CARD Bank, Inc.

(A Microfinance-Oriented Rural Bank)

Financial Statements
December 31, 2015 and 2014

and

Independent Auditors’ Report

 SyCip Gorres Velayo & Co. Tel: (632) 891 0307 BOA/PRC Reg. No. 0001,
6760 Ayala Avenue Fax: (632) 819 0872 December 14, 2015, valid until December 31, 2018
1226 Makati City ey.com/ph SEC Accreditation No. 0012-FR-4 (Group A),
Philippines November 10, 2015, valid until November 9, 2018

INDEPENDENT AUDITORS’ REPORT

The Stockholders and the Board of Directors

CARD Bank, Inc. (A Microfinance-Oriented Rural Bank)

Report on the Financial Statements

We have audited the accompanying financial statements of CARD Bank, Inc. (A Microfinance-
Oriented Rural Bank), which comprise the statements of financial position as at December 31, 2015
and 2014, 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

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 and fair presentation 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 the 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.

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A member firm of Ernst & Young Global Limited
 -2-

Opinion

In our opinion, the financial statements present fairly, in all material respects, the financial position of
CARD Bank, Inc. (A Microfinance-Oriented Rural Bank) as at December 31, 2015 and 2014, and its
financial performance and its cash flows for the years then ended, in accordance with Philippine
Financial Reporting Standards.

Report on the Supplementary Information Required Under Revenue Regulations 15-2010

Our audits were conducted for the purpose of forming an opinion on the basic financial statements
taken as a whole. The supplementary information required under Revenue Regulations 15-2010 in
Note 25 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 CARD Bank, Inc. (A Microfinance-Oriented Rural 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.

Ray Francis C. Balagtas

Partner
CPA Certificate No. 108795
SEC Accreditation No. 1510-A (Group A),
October 1, 2015, valid until September 30, 2018
Tax Identification No. 216-950-288
BIR Accreditation No. 08-001998-107-2015,
March 4, 2015, valid until March 3, 2018
PTR No. 5321607, January 4, 2016, Makati City

March 19, 2016

*SGVFS017997*
A member firm of Ernst & Young Global Limited
CARD BANK, INC.
(A MICROFINANCE-ORIENTED RURAL BANK)
STATEMENTS OF FINANCIAL POSITION

December 31
2015 2014

ASSETS
Cash and other cash items P
=100,838,896 P65,451,150
=
Due from Bangko Sentral ng Pilipinas (Notes 6 and 13) 149,539,008 124,989,147
Due from other banks (Note 6) 1,158,855,488 587,745,810
Available-for-sale investments (Note 7) 136,508,213 139,523,981
Loans and receivables (Notes 8 and 22) 5,324,253,781 4,308,142,574
Held-to-maturity investments (Note 9) 238,220,396 258,865,664
Investment in an associate (Notes 10 and 22) 118,783,722 62,164,989
Property and equipment (Note 11) 519,858,626 420,163,724
Retirement asset (Note 19) 126,100,919 87,600,047
Deferred tax assets (Note 21) 46,027,575 42,462,832
Other assets (Note 12) 167,480,409 63,088,812
P
=8,086,467,033 =6,160,198,730
P

LIABILITIES AND EQUITY

Liabilities
Deposit liabilities (Notes 13 and 22)
Demand P
=152,278,885 =107,458,554
P
Savings 4,360,487,687 3,412,441,873
4,512,766,572 3,519,900,427
Bills payable (Note 14) 1,261,701,810 881,954,896
Income tax payable 106,109,509 61,983,762
Other liabilities (Notes 15 and 22) 439,805,859 266,546,634
P
=6,320,383,750 =4,730,385,719
P

Equity
Capital stock (Note 17)
Preferred stock 499,884,000 496,938,400
Common stock 492,286,800 470,438,900
992,170,800 967,377,300
Surplus 772,926,265 441,202,779
Remeasurement gains on retirement liabilities (Note 19) 9,997,169 18,869,940
Share in the associate’s other comprehensive
income (loss) (Note 10) (8,173,090) 1,568,984
Net unrealized gains (losses) on available
for-sale investments (Note 7) (837,861) 794,008
1,766,083,283 1,429,813,011
=8,086,467,033 =
P P6,160,198,730

See accompanying Notes to Financial Statements.

*SGVFS017997*
CARD BANK, INC.
(A MICROFINANCE-ORIENTED RURAL BANK)
STATEMENTS OF INCOME

Years Ended December 31

2015 2014
INTEREST INCOME ON
Loans and receivables (Note 8) =2,429,605,719 =
P P1,935,254,096
Investment securities (Notes 7 and 9) 16,417,695 16,864,075
Due from other banks (Note 6) 8,262,581 6,676,433
2,454,285,995 1,958,794,604
INTEREST EXPENSE ON
Deposit liabilities (Notes 13 and 22) 102,803,409 84,291,799
Bills payable (Note 14) 24,436,751 25,932,667
127,240,160 110,224,466
NET INTEREST INCOME 2,327,045,835 1,848,570,138
Miscellaneous (Note 18) 17,611,672 14,556,648
TOTAL OPERATING INCOME 2,344,657,507 1,863,126,786
OPERATING EXPENSES
Compensation and benefits (Notes 19 and 22) 694,381,592 623,545,744
Transportation and travel 135,783,941 124,932,531
Taxes and licenses 131,176,178 108,660,526
Occupancy (Notes 20 and 22) 79,803,354 56,324,882
Members training and development (Note 22) 79,212,352 100,512,897
Depreciation and amortization (Notes 11 and 12) 73,812,754 52,882,082
Stationery and office supplies 63,767,561 56,640,742
Information and technology (Note 22) 60,233,514 35,831,252
Provision for credit losses (Note 8) 52,507,667 38,525,203
Employee trainings (Note 22) 49,240,958 36,759,687
Security, messengerial and janitorial 43,450,444 37,248,041
Postage, telephone and cable 35,896,351 22,443,485
Power, light and water 23,629,521 19,587,898
Insurance 19,515,081 17,477,523
Management and other professional fees 17,581,814 13,172,918
Seminars and meetings (Note 22) 10,285,783 9,136,471
Repairs and maintenance 8,373,443 8,488,638
Program monitoring and evaluation 6,790,893 6,645,533
Miscellaneous (Notes 18 and 22) 61,587,470 44,861,375
1,647,030,671 1,413,677,428
INCOME BEFORE SHARE IN NET
INCOME OF THE ASSOCIATE 697,626,836 449,449,358
SHARE IN NET INCOME OF THE ASSOCIATE (Note 10) 36,760,807 13,121,813
INCOME BEFORE TAX 734,387,643 462,571,171
PROVISION FOR INCOME TAX (Note 21) 217,838,302 140,381,636
NET INCOME P
=516,549,341 P
=322,189,535

See accompanying Notes to Financial Statements.

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CARD BANK, INC.
(A MICROFINANCE-ORIENTED RURAL BANK)
STATEMENTS OF COMPREHENSIVE INCOME

Years Ended December 31

2015 2014

NET INCOME P
=516,549,341 P
=322,189,535

OTHER COMPREHENSIVE INCOME (LOSS)

Items that may not be classified to the statement of income:
Remeasurement gains (losses) on retirement
liabilities (Note 19) (12,675,386) 298,345,944
Income tax effect 3,802,615 (89,503,783)
(8,872,771) 208,842,161
Items that may be reclassified to the statement of income:
Unrealized gains (losses) on available-for-sale
investments (Note 7) (2,331,240) 1,134,297
Income tax effect 699,371 (340,289)
(1,631,869) 794,008
Share in the associate’s other comprehensive
income (loss) (Note 10) (9,742,074) 3,764,808
(11,373,943) 4,558,816

TOTAL COMPREHENSIVE INCOME P

=496,302,627 P
=535,590,512

See accompanying Notes to Financial Statements.

*SGVFS017997*
CARD BANK, INC.
(A MICROFINANCE-ORIENTED RURAL BANK)
STATEMENTS OF CHANGES IN EQUITY

Remeasurement Share in an Net Unrealized

Gains (Losses) on Associate’s Other Gain on
Preferred Common Retirement Comprehensive Available-for-sale
Stock Stock Surplus Liabilities Income (Loss) Investments
(Note 17) (Note 17) (Note 17) (Note 19) (Note 10) (Note 7) Total
Balance at January 1, 2015 P
=496,938,400 P
=470,438,900 P
=441,202,779 P
=18,869,940 P
=1,568,984 P
=794,008 P
=1,429,813,011
Total comprehensive income – – 516,549,341 (8,872,771) (9,742,074) (1,631,869) 496,302,627
Collection of subscription
receivable (Notes 17 and 23) 2,945,600 21,847,900 – – – – 24,793,500
Cash dividends (Note 17) – – (184,825,855) – – – (184,825,855)
Balance at December 31, 2015 P
=499,884,000 P
=492,286,800 P
=772,926,265 P
=9,997,169 (P
= 8,173,090) (P
= 837,861) P
=1,766,083,283

Balance at January 1, 2014 =

P420,929,800 =
P361,443,500 =
P398,895,728 (P
=189,972,221) (P
=2,195,824) P
=– 989,100,983
Total comprehensive income – – 322,189,535 208,842,161 3,764,808 794,008 535,590,512
Collection of subscription
receivable (Notes 17 and 23) 1,063,200 22,371,048 – – – – 23,434,248
Issuance of new shares 74,945,400 – – – – – 74,945,400
Stock dividends (Note 17) – 86,624,352 (86,624,352) – – – –
Cash dividends (Note 17) – – (193,258,132) – – – (193,258,132)
Balance at December 31, 2014 =
P496,938,400 =
P470,438,900 =
P441,202,779 =
P18,869,940 =
P1,568,984 =
P794,008 =
P1,429,813,011

See accompanying Notes to Financial Statements.

*SGVFS017997*
CARD BANK, INC.
(A MICROFINANCE-ORIENTED RURAL BANK)
STATEMENTS OF CASH FLOWS

Years Ended December 31

2015 2014

CASH FLOWS FROM OPERATING ACTIVITIES

Income before income tax = 734,387,643
P =462,571,171
P
Adjustments for:
Depreciation and amortization (Notes 11 and 12) 73,812,754 52,882,082
Provision for credit losses (Note 8) 52,507,667 38,525,203
Share in the net income of an associate (Note 10) (36,760,807) (13,121,813)
Amortization of premium on available-for-sale
investments (Note 7) 684,527 455,316
Amortization of premium on
held-to-maturity investments (Note 9) 2,668,767 5,535,382
Retirement expense (Note 19) 24,691,258 79,774,489
Gain on disposal of property and equipment (Note 18) (1,940,537) (683,562)
Net unrealized loss on foreign exchange transactions 183,224 104,500
Amortization of discount on bills payable (Note 14) 4,028,347 4,362,279
Operating income before changes in operating
assets and liabilities: 854,262,843 630,405,047
Increase in the amounts of:
Loans and receivables (1,068,618,874) (701,174,811)
Other assets (70,948,780) (15,372,980)
Increase in the amounts of:
Deposit liabilities 992,866,145 349,530,818
Other liabilities 121,582,245 29,516,294
Net cash generated from operations 829,143,579 292,904,368
Income taxes paid (172,775,311) (162,737,330)
Contribution to retirement fund (Note 19) (75,867,516) (75,867,516)
Net cash provided by operating activities 580,500,752 54,299,522

CASH FLOWS FROM INVESTING ACTIVITIES

Acquisitions of:
Property and equipment (Note 11) (173,167,008) (176,982,436)
Available-for-sale investments – (138,845,000)
Held-to-maturity investments (Note 9) (34,859,499) (48,233,415)
Software costs (Notes 12 and 23) (14,046,232) (981,000)
Dividends received from associate (Note 10) 10,400,000 –
Additional investment to/advances to an
associate (Notes 10, 12 and 23) (40,000,000) (20,000,000)
Proceeds from:
Maturity of held-to-maturity investments (Note 10) 52,836,000 106,150,758
Disposal of property and equipment 1,940,537 1,348,582
Net cash used in investing activities (P
=196,896,202) (P
=277,542,511)

(Forward)

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Years Ended December 31

2015 2014

CASH FLOWS FROM FINANCING ACTIVITIES

Availment of bills payable (Note 14) =1,310,718,567 ₱1,179,159,932
P
Settlement of bills payable (Note 14) (935,000,000) (725,000,000)
Proceeds from (Note 17):
Issuance of preferred stock – 74,945,400
Collection of subscriptions receivable on common stock 4,886,900 22,371,048
Collection of subscriptions receivable on preferred stock 2,826,800 1,063,200
Dividends paid (Note 17) (135,806,308) (187,400,258)
Net cash provided by financing activities 247,625,959 365,139,322

EFFECTS OF EXCHANGE RATE CHANGES IN

CASH AND CASH EQUIVALENTS (183,224) (104,500)

NET INCREASE IN CASH AND CASH EQUIVALENTS 631,047,285 141,791,833

CASH AND CASH EQUIVALENTS AT

BEGINNING OF YEAR
Cash and other cash items 65,451,150 46,793,184
Due from Bangko Sentral ng Pilipinas 124,989,147 73,783,424
Due from other banks 587,745,810 515,817,666
778,186,107 636,394,274

CASH AND CASH EQUIVALENTS AT END OF YEAR

Cash and other cash items 100,838,896 65,451,150
Due from Bangko Sentral ng Pilipinas 149,539,008 124,989,147
Due from other banks 1,158,855,488 587,745,810
P
=1,409,233,392 =778,186,107
P

OPERATIONAL CASH FLOWS FROM INTEREST AND DIVIDENDS

Years Ended December 31

2015 2014
Interest received =2,400,854,569 P
P =1,988,996,653
Interest paid 107,072,802 93,516,004
Dividend received 10,400,000 –

See accompanying Notes to Financial Statements.

