United Coconut Planters Bank and Subsidiaries. Financial Statements December 31, 2010 and and. Independent Auditors Report

Transcription

1 United Coconut Planters Bank and Subsidiaries Financial Statements December 31, 2010 and 2009 and Independent Auditors Report SyCip Gorres Velayo & Co.

2 SyCip Gorres Velayo & Co Ayala Avenue 1226 Makati City Philippines Phone: (632) Fax: (632) BOA/PRC Reg. No SEC Accreditation No FR-2 INDEPENDENT AUDITORS REPORT The Stockholders and the Board of Directors United Coconut Planters Bank and Subsidiaries Report on the Financial Statements We have audited the accompanying consolidated financial statements of United Coconut Planters Bank and Subsidiaries (the Group) and the parent company financial statements of United Coconut Planters Bank (the Bank or the ), which comprise the statements of financial position as at December 31, 2010 and 2009, and the statements of income, statements of comprehensive income, statements of changes in equity and statements of cash flows for the years then ended, and a summary of significant accounting policies and other explanatory information. Management s Responsibility for the Financial Statements The Group s management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the Philippines for banks (PGAAP for banks) as described in Note 2 to the financial statements, 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 audits. We conducted our audits 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 qualified audit opinion. A member firm of Ernst & Young Global Limited

3 - 2 - Basis for Qualified Opinion As discussed in Note 8 to the financial statements, the Bank has not determined the amount of interest income that should be accreted under the effective interest method for certain impaired loan accounts and its impact on the determination of required allowance for credit losses under PGAAP for banks. In addition, as discussed in Note 11, the Bank has not determined the effect of accumulated depreciation that should have been considered in the determination of the gain or loss on sale or disposal of certain investment properties in 2010 and As such, we were unable to obtain sufficient audit evidence on the propriety of interest income that should have been accreted on certain impaired loan accounts and of the gain or loss on sale of certain investment properties that should have been recognized as at and for the years ended December 31, 2010 and 2009, nor were we able to satisfy ourselves by other audit procedures. As discussed in Note 1 to the financial statements, the 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 was approved by the Bangko Sentral ng Pilipinas (BSP) on January 10, On May 15, 2008, PDIC and the Monetary Board of the BSP, in its Resolution No. 590, approved the amended Rehabilitation Plan of the Bank with the following concessions: (a) issuance of P=12.0 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. On February 26, 2009, the Monetary Board of the BSP, in its Resolution No. 345, approved to defer the start of the staggered booking of the unbooked valuation reserves and deferred charges to January 1, 2009 and exempt the Bank from sanctions that may be imposed for its non-compliance with the 10.0% capital adequacy ratio and all the capital-based regulatory ratios for the year 2008 until such time that the Bank s amended Rehabilitation Plan is fully implemented. Pursuant to the amended Rehabilitation Plan as at December 31, 2008, the Bank did not book credit and impairment losses on available-for-sale investments, loans and receivables, investment properties and other assets totaling P=13.4 billion, and deferred the recognition of losses on sale and dacion en pago settlement totaling P=15.7 billion. These P=29.1 billion unbooked valuation reserves and deferred losses will be booked by the Bank on a staggered basis starting in As discussed in Notes 1, 12 and 13, the Bank recognized P=291.1 million and P=259.7 million of the unbooked valuation reserves and deferred losses in 2010 and 2009, respectively, by a charge to surplus (deficit). The unbooked valuation reserves and deferred losses referred to in the preceding paragraph were determined based on BSP guidelines which differ in some respects from PGAAP for banks. As discussed in Notes 12 and 13 to the financial statements, under PGAAP for banks, as at December 31, 2010 and 2009, additional credit and impairment losses on available-for-sale investments, loans and receivables, investment properties and other assets amounting to P=5.6 billion and P=6.1 billion, respectively, and deferred losses on sale and dacion en pago settlement amounting to P=15.5 billion and P=15.2 billion, respectively, should have been charged against operations in the years the losses were incurred.

