com Muntinlupa Elizabeth Center Building National Road, Putatan, Muntinlupa City (02) to 26 (02) (fax) muntinlupa@ucpb.com Sucat 8404 Dr. A. Santos Avenue corner Rainbow Drive, Barangay BF Homes Sucat, Parañaque City (02) ; (02) (fax) sucat@ucpb.com Zapote UCPB Building, Real Street Alabang-Zapote Road, Las Piñas City (02) ; (02) (fax) zapote@ucpb.com

196 194 UCPB 2015 Annual Report Branches and Subsidiaries NORTH-CENTRAL LUZON BAGUIO CITY Baguio UCPB Building, T. Claudio and Calderon Streets, Baguio City (074) ; (074) (fax) ILOCOS NORTE / ILOCOS SUR Laoag Bueno Building, J.P. Rizal corner E. Ruiz Streets, Laoag City (077) ; (077) (fax) laoag@ucpb.com Vigan UCPB Building M.L. Quezon Avenue, Vigan City (077) ; (077) (fax) vigan@ucpb.com LA UNION La Union Unison Realty Building Quezon Avenue San Fernando, La Union (072) ; (072) (fax) launion@ucpb.com PANGASINAN Dagupan UCPB Building A.B. Fernandez Avenue corner Herrero Street Dagupan City (075) ; (075) (fax) dagupan@ucpb.com Urdaneta UCPB Building Alexander Street, Urdaneta City (075) ; (075) (telefax) urdaneta@ucpb.com CAGAYAN Tuguegarao A. Luna and A. Bonifacio Streets Tuguegarao City (078) to 61 (078) (fax) tuguegarao@ucpb.com ISABELA Cauayan C. Uy Building, National Highway Cauayan City, Isabela (078) (078) (fax) cauayan@ucpb.com Santiago UCPB Building, National Highway corner Camacam Street, Santiago, Isabela (078) ; (078) (fax) santiago@ucpb.com NUEVA VIZCAYA Solano J.P. Rizal Street, Poblacion Solano Nueva Vizcaya (078) (078) (fax) solano@ucpb.com BATAAN Balanga UCPB Building Don M. Banzon Avenue Balanga City, Bataan (047) ; (047) (fax) balanga@ucpb.com Limay UCPB Building Roman National Highway Alangan, Limay, Bataan (047) ; (047) (fax) limay@ucpb.com BULACAN Balagtas Roma Building 491 McArthur Highway San Juan, Balagtas, Bulacan (044) ; (044) (fax) balagtas@ucpb.com Baliuag PVR Building Benigno S. Aquino Avenue Baliuag, Bulacan (044) to 28 (044) (fax) baliuag@ucpb.com Meycauayan Sarmiento Building McArthur Highway, Calvario Meycauayan, Bulacan (044) ; (044) (fax) meycauayan@ucpb.com NUEVA ECIJA Cabanatuan Ramoso Building, Burgos Avenue corner A. Bonifacio Street, Cabanatuan City (044) ; (044) (fax) cabanatuan@ucpb.com ZAMBALES Olongapo UCPB Building, 1869 Rizal Avenue West Bajac-Bajac, Olongapo City (047) ; (047) (fax) olongapo@ucpb.com Subic Royal Sky Plaza Royal Gateway District Argonaut Highway Subic Bay Freeport Zone, Olongapo (047) ; (047) (fax) subic@ucpb.com PAMPANGA Angeles UCPB Building, Sto. Rosario corner Plaridel Streets Angeles City (045) ; (045) (fax) angeles@ucpb.com Clark Field Lilly Hill Plaza, C.M. Recto Highway Clark Freeport Zone, Pampanga (045) to 73 (045) (fax) clarkfield@ucpb.com San Fernando U2 Building, McArthur Highway Dolores, San Fernando, Pampanga (045) ; (045) (fax) sanfernando@ucpb.com TARLAC Paniqui UCPB Building, National Highway Paniqui, Tarlac (045) ; (045) (fax) paniqui@ucpb.com Tarlac Que Kian Juat Building F. Taniedo Street, San Nicolas Tarlac City (045) ; (045) (fax) tarlac@ucpb.com