*SGVFS017997*
CARD BANK, INC.
(A MICROFINANCE-ORIENTED RURAL BANK)
NOTES TO FINANCIAL STATEMENTS

1. Corporate Information

CARD Bank, Inc. (A Microfinance-Oriented Rural Bank) (the Bank) was incorporated in the
Philippines on July 1, 1997. The Bank was granted the authority to operate by the Bangko Sentral
ng Pilipinas (BSP) on August 25, 1997 and formally opened for business on September 1, 1997. It
is currently engaged in extending microcredit and rural credit to small farmers and tenants and to
deserving rural industries or enterprises. The Bank offers a wide range of products and services
such as deposit products, loans, and treasury that serve mainly to the consumer market.

On April 16, 2011, the Bank’s Board of Directors (BOD) and stockholders approved the
amendment to the Articles of Incorporation, adding to the Bank’s purpose the function to act as a
micro-insurance agent for the presentation, marketing, sale, and servicing of micro-insurance
products. This was subsequently approved by the BSP and the Insurance Commission on
February 10, 2012 and January 17, 2012, respectively. The Philippine Securities and Exchange
Commission (SEC) approved and issued the certificate of filing of amended Articles of
Incorporation on June 29, 2012.

The Bank is a member of Center for Agriculture and Rural Development (CARD) – Mutually
Reinforcing Institutions (MRI).

As at December 31, 2015 and 2014, the Bank is 29.6%-owned by CARD, Inc.

The Bank’s executive office is located at 20 M. L. Quezon Street, City Subdivision, San Pablo
City, Laguna. The head office is located at No. 58 P. Burgos, corner M. Paulino Street, San Pablo
City. As at December 31, 2015 and 2014, the Bank has 69 and 57 branches, respectively.

2. Summary of Significant Accounting Policies

Basis of Preparation
The accompanying financial statements have been prepared on a historical cost basis, except for
available-for-sale (AFS) investments which are measured at fair value. The financial statements
are presented in Philippine peso (P
=), which is the Bank’s functional currency. All values are
rounded to the nearest peso, unless otherwise indicated.

The accompanying financial statements of the Bank include the accounts maintained in the
Regular Banking Unit (RBU) and Foreign Currency Deposit Unit (FCDU). The functional
currency of the RBU and the FCDU is the 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 pesos (see accounting
policy on foreign currency transaction). The financial statements of these units are combined after
eliminating inter-unit accounts and transactions.

Statement of Compliance
The financial statements of the Bank have been prepared in compliance with Philippine Financial
Reporting Standards (PFRS).

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Presentation of Financial Statements

The Bank presents its statement of financial position broadly in order of liquidity. An analysis
regarding recovery (asset) or settlement (liability) within 12 months after the reporting date
(current) and more than 12 months after the reporting date (noncurrent) is presented in Note 16.

Changes in Accounting Policies and Disclosures

Except for these new and amended standards and interpretations which were adopted as at
January 1, 2015, the accounting policies adopted are consistent with those of the previous
financial year.

· Amendments to Philippine Accounting Standards (PAS) 19, Defined Benefit Plans:

Employee Contributions

· Annual Improvements 2010-2012 Cycle

· PFRS 2, Share-based Payment - Definition of Vesting Condition
· PFRS 3, Business Combinations - Accounting for Contingent Consideration in a Business
Combination
· PFRS 8, Operating Segments - Aggregation of Operating Segments and Reconciliation of
the Total of the Reportable Segments’ Assets to the Entity’s Assets
· PAS 16, Property, Plant and Equipment, and PAS 38, Intangible Assets - Revaluation
Method - Proportionate Restatement of Accumulated Depreciation and Amortization
· PAS 24, Related Party Disclosures - Key Management Personnel

· Annual Improvements 2011-2013 Cycle

· PFRS 3, Business Combinations - Scope Exceptions for Joint Arrangements
· PFRS 13, Fair Value Measurement - Portfolio Exception
· PAS 40, Investment Property

The aforementioned new and amended standards and interpretations did not have any impact on
the financial position or performance of the Bank.

Cash and Cash Equivalents

For purposes of reporting cash flows, cash and cash equivalents include cash and other cash items,
amounts due from Bangko Sentral ng Pilipinas (BSP) and other banks that are highly liquid,
readily convertible to known amounts of cash with original maturities of three months or less from
dates of placements and which are subject to insignificant risk of changes in value.

Fair Value Measurement

The Bank measures financial instruments, such as financial assets at fair value through profit or
loss (FVPL) and AFS investments, at fair value at each reporting date.

Fair value is the estimated price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement date. The fair value
measurement is based on the presumption that the transaction to sell the asset or transfer the
liability takes place either:

· in the principal market for the asset or liability, or

· in the absence of a principal market, in the most advantageous market for the asset or liability.

The principal or the most advantageous market must be accessible to the Bank.

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

A fair value measurement of a non-financial asset takes into account a market participant's ability
to generate economic benefits by using the asset in its highest and best use or by selling it to
another market participant that would use the asset in its highest and best use.

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

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

· Level 1 - Quoted (unadjusted) market prices in active markets for identical assets or liabilities
in the absence of a principal market, in the most advantageous market for the asset or liability
· Level 2 - Valuation techniques for which the lowest level input that is significant to the fair
value measurement is directly or indirectly observable
· Level 3 - Valuation techniques for which the lowest level input that is significant to the fair
value measurement is unobservable

For assets and liabilities that are recognized in the financial statements at fair value on a recurring
basis, the Bank determines whether transfers have occurred between levels in the hierarchy by
reassessing categorization (based on the lowest level input that is significant to the fair value
measurement as a whole) at each reporting date.

For the purpose of fair value disclosures, the Bank has determined classes of assets and liabilities
on the basis of the nature, characteristics and risks of the asset or liability and the level of the fair
value hierarchy (see Note 4).

Foreign Currency Translation

RBU
As at statement of financial position date, foreign currency-denominated monetary assets and
monetary liabilities of the RBU are translated in Philippine pesos based on the BSP closing rate
prevailing at end of the year and foreign currency-denominated income and expenses, based on the
spot rate at date of transactions. Foreign exchange differences arising from the restatement of
foreign currency-denominated assets and foreign currency-denominated liabilities in the RBU are
credited to or charged against the statement of income in the year in which the rates change.
Non-monetary items that are measured in terms of historical cost in a foreign currency are
translated using the exchange rates as at the dates of the initial transactions. Non-monetary items
measured at fair value in a foreign currency are translated using the exchange rates at the date
when the fair value was determined.

FCDU
As at the reporting position date, the FCDU’s balances are translated into the Bank’s presentation
currency, Philippine pesos, using BSP closing rate of exchange.

Exchange differences arising from translation are taken directly to as a separate component of
equity under ‘Translation adjustment’. Upon actual remittance of FCDU profits to RBU, the
deferred cumulative amount recognized in the statement of other comprehensive income (OCI) is
reclassified to profit or loss.

*SGVFS017997*
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Financial Instruments - Initial Recognition and Subsequent Measurement

Date of recognition
Regular way purchases or sales of financial assets that require delivery of the assets within the
time frame established by regulation or convention in the marketplace are recognized on
settlement date. Deposit liabilities and loan receivables are recognized when cash is received or
released to the borrowers, respectively, by the Bank.

Initial recognition of financial instruments

All financial assets are initially recognized at fair value. Except for financial instruments at
FVPL, the initial measurement of financial instruments includes transaction costs. Financial
assets are classified, at initial recognition, as financial assets at FVPL, AFS investments, held-to-
maturity (HTM) investments and loans and receivables. The classification of financial
instruments depends on the purpose for which the investments are acquired and whether they are
quoted in an active market. Financial liabilities are classified into financial liabilities at FVPL and
other financial liabilities at amortized cost. Management determines the classification of its
investments at initial recognition and, where allowed and appropriate, re-evaluates such
designation at every reporting date.

As at December 31, 2015 and 2014, the Bank has no outstanding financial instruments at FVPL.

‘Day 1’ difference
Where the transaction price in a non-active market is different from the fair value or from other
observable current market transactions in the same instrument or based on a valuation technique
whose variables include only data from observable market, the Bank recognizes the difference
between the transaction price and fair value (a ‘Day 1’ difference) in the statement of income
under ‘Miscellaneous’ unless it qualifies for recognition as some other type of asset. In cases
where the transaction price used is made of data which is not observable, the difference between
the transaction price and model value is only recognized in the statement of income when the
inputs become observable or when the instrument is derecognized. For each transaction, the Bank
determines the appropriate method of recognizing the ‘Day 1’ difference amount.

Embedded derivatives
Embedded derivatives are separated from their host contracts and carried at fair value when the
entire hybrid contracts (composed of both the host contract and the embedded derivative) are not
accounted for as financial assets at FVPL, when their economic risks and characteristics are not
closely related to those of their respective host contracts, and when a separate instrument with the
same terms as the embedded derivatives would meet the definition of a derivative. The Bank
assesses whether embedded derivatives are required to be separated from the host contract when
the Bank first becomes a party to the contract. Reassessment of embedded derivatives is only
done when there are changes in the contract that significantly modifies the contractual cash flows.

AFS investments
AFS investments are those which are designated as such or do not qualify to be classified as
designated at FVPL, HTM investments or loans and receivables. They are purchased and held
indefinitely, and may be sold in response to liquidity requirements or changes in market
conditions. The Bank’s AFS investments are composed of government debt securities.

*SGVFS017997*
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After initial measurement, AFS investments are subsequently measured at fair value. The
effective yield component of AFS debt securities is recognized in the statement of income under
‘Interest income’ account. The unrealized gains and losses arising from the fair valuation of AFS
investments are excluded, net of tax, from reported income and are reported as ‘Net unrealized
gains (losses) on AFS investments’ under ‘Other Comprehensive Income’.

When the security is disposed of, the cumulative gain or loss previously recognized in OCI is
recognized in the statement of income under ‘Miscellaneous’ account. Interest earned on holding
AFS debt securities are reported as ‘Interest income’ using the effective interest method. The
losses arising from impairment of AFS investments are recognized as ‘Provision for credit losses’
in the statement of income.

Loans and receivables

This accounting policy applies to ‘Due from BSP’, ‘Due from other banks’, ‘Loans and
receivables’ and refundable deposits under ‘Other assets’. These are non-derivative financial
assets with fixed or determinable payments and fixed maturities that are not quoted in an active
market. They are not entered into with the intention of immediate or short-term resale and are not
designated as ‘AFS investments’, ‘Financial assets at FVPL’ or ‘HTM investments’.