4 - 3 - As discussed in Note 11 to the financial statements, the Bank did not recognize the related accumulated depreciation on certain investment properties amounting to P=3.0 billion as at December 31, 2010 and PGAAP for banks requires that depreciation expense be recognized on depreciable investment properties. As discussed in Note 23 to the financial statements, in 2003, PDIC granted financial assistance to the Bank aggregating to P=12.0 billion payable in 2013 (the PDIC loan). When the Bank transitioned to PGAAP for banks in 2005, the initial measurement of the PDIC loan was revisited and adjusted to its fair value thereby recognizing a Day 1 gain of P=6.7 billion as a credit to surplus (deficit). On March 31, 2009, the Bank s PDIC loan was converted into Interim Tier 1 Capital Notes (the Capital Notes). At the time of conversion, the carrying amount of the liability amounted to P=8.1 billion, net of unamortized Day 1 gain of P=3.9 bilion. Consequently, the Capital Notes was recognized by the Bank at P=8.1 billion. However, in 2010, the Bank restated its prior year financial statements to recognize the Capital Notes at its face amount of P12.0 billion consistent with the terms and conditions of the Capital Notes as discussed in Notes 1 and 23. The P=3.9 billion unamortized Day 1 gain was charged to surplus (deficit). Under PGAAP for banks, the Capital Notes should have been measured at the carrying value of the liability converted instead of the liability s face amount. Had the Bank booked (a) the losses discussed in the eighth paragraph in the years these were incurred and (b) the depreciation on certain investment properties discussed in the ninth paragraph, deficit would have increased, and equity and total assets would have decreased by P=24.1 billion and P=24.4 billion as at December 31, 2010 and 2009, respectively, inclusive of the decrease in net income in 2010 and 2009 of P=56.0 million and P=842.5 million, respectively. The Bank did not recognize the losses since it believes that the total unbooked valuation reserves and deferred losses referred to in the seventh paragraph of P=28.6 billion and P=28.8 billion as at December 31, 2010 and 2009, respectively, that will be recognized on a staggered basis is sufficient to cover the financial impact of the unbooked adjustments for losses. Moreover, as discussed in the tenth paragraph, had the Bank recognized the Capital Notes based on the carrying amount of the converted PDIC loan and not based on its face amount, deficit as at December 31, 2010 and 2009 would have decreased by P=3.9 billion. Qualified Opinion In our opinion, except for the possible effects and effects of the matters described in the Basis for Qualified Opinion paragraphs, the financial statements present fairly, in all material respects, the financial position of the Group and of the as at December 31, 2010 and 2009, and their financial performance and their cash flows for the years then ended in accordance with PGAAP for banks as described in Note 2 to the financial statements. Emphasis of Matter The financial statements have been prepared on a going concern basis. The Bank s losses prior to 2005, including the losses not recognized by the Bank as discussed in the Basis for Qualified Opinion paragraphs, brought the Bank s capital below the required minimum capital requirement for a universal bank. As discussed in Note 1 to the financial statements, the Bank s management has taken active steps in ensuring the continued liquidity of the Bank, and implemented its capital build-up plan pursuant to the Financial Assistance Agreement with PDIC and the memorandum of agreement (MOA) that was signed with the Republic of the Philippines, PDIC and the Presidential Commission

5 - 4 - on Good Government (PCGG) on July 25, As discussed fully in Note 1, the terms and conditions of the MOA were implemented in March The Bank has also received the P=30.0 billion deposits of the National Government. As discussed in Note 23 to the financial statements, a substantial portion of the outstanding shares of the Bank remains sequestered by the PCGG. In addition, as discussed in Notes 10 and 27, the Coconut Industry Investment Fund Companies have substantial investments in 14 Holding Companies whose funds were invested in San Miguel Corporation (SMC) shares that were sequestered by the PCGG in May The status of the related cases is discussed in Note 23 for the Bank shares and Note 27 for the SMC shares. The impact of these matters on the financial statements cannot be determined at this time. Our opinion is not qualified in respect of the foregoing matters. Report on the Supplementary Information Required Under Revenue Regulations No Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplementary information on taxes and licenses in Note 32 to the financial statements is presented for purposes of filing with the Bureau of Internal Revenue and is not a required part of the basic financial statements. Such information is the responsibility of the management of the United Coconut Planters Bank. The information has been subjected to the auditing procedures applied in our audit of the basic financial statements. In our opinion, the information is fairly stated in all material respects in relation to the basic financial statements taken as a whole. SYCIP GORRES VELAYO & CO. Josephine Adrienne A. Abarca Partner CPA Certificate No SEC Accreditation No AR-1 Tax Identification No BIR Accreditation No , June 1, 2009, Valid until May 31, 2012 PTR No , January 3, 2011, Makati City April 28, 2011

6 UNITED COCONUT PLANTERS BANK AND SUBSIDIARIES STATEMENTS OF FINANCIAL POSITION ASSETS As of December Cash and Other Cash Items (Note 14) P=5,080,842 P=5,140,215 P=4,934,052 P=4,891,510 Due from Bangko Sentral ng Pilipinas (Note 14) 22,601,760 13,584,792 22,480,433 13,461,441 Due from Other Banks 2,154,600 2,884,253 1,959,230 2,768,396 Interbank Loans Receivable and Securities Purchased Under Resale Agreements (Note 6) 1,354,696 7,586,000 1,070,696 7,125,000 Financial Assets at Fair Value Through Profit or Loss (Note 7) 1,816,740 1,090,684 1,756,577 1,030,239 Available-for-Sale Investments (Note 7) 14,501,586 9,112,318 14,355,390 8,917,634 Held-to-Maturity Investments (Note 7) 34,020,203 34,044,549 33,876,053 33,869,460 Loans and Receivables (Notes 8 and 26) 61,988,567 51,858,715 56,239,693 47,218,284 Property and Equipment (Note 9) 1,766,560 1,424,805 1,680,677 1,344,194 Investments in Subsidiaries, Associates and Joint Venture (Note 10) 6,955,249 6,302,280 3,913,415 3,903,415 Investment Properties (Note 11) 9,212,833 9,831,447 8,977,897 9,603,549 Deferred Tax Assets (Note 22) 48,385 25,597 Intangible and Other Assets (Note 12) 22,280,720 19,920,006 18,955,529 16,908,241 P=183,782,741 P=162,805,661 P=170,199,642 P=151,041,363 LIABILITIES AND EQUITY LIABILITIES Deposit Liabilities (Notes 14 and 26) Demand P=8,779,761 P=7,949,172 P=8,702,472 P=7,906,463 Savings 93,372,107 79,395,810 91,171,412 77,349,850 Time 47,217,436 44,518,013 45,574,723 43,260,127 Long Term Negotiable Certificate of Deposits 4,466,765 4,466, ,836, ,862, ,915, ,516,440 Bills Payable and Securities Sold Under Repurchase Agreements (Note 15) 7,226,095 6,034,826 6,999,942 5,927,198 Accrued Taxes, Interest and Other Expenses (Note 16) 1,216,993 3,596,124 1,176,913 3,553,854 Income Tax Payable 38, ,273 22, ,367 Deferred Tax Liabilities (Note 22) 67,941 72,916 34,791 49,098 Other Liabilities (Note 17) 6,702,360 8,593,343 6,191,491 8,198, ,087, ,357, ,340, ,412,366 EQUITY Equity Attributable to Equity Holders of the Common stock (Note 23) 1,484,843 1,484,843 1,484,843 1,484,843 Capital notes (Notes 1 and 23) 12,000,000 12,000,000 12,000,000 12,000,000 Surplus reserves (Note 24) 896, , , ,483 Surplus (Deficit) (Notes 13 and 23) 191,024 (1,960,546) (8,572,808) (9,720,160) Net unrealized gain (loss) on available-for-sale investments (Note 7) 139,896 14, ,768 (3,913) Equity in net unrealized gain (loss) on available-forsale investments of associates (Note 10) 168 (66) Translation adjustment (65,439) (28,256) (65,439) (28,256) (Forward)