197 Branches and Subsidiaries 195 SOUTHERN LUZON BATANGAS Batangas UCPB Building, C. Tirona corner P. Zamora Streets Batangas City (043) ; (043) (fax) Lemery UCPB Building, Ilustre Avenue corner Gen. Luna Street Lemery, Batangas (043) ; (043) (fax) Lipa - Big Ben Big Ben Commercial Building Ayala Highway, Lipa City (043) ; (043) (fax) bigben-lipa@ucpb.com Lipa Recto Wood Heights Building C.M. Recto Avenue, Lipa City (043) ; (043) (fax) lipa-recto@ucpb.com Sto. Tomas NDN Building, 34 JP Laurel Highway Barangay San Roque Sto. Tomas, Batangas (043) (043) (fax) stotomas@ucpb.com Tanauan P&G Commercial Complex JP Laurel Highway, Tanauan City (043) to 02 (043) (fax) tanauan@ucpb.com CAVITE Dasmariñas Toledo Building, 2-A Sampaloc 1 Aguinaldo Highway, Damariñas Cavite (046) to 57 (046) (fax) dasmarinas@ucpb.com Imus Maliksi Building,Tanzang Luma Aguinaldo Highway, Imus, Cavite (046) ; (02) (fax) imus@ucpb.com Molino Solagrande Center Molino, Bacoor, Cavite (046) ; (046) (fax) molino@ucpb.com Rosario UCPB Building, Gen. Trias Drive Rosario, Cavite (046) to 14 (046) rosario@ucpb.com LAGUNA Biñan UCPB Building Biñan Business Center National Highway, Platero Biñan, Laguna (049) ; (02) (fax) binan@ucpb.com Calamba Lazaro and Borres Building National Road, Crossing Calamba, Laguna (049) ; (049) (fax) calamba@ucpb.com Laguna UCPB Building Km. 32 Old National Highway San Pedro, Laguna (02) ; (02) (fax) laguna@ucpb.com San Pablo UCPB Building, Rizal Avenue corner P. Alcantara Street San Pablo City (049) ; (049) (fax) sanpablo@ucpb.com Sta. Cruz UCPB Building, P. Guevarra and P. Burgos Streets Sta. Cruz, Laguna (049) ; (049) (fax) stacruz@ucpb.com Sta. Rosa Phase 2 A, Block 5, Lot 3B Santa Rosa Estates Commercial Sta. Rosa Tagaytay Road Sta. Rosa, Laguna (049) to 52 (049) (fax) starosa@ucpb.com QUEZON Gumaca Dalisay Building, Antonio Luna and Andres Bonifacio Streets Gumaca, Quezon (042) ; (042) (fax) gumaca@ucpb.com Lucena Centro Quezon Avenue corner San Fernando Street Lucena City (042) ; (042) (fax) centro-lucena@ucpb.com Lucena Guinto UCPB Building, Quezon Avenue corner Leon Guinto Street Lucena City (042) ; (042) (fax) lucena@ucpb.com MINDORO Calapan Baniway Building, J.P. Rizal Street Barangay San Vicente Calapan City, Oriental Mindoro (043) ; (043) (fax) calapan@ucpb.com San Jose Lopez Jaena Street San Jose, Occidental Mindoro (043) (043) (fax) sanjose@ucpb.com ALBAY Legaspi UCPB Building, Quezon Avenue Legaspi City (052) ; (052) (fax) legaspi@ucpb.com CAMARINES NORTE/ CAMARINES SUR Daet UCPB Building, F. Pimentel Street Daet, Camarines Norte (054) ; (02) (02) (fax) daet@ucpb.com