After initial measurement, ‘Loans and receivables’ are subsequently measured at cost
(or amortized cost using the effective interest method), less allowance for credit losses. Amortized
cost is calculated by taking into account any discount or premium on acquisition and fees and
costs that are an integral part of the effective interest rate (EIR). The amortization is included in
‘Interest income’ in the statement of income. The losses arising from impairment are recognized
in ‘Provision for credit losses’ in the statement of income.

HTM investments
HTM investments are quoted non-derivative financial assets with fixed or determinable payments
and fixed maturities for which the Bank’s management has the positive intention and ability to
hold to maturity. Where Bank sells more than an insignificant amount of HTM investments prior
to maturity (other than in specific circumstances), the entire category would be tainted and
reclassified as AFS investments. Furthermore, the Bank would be precluded from using the HTM
investment category for the following two years.

After initial measurement, these investments are subsequently measured at amortized cost using
the effective interest method, less any impairment in value. Amortized cost is calculated by taking
into account any discount or premium on acquisition and fees that are an integral part of the EIR.
The amortization is included in ‘Interest income’ in the statement of income. Gains and losses are
recognized in statement of income when the HTM investments are derecognized and impaired, as
well as through the amortization process. The losses arising from impairment of such investments
are recognized in the statement of income under ‘Provision for credit losses’.

Other financial liabilities at amortized cost

This category represents issued financial instruments or their components, which are not
designated at FVPL where the substance of the contractual arrangement results in the Bank having
an obligation either to deliver cash or another financial asset to the holder, or to satisfy the
obligation other than by the exchange of a fixed amount of cash or another financial asset for a
fixed number of own equity shares.

*SGVFS017997*
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The components of issued financial instruments that contain both liability and equity elements are
accounted for separately, with the equity component being assigned the residual amount after
deducting from the instrument as a whole the amount separately determined as the fair value of the
liability component on the date of issue.

After initial measurement, financial liabilities not qualified and not designated as FVPL, are
subsequently measured at amortized cost using the effective interest method. Amortized cost is
calculated by taking into account the impact of applying the effective interest method of
amortization for any related premium, discount and any directly attributable transaction costs.

When the Bank breaches a provision of a long-term loan arrangement on or before the end of the
reporting period with the effect that the liability becomes payable on demand, it classifies the
liability as current, even if the lender agreed, after the reporting period and before the
authorization of the financial statements for issue, not to demand payment as a consequence of the
breach. The Bank classifies the liability as current because, at the end of the reporting period, it
does not have an unconditional right to defer its settlement for at least twelve months after that
date.

These policies apply to liabilities classified under ‘Deposit liabilities’, ‘Bills payable’ or other
financial liabilities under ‘Other liabilities’ in the statement of financial position.

Classification of Financial Instruments between Debt and Equity

A financial instrument is classified as debt if it provides for a contractual obligation to:

· deliver cash or another financial asset to another entity; or

· exchange financial assets or financial liabilities with another entity under conditions that are
potentially unfavorable to the Bank; or
· satisfy the obligation other than by the exchange of a fixed amount of cash or another financial
asset for a fixed number of own equity shares.

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

Offsetting Financial Instruments

Financial assets and financial liabilities are offset and the net amount is reported in the statement
of financial position if there is a currently enforceable legal right to set off the recognized amounts
and there is intention to settle on a net basis, or to realize the asset and settle the liability
simultaneously. The Bank assesses that it has a currently enforceable right of offset if the right is
not contingent on a future event, and is legally enforceable in the normal course of business, event
of default, and event of insolvency or bankruptcy of the Bank and all of the counterparties.

Derecognition of Financial Assets and Liabilities

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

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

*SGVFS017997*
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· the Bank has transferred its rights to receive cash flows from the asset or has assumed an
obligation to pay the received cash flows in full without material delay to a third party under a
“pass-through” arrangement and either (a) the Bank has transferred substantially all the risks
and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks
and rewards of the asset, but has transferred the control of the asset.

Where the Bank has neither transferred nor retained substantially all the risks and rewards of the
asset, nor transferred control of the asset, the Bank continues to recognize the transferred asset to
the extent of the Bank’s continuing involvement. In that case, the Bank also recognizes an
associated liability. The transferred asset and the associated liability are measured on a basis that
reflects the rights and obligations that the Bank has retained. Continuing involvement that takes
the form of a guarantee over the transferred asset is measured at the lower of the original carrying
amount of the asset and the maximum amount of consideration that the Bank could be required to
repay.

Financial liabilities
A financial liability is derecognized when the obligation under the liability is discharged or
cancelled or has expired. Where an existing financial liability is replaced by another from the
same lender on substantially different terms, or the terms of an existing liability are substantially
modified, such an exchange or modification is treated as a derecognition of the original liability
and the recognition of a new liability, and the difference in the respective carrying amounts is
recognized in the statement of income.

Impairment of Financial Assets

The Bank assesses at each reporting date whether there is objective evidence that a financial asset
or a group of financial assets is impaired. An impairment exists if one or more events that has
occurred since the initial recognition of the asset (an incurred ‘loss event’) has an impact on the
estimated future cash flows of the financial asset or the group of financial assets that can be
reliably estimated.

Evidence of impairment may include indications that the borrower or a group of borrowers is
experiencing significant financial difficulty, default or delinquency in interest or principal
payments, the probability that they will enter bankruptcy or other financial reorganization and
where observable data indicate that there is measurable decrease in the estimated future cash
flows, such as changes in arrears or economic conditions that correlate with defaults.

Financial asset carried at amortized cost

For ‘Loans and receivables’ and ‘HTM investments’, and the Bank first assesses whether
objective evidence of impairment exists individually for financial assets that are individually
significant, or collectively for financial assets that are not individually significant.

If the Bank determines that no objective evidence of impairment exists for individually assessed
financial asset, whether significant or not, it includes the asset in a group of financial assets with
similar credit risk characteristics and collectively assesses for impairment. Those characteristics
are relevant to the estimation of future cash flows for groups of such assets by being indicative of
the counterparties’ ability to pay all amounts due according to the contractual terms of the assets
being evaluated. Assets that are individually assessed for impairment and for which an
impairment loss is, or continues to be, recognized are not included in a collective assessment for
impairment.

If there is objective evidence that an impairment loss has been incurred, the amount of the loss is
measured as the difference between the asset’s carrying amount and the present value of the
estimated future cash flows (excluding future credit losses that have not been incurred).

*SGVFS017997*
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The estimated future cash flows are discounted at the financial assets’ original EIR. The carrying
amount of the asset is reduced through the use of an allowance account and the amount of loss is
charged to the statement of income under ‘Provision for credit losses’. Financial assets, together
with the associated allowance accounts, are written off when there is no realistic prospect of future
recovery and all collateral has been realized. If, subsequently, the amount of the estimated
impairment loss decreases because of an event occurring after the impairment was recognized, the
previously recognized impairment loss is reduced by adjusting the allowance account.

For the purpose of a collective assessment of impairment, financial assets are grouped on the basis
past due status of the borrowers. Future cash flows in a group of financial assets that are
collectively assessed for impairment are estimated on the basis of historical loss experience for
assets with credit risk characteristics similar to those in the group. Historical loss experience is
adjusted on the basis of current observable data to reflect the effects of current conditions that did
not affect the period on which the historical loss experience is based and to remove the effects of
conditions in the historical period that do not exist currently. Estimates of changes in future cash
flows reflect, and are directionally consistent with changes in related observable data from period
to period (such as changes in unemployment rates, property prices, payment status, or other factors
that are indicative of incurred losses in the group and their magnitude).

The methodology and assumptions used for estimating future cash flows are reviewed regularly by
the Bank to reduce any differences between loss estimates and actual loss experience.

When a financial asset is uncollectible, it is written off against the related allowance for credit
losses. Such loans are written off after all the necessary procedures have been completed and the
amount of the loss has been determined. Subsequent recoveries of amounts previously written off
are recognized under ‘Miscellaneous’ account in the statement of income.

If, subsequently, 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 repayment rate), the previously recognized impairment loss is reversed by adjusting
the provision.

Restructured loans
Where possible, the Bank seeks to restructure receivables, which may involve extending the
payment arrangements and the agreement of new loan conditions. Once the terms have been
renegotiated, the loan is no longer considered past due. Management continuously reviews
restructured loans to ensure that all criteria are met and that future payments are likely to occur.

The loans continue to be subjected to an individual or collective impairment assessment,

calculated using the loan’s original EIR. The difference between the recorded value of the original
loan and the present value of the restructured cash flows, discounted at the original EIR, is
recognized in ‘Provision for credit losses’ in the statement of income.

*SGVFS017997*
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AFS investments
In the case of debt instruments classified as AFS investments, impairment is assessed based on the
same criteria as financial assets carried at amortized cost. However, the amount recorded for
impairment is the cumulative loss measured as the difference between the amortized cost and the
current fair value, less any impairment loss on that investment previously recognized in the
statement of income. Future interest income is based on the reduced carrying amount and is
accrued based on the original EIR. Such accrual is recorded as part of ‘Interest income’ in the
statement of income. If, in subsequent year, the fair value of a debt instrument increases and the
increase can be objectively related to an event occurring after the impairment loss was recognized
in the statement of income, the impairment loss is reversed through the statement of income.

Investment in an Associate
An associate pertains to an entity over which the Bank has a significant influence. Significant
influence is the power to participate in the financial and operating policy decisions of the investee,
but is not control or joint control over those policies. Investment in an associate is accounted for
using the equity method of accounting.

Under the equity method, investment in an associate is carried in the statement of financial
position at cost plus post-acquisition changes in the Bank’s share in the net assets of the associate.
The Bank’s share in an associate’s post-acquisition earnings is recognized in statement of income,
and its share of post-acquisition movements in the associate’s OCI is recognized directly in OCI.
Distributions received from an associate reduce the carrying amount of the investment. When the
Bank’s share of losses in an associate equals or exceeds its interest in the associate, including any
other unsecured receivables, the Bank does not recognize further losses, unless it has incurred
obligations or made payments on behalf of the associate. Profits and losses resulting from
transactions between the Bank and an associate are eliminated to the extent of the interest in the
associate.

The financial statements of the associate are prepared for the same reporting period as the Bank.
The associate’s accounting policies conform to those used by the Bank for like transactions and
events in similar circumstances.

Property and Equipment

Land is carried at cost less any impairment in value and depreciable property and equipment,
which include buildings, transportation equipment, furniture and fixture equipment, land
improvements, and leasehold improvements, are carried at cost less accumulated depreciation and
any impairment in value. The initial cost of property and equipment consists of its purchase price,
including import duties, taxes and any directly attributable costs to bring the asset to its working
condition and location for its intended use.

Construction in progress represents structures under construction and is measured using the
percentage of completion of the project, or the amount billed by the contractor if the former is not
present. This cost includes cost of construction, equipment, and other direct costs. Cost also
includes interest on borrowed funds incurred during the construction period. Construction in
progress is not depreciated until such time that the relevant assets are completed and are ready for
use.

Expenditures incurred after items of property and equipment have been put into operation, such as
repairs and maintenance, are normally charged against statement of income in the year in which
the costs are incurred.

*SGVFS017997*
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In situations where it can be clearly demonstrated that the expenditures have resulted in an
increase in the future economic benefits expected to be obtained from the use of an item of
property and equipment beyond its originally assessed standard of performance, the expenditures
are capitalized as an additional cost of property and equipment.

Depreciation and amortization commences once the property and equipment are available for use
and is computed using the straight-line method over the estimated useful lives (EUL) of the
respective assets, except for leasehold improvements which are amortized over the shorter of the
EUL of the improvements or the terms of the related leases.

The EUL of the property and equipment follows:

Building 7 years
Furniture, fixtures and equipment 3 to 7 years
Transportation equipment 3 years
Land improvements 3 years
Leasehold improvements 3 years or the terms of the related leases,
whichever is shorter

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

Fully depreciated assets are retained in the accounts until they are no longer in use and no further
depreciation is credited against profit or loss.

When the property and equipment are retired or otherwise disposed of, the cost and the related
accumulated depreciation and amortization, and any impairment in value are removed from the
accounts, and any resulting gain or loss is reflected in the statement of income.