7 - 2 - As of December Equity in translation adjustment of associates (Note 10) P=2,643 P=2,971 P= P= 14,649,618 12,409,834 5,858,847 4,628,997 Non-controlling Interest 45,482 38,350 14,695,100 12,448,184 5,858,847 4,628,997 P=183,782,741 P=162,805,661 P=170,199,642 P=151,041,363 See accompanying Notes to Financial Statements.

8 UNITED COCONUT PLANTERS BANK AND SUBSIDIARIES STATEMENTS OF INCOME Years Ended December INTEREST INCOME ON Loans and other receivables (Notes 8 and 26) P=4,912,796 P=4,080,595 P=4,164,798 P=3,465,519 Trading and investment securities (Note 7) 3,246,315 2,842,973 3,211,426 2,800,201 Due from BSP and other banks 479, , , ,141 Interbank loans receivable and securities purchased under resale agreements (Note 6) 144, , ,848 95,827 8,784,011 7,468,092 7,980,276 6,791,688 INTEREST AND FINANCE CHARGES ON Deposit liabilities (Notes 14 and 26) 2,452,766 2,711,861 2,378,680 2,659,781 Bills payable (Note 15) 286, , , ,358 2,738,963 3,185,965 2,613,225 3,124,139 NET INTEREST INCOME 6,045,048 4,282,127 5,367,051 3,667,549 Trading and securities gain - net (Notes 7 and 26) 1,091, ,538 1,060, ,747 Service charges, fees and commissions 732, , , ,011 Foreign exchange gain - net 191, , , ,608 Income from trust operation 83,625 63,332 83,366 63,332 Miscellaneous income (Note 20) 311, , , ,271 TOTAL OPERATING INCOME 8,455,098 6,083,209 7,545,818 5,351,518 Compensation and fringe benefits (Notes 25 and 26) 1,496,217 1,470,969 1,335,823 1,312,878 Provision for credit and impairment losses (Note 13) 1,301, ,334 1,250, ,911 Taxes and licenses (Note 22) 672, , , ,239 Occupancy expense (Note 19) 611, , , ,560 Depreciation and amortization (Note 11) 421, , , ,509 Insurance 335, , , ,971 Security, clerical and messengerial 224, , , ,122 Litigation and assets acquired 168, , , ,132 Loss (gain) on sale of acquired assets (67,924) (54,538) (13,994) 6,602 Miscellaneous expense (Note 21) 746, , , ,302 TOTAL OPERATING EXPENSES 5,909,235 4,651,026 5,451,961 4,197,226 INCOME BEFORE SHARE IN NET INCOME OF ASSOCIATES 2,545,863 1,432,183 2,093,857 1,154,292 SHARE IN NET INCOME OF ASSOCIATES (Note 10) 653,063 2,170,083 DILUTION LOSS (Note 10) (1,229,952) INCOME BEFORE INCOME TAX 3,198,926 2,372,314 2,093,857 1,154,292 PROVISION FOR INCOME TAX (Note 22) 749, , , ,815 NET INCOME P=2,449,719 P=1,658,341 P=1,438,425 P=564,477 Attributable to: Equity holders of the P=2,442,643 P=1,654,182 Non-controlling Interest 7,076 4,159 P=2,449,719 P=1,658,341 See accompanying Notes to Financial Statements.