198 196 UCPB 2015 Annual Report Branches and Subsidiaries Naga UCPB Building Evangelista Street, Naga City Camarines Sur (054) (054) (telefax) BICOL Masbate UCPB Building, Quezon Avenue corner Rosero Stairway, Masbate (056) ; (056) (fax) Sorsogon PJJR Building, corner Magsaysay and Garcia Streets, Barangay Salog, Sorsogon City (056) ; (056) (telefax) VISAYAS WESTERN VISAYAS AKLAN Kalibo Kalibo, UCPB Building Martelino Street, Kalibo, Aklan (036) ; (036) (fax) CAPIZ Roxas Gaisano Building Arnaldo Boulevard, Roxas City, Capiz (036) ; (036) (fax) ILOILO Iznart UCPB Building, Iznart Street Iloilo City (033) ; (033) (fax) Jaro UCPB Building Rizal Avenue and Libertad Street Jaro, Iloilo City (033) ; (033) (fax) Mabini J&B Building, Mabini Street Iloilo City (033) ; (033) (fax) BACOLOD Lacson-Galo UCPB Building, Lacson corner Galo Street, Bacolod City (034) to 25 (034) (fax) Libertad UCPB Building, P. Hernaez and Doña Juliana Streets, Bacolod City (034) ; (034) (fax) North Drive Northpoint Building North Drive, Bacolod City (034) to 72 (034) (fax) San Juan UCPB Building, San Juan Street corner Luzuriaga Street, Bacolod City (034) ; (034) (fax) CENTRAL VISAYAS BOHOL Tagbilaran UCPB Building C.P. Garcia Avenue, Tagbilaran City (038) ; (038) (fax) CEBU Banilad TPE Building Banilad Road, Cebu City (032) ; (032) (fax) Carbon UCPB Building Manalili and Progreso Streets Cebu City (032) ; (032) (fax) F. Ramos Yap Building, Ramos Street Barangay Cogon, Cebu City (032) ; (032) (fax) Jones Avenue UCPB Building, Osmeña Boulevard Cebu City (032) to 53 (032) (fax) Mabolo AMV Bros. Building Almendras and F. Cabahug Streets Mabolo, Cebu City (032) ; (032) (fax) Mandaue UCPB Building, National Highway Mandaue, Cebu City (032) to 96 (032) (fax) Mango Avenue Gen. Maxilom Avenue Cebu City (032) ; (032) (fax) SM City Cebu Lower Ground Floor SM City Cebu, Reclamation Area Cebu City (032) to 72 (032) (fax) DUMAGUETE Dumaguete UCPB Building Real and San Jose Streets Dumaguete City (035) ; (035) (fax) EASTERN VISAYAS LEYTE Tacloban UCPB Building, Zamora Street Tacloban City (053) ; (053) (fax)

199 Branches and Subsidiaries 197 SAMAR Calbayog UCPB Building Gomez and Nijiaga Streets Calbayog City, Samar (055) ; (055) (fax) MINDANAO ZAMBOANGA Pagadian Rizal Avenue, Sta. Lucia District Pagadian City (062) ; (062) (fax) Zamboanga UCPB Building, Rizal corner Corcuera Streets, Zamboanga City (062) ; (062) (telefax) NORTHERN MINDANAO CAGAYAN DE ORO Cogon Chee Building Osmeña and Lim Ket Kai Avenue Cagayan de Oro City (08822) ; (088) (fax) Velez Leonila Building, Apolinar Velez and Pacana Streets Cagayan de Oro City (088) ; (088) (fax) LANAO DEL NORTE Iligan UCPB Building Mabini & Aguinaldo Streets Iligan City (063) ; (063) (fax) MISAMIS OCCIDENTAL Oroquieta UCPB Building, Washington Street Oroquieta City (088) to 24 (088) (fax) Ozamiz UCPB Building, Rizal Avenue and Laurel Street, Ozamiz City (088) ; (088) (fax) DAVAO REGION Bajada DASI Building JP Laurel Avenue, Davao City (082) (082) (fax) Palma Gil Cocolife Building C.M. Recto Avenue corner Palma Gil Street, Davao City (082) to 