Intangible Assets
Intangible assets consist of software costs and are recognized under ‘Other assets’ in the statement
of financial position. Intangible assets acquired separately are measured on initial recognition at
cost. The cost of intangible assets acquired in a business combination is their fair value at the date
of acquisition. Following initial recognition, intangible assets are carried at cost less any
accumulated amortization and accumulated impairment losses. Internally generated intangibles,
excluding capitalized development costs, are not capitalized and the related expenditure is
reflected in profit or loss in the period in which the expenditure is incurred.

If the entity acquires intangible assets by subcontracting other parties (e.g., development-and-
supply contracts or research and development contracts), the entity must exercise judgment in
determining whether it is acquiring an intangible asset or whether it is obtaining goods and
services that are being used in the development of an intangible asset by the entity itself. In the
latter case, the entity will only be able to recognize an intangible asset if the expenditures meet the
criteria which confirm that the related activity is at a sufficiently advanced stage of development,
which shall be both technically and commercially viable and includes only directly attributable
costs.

Only expenditure arising from the development phase can be considered for capitalization, with all
expenditure on research being recognized as an expense when it is incurred.

*SGVFS017997*
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Intangible assets with finite lives are amortized over the useful life. Capitalized computer
software costs are amortized on a straight-line basis over three (3) to ten (10) years. The
amortization period and method for an intangible asset with a finite useful life are reviewed at
least at the end of each reporting period. Changes in the expected useful life or the expected
pattern of consumption of future economic benefits embodied in the asset are considered to
modify the amortization period or method, as appropriate, and are treated as changes in accounting
estimates. The amortization expense on intangible assets with finite lives is recognized in the
statement of income in the expense category that is consistent with the function of the intangible
assets. Software costs under development are not amortized until available for use.

Impairment of Nonfinancial Assets

Property and equipment and investment in an associate
At each reporting date, the Bank assesses whether there is any indication that its nonfinancial
assets may be impaired. When an indicator of impairment exists or when an annual impairment
testing for an asset is required, the Bank makes a formal estimate of recoverable amount.

Recoverable amount is the higher of an asset’s fair value less costs to sell and its value in use and
is determined for an individual asset, unless the asset does not generate cash inflows that are
largely independent of those from other assets or groups of assets, in which case the recoverable
amount is assessed as part of the Cash Generating Unit (CGU) to which it belongs. Where the
carrying amount of an asset exceeds its recoverable amount, the asset (or CGU) is considered
impaired and is written down to its recoverable amount.

In assessing value in use, the estimated future cash flows are discounted to their present value
using a pre-tax discount rate that reflects current market assessments of the time value of money
and the risks specific to the asset.

A previously recognized impairment loss is reversed only if there has been a change in the
estimates used to determine the asset’s recoverable amount since the last impairment loss was
recognized. If that is the case, the carrying amount of the asset is increased to its recoverable
amount. That increased amount cannot exceed the carrying amount that would have been
determined, net of depreciation and amortization, had no impairment loss been recognized for the
asset in prior years. Such reversal is recognized in the statement of income. After such a reversal,
the depreciation expense is adjusted in future years to allocate the asset’s revised carrying amount,
less any residual value, on a systematic basis over its remaining life.

Intangible assets
Software costs are assessed for impairment whenever there is an indication that the intangible
asset may be impaired. Any impairment loss and direct write-off is recorded under ‘Provision for
credit losses’ in the statement of income.

Retirement Benefits
The Bank operates a defined benefit retirement plan which requires contribution to be made to a
separately administered fund. The net defined benefit liability or asset is the aggregate of the
present value of the defined benefit obligation at the reporting date reduced by the fair value of
plan assets, adjusted for any effect of limiting a net defined benefit asset to the asset ceiling (if
any). The asset ceiling is the present value of any economic benefits available in the form of
refunds from the plan or reductions in future contributions to the plan.

The cost of providing benefits under the defined benefit plans is actuarially determined using the
projected unit credit method.

*SGVFS017997*
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Defined benefit costs comprise the following:

· Service cost
· Net interest on the net defined benefit liability or asset
· Remeasurements of net defined benefit liability or asset

Service costs which include current service costs, past service costs and gains or losses on
non-routine settlements are recognized as expenses in the statement of income. Past service costs
are recognized when plan amendment or curtailment occurs. These amounts are calculated
periodically by independent qualified actuaries.

Net interest on the net defined benefit liability or asset is the change during the period in the net
defined benefit liability or asset that arises from the passage of time which is determined by
applying the discount rate based on government bonds to the net defined benefit liability or asset.
Net interest on the net defined benefit liability or asset is recognized as expense or income in the
statement of income.

Remeasurements comprising actuarial gains and losses, return on plan assets and any change in
the effect of the asset ceiling (excluding net interest on defined benefit liability) are recognized
immediately in the statement of financial position with a corresponding debit or credit to
‘Remeasurement gains (losses) on retirement liabilities’ under OCI in the period in which they
arise. Remeasurements are not reclassified to the statement of income in subsequent periods.

Plan assets are assets that are held by a long-term employee benefit fund. Plan assets are not
available to the creditors of the Bank, nor can they be paid directly to the Bank. Fair value of plan
assets is based on market price information. When no market price is available, the fair value of
plan assets is estimated by discounting expected future cash flows using a discount rate that
reflects both the risk associated with the plan assets and the maturity or expected disposal date of
those assets (or, if they have no maturity, the expected period until the settlement of the related
obligations). If the fair value of the plan assets is higher than the present value of the defined
benefit obligation, the measurement of the resulting defined benefit asset is limited to the present
value of economic benefits available in the form of refunds from the plan or reductions in future
contributions to the plan.

The Bank’s right to be reimbursed of some or all of the expenditure required to settle a defined
benefit obligation is recognized as a separate asset at fair value when, and only when,
reimbursement is virtually certain.

Equity
Capital stock
Capital stock is measured at par value for all shares issued and outstanding. When the Bank issues
more than one class of stock, a separate account is maintained for each class of stock and the
number of shares issued. Incremental costs incurred directly attributable to the issuance of new
shares are shown in equity as deduction from proceeds, net of tax. The subscribed capital stock is
reported in equity less the related subscription receivable.

Surplus
Surplus represents cumulative balance of periodic net income or loss, dividend declarations, prior
period adjustments, effect of changes in accounting policy and other capital adjustments.

*SGVFS017997*
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Dividends
Dividends on preferred and common shares are recognized as a liability and deducted from
retained earnings when approved by the BOD of the Bank and the BSP. Dividends for the year
that are approved after the reporting date are dealt with as an event after the reporting date.

Deposit for Future Stock Subscription

Deposit for future stock subscription (DFS) represents payments made on subscription of shares
which cannot be directly credited to ‘Preferred stock’ or ‘Common stock’ pending registration
with the SEC of the amendment to the Articles of Incorporation increasing capital stock. The
paid-up subscription can be classified under equity if the nature of the transaction gives rise to a
contractual obligation of the Bank to deliver a fixed number of its own shares to the subscriber in
exchange of the subscription amount. In addition, deposit for future stock subscription shall be
classified under equity if all of the following elements are present as at reporting date:

a. the unissued authorized capital stock of the entity is insufficient to cover the amount of shares
indicated in the contract;
b. there is BOD approval on the proposed increase in authorized capital stock (for which a
deposit was received by the corporation);
c. there is stockholders’ approval of said proposed increase; and
d. the application for the approval of the proposed increase has been filed with the BSP and the
SEC.

DFS that does not meet the foregoing provisions is treated as a financial liability.

Details of DFS as at December 31, 2015 are disclosed in Note 17.

Revenue Recognition
Revenue is recognized to the extent that it is probable that the economic benefits will flow to the
Bank and the revenue can be reliably measured. The Bank assesses its revenue arrangements
against specific criteria in order to determine if it is acting as principal or agent. The Bank has
concluded that it is acting as a principal in recognizing interest income, loan fees, service fees,
penalties and charges, and rental income, except commission income.

The following specific recognition criteria must also be met before the revenue is recognized:

Interest income
Interest on financial instruments is recognized based on the effective interest method of
accounting. 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 over the relevant period.
The EIR is the rate that exactly discounts estimated future cash flows through the expected useful
life of the financial instrument or a shorter period, where appropriate, to the net carrying amount
of the financial asset or financial liability. The calculation takes into account all contractual terms
of the financial instrument (for example, prepayment options), includes any fees (such as service
fees) or incremental costs that are directly attributable to the instrument and are an integral part of
the EIR, but not future credit losses.

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

‘Unearned interest income’, which represents discounted interest from salary loans, is recognized
as income over the terms of the receivable from borrowers using the effective interest method and
shown as deduction from receivable from borrowers.

*SGVFS017997*
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Commission income, deposit-related fees, services fees, penalties and bank charges
Commissions are accrued when earned. Service fees, penalties and bank charges are recognized
only upon collection or where there is a reasonable degree of certainty as to their collectability.
These items are reported under ‘Miscellaneous’ in the statement of income.

Rental income
Rental income arising on leased properties is accounted for on a straight-line basis over the lease
terms on ongoing leases and is recorded in the statement of income under ‘Miscellaneous’.

Expense Recognition
Expenses are recognized when it is probable that decrease in the future economic benefits related
to decrease in asset or an increase in liability has occurred and that the decrease in economic
benefits can be measured reliably. Expenses that may arise in the course of ordinary regular
activities of the Bank include among others the operating expenses of the Bank’s operation.
Expenses are recognized as incurred.

Interest expense
Interest expense for financial liabilities is recognized in ‘Interest expense’ in the statement income
using the EIR of the financial liabilities to which they relate.

Leases
The determination of whether an arrangement is, or contains a lease is based on the substance of
the arrangement and requires an assessment of whether the fulfillment of the arrangement is
dependent on the use of a specific asset or assets and the arrangement conveys a right to use the
asset.

A reassessment is made after inception of the lease only if one of the following applies:

a. There is a change in contractual terms, other than a renewal or extension of the arrangement.
b. A renewal option is exercised or extension granted, unless that term of the renewal or
extension was initially included in the lease term.
c. There is a change in the determination of whether fulfillment is dependent on a specified asset.
d. There is a substantial change to the asset.

Where a reassessment is made, lease accounting shall commence or cease from the date when the
change in circumstances gave rise to the reassessment for scenarios ‘a’, ‘c’ or ‘d’ above, and at the
date of renewal or extension period for scenario ‘b’.

Bank as lessee
Leases where the lessor retains substantially all the risks and rewards of ownership of the asset are
classified as operating leases. Operating lease payments are recognized as an expense under
‘Occupancy’ in the statement of income on a straight-line basis over the lease term.

Offsetting Income and Expense

Income and expenses are not offset in the statement of income unless required or permitted by any
accounting standard or interpretation and as specifically disclosed in the accounting policies of the
Bank. This is not generally the case with master-netting agreements, and the related assets and
liabilities are presented gross in the statement of financial position.

*SGVFS017997*
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Income Taxes
Income tax on profit or loss for the year comprises current and deferred tax. Income tax is
determined in accordance with Philippine tax laws. Income tax is recognized in profit or loss,
except to the extent that it relates to items recognized directly in other comprehensive income.

Current tax
Current tax assets and liabilities for the current and prior years are measured at the amount
expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used
to compute the amount are those that are enacted or substantively enacted at the reporting date.

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

Deferred tax liabilities are recognized for all taxable temporary differences with exceptions.
Deferred tax assets are recognized for all deductible temporary differences, carryforward of
unused tax credits from excess minimum corporate income tax (MCIT) over regular corporate
income tax (RCIT) and unused net operating loss carryover (NOLCO), to the extent that it is
probable that future taxable income will be available against which the deductible temporary
differences and carryforward of unused excess MCIT over RCIT and unused NOLCO can be
utilized.

Deferred tax assets or liabilities, however, is not recognized when it arises from the initial
recognition of an asset or liability in a transaction that is not a business combination and, at the
time of the transaction, affects neither the accounting income nor taxable income or loss.

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

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

Deferred tax assets and deferred tax liabilities are offset if a legally enforceable right exists to set
off current tax assets against current tax liabilities and deferred taxes relates to the same taxable
entity and the same taxation authority.