9 UNITED COCONUT PLANTERS BANK AND SUBSIDIARIES STATEMENTS OF COMPREHENSIVE INCOME Years Ended December Net Income P=2,449,719 P=1,658,341 P=1,438,425 P=564,477 Other Comprehensive Income (Loss): Net unrealized gain on available-for-sale investments (Note 7) 125, , , ,375 Equity in net unrealized gain (loss) on available-forsale investments of associates (Note 10) 234 (47) Translation adjustment (37,183) (49,828) (37,183) (49,828) Equity in translation adjustment of associates (Note 10) (328) (295,391) Equity in revaluation increment of associates (680) Other Comprehensive Income (Loss), net of tax 88,270 (64,284) 82, ,547 Total Comprehensive Income P=2,537,989 P=1,594,057 P=1,520,923 P=787,024 Total Comprehensive Income attributable to: Equity holders of the P=2,530,857 P=1,589,999 Non-controlling Interest 7,132 4,058 P=2,537,989 P=1,594,057 See accompanying Notes to Financial Statements.

10 UNITED COCONUT PLANTERS BANK AND SUBSIDIARIES STATEMENTS OF CHANGES IN EQUITY Common Stock (Note 23) Preferred Capital Stock Notes (Note 23) (Notes 1 and 23) Surplus Reserves (Note 24) Surplus (Deficit) (Note 13) Equity Attributable to Equity Holders of the Net Unrealized Gain (Loss) on Availablefor-Sale Investments (Note 7) Equity in Net Unrealized Gain (Loss) on Availablefor-Sale Investments of Associates (Note 10) Translation Adjustment Equity in Translation Adjustment of Associates (Note 10) Equity in Revaluation Increment of Associates (Note 10) Equity Adjustments Non-controlling Total Interest Total Equity Balance at January 1, 2010, as previously reported P=1,484,843 P= P=8,063,593 P=896,483 P=1,263,968 P=14,405 (P=66) (P=28,256) P=2,971 P= P=711,893 P=12,409,834 P=38,350 P=12,448,184 Restatement (Note 23) 3,936,407 (3,936,407) Reclassification 711,893 (711,893) Balance at January 1, 2010, as restated 1,484,843 12,000, ,483 (1,960,546) 14,405 (66) (28,256) 2,971 12,409,834 38,350 12,448,184 Amortization of unbooked valuation reserves and losses (Notes 1 and 13) (291,073) (291,073) (291,073) Total comprehensive income (loss) 2,442, , (37,183) (328) 2,530,857 7,132 2,537,989 Balance at December 31, 2010 P=1,484,843 P= P=12,000,000 P=896,483 P=191,024 P=139,896 P=168 (P=65,439) P=2,643 P= P= P=14,649,618 P=45,482 P=14,695,100 Balance at January 1, 2009 P=734,843 P=750,000 P= P=896,483 (P=130,485) (P=267,358) (P=19) P=21,572 P=298,362 P=680 P=711,893 P=3,015,971 P=37,441 P=3,053,412 Conversion to common stock 750,000 (750,000) Conversion to capital notes 8,063,593 8,063,593 8,063,593 Cash dividend (3,149) (3,149) Amortization of unbooked valuation reserves and losses (Notes 1 and 13) (259,729) (259,729) (259,729) Total comprehensive income (loss) 1,654, ,763 (47) (49,828) (295,391) (680) 1,589,999 4,058 1,594,057 Balance at December 31, 2009, as previously reported 1,484,843 8,063, ,483 1,263,968 14,405 (66) (28,256) 2, ,893 12,409,834 38,350 12,448,184 Restatement (Note 23) 3,936,407 (3,936,407) Reclassification 711,893 (711,893) Balance at December 31, 2009, as restated P=1,484,843 P= P=12,000,000 P=896,483 (P=1,960,546) P=14,405 (P=66) (P=28,256) P=2,971 P= P= P=12,409,834 P=38,350 P=12,448,184

11 - 2 - Common Stock (Note 23) Preferred Stock (Note 23) Capital Notes (Notes 1 and 23) Surplus Reserves (Note 24) Deficit (Note 13) Net Unrealized Gain (Loss) on Available-for-Sale Investments (Note 7) Translation Adjustment Total Equity Balance at January 1, 2010, as previously reported P=1,484,843 P= P=8,063,593 P=896,483 (P=5,783,753) (P=3,913) (P=28,256) P=4,628,997 Restatement (Note 23) 3,936,407 (3.936,407) Balance at January 1, 2010, as restated 1,484,843 12,000, ,483 (9,720,160) (3,913) (28,256) 4,628,997 Amortization of unbooked valuation reserves and losses (Notes 1 and 13) (291,073) (291,073) Total comprehensive income (loss) 1,438, ,681 (37,183) 1,520,923 Balance at December 31, 2010 P=1,484,843 P= P=12,000,000 P=896,483 (P=8,572,808) P=115,768 (P=65,439) P=5,858,847 Balance at January 1, 2009 P=734,843 P=750,000 P= P=896,483 (P=6,088,501) (P=276,288) P=21,572 (P=3,961,891) Conversion to common stock 750,000 (750,000) Conversion to capital notes 8,063,593 8,063,593 Amortization of unbooked valuation reserves and losses (Notes 1 and 13) (259,729) (259,729) Total comprehensive income (loss) 564, ,375 (49,828) 787,024 Balance at December 31, 2009, as previously reported 1,484,843 8,063, ,483 (5,783,753) (3,913) (28,256) 4,628,997 Restatement (Note 23) 3,936,407 (3.936,407) Balance at December 31, 2009, as restated P=1,484,843 P= P=12,000,000 P=896,483 (P=9,720,160) (P=3,913) (P=28,256) P=4,628,997 See accompanying Notes to Financial Statements.