02 (082) (fax) R. Magsaysay UCPB Building, R. Magsaysay corner Sales Streets, Davao City (082) ; (082) (fax) San Pedro UCPB Business Center San Pedro Street, Davao City (082) ; (082) (fax) SOCSKSARGEN COTABATO Cotabato UCPB Building, Magallanes corner Don Rufino Alonzo Street Cotabato City (064) ; (064) (fax) Kidapawan UCPB Building, Quezon Boulevard Kidapawan City, North Cotabato (064) ; (064) (fax) GENERAL SANTOS CITY General Santos UCPB Building, Santiago Boulevard & Magsaysay Avenue General Santos City (083) ; (083) (fax) CARAGA REGION BUTUAN Butuan Saint Joseph Parish Hall Ester Luna Street, Butuan City (085) ; (085) (fax) SURIGAO Surigao UCPB Building, San Nicolas and Diaz Streets, Surigao City (086) ; (086) (fax) CONSUMER FINANCE BUSINESS CENTERS HEAD OFFICE Ground Floor, UCPB Corporate Offices 7907 Makati Avenue, Makati City local or 07 (telefax) BACOLOD 2 nd Floor, UCPB Building Hernaez corner Dona Juliana Street Libertad, Bacolod City (034) (telefax) BATANGAS NDN Building, 34 JP Laurel Highway Barangay San Roque Sto. Tomas, Batangas (043) (telefax) CAGAYAN DE ORO Chee Building, Osmeña & Lim Ket Kai Avenue Cagayan de Oro City (088) (telefax) CEBU UCPB Building, Jones Avenue corner Visitacion Street Cebu City (032) (telefax) DAGUPAN UCPB Building, A.B. Fernandez Avenue corner Herrero Street, Dagupan City (075) (telefax) DAVAO UCPB Business Center San Pedro Street, Davao City (082) (082) (telefax)

200 198 UCPB 2015 Annual Report Branches and Subsidiaries ILOILO UCPB Building, Rizal Avenue and Libertad Street, Jaro, Iloilo City (033) (telefax) NAGA UCPB Building Evangelista Street, Naga City (054) (telefax) PAMPANGA UCPB Building Sto. Rosario corner Plaridel Streets Angeles City (045) (telefax) SUBSIDIARIES HEAD OFFICE 14 th Floor UCPB Corporate Offices Makati Avenue, Makati City Marketing (02) (02) (fax) Operations (02) LUZON ALAMINOS M. H. Del Pilar Street Poblacion, Alaminos, Laguna (049) telefax (049) usb-alaminos@ucpbsavings.com ATIMONAN Quezon Street corner C.O. Reyes Street, Barangay Zone II Atimonan, Quezon (042) telefax (0917) usb-atimonan@ucpbsavings.com BATAC MC Building Washington Street Barangay Ablan, Batac, Ilocos Norte (077) (077) (0917) usb-batac@ucpbsavings.com CALAUAG Cantre Street corner Bonifacio Street, Barangay 3 Calauag, Quezon (042) (042) usb-calauag@ucpbsavings.com CARAMOAN 41 Real Street, Tawog Caramoan, Camarines Sur (054) (02) / (0917) usb-caramoan@ucpbsavings.com KALAYAAN 106 Neptune Street Kalayaan Avenue corner Makati Avenue Makati City (02) (02) usb-kalayaan@ucpbsavings.com DSU - RIZAL AVENUE Unit Tan Han Chi Place 1558 Rizal Avenue corner Mayhaligue Street, Sta. Cruz, Manila (02) telefax (02) / (02) usb-dsu@ucpbsavings.com GOA Rizal Street corner Panday Street Barangay Poblacion, Goa Camarines Sur (054) telefax (054) usb-goa@ucpbsavings.com LINGAYEN corner Avenida Rizal and Artacho Streets, Lingayen, Pangasinan (075) telefax (075) usb-lingayen@ucpbsavings.com LIBMANAN Bichara Arcade, T. Dilanco Street Libod#1, Libmanan, Camarines Sur (054) telefax (054) usb-libmanan@ucpbsavings.com LUCBAN Rizal Avenue corner San Luis Street Barangay 8, Lucban, Quezon (042) telefax (042) /(042) usb-lucban@ucpbsavings.com MABALACAT Kimaesha Bldg. Dau McArthur Highway Mabalacat City (045) usb-mabalacat@ucpbsavings.com MALOLOS Paseo Del Congreso, Catmon Malolos, Bulacan (044) telefax (044) / (044) usb-malolos@ucpbsavings.com MORONG 600 Tomas Claudio Street San Pedro, Morong, Rizal (02) telefax (02) usb-morong@ucpbsavings.com NAGCARLAN E.A. Fernandez corner E. Lucido Streets, Poblacion Nagcarlan, Laguna (049) telefax (049) usb-nagcarlan@ucpbsavings.com PILI National Highway Barangay Old San Roque Pili, Camarines Sur (054) telefax (054) / (054) usb-pili@ucpbsavings.com PUERTO PRINCESA AICON Plaza, National Highway Bgy. San Pedro Puerto Princesa City, Palawan (048) telefax (0917) (048) usb-puerto@ucpbsavings.com SABLAYAN 420 P. Urieta Street Barangay Buenavista Sablayan, Occidental Mindoro (043) (0929) / (0917) usb-sablayan@ucpbsavings.com SAN JOSE DEL MONTE Dalisay Bldg., Halili Ave. Tungkong Mangga San Jose Del Monte, Bulacan (044) telefax (044) SAN MATEO G/F No. 44 General Luna Street Barangay Banaba, San Mateo, Rizal (02) telefax (02) /(02) usb-sanmateo@ucpbsavings.com

201 Branches and Subsidiaries 199 STA. CRUZ M.F. Tiaoqui Building Plaza Sta. Cruz, Sta. Cruz, Manila (02) telefax (02) (02) /(02) usb-stacruz@ucpbsavings.com STA. IGNACIA URI Bldg., Romulo Highway Poblacion West, Sta. Ignacia, Tarlac (045) telefax (045) usb-staignacia@ucpbsavings.com STA. ROSA UCPB Building National Highway Barangay Balibago, Sta Rosa Laguna (049) telefax (049) /(049) usb-starosa@ucpbsavings.com TANAY F.T Catapusan Street, Plaza Aldea Tanay, Rizal (02) telefax (02) usb-tanay@ucpbsavings.com TANZA 007 A. Soriano Highway Daang Amaya 1, Tanza, Cavite (02) telefax (046) /(046) usb-tanza@ucpbsavings.com TAYABAS 64 Quezon Avenue (Tayabas-Lucban Road) corner M. Ponce Street, Barangay San Diego Zone 1, City of Tayabas (042) telefax (042) usb-tayabas@ucpbsavings.com VISAYAS BACOLOD Ground Floor, San Antonio Park Square Mandalangan, Bacolod City Negros Occidental (034) to 86/(034) usb-bacolod@ucpbsavings.com BORONGAN E. Cinco Street Borongan City, Eastern Samar (055) / (02) (0917) usb-borongan@ucpbsavings.com ILOILO Angeles Arcade De Leon Street, Iloilo City (033) telefax (033) / (033) usb-iloilo@ucpbsavings.com LA CASTELLANA Feria corner Bonifacio Street Barangay Robles, La Castellana Negros Occidental (034) telefax (034) / (034) usb-la castellana@ucpbsavings.com NAGA CEBU E. Sayson Street, Central Poblacion Naga City, Cebu (032) telefax (032) / usb-naga@ucpbsavings.com NUMANCIA Estrella Building, National Highway corner Zamora Street, Poblacion Numancia, Aklan (036) telefax (036) usb-numancia@ucpbsavings.com SOGOD Osmeña