Current tax and deferred tax relating to items recognized directly in equity is recognized in OCI,
and not in the statement of income.

Provisions
Provisions are recognized when the Bank has a present obligation (legal or constructive) where, as
a result of a past event, it is probable that an outflow of resources embodying economic benefits
will be required to settle the obligation and a reliable estimate can be made of the amount of the
obligation.

*SGVFS017997*
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Where the Bank expects some or all of a provision to be reimbursed, for example, under an
insurance contract, the reimbursement is recognized as a separate asset but only when the
reimbursement is virtually certain. The expense relating to any provision is presented in the
statement of income, net of any reimbursement. If the effect of the time value of money is
material, provisions are determined by discounting the expected future cash flows at a pre-tax rate
that reflects current market assessments of the time value of money and, where appropriate, the
risks specific to the liability. Where discounting is used, the increase in the provision due to the
passage of time is recognized as an ‘Interest expense’ in the statement of income.

Contingent Liabilities and Contingent Assets

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

Events After the Reporting Period

Post-year-end events up to the date of the approval of the BOD of the financial statements that
provide additional information about the Bank’s position at the reporting date (adjusting events)
are reflected in the financial statements. Post-year-end events that are not adjusting events are
disclosed in the notes to the financial statements when material.

Standards Issued but not yet Effective

The standards and interpretations that are issued, but not yet effective, up to the date of issuance of
the Bank’s financial statements are listed below. The Bank intends to adopt these standards when
they become effective. Adoption of these standards and interpretations are not expected to have
any significant impact on the financial statements of the Bank.

No definite adoption date prescribed by the SEC and Financial Reporting Standards
Council (FRSC)
· Philippine Interpretation on International Financial Reporting Interpretations Committee
(IFRIC) 15, Agreements for the Construction of Real Estate

Effective January 1, 2016

· PFRS 10, Consolidated Financial Statements, and PAS 28, Investments in Associates and
Joint Ventures - Investment Entities: Applying the Consolidation Exception (Amendments)
· PAS 27, Separate Financial Statements - Equity Method in Separate Financial Statements
(Amendments)
· PFRS 11, Joint Arrangements - Accounting for Acquisitions of Interests (Amendments)
· PAS 1, Presentation of Financial Statements - Disclosure Initiative (Amendments)
· PFRS 14, Regulatory Deferral Accounts
· PAS 16, Property, Plant and Equipment, and PAS 38, Intangible Assets - Clarification of
Acceptable Methods of Depreciation and Amortization (Amendments)
· PAS 16, Property, Plant and Equipment, and PAS 41, Agriculture - Bearer Plants
· Annual Improvements to PFRSs (2012-2014 Cycle)
· PFRS 5, Non-current Assets Held for Sale and Discontinued Operations - Changes in
Methods of Disposal
· PFRS 7, Financial Instruments: Disclosures - Servicing Contracts
· PFRS 7, Applicability of the Amendments to PFRS 7 to Condensed Interim Financial
Statements
· PAS 19, Employee Benefits - Regional Market Issue Regarding Discount Rate

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· PAS 34, Interim Financial Reporting - Disclosures of Information ‘Elsewhere in the

Interim Financial Report’

Effective January 1, 2018

· PFRS 9, Financial Instruments
In July 2014, the International Accounting Standards Board (IASB) issued the final version of
PFRS 9, Financial Instruments. The new standard (renamed as PFRS 9) reflects all phases of
the financial instruments project and replaces PAS 39, Financial Instruments: Recognition
and Measurement, and all the previous versions of PFRS 9. The standard introduces new
requirements for classification and measurement, impairment, and hedge accounting. PFRS 9
is effective for annual periods beginning on or after January 1, 2018, with early application
permitted. Retrospective application is required, but providing comparative information is not
compulsory. For hedge accounting, the requirements are generally applied prospectively, with
some limited exceptions. Early application of previous versions of PFRS 9 (2009, 2010 and
2013) is permitted if the date of initial application is before February 1, 2015. The Bank did
not early adopt PFRS 9 and is currently assessing the impact of adopting this standard.

The adoption of PFRS 9 will have an effect on the classification and measurement of the
Bank’s financial assets and impairment methodology for financial assets, including amount of
credit losses, but will have no impact on the classification and measurement of the Bank’s
financial liabilities. The new hedge accounting rules will have no effect on the Bank. The
Bank is currently assessing the impact of adopting this standard.

In addition, the IASB has issued the following new standards that have not yet been adopted
locally by the SEC, FRSC, Board of Accountancy and Professional Regulation Commission. The
Bank is currently assessing the impact of these new standards and plans to adopt them on their
required effective dates once adopted locally.

· International Financial Reporting Standards (IFRS) 15, Revenue from Contracts with
Borrowers
IFRS 15 was issued in May 2014 by IASB and establishes a new five-step model that will
apply to revenue arising from contracts with borrowers. Under IFRS 15, revenue is
recognized at an amount that reflects the consideration to which an entity expects to be
entitled in exchange for transferring goods or services to a customer. The principles in
IFRS 15 provide a more structured approach in measuring and recognizing revenue.

The new revenue standard is applicable to all entities and will supersede all current revenue
recognition requirements under IFRS. Either a full or modified retrospective application is
required for annual periods beginning on or after January 1, 2018.

· IFRS 16, Leases

On January 13, 2016, IASB issued its new standard, IFRS 16, Leases, which replaces PAS 17,
the current leases standard, and the related interpretations.

Under the new standard, lessees will no longer classify their leases as either operating or
finance leases in accordance with PAS 17. Rather, lessees will apply the single-asset
model. Under this model, lessees will recognize the assets and related liabilities for most
leases on their balance sheets, and subsequently will depreciate the lease assets and recognize
interest on the lease liabilities in their profit or loss. Leases with a term of 12 months or less
or for which the underlying asset is of low value are exempted from these requirements.

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The accounting of lessors is substantially unchanged as the new standard carries forward the
principles of lessor accounting under PAS 17. Lessors, however, will be required to disclose
more information in their financial statements, particularly on the risk exposure to residual
value.

The new standard is effective for annual periods beginning on or after January 1, 2019.
Entities may early adopt IFRS 16 but only if they have also adopted IFRS 15. When adopting
IFRS 16, an entity is permitted to use either full retrospective or a modified retrospective
approach, with options to use certain transition reliefs.

3. Significant Accounting Judgments and Estimates

The preparation of the Bank’s financial statements in accordance with PFRS requires the
management to make judgments and estimates that affect the reported amounts of assets,
liabilities, revenue and expenses and disclosure of contingent assets and contingent liabilities, if
any. Future events may occur which will cause the judgments used in arriving at the estimates to
change. The effects of any change in estimates are reflected in the financial statements as they
become reasonably determinable.

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

Judgments
(a) Operating leases
In determining whether or not there is an indication of operating lease treatment, the Bank
considers retention of ownership title to the leased property, period of lease contract relative to
the estimated useful economic life of the leased property and bearer of executory costs, among
others are considered.

Bank as lessee
The Bank has entered into leases on premises, transportation and IT equipment it uses for its
operations. The Bank has determined that the lessor retains all significant risks and rewards of
ownership over the leased property. Accordingly, the lease agreements are accounted for as
operating leases.

(b) Classification of financial assets to HTM Category

The classification requires significant judgment. In making this judgment, the Bank evaluates
its intention and ability to hold such investments to maturity. If the Bank fails to keep these
investments to maturity other than in certain specific circumstances - for example, selling
more than an insignificant amount close to maturity - it will be required to reclassify the entire
portfolio as AFS investments. The investments would therefore be measured at fair value and
not at amortized cost. The Bank has assessed that it has the intention and ability to hold these
investments until maturity.

There are no HTM investments disposed in 2015 and 2014 prior to their maturity.

(c) Fair value of financial instruments

When the fair values of financial assets and financial liabilities recorded in the statement of
financial position cannot be measured based on quoted prices in active markets, their fair value
is measured using valuation techniques including the discounted cash flow model. The inputs
to these models are taken from observable markets where possible, but where this is not

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feasible, a degree of judgment is required in establishing fair values. Judgments include

considerations of inputs such as liquidity risk, credit risk and volatility for longer-dated
derivatives and discount rates, prepayments and default rates assumptions. Changes in
assumptions about these factors could affect the reported fair value of financial instruments.
The fair values of the Bank’s financial instruments are disclosed in Note 4.

(d) Financial assets not quoted in an active market

The Bank classifies financial assets by evaluating, among others, whether the asset is quoted
or not in an active market. Included in the evaluation on whether the asset is quoted in an
active market is the determination on whether the quoted prices are readily and regularly
available, and whether those prices represent actual and regularly occurring market
transactions on an arm’s length basis.

(d) Embedded derivatives

Where a hybrid instrument is not classified as financial asset or liability at FVPL, the Bank
evaluates whether the embedded derivative should be bifurcated and accounted for separately.
This includes assessing whether the embedded derivatives has a close economic relationship
to the host contract.

Estimates
(a) Credit losses on loans and receivables
The Bank reviews its loans and receivables to assess impairment annually. In determining
whether an impairment loss should be recorded in the statement of income, the Bank makes
judgments as to whether there is any observable data indicating that there is a measurable
decrease in the estimated future cash flows from a portfolio of receivables before the decrease
can be identified with an individual receivable in that portfolio. This evidence may include
observable data indicating that there has been an adverse change in the payment status of
borrowers or national or local economic conditions that correlate with defaults on the loans
and receivables. Past-due accounts for more than 90 days, and loans wherein the borrower
requested moratorium but no subsequent collection is made after the moratorium period ends
as at year-end, fall under specific loan loss.

In addition to specific allowance against individually significant loans and receivables, the
Bank also makes a collective impairment allowance against exposures which, although not
specifically identified as requiring a specific allowance, have a greater risk of default than
when originally granted. As at December 31, 2015 and 2014, the carrying values of loans and
receivables and related allowance for credit losses are disclosed in Note 8.

(b) Impairment of AFS and HTM debt securities

The Bank reviews its AFS and HTM debt securities at each reporting date to assess whether it
is impaired. This requires similar judgment applied to the individual assessment of loans and
receivables.

As at December 31, 2015, no impairment losses were recognized on AFS and HTM debt
securities which comprised of fixed treasury notes issued by the Philippine Government. The
carrying value of AFS and HTM debt securities is disclosed in Note 7 and Note 9,
respectively.

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(c) Impairment of investment in an associate and other nonfinancial assets

The Bank also assesses impairment on its investment in an associate, property and equipment
and software costs whenever events or changes in circumstances indicate that the carrying
amount of the respective assets may not be recoverable.

Among others, the factors that the Bank considers important which could trigger an
impairment review on its investment in an associate include the following:

· deteriorating or poor financial condition;

· recurring net losses; and
· significant changes on the technological, market, economic, or legal environment which
had an adverse effect on the associate during the period or in the near future, in which the
associate operates. The Bank also assesses impairment on investment in an associate
whenever events or changes in circumstances indicate that their carrying amount may not
be recoverable.

The Bank recognizes an impairment loss whenever the carrying amounts exceed their
recoverable amounts.

(d) Estimated useful lives of property and equipment and software costs
The Bank estimates the useful lives of its property and equipment and software costs. This
estimate is reviewed periodically to ensure that the periods of depreciation and amortization
are consistent with the expected pattern of economic benefits from the items of property and
equipment and software costs. Refer to Note 2 for the estimated useful lives of property and
equipment and software costs.

In 2015, the BOD approved the change in EUL of buildings from 10 years to 7 years. The
change is accounted for as change in accounting estimates and applied prospectively by the
Bank.

(e) Present value of retirement liability/asset

The determination of the Bank’s retirement cost is dependent on certain assumptions used by
the actuary in calculating such amount. Those assumptions are described in Note 19 to the
financial statements and include, among others, discount rate, future salary increase and
average remaining working lives of employees. While management believes that the
assumptions are reasonable and appropriate, significant differences in the Bank’s actual
experience or significant changes in the assumptions may materially affect the pension and
other retirement obligation.

As of December 31, 2015 and 2014, the carrying values of retirement asset of the
Company are disclosed in Note 19.