12 UNITED COCONUT PLANTERS BANK AND SUBSIDIARIES STATEMENTS OF CASH FLOWS Years Ended December CASH FLOWS FROM OPERATING ACTIVITIES Income before income tax P=3,198,926 P=2,372,314 P=2,093,857 P=1,154,292 Adjustments for: Provision for credit and impairment losses (Note 13) 1,301, ,334 1,250, ,911 Depreciation and amortization (Note 11) 421, , , ,509 Loss (gain) on sale of acquired assets (67,924) (54,538) (13,994) 6,602 Loss (gain) on foreclosure (Note 20) 18,353 (5,283) 18,353 (5,283) Unrealized gain on financial assets FVPL (5,661) (226,454) (6,830) (228,557) Trading gain on available-for-sale investments (Note 7) (653,099) (220,252) (639,532) (216,874) Share in net income of associates (Note 10) (653,063) (2,170,083) Dilution loss (Note 10) 1,229,952 Accretion of bills payable and unsecured subordinated debt (Note 15) 173, ,966 Gain from settlement of loans receivable (Note 10) (20,864) Changes in operating assets and liabilities: Decrease (increase) in the amounts of: Financial assets at fair value through profit or loss (720,394) (511,313) (719,509) (551,365) Loans and receivables (11,917,506) (10,310,717) (10,720,072) (8,226,039) Other assets (2,527,837) 133,112 (2,156,492) 29,068 Increase (decrease) in the amounts of: Deposit liabilities 17,506,309 36,086,570 16,932,168 35,001,656 Accrued taxes, interest and other expenses (2,379,131) 240,162 (2,376,941) 254,900 Other liabilities (1,824,494) 2,672,008 (2,006,919) 2,163,651 Net cash generated from operating activities 1,697,350 29,997,719 2,003,040 30,027,437 Income taxes paid (937,569) (476,399) (814,820) (417,514) Net cash provided by operating activities 759,781 29,521,320 1,188,220 29,609,923 CASH FLOWS FROM INVESTING ACTIVITIES Acquisitions of: Available-for-sale investments (54,454,681) (22,749,871) (53,878,875) (22,177,569) Held-to-maturity investments (523,582) (22,235,976) (523,582) (22,235,976) Property and equipment (Note 9) (899,423) (821,819) (865,227) (761,961) Software costs (Note 12) (101,031) (340,043) (100,811) (323,936) Proceeds from sale of: Available-for-sale investments 49,911,745 20,098,106 49,267,838 19,630,142 Property and equipment 244, , , ,392 Investments properties 890, , , ,146 Proceeds from maturity of HTM investments 547,928 67, ,989 10,310 Net cash used in investing activities (4,383,994) (25,081,027) (4,492,482) (25,058,452) CASH FLOWS FROM FINANCING ACTIVITIES Settlements of bills payable (170,387,159) (15,560,961) (170,242,943) (15,603,589) Availments of bills payable 171,578,428 18,925, ,315,687 18,925,845 Issuance of Long Term Negotiable Certificate of Deposits (Note 14) 4,466,765 4,466,765 Net cash provided by financing activities 5,658,034 3,364,884 5,539,509 3,322,256 (Forward)

13 - 2 - Years Ended December TRANSLATION ADJUSTMENT (P=37,183) (P=49,828) (P=37,183) (P=49,828) NET INCREASE IN CASH AND CASH EQUIVALENTS 1,996,638 7,755,349 2,198,064 7,823,899 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR Cash and other cash items 5,140,215 3,403,508 4,891,510 3,287,466 Due from Bangko Sentral ng Pilipinas 13,584,792 11,163,876 13,461,441 10,788,481 Due from other banks 2,884,253 2,259,480 2,768,396 2,129,454 Interbank loans receivable and Securities purchased under repurchasing agreements (Note 6) 7,586,000 4,613,047 7,125,000 4,217,047 29,195,260 21,439,911 28,246,347 20,422,448 CASH AND CASH EQUIVALENTS AT END OF YEAR Cash and other cash items 5,080,842 5,140,215 4,934,052 4,891,510 Due from Bangko Sentral ng Pilipinas 22,601,760 13,584,792 22,480,433 13,461,441 Due from other banks 2,154,600 2,884,253 1,959,230 2,768,396 Interbank loans receivable and Securities purchased under repurchasing agreements (Note 6) 1,354,696 7,586,000 1,070,696 7,125,000 P=31,191,898 P=29,195,260 P=30,444,411 P=28,246,347 OPERATIONAL CASH FLOWS FROM INTEREST Years Ended December Interest paid P=4,970,522 P=2,864,982 P=4,846,356 P=2,838,054 Interest received 8,875,818 6,746,677 8,057,611 6,093,568 See accompanying Notes to Financial Statements.