Street, Barangay Zone IV Sogod, Southern Leyte (053) telefax (053) usb-sogod@ucpbsavings.com ESCALANTE New Libra Mart, Victoria Building North Avenue, Escalante City Negros Occidental (034) telefax (034) /(034) usb-escalante@ucpbsavings.com TUBURAN Tabotabo Street, Poblacion Tuburan, Cebu City (032) telefax (032) usb-tuburan@ucpbsavings.com MINDANAO ALORAN Jose Mutia Street, Barangay Ospital Aloran, Misamis Occidental (088) telefax (0918) usb-aloran@ucpbsavings.com BULUA G/F Forever Books Building, Zone 6 Bulua, Cagayan De Oro City Misamis Oriental (088) telefax (088) usb-bulua@ucpbsavings.com CAGAYAN DE ORO Capistrano-Cruz, Taal Streets Brgy 7, Cagayan de Oro City Misamis Oriental (088) telefax (088) Direct Line (088) usb-cdo@ucpbsavings.com DAVAO MK Central Bldg. J.P. Laurel Avenue, Bajada, Davao City (082) telefax (082) (082) /(082) usb-davao@ucpbsavings.com DIPOLOG Quezon Avenue, Miputak, Dipolog City Zamboanga Del Norte (065) telefax (065) usb-dipolog@ucpbsavings.com GLAN 182-C Enrique Yap Street Poblacion, Glan, Sarangani Province (083) telefax (083) usb-glan@ucpbsavings.com LAMITAN Quezon Boulevard Barangay Malakas, Lamitan, Basilan (062) usb-lamitan@ucpbsavings.com LAPASAN Market City, Agora Lapasan, Cagayan de Oro City (088) telefax (088) usb-lapasan@ucpbsavings.com TAGUM Consuelo Business Center Units 9-12 Pioneer Ave. Magugpo South, Tagum City (084) (084) / (084) usb-tagum@ucpbsavings.com LENDING OFFICES LUZON LEGAZPI ALBAY 2nd Floor UCPB Building Quezon Avenue, Orosite Legazpi City (052) usb-pili@ucpbsavings.com ILAGAN, ISABELA G/F Hipolito Building Calamagui 2nd, City of Ilagan, Isabela (078) telefax (078) CABANATUAN Mayapyap Sur, Maharlika Highway Cabanatuan City (044)

202 200 UCPB 2015 ANNUAL Annual Report REPORT CALAPAN Ground Floor Halcon Heights Building Dama de Noche Street, Lumang Bayan Calapan City, Oriental Mindoro PAMPANGA McArthur Highway, Barangay Sindalan San Fernando, Pampanga (045) BALANGA Stall 1 Sanchez Commercial Stall Lot 2 Block 3 Remaville Subdivision Ibayo, Balanga City, Bataan (047) VISAYAS SINDANGAN Mabini Street, Barangay Poblacion Sindangan, Zamboanga del Norte (065) (0998) MALAYBALAY Unit 3 Saint Joseph Square Fortich Street, Barangay 3 Malaybalay City, Bukidnon SAN JOSE DE BUENAVISTA Ground Floor, LASP Building Gov. Fullion Street San Jose de Buenavista, Antique TACLOBAN Sto. Niño Street Tacloban City, Leyte (053) CALBAYOG Purok 4, Maharlika Highway Capoocan, Calbayog City (0917) (0936) MINDANAO HEAD OFFICE 7 th Floor, UCPB Corporate Offices 7907 Makati Avenue, Makati City Sales and Marketing (02) ; to 79 Operations (02) to 71 Trading Floor (02) to 37 LAGUINDINGAN Daroy Street, Barangay Purok 2 Laguindingan, Misamis Oriental (088) ZAMBOANGA CITY UCPB Building Rizal and Corcuera Street Zamboanga City (062) BUTUAN CITY Door G, 2/F Oro Cam Building J.C. Aquino Avenue corner M. Carlo Street, Silongan Butuan City, Agusan Del Norte (085)