(f) Recognition of deferred tax assets

Deferred tax assets are recognized for all unused tax losses and temporary differences to the
extent that it is probable that taxable profit will be available against which the losses can be
utilized. Significant management judgment is required to determine the amount of deferred
tax asset that can be recognized, based upon the likely timing and level of future taxable
profits together with future tax planning.

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The Bank reviews the carrying amount of deferred tax asset at each reporting date and reduces
this to the extent that it is no longer probable that sufficient taxable income will be available to
allow all or part of the deferred tax assets to be utilized. Details of recognized and
unrecognized deferred tax assets are disclosed on Note 21.

4. Fair Value Measurement

The Bank uses a hierarchy for determining and disclosing the fair value of its assets and liabilities
(see accounting policy on Fair Value Measurement in Note 2).

The fair values of cash and cash equivalents, current loans and receivables (except for its
noncurrent portion), current bills payable and other liabilities (including deposit for future stocks
subscriptions) approximate their carrying values in view of the relatively short-term maturities of
these instruments.

As at December 31, 2015 and 2014, the Bank’s financial instruments where the carrying values do
not approximate fair value pertain to security deposits recorded under ‘Other assets’. These are
reported at cost and are not significant in relation to the Bank’s asset portfolio.

Fair values of noncurrent loans and receivables are estimated based on the discounted cash flow
methodology using discount rate that reflects the issuer’s borrowing rate as at the end of the
reporting period. Where the instrument reprices on a quarterly basis or has a relatively short
maturity, the carrying amounts approximate fair values.

As at December 31, 2015 and 2014, the Bank has no financial instruments with repricing and
floating interest rates.

Quoted securities classified as AFS and HTM investments are generally based on quoted market
prices, which is within the bid-ask price. AFS and HTM investments of the Bank are categorized
as Level 2 in the absence of bid-offer as at reporting date and due to low volume of trading
activity in the market.

Fair values of noncurrent deposit liabilities are estimated using the discounted cash flow
methodology, using the Bank’s current incremental borrowing rates for similar borrowings,
ranging from 1.0% to 1.1% in 2015 and 2014 with maturities consistent with those remaining for
the liability being valued, if any.

Fair value of long-term bills payable were based on interpolation of Philippine zero rate of 3.7%
adjusted for 2.7% creditor’s credit spread, as at reporting date.

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Fair Value Hierarchy

The following table summarizes the carrying amounts and the fair values by level of the fair value
hierarchy of the Bank’s financial assets and liabilities that are carried at fair value or for which fair
value is disclosed as at December 31, 2015 and 2014 (amounts in thousands):

2015
Carrying
Value Level 1 Level 2 Level 3 Total
Recurring fair value measurements
AFS investments P
=136,508 P
=63,334 P
=73,174 P
=– P
=136,508
Assets and liabilities for which fair values are
disclosed:
Financial assets
HTM investments 174,488 – 176,371 – 176,371
Loans and receivables
Receivable from borrowers 30,440 – – 35,356 35,356
Financial liabilities
Bills payable 534,557 – – 540,347 540,347
Deposit liabilities
Special savings 180,481 – – 172,274 172,274

2014
Carrying
Value Level 1 Level 2 Level 3 Total
Recurring fair value measurements
AFS investments P
=139,524 P
=64,701 P
=74,823 =
P– P
=139,524
Assets and liabilities for which fair values are
disclosed:
Financial assets
HTM investments 205,815 133,115 84,772 – 217,887
Loans and receivables
Receivable from borrowers 19,902 – – 24,240 24,240
Financial liability
Deposit liabilities
Special savings 144,138 – – 139,152 139,152

As at December 31, 2015, the Bank transferred government debt securities classified under HTM
investments from Level 1 to Level 2 since these are not actively traded and have no bid-offer
prices. The amount of transfers from Level 1 to Level 2 amounted to = P133.1 million.

5. Financial Risk Management Objectives and Policies

In the course of the business cycle, the Bank has exposure to the following risks from its use of
financial instruments:

· Credit risk
· Market risk
· Liquidity risk

The Bank adheres to the proactive and prudent approach of managing the business that recognizes
and manages risks to continuously provide quality financial services to clients and to protect
shareholders’ value.

Risk management process involves identifying and assessing the risk, taking actions to mitigate
the risks through defined roles and responsibilities, close monitoring of the scenarios, and
adjustment of the systems and policies necessary to effectively minimize risk level.

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The BOD through its Risk Oversight Committee (ROC) is responsible for monitoring the Bank’s
implementation of risk management policies and procedures, and for reviewing the adequacy of
risk management framework in relation to the risks faced by the Bank.

The ROC regularly reports to the BOD the results of reviews of actual implementation of risk
management policies. Risk management of the Bank is strengthened in conjunction with Audit
Committee (AC) and Internal Audit (IA) functions. IA undertakes both regular and ad hoc
reviews of risk management controls and procedures, the results of which are reported to the AC.
In addition, an Asset Liability Committee (ALCO) with members from Executive Committee and
Management Committee of the Bank, together with the Senior Finance and Accounting staff
regularly performs analysis of the operating and financial status of the Bank. The ALCO handles
the Financial Risk Management of the Bank.

Credit Risk
Credit risk is the risk of financial loss to the Bank if the counterparty to a financial instrument fails
to meet its contractual obligations. The Bank manages and controls credit risk by setting limits on
the amount of risk it is willing to accept for individual counterparties and for industry
concentrations, and by monitoring exposures in relation to such limits.

Management of credit risk

Credit risk is being managed by instilling credit discipline both among the staff and the borrowers.
Staff performs close-monitoring and assessment of account throughout the borrowing period,
hence, on-time service delivery motivate the borrowers to fulfill their financial obligation to the
highest standards. Borrowers are well-oriented and committed on the credit repayment design
they undertake. In general, borrowers are also perpetual savers. Consequently, their pledge
savings balances serve as guarantee to their loans, which increase their borrowing capacity.

Each business unit has a Unit Manager who reports on all credit related matters to the local
management consisting of the Area Manager and the Regional Director. Each business unit is
responsible for the quality and performance of its credit portfolio and for monitoring and
controlling all credit risks in its portfolio. Regular audits of business units and credit processes are
undertaken by IA. Field operations per unit are frequently monitored by the Executive Committee
and Management Committee by actual visitations at the center level and unit office covered area.
In line with the Bank’s mission of “providing continued access to integrated microfinance and
social development services to an expanding membership base by organizing and empowering
women and their families”, microfinance services is a major program of the Bank. Accordingly,
the microfinance loans portfolio represents the bulk of the Bank’s assets.

In microfinance lending operations, the field operations personnel are provided with thorough
skills training for effective and efficient service delivery. The operations manual is a reference for
every operations personnel.

The manual is customized for microfinance clients and is being updated as often as new policies
and procedures are finalized and approved by the BOD, based on client and staff satisfaction
surveys, staff and management program review and planning meetings and workshops. A codified
signing authority is in place for every level of loan processing and approval.

Credit worthiness of microfinance clients is deepened by their ownership of the Bank’s preferred
stock, opportunity for their children to avail scholarship program and a chance to become a regular
staff of CARD-MRI. Maximum loan amount per account holder is below 2.0% of the Bank’s
equity and does not fall under directors, officers, stockholders and related interests (DOSRI)
classification.

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All past due or impaired accounts are reported on a daily, weekly and monthly bases. Consistent
monitoring for this group of accounts is established by competent and diligent staff to maximize
recovery. Incentives for bad debts collection have been established and subjected to review and
assessment periodically. These were given to staff to recover from the accounts and to fully install
credit discipline to clients. Restructuring of loan payments are done after full compliance of
approved policies and procedures. Writing off bad accounts are approved by the BOD and
reported to the BSP in compliance with the rules and regulations for banks.

An independent research unit continuously conducts market research as a tool for updating and
developing loan products responsive to the needs and demands of existing and potential clients.
Hence, individual loans for advance microfinance clients have been developed and are being
tested as a complement to their micro-entrepreneurial capacities. Loans under this system are
fully backed-up by their co-borrower, co-maker, savings balances and/or collateral required as
appropriate.

The ROC closely monitors the overall credit operations. Identified existing and potential risks are
acted upon appropriately and are reported during monthly BOD meeting.

Maximum exposure to credit risk

The carrying values of the financial assets and liabilities best represent the maximum exposure to
credit risk. The table below shows the analysis of the maximum exposure to risk, net of allowance
for credit losses, for financial assets as at December 31, 2015 and 2014:

2015
Financial Effect
of Collateral or
Fair Value of Maximum Exposure Credit
Carrying Amount Collateral to Credit Risk Enhancement
Receivable from
borrowers P
=5,233,111,407 P
=3,197,922,781 P
=4,452,897,165 P
=780,214,242

2014
Financial Effect
of Collateral or
Fair Value of Maximum Exposure to Credit
Carrying Amount Collateral Credit Risk Enhancement
Receivable from
borrowers P
=4,239,851,544 P
=3,473,235,278 P
=3,231,450,306 =
P1,008,401,238

Credit enhancement on receivable from borrowers pertains to deposit hold-out from pledge
savings equivalent to 15.0% of the original amount of the loan to the member, deed of assignment,
and real estate mortgage as at December 31, 2015 and 2014 (Note 13).

As at December 31, 2015 and 2014, the Bank has no financial assets with rights to offset in
accordance with PAS 32. There are also no financial assets that are subject to an enforceable
master netting arrangements or similar agreements which require disclosure in the financial
statements in accordance with the offsetting disclosure requirements of PFRS 7.

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Additionally, the tables below show the distribution of maximum credit exposure by industry
sector of the Bank as at December 31, 2015 and 2014, net of unearned income (in thousands):

2015
Loans and AFS HTM Security
Receivables* Investments Investments Deposits** Total
Wholesale and retail
trade, repair of
motor vehicles,
motorcycles and
personal and
household goods P
=3,558,706 P
=– P
=– P
=– P
=3,558,706
Agriculture, hunting and
forestry 1,017,069 – – – 1,017,069
Financial institutions 1,248,648 – – – 1,248,648
Government 155,474 136,508 238,220 – 530,202
Real estate, renting and
business activities 391,800 – – 22,189 413,989
Fishing 272,041 – – – 272,041
Education 159,091 – – – 159,091
Manufacturing 33,177 – – – 33,177
Other community, social
and personal
service activities 16,450 – – – 16,450
Health and social work 5,926 – – – 5,926
6,858,382 136,508 238,220 22,189 7,255,299
Less: allowance for
credit losses 225,734 – – – 225,734
Total P
=6,632,648 P
=136,508 P
=238,220 P
=22,189 P
=7,029,565
*Consist of due from BSP and other banks, receivable from borrowers and other receivables
**Reported under ‘Other Assets’

2014
Loans and AFS HTM Security
Receivables* Investments Investments Deposits** Total
Wholesale and retail
trade, repair of
motor vehicles,
motorcycles and
personal and
household goods P
=2,667,877 =
P– =
P– P
=– =
P2,667,877
Agriculture, hunting and
forestry 872,332 – – – 872,332
Financial institutions 677,303 – – – 677,303
Real estate, renting and
business activities 340,893 – – 13,094 353,987
Fishing 211,977 – – – 211,977
Other community, social
and personal
service activities 144,770 – – – 144,770
Education 120,310 – – – 120,310
Government 124,989 139,524 258,866 – 523,379
Manufacturing 36,805 – – – 36,805
Health and social work 2,635 – – – 2,635
5,199,891 139,524 258,866 13,094 5,611,375
Less: allowance for
credit losses 179,014 – – – 179,014
Total P
=5,020,877 P
=139,524 P
=258,866 P
=13,094 P
=5,432,361
*Consist of due from BSP and other banks, receivable from borrowers, and other receivables
**Reported under ‘Other Assets’

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Credit quality per class of financial assets

The table below shows the credit quality per class of financial assets (gross of allowance for credit
and impairment losses and unearned interest income) as at December 31, 2015 and 2014:

2015
Neither past due nor impaired
Standard Past due but
High grade grade not impaired Impaired Total
Due from BSP P
=149,539,008 P
=– P
=– P
=– P
=149,539,008
Due from other banks 1,157,755,403 1,100,015 – – 1,158,855,418
AFS investments 136,508,213 – – – 136,508,213
Receivable from borrowers
Microfinance loans – 4,537,553,979 8,293,985 120,252,978 4,666,100,942
Other loans – 703,490,108 1,825,643 9,263,227 714,578,978
Other receivables:
Accrued interest receivable – 78,165,932 – – 78,165,932
Accounts receivable – 35,271,552 – – 35,271,552
Unquoted debt securities
classified as
loans (UDSCL) – 56,000,000 – – 56,000,000
HTM investments 238,220,396 – – – 238,220,396
Security deposits – 22,189,022 – – 22,189,022
P
=1,682,023,020 P
=5,433,770,608 P
=10,119,628 P
=129,516,205 P
=7,255,429,461

2014
Neither past due nor impaired
Past due but
High grade Standard grade not impaired Impaired Total
Due from BSP P
=124,989,147 =
P– =
P– =
P– P
=124,989,147
Due from other banks 585,984,915 1,760,895 – 587,745,810
AFS investments 136,508,213 – – – 136,508,213
Receivable from borrowers 139,523,981 – – – 139,523,981
Microfinance loans – 3,782,149,789 14,972,671 111,675,284 3,908,797,744
Other loans – 478,076,323 2,637,354 8,044,784 488,758,461
Other receivables:
Accrued interest receivable – 21,381,212 – – 21,381,212
Accounts receivable – 31,291,030 – – 31,291,030
UDSCL – 37,000,000 – – 37,000,000
HTM investments 258,865,664 – – – 258,865,664
Security deposits – 13,094,110 – – 13,094,110
P
=1,245,871,920 P
=4,364,753,359 P
=17,610,025 P
=119,720,068 P
=5,747,955,372

The description of the financial assets grading used by the Bank is as follows:

· High grade - These are receivables and investments which have a high probability of
collection. The counterparty has the apparent ability to satisfy its obligation and the securities
on the receivables are readily enforceable. These also include deposits with reputable
institutions from which the deposits may be withdrawn and recovered with certainty.

· Standard grade - These are deposits, receivables and investments where collections are
probable due to the reputation and the financial ability of the counterparty to pay but with
experience of default.

As at December 31, 2015 and 2014, the Bank’s receivables that are past due for more than
90 days are considered impaired.

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Aging analysis of past due but not impaired loans and receivables
The following table shows the total aggregate amount of loans and receivables that are
contractually past due but not considered as impaired per delinquency bucket as at
December 31, 2015 and 2014:

2015
Less than
30 Days 31 to 60 Days 61 to 90 Days Total
Microfinance =1,357,392
P =3,275,899
P =3,660,694
P =8,293,985
P
Regular 400,518 394,169 415,151 1,209,838
Agri-agra 346,725 73,681 195,399 615,805
=2,104,635
P =3,743,749
P =4,271,244
P =10,119,628
P

2014
Less than
30 Days 31 to 60 Days 61 to 90 Days Total
Microfinance =4,654,792
P =4,714,640
P =5,603,240
P =14,972,672
P
Agri-agra 434,429 104,252 66,546 605,227
Regular 866,285 644,500 521,341 2,032,126
=5,955,506
P =5,463,392
P =6,191,127
P =17,610,025
P

Carrying amount per class of loans and receivables which terms have been renegotiated
Restructured receivables have principal terms and conditions that have been modified in
accordance with an agreement setting forth a new plan of payment or a schedule of payment on a
periodic basis. When the receivable account becomes past due and is being restructured or
extended, the approval of the BOD is required before loan booking and is always governed by the
BSP rules on restructuring. As at December 31, 2015 and 2014, the Bank’s outstanding
restructured receivables tagged as impaired account amounted P=0.4 million.

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 come due without incurring
unacceptable losses or costs.

Liquidity risk is managed by the Bank through holding sufficient liquid assets and appropriate
assessment to ensure short-term funding requirements are met and by ensuring the high collection
performance at all times. Deposits with banks are made on a short-term basis with almost all
being available on demand or within one month.

The Treasury Group uses liquidity forecast models that estimate the Bank’s cash flow needs based
on the Bank’s actual contractual obligations and under normal circumstances and extraordinary
circumstances. The Bank expects that majority of the depositors will not request payment on the
earliest date that the Bank could be required to pay.

The ALCO is responsible in formulating the Bank’s liquidity risk management policies. Liquidity
management is among the most important activities conducted within the Bank. The Bank
manages its liquidity risk through analyzing net funding requirements under alternative scenarios,
diversification of funding sources and contingency planning. The Bank utilizes a diverse range of
sources of funds, although short-term deposits made with the Bank’s network of domestic
branches comprise the majority of such funding. Core deposits composed mainly of microfinance
savings.

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The tables below summarize the maturity profile of the financial instruments of the Bank based on
contractual undiscounted cash flows (in thousands):

2015
Less than More than
On Demand 30 days 30 to 90 days 91 to 360 days 360 days Total
Financial Assets
Cash and other cash items P
= 100,839 P
=– P
=– P
=– P
=– P
= 100,839
Due from BSP 149,539 – – – – 149,539
Due from other banks 483,052 585,537 90,513 – – 1,159,102
AFS investment – 112 1,581 4,159 152,491 158,343
Loans and receivables*
Micro-finance 113,599 102,960 912,147 3,962,157 45 5,090,908
Others 8,855 38,939 174,498 563,535 93,233 879,060
HTM investments – 44,400 14,160 15,920 195,715 270,195
Total Financial Assets 855,884 771,948 1,192,899 4,545,771 441,484 7,807,986

Financial Liabilities
Deposit liabilities**
Demand 152,279 – – – – 152,279
Savings 3,767,324 174,757 118,084 160,897 180,482 4,401,544
Bills payable – 51,629 150,264 667,481 604,852 1,474,226
Other liabilities 95,146 51,430 34,012 72,295 95,340 348,223
Total Financial Liabilities 4,014,749 277,816 302,360 900,673 880,674 6,376,272
Net (P= 3,158,865) P
= 494,132 P
= 890,539 P
= 3,645,098 (P
= 439,190) P
= 1,431,714
*Includes accrued interest receivable
**Includes accrued interest payable

2014
Less than More than
On Demand 30 days 30 to 90 days 91 to 360 days 360 days Total
Financial Assets
Cash and other cash items P
=65,451 =
P– =
P– =
P– =
P– P
=65,451
Due from BSP 124,989 – – – – 124,989
Due from other banks 331,774 256,252 43 – – 588,069
Available-for-sale investment – 112 1,581 4,159 158,343 164,195
Loans and receivables*
Micro-finance 104,160 79,356 737,853 3,317,942 – 4,239,311
Others 6,916 29,050 126,356 327,229 65,098 554,649
Held-to-maturity investments – 1,275 3,745 25,825 235,302 266,147
Total Financial Assets 633,290 366,045 869,578 3,675,155 458,743 6,002,811

Financial Liabilities
Deposit liabilities**
Demand 107,459 – – – – 107,459
Savings 2,828,930 156,571 193,757 160,897 145,010 3,485,165
Bills payable – 37,898 249,773 559,626 – 847,297
Other liabilities 82,809 47,324 28,454 56,855 33,881 249,323
Total Financial Liabilities 3,019,198 241,793 471,984 777,378 178,891 4,689,244
Net (P=2,385,908) P
=124,252 P
=397,594 P
=2,897,777 P
=279,852 P
=1,313,567
*Includes accrued interest receivable
**Includes accrued interest payable

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 price of a financial instrument. The value of a financial instrument may
change as a result of changes in interest rates. The financial instruments of the Bank have fixed
interest rates, and therefore are not subject to any interest rate risk.

Interest rate risk

The Bank’s receivables earn fixed interest rates ranging from 7.7% to 28.0% per annum with
equivalent EIR ranging from 16.0% to 53.0% in 2015 and 2014. The shortest term of loan is one
week while the longest term is twelve (12) years.

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The Bank’s savings deposit liabilities include compulsory and voluntary savings that earn 0.3% to
6.0% per annum in 2015 and 2014. Special savings deposits have interest rates of 2.0% to 4.3% in
2015 and 2014.

The Bank pays fixed interest rates on its bills payables from 3.4% to 6.5% and payable within one
year to seven years in 2015 and from 4.3% to 5.0% per annum, payable within one year to three
years in 2014.

In order to manage its net interest margin, the Bank places its excess funds in high yield
investments and other short-term time deposits.

Fair value interest rate risk

Fair value interest rate risk is the risk that the value of a financial instrument will fluctuate because
of changes in interest rates. The Bank’s exposure to fair value interest rate risk relates primarily to
investments in AFS debt securities.

The table below demonstrates the sensitivity to a reasonably possible change in interest rates with
all other variables held constant, of the Bank’s OCI through the impact of interest on AFS debt
securities:

Changes in interest rates (in basis points)

2015 2014
+10.0 -10.0 +10.0 -10.0
Sensitivity of Equity (P
=3,773,968) =4,690,051
P =
P4,796,962 (P
=4,995,783)

Cash flow interest rate risk

The exposure to cash flow interest rate risk results primarily to financial instruments such as AFS
investments, HTM investments and loans and receivables which carry floating interest rates that
are reset as market rates changes.

As at December 31, 2015, the Bank has no AFS investments, HTM investments and loans and
receivables and financial liabilities that have floating interest rates, therefore no exposure to cash
flow interest risk.

Foreign currency risk

The Bank’s exposure to foreign exchange risk is minimal as it arises mainly from deposit
transactions that are denominated in foreign currency.

Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in
foreign exchange rates. Foreign currency liabilities generally consist of foreign currency-deposits
in the Bank’s FCDU account made in the Philippines or which are generated from remittances to
the Philippines by Filipino expatriates and overseas Filipino workers who retain for their own
benefit or for the benefit of a third party, foreign currency deposit accounts with the Bank and
foreign currency-denominated borrowings appearing in the regular books of the Bank.

Foreign currency deposits are generally used for those depositors accepting and will accept
remittance from abroad. Banks are required by the BSP to match the foreign currency assets with
the foreign currency liabilities held through FCDUs.

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

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6. Due from BSP and Other Banks

‘Due from BSP’ account represents the aggregate balance of noninterest-bearing peso deposit
account with BSP which the Bank maintains primarily to meet reserve requirements and to serve
as a clearing account for interbank claims.

Due from other banks represent funds deposited with domestic banks which are used as part of
the Bank’s operating funds. Due from other banks totaled P
=1.2 billion and =
P0.6 billion in 2015
and 2014, respectively.

As at December 31, 2015 and 2014, due from other banks include dollar-denominated deposits
amounting to USD249.3 thousand (P
=12.0 million) and USD155.5 thousand (P =7.0 million),
respectively.

Peso-denominated deposits earn interest at annual rates ranging from 0.5% to 1.0% in 2015 and
2014. Dollar-denominated deposits earn interest at annual rates ranging from 0.13% to 1.0% in
2015 and 2014.

Total interest income earned on deposits from other banks amounted to P

=8.3 million and
=
P6.7 million in 2015 and 2014, respectively. Of these amounts, =
P32.8 thousand and
P
=11.5 thousand pertain to interest income from USD deposits in 2015 and 2014, respectively.

7. Available-for-Sale Investments

This account consists of investments in quoted government debt securities amounting to

P
=136.5 million and =
P139.5 million on December 31, 2015 and 2014, respectively. These
securities have remaining maturity period of four (4) years and bear annual interest rates of 3.9%
to 4.8% in 2015.

Interest income on AFS investments amounted to =

P5.2 million and =
P3.5 million in 2015 and 2014,
respectively. Amortized premium on AFS investments amounted to = P0.7 million and
=
P0.5 million in 2015 and 2014, respectively.