14 UNITED COCONUT PLANTERS BANK AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS 1. Corporate Information United Coconut Planters Bank (the Bank or the ) is a universal bank incorporated in the Philippines on May 10, The and its subsidiaries (the Group) are engaged in all aspects of financial services such as banking, financing, leasing, real estate and stock brokering. As a bank, the 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 Bank is licensed to enter into regular financial derivatives. The Bank was authorized to engage in trust operations in June 1963 and in foreign currency deposit operations in October At the end of 2010, the Bank has 184 branches and 242 automated teller machines, located nationwide. The Bank s registered address and main office is at UCPB Building, Makati Avenue, Makati City. As a banking institution, the Bank s operations are regulated and supervised by the Bangko Sentral ng Pilipinas (BSP). In this regard, the Bank is 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 Bank is subject to the provisions of the General Banking Law of 2000 (Republic Act No. 8791). Rehabilitation Plan On July 7, 2003, the 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 P=20.0 billion has three components: a. P=8.0 billion direct purchase of nonperforming loans; b. P=7.0 billion in Tier 2 capital with a cost to the Bank of 5.0% due in 2013 (referred to as Asset Pool A ); and c. P=5.0 billion purchase of nonperforming loans with buyback by 2013 (referred to as Asset Pool B ). On February 26, 2004, PDIC endorsed to the BSP for approval the Bank s 10-year Business/Rehabilitation Plan (the Plan). Part of the Plan is the Bank s business strategy that has the following elements: (1) separation of bad bank 1 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 (see Note 23). The BSP approved the 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 Bank is able to comply with the required 10.0% capital adequacy ratio, whichever comes earlier; and (b) staggered booking of required valuation reserves for 10 years. 1 Non-performing assets wherein the required valuation reserves were approved by the BSP for staggered booking are considered bad bank assets.

15 - 2 - Conversion of PDIC financial assistance to Interim Tier 1 Capital Notes The Monetary Board (MB), in its Resolution No. 590 dated May 15, 2008, decided to: 1. Approve the amended Ten-Year Rehabilitation/Business Plan ( ) of the Bank and grant to the Bank (the Issuer) the authority to issue P=12.0 billion Interim Tier 1 Capital Notes (the Capital Notes or Notes) to PDIC which will qualify as Interim Tier 1 capital (see Note 23), provided that: a. The Capital Notes to be issued meet the minimum features under Circular No. 595 dated January 11, 2008; and, b. UCPB s Articles of Incorporation shall be amended to: i. Increase its authorized capital of P=3.25 billion to an amount that will cover the amount of the Capital Notes; and ii. Remove the ownership limitation in the Bank, which is 1.0% of the issued and outstanding preferred and common shares, for a stockholder who is not a stockholder as of December 31, Grant to UCPB the following concessions: a. Authority to accept deposit from the National Government (NG), Local Government Units and Government-Owned and Controlled Corporations, with the ceiling of P=5.9 billion increased by the amount that the NG will deposit with the Bank. b. Consider the government securities (GS) purchased out of the P=30.0 billion deposit of the NG as alternative/eligible compliance with the liquidity reserves and liquidity floor requirement; c. Stagger the booking of the unbooked valuation reserves and deferred charges aggregating to P=27.9 billion consistent with the Bank s approved 10-Year Business/Rehabilitation Plan: Provided, that subsequent valuation reserves to be required in excess of the P=27.9 billion shall be immediately booked and no dividend shall be declared while the concession is in effect; d. Waiver of certain monetary penalties; and e. Continued access to the BSP Rediscounting Facility, subject to a rediscount ceiling of P=1.5 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 P=12.0 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 Bank executed a Memorandum of Agreement (MOA), for the strengthening of the 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 P=12.0 billion. In addition, the MOA provides for the maintenance by the ROP of at least P=25.0 billion but not to exceed P=30.0 billion of deposits in the Bank.

16 - 3 - On March 31, 2009, the 2003 FAA and the Subscription Agreement have been amended and signed, respectively, by the PDIC. On the same date, the Bank issued the Capital Notes, which has no maturity date and has the following features: 1. Dividend/Coupon Rate - Dividend/Coupon rates as follows: 2.0% from April 1, 2009 to March 31, 2011; 4.0% from April 1, 2011 to March 31, 2013; 8.0% from April 1, 2013 to March 31, 2015; 12.0% from April 1, 2015 to March 31, 2017 and; 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 the exercise of its discretion, the Issuer decides to declare and pay coupons. The Issuer shall, everytime 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. 2. 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 (5) years from the date of issuance of the Notes. However, the option granted to the Issuer may be exercised within five (5) 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. 3. 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. 4. Conversion Right - At any time, the Holder of the Notes shall have the right to convert the Notes, in whole or in part, to Special Preferred Shares of the Issuer which, in turn, shall be convertible into Common Shares. The Issuer shall ensure that its Articles of Incorporation and By-laws shall be amended to accommodate all the rights of the Holder under the Notes. The conversion right provided herein shall be superior to the redemption option of the Issuer. Accordingly, in the event the Issuer serves notice to the Holder of the exercise of a redemption option, the Holder shall have 45 days to notify the Issuer and the BSP in writing that instead of being repaid pursuant to the redemption, the Holder shall instead convert the Notes to Special Preferred Shares. 5. Conversion Price - The Notes shall be convertible to Special Preferred Shares or Common Shares with an aggregate par value of P=12.0 billion at the time of conversion.

17 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: i. Collect the principal of the Notes in the amount of P=12.0 billion and interest at the rate of 14.0%; and ii. 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 Insolvency of the Issuer clause with the following consequences: a) If the Issuer becomes insolvent, PDIC shall, within fifteen (15) 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. b) 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. 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 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 Bank s stockholders. The proposed amendments include: a) Reclassifying (i) 1,002,829,769 unissued common shares of the Bank and (ii) 750,000,000 unissued preferred shares of the Bank, all with a par value of P=1.0 per share, into 1,752,829,769 Special Preferred Shares; b) 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 c) Deletion of ownership limitation in the Bank, which is 1.0% of the issued and outstanding preferred and common shares, for a stockholder who is not a stockholder as of December 31, In March 2011, the Bank filed with the SEC the application for the amended Articles of Incorporation to address these proposed amendments.

18 - 5 - Staggered booking of required valuation reserves and deferred charges On February 26, 2009, the MB, in its Resolution No. 345, decided to: 1. Consider the year 2009 as the start of the 10-year rehabilitation period ( ) of the Bank instead of 2008 as contained in the Bank s Rehabilitation Plan approved by the MB under Resolution No. 590 dated May 15, 2008; 2. Exempt the Bank from sanctions that may be imposed for its non-compliance with the 10.0% Capital Adequacy Ratio (CAR) and all the capital-based regulatory ratios for the year 2008 until such time that the Bank s Rehabilitation Plan is fully implemented; and 3. Approve the following requests of the Bank: a. Reversal of all previous staggered bookings of unbooked valuation reserves and amortization of deferred losses, based on the Special Purpose Vehicle (SPV) formula that the Bank has been providing starting 2007 in accordance with the original rehabilitation program approved by the BSP on January 10, 2005 (the Bank s Surplus as of January 1, 2008 was restated for the effect of the amortization of valuation reserves); b. Deferment of any staggered booking or amortization of unbooked valuation reserves and deferred losses until the 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 losses following the concept of affordability per the latest approved business plan by the BSP; and c. Temporary relief from full compliance with the required 10.0% CAR as provided under Section 34 of Republic Act No (the General Banking Law of 2000) by reducing the Bank s CAR to 8.0% for a period of three years up to 2011 or until such time that the Bank is able to comply with the required 10.0% CAR, whichever comes first. On May 20, 2010, the MB, in its Resolution No. 697 confirmed the implementation of the Bank s approved amortization of unbooked valuation reserves and deferred losses as follows: 1. Any excess valuation reserves resulting from assets pertaining to the bad bank shall be allowed for re-allocation to another asset requiring additional valuation as long as these assets are part of the bad bank assets and within the P=29.1 billion approved for staggered booking; and, 2. Any actual losses from the sale of real and other properties acquired from the bad bank assets shall be booked as deferred losses provided the total losses to be deferred shall not exceed the unbooked valuation reserves for that property subject to the condition that the Bank shall submit quarterly monitoring report for the status of the bad bank assets and allocation of valuation reserves for each asset pool. As of December 31, 2008, the unbooked valuation reserves that the will recognize on a staggered basis starting January 2009, as allowed by the BSP, amounted to P=29.1 billion. This consists of the (a) P=27.9 billion unbooked valuation reserves and deferred charges allowed to be staggered in the MB Resolution No. 590 dated May 15, 2008, and (b) P=1.2 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 were

19 - 6 - determined based on the criteria set by the BSP which differs from accounting principles generally accepted in the Philippines for banks (PGAAP for banks) in certain respects. As of December 31, 2010 and 2009, the balance of unbooked valuation reserves and deferred charges amounted to P=28.6 billion and P=28.8 billion, respectively, net of the P=291.1 million and P=259.7 million amortization recognized in 2010 and 2009, respectively, which were added directly to negative surplus (see Note 13). As discussed in Notes 12 and 13, the P=29.1 billion valuation reserves and losses allowed by BSP to be deferred consist of P=13.4 billion impairment and credit losses on loans and receivables, AFS investments, investment properties and other assets, and P=15.7 billion losses on sale and dacion en pago settlement. 2. Summary of Significant Accounting Policies Basis of Preparation The accompanying financial statements have been prepared on a historical cost basis except for financial assets and liabilities at fair value through profit or loss (FVPL) and available-for-sale (AFS) investments that are measured at fair value. The financial statements are presented in Philippine peso, and all values are rounded to the nearest thousand pesos (P=000) except when otherwise indicated. The financial statements of the reflect the accounts maintained in the Regular Banking Unit (RBU) and Foreign Currency Deposit Unit (FCDU). The financial statements individually prepared for these units are combined after eliminating inter-unit accounts. The functional currency of RBU and FCDU is Philippine Peso and United States Dollar (USD), respectively. For financial reporting purposes, FCDU accounts and foreign currency-denominated accounts in the RBU are translated into their equivalents in Philippine peso (see accounting policy on Foreign Currency Translation). Each entity in the Group determines its own functional currency and items included in the financial statements of each entity are measured using that functional currency. The respective functional currencies of the subsidiaries are presented under Basis of Consolidation. Statement of Compliance The accompanying financial statements have been prepared in accordance with PGAAP for banks particularly the following, which are permitted by the BSP for prudential regulation and the SEC for financial reporting purposes: a. the s reclassification in 2008 of certain investments in ROP credit-linked notes (CLN) from AFS investments to loans and receivables without bifurcating the embedded derivatives (see Note 7); b. retroactive adjustment of dilution loss on the conversion of redeemable preferred shares to common shares of certain associates of the (see Note 10); and c. the presentation of the Capital Notes of the under the equity section of the statements of financial position (see Note 23), except for the following departures from PGAAP for banks: a. staggered booking of required credit and impairment losses on loans and receivables, AFS investments, investment properties and other assets, and losses on sale and dacion en pago settlement, which were allowed separately by the BSP (see Note 1);

20 - 7 - b. non-accretion of interest on certain impaired loans (see Note 8); c. non-recognition of depreciation on certain investment properties and its impact on the gain or loss on sale or disposal of such properties (see Note 11); and d. initial recognition of Interim Tier 1 Capital Notes at the face amount of the liability settled rather than at the liability s carrying amount at the time of settlement (see Note 23). Basis of Consolidation and Investments in Subsidiaries The consolidated financial statements of the Group are prepared for the same reporting year as the, using consistent accounting policies. The following are the wholly and majority-owned subsidiaries of the : Effective Percentage of Ownership Country of Incorporation Functional Currency Subsidiary Financial Markets: UCPB Leasing and Finance Corporation (ULFC) Philippines Philippine Peso UCPB Securities, Inc. (USI) Philippines Philippine Peso UCPB Savings Bank, Inc. (USB) Philippines Philippine Peso Real Estate: UCPB Properties, Inc. (UPI) Philippines Philippine Peso Balmoral Resources Corporation (BRC) Philippines Philippine Peso Green Homes Development Corporation (GHDC) Philippines Philippine Peso Subsidiaries are all entities over which the has the power to govern the financial and operating policies generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the controls another entity. All significant intra-group balances, transactions, income and expenses, and profits and losses resulting from intra-group transactions are eliminated in full. Subsidiaries are consolidated from the date on which control is transferred to the. Control is achieved when the has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. Consolidation of subsidiaries ceases when control is transferred out of the Group. The results of subsidiaries acquired or disposed of during the year are included in the consolidated statement of income from the date of acquisition up to the date of disposal, as appropriate. When a change in ownership interest in a subsidiary occur which result in loss of control over the subsidiary, the : derecognizes the assets (including goodwill) and liabilities of the subsidiary; derecognizes the carrying amount of any non-controlling interest; derecognizes the related other comprehensive income recorded in equity and recycle the same to profit or loss or surplus (deficit); recognizes the fair value of the consideration received; recognizes the fair value of any investment retained; and, recognizes any surplus or deficit in profit or loss. In the s separate financial statements, investments in subsidiaries are carried at cost, less accumulated impairment in value. Dividends earned are reported as dividend income when the right to receive the payment is established.

21 - 8 - Non-controlling Interests Non-controlling interests represent the portion of profit or loss and the net assets not owned directly or indirectly, by the Group and are presented separately in the consolidated statement of income, consolidated statement of comprehensive income and within equity in the consolidated statement of financial position, separately from equity attributable to the. Any losses applicable to the non-controlling interests are allocated against the interests of the noncontrolling interest even if this results in the non-controlling interests having a deficit balance. Acquisitions of non-controlling interests that does not result in a loss of control are accounted for as an equity transaction whereby the difference between the consideration and the fair value of the share of the net assets acquired is recognized as an equity transaction and attributed to the owners of the. Changes in Accounting Policies The accounting policies adopted are consistent with those of the previous financial year except for the adoption of the following new and amended Philippine Financial Reporting Standards (PFRS) and Philippine Interpretations which became effective on January 1, 2010: New standards and interpretations PFRS 3, Business Combinations (Revised) Philippine Accounting Standards (PAS) 27, and Separate Financial Statements (Amended) Philippine Interpretation of International Financial Reporting Interpretations Committee (IFRIC) 17, Distributions of Non-cash Assets to Owners Amendments to standards PFRS 2 Amendments, Share-based Payment: Group Cash-settled Share-based Payment Transactions PAS 39 Amendment, Financial Instruments: Recognition and Measurement - Eligible Hedged Items Improvements to PFRSs The omnibus amendments to PFRSs issued in 2008 and 2009 were issued primarily with a view of removing inconsistencies and clarifying wordings. There are separate transitional provisions for each standard. The adoption of the amendments did not have any impact in the accounting policies, financial position or performance of the Group. PFRS 2, Share-based Payment PFRS 5, Non-current Assets Held for Sale and Discontinued Operations PFRS 8, Operating Segments PAS 1, Presentation of Financial Statements PAS 7, Statement of Cash Flows PAS 17, Leases PAS 34, Interim Financial Reporting PAS 36, Impairment of Assets PAS 38, Intangible Assets PAS 39, Financial Instruments: Recognition and Measurement Philippine Interpretation IFRIC 9, Reassessment of Embedded Derivatives Philippine Interpretation IFRIC 16, Hedge of a Net Investment in a Foreign Operation