The movements in the net unrealized gains (losses) on AFS investments of the Bank follow:

2015 2014
Balance at January 1 P
=794,008 =–
P
Fair value changes during the year (2,331,240) 1,134,297
Income tax effect 699,371 (340,289)
(1,631,869) 794,008
Balance at December 31 (P
=837,861) =794,008
P

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8. Loans and Receivables

This account consists of:

2015 2014
Receivables from borrowers
Microfinance loans P
=4,666,100,942 =3,908,797,744
P
Regular loans* 479,583,467 298,366,134
Agricultural-agrarian loans 234,620,264 189,973,855
Restructured loans 375,247 418,472
5,380,679,920 4,397,556,205
Less: unearned interest income 129,178 72,255
5,380,550,742 4,397,483,950
Other receivables:
UDSCL 56,000,000 37,000,000
Accounts receivable (Note 22) 35,271,552 31,291,030
Accrued interest receivable 78,165,932 21,381,212
5,549,988,226 4,487,156,192
Less: allowance for credit losses 225,734,445 179,013,618
P
=5,324,253,781 =4,308,142,574
P
*Include salary loans amounting to =
P31.3 million and =
P 14.9 million in 2015 and 2014, respectively.

As of December 31, 2015 and 2014, microfinance loans include receivables from borrowers
amounting to =
P2.1 billion and =
P1.2 billion , respectively, that are used to secure the Bank’s bills
payable (Note 14).

Regular loans include salary loans granted to the Bank's employees and officers and government
and schools employees earning fixed annual interest rates from 10.0% to 18.0% (Note 22).

Interest income on receivables from borrowers amounted to P

=2.4 billion and =P1.9 billion in 2015
and 2014, respectively. Receivables from borrowers bear fixed interest rates ranging from 7.7% to
28.0% per annum and with equivalent EIR ranging from 16.0% to 53.0% in 2015 and 2014.

BSP Reporting
In accordance with BSP regulations, the Bank considers as part of portfolio-at-risk (PAR) an
installment payment that is past due for one day. As at December 31, 2015 and 2014, the Bank’s
PAR amounted to P =139.6 million and P =137.3 million, respectively.

Generally, NPLs refer to loans whose principal and/or interest is unpaid for thirty days or more
after due date or after they have become past due in accordance with existing BSP 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 loans 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 loans 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.

*SGVFS017997*
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In the case of microfinance loans, past due/PAR accounts are considered as NPL.

Loans are classified as nonperforming in accordance with BSP regulations, or when, in the
opinion of management, collection of interest is doubtful. Loans are not reclassified as performing
until interest and principal payments are brought current or the loans are restructured in
accordance with existing BSP regulations, and future payments appear assured.

As at December 31, 2015 and 2014, based on the revised definition of NPLs under
Circular No. 772, NPLs of = P10.1 million and =
P17.6 million which the Bank reported to the BSP
are net of specific allowance amounting to =
P129.6 million and =
P119.7 million, respectively.

The following table shows the secured and unsecured portions of receivable from borrowers as at
December 31, 2015 and 2014:

2015 2014
Secured portion
Deposit hold-out (Note 13) P
=5,347,785,942 =4,375,511,332
P
Deed of assignment 5,738,337 5,223,725
Real estate mortgage 3,475,839 6,039,844
Unsecured portion 23,679,802 10,781,304
Total P
=5,380,679,920 =4,397,556,205
P

As at December 31, 2015 and 2014, information on the concentration of gross loans and
receivables as to industry follows (amounts in thousands):

2015 2014
Amount % Amount %
Wholesale and retail trade P
=3,558,706 64.1% =2,667,876
P 59.5%
Agriculture, hunting and forestry 1,017,069 18.3% 872,333 19.4%
Real estate renting and business
activities 391,800 7.1% 340,893 7.6%
Fishing 272,041 4.9% 211,977 4.7%
Education 159,091 2.9% 120,310 2.7%
Financial institutions 89,792 1.6% 89,557 2.0%
Manufacturing 33,177 0.6% 36,805 0.8%
Other community, social and
personal service activities 16,450 0.3% 144,770 3.2%
Government 5,936 0.1% – –
Health and social work 5,926 0.1% 2,635 0.1%
P
=5,549,988 100.0% =4,487,156
P 100.0%

The BSP considers the concentration of credit exists when the total loan exposure to a particular
industry or economic sector exceeds 30.00% of total loan portfolio.

Identified concentrations of credit risks are controlled and managed accordingly.

*SGVFS017997*
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The movements in allowance for credit losses on receivable from borrowers follow:

2015 2014
Balance at beginning of year P
=178,101,931 =150,201,602
P
Provision for credit losses 52,391,515 37,387,080
Accounts written-off (5,542,019) (9,486,751)
Reversal of accounts written-off 15,781 –
Balance at end of year P
=224,967,208 =178,101,931
P
Individual impairment 129,516,205 119,720,068
Collective impairment 95,451,003 58,381,863
Total allowance for credit losses P
=224,967,208 178,101,931
Gross amounts of loans individually determined to
be impaired, before deducting any individually
assessed impairment losses P
=129,516,205 P
=119,720,068

The movements in allowance for credit losses on other risk assets follow:

2015 2014
Balance at beginning of year P
=911,687 =190,439
P
Provision for credit losses 116,152 721,248
Accounts written-off (260,602) –
Balance at end of year P
=767,237 =911,687
P

Collective impairment also covers incurred but not reported losses which may correlate with
overall decline in portfolio or sub-portfolio quality either due to macroeconomic factors or
external events (e.g., calamities).

Unquoted debt instruments

As at December 31, 2015 and 2014, unquoted debt securities consist of short-term non-negotiable
Micro, Small and Medium Enterprise Notes issued by Small Business Corporation amounting to
P
=56.0 million and =
P37.0 million with term of one year. These notes bear annual interest ranging
from 1.3% to 1.5% and 1.3% to 1.7% in 2015 and 2014, respectively . Income earned from this
account amounted to =
P0.7 million and =P0.5 million in 2015 and 2014, respectively.

9. Held-to-Maturity Investments

This account represents investments in quoted government debt securities bearing fixed annual
interest rates ranging from 3.3% to 9.1% in 2015 and 4.1% to 9.1% in 2014 and EIR ranging from
3.1% to 7.0% in 2015 and 2014.

The rollforward analysis of this account follows:

2015 2014
Face Value
Balance at beginning of year P
=253,330,281 =313,499,039
P
Acquisitions 35,933,000 45,982,000
Maturities (52,836,000) (106,150,758)
Balance at end of year 236,427,281 253,330,281
(Forward)

*SGVFS017997*
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2015 2014
Net premium (discount)
Balance at beginning of year P
=5,535,383 =8,819,350
P
Acquisitions (1,073,501) 2,251,415
Amortization (2,668,767) (5,535,382)
Balance at end of year 1,793,115 5,535,383
Carrying value P
=238,220,396 =258,865,664
P

Interest income earned from HTM investments amounted to P

=11.2 million and P
=13.4 million
in 2015 and 2014, respectively.

10. Investment in an Associate

This account consists of:

2015 2014
Total acquisition cost
Acquisition cost P
=23,750,000 =10,750,000
P
Additional investments during
the year (Notes 15 and 23) 59,600,000 13,000,000
83,350,000 23,750,000
Accumulated equity in net earnings
Beginning balance 16,846,005 3,724,192
Share in net income of the associate for the year 36,760,807 13,121,813
53,606,812 16,846,005
Accumulated equity in other comprehensive
income
Beginning balance 1,568,984 (2,195,824)
Share in other comprehensive income of the
associate for the year (9,742,074) 3,764,808
(8,173,090) 1,568,984
Dividends received (10,400,000) –
Balance at the end of the year P
=118,383,722 =42,164,989
P
Advances to an associate (Note 22) 400,000 20,000,000
Total investment in associate P
=118,783,722 =62,164,989
P

The Bank’s investment in associate represents the carrying value of its 40.0% interest in Rizal
Bank, Inc. (RBI). RBI is involved in the business of rural banking as defined in and authorized
under Republic Act No. 3779, as amended. RBI’s primary activities include granting loans to
small farmers and to deserving rural enterprises, as well as receiving deposits in accordance with
the law. RBI is not listed on any public exchange. The primary place of business of RBI is at
P. Guevarra St., Cor. Aguirre St., Brgy. Poblacion 2, Sta. Cruz, Laguna.

As of December 31, 2015, the Bank has outstanding subscriptions payable to RBI amounting to
P
=29.6 million (Note 15).

*SGVFS017997*
 - 35 -

Advances to an RBI amounting to = P19.6 million made in 2014 were converted as additional
investments upon SEC’s approval of the Associate's increase in authorized capital stock on
April 15, 2015. The Bank intends to recognize the remaining advances amounting to = P0.4 million
once the additional increase in authorized capital stock is approved. As of December 31, 2015, the
Associate’s additional increase in authorized capital stock is not yet approved by the Associate’s
BOD.

The following table illustrates the summarized financial information of RBI (amounts in millions):

2015 2014
Current assets = 998.9
P =583.8
P
Noncurrent assets 82.0 46.1
Current liabilities 850.9 543.4
Noncurrent liabilities 21.8 3.6
Net Assets 208.2 82.9

Summarized financial information in the statements of income and comprehensive income of RBI
follow:

2015 2014
Revenue P
=310,475,032 =148,153,637
P
Net income 92,741,559 32,804,533
Other comprehensive income (loss) (24,355,185) 9,412,020
Total comprehensive income P
=68,386,374 =42,216,553
P

As of December 31, 2015, RBI has outstanding 8.0% cumulative preferred stocks amounting to
P
=9.8 million which have been considered in determining the Bank’s share in RBI’s net income.
RBI has no outstanding preferred stock in 2014.

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11. Property and Equipment

The composition of and movements in this account follow:

2015
Furniture,
Fixtures and Transportation Leasehold Construction Land
Equipment Building Land Equipment Improvements in Progress Improvements Total
Cost
Balance at beginning of year P
= 209,441,516 P
= 143,628,219 P
= 173,623,402 P
= 39,578,449 P
= 54,155,607 P
= 36,549,500 =
P– P
= 656,976,693
Additions 51,381,999 1,300,117 30,318,583 – 9,538,990 80,311,319 316,000 173,167,008
Disposals (2,174,264) – – (7,688,998) (136,800) – – (10,000,062)
Reclassification – 22,370,468 – – 2,680,000 (27,800,468) 2,750,000 –
Balance at end of year 258,649,251 167,298,804 203,941,985 31,889,451 66,237,797 89,060,351 3,066,000 820,143,639
Accumulated Depreciation and
Amortization
Balance at beginning of year 122,670,685 35,927,847 – 35,950,375 42,264,062 – – 236,812,969
Depreciation and amortization 36,660,541 26,159,416 – 3,553,289 6,704,760 – 394,100 73,472,106
Disposals (2,174,264) – – (7,688,998) (136,800) – – (10,000,062)
Balance at end of year 157,156,962 62,087,263 – 31,814,666 48,832,022 – 394,100 300,285,013
Net Book Value P
= 101,492,289 P
= 105,211,541 P
= 203,941,985 P
= 74,785 P
= 17,405,775 P
= 89,060,351 P
= 2,671,900 P
= 519,858,626

2014
Furniture,
Fixtures and Transportation Leasehold Construction Land
Equipment Building Land Equipment Improvements in Progress Improvements Total
Cost
Balance at beginning of year P
=158,241,563 P
=105,126,587 P
=115,006,911 P
=46,492,866 P
=47,377,388 P
=16,236,998 =
P– P
=488,482,313
Additions 52,651,112 40,411,632 58,616,491 122,480 4,868,219 20,312,502 – 176,982,436
Disposals (1,451,159) – – (7,036,897) – – – (8,488,056)
Reclassification – (1,910,000) – – 1,910,000 – – –
Balance at end of year 209,441,516 143,628,219 173,623,402 39,578,449 54,155,607 36,549,500 – 656,976,693
Accumulated Depreciation and Amortization
Balance at beginning of year 98,019,795 22,915,672 – 35,895,937 36,413,131 – – 193,244,535
Depreciation and amortization 25,537,028 13,012,175 – 6,991,336 5,850,931 – – 51,391,470
Disposals (886,138) – – (6,936,898) – – – (7,823,036)
Balance at end of year 122,670,685 35,927,847 – 35,950,375 42,264,062 – – 236,812,969
Net Book Value P
=86,770,831 P
=107,700,372 P
=173,623,402 P
=3,628,074 P
=11,891,545 P
=36,549,500 =
P– P
=420,163,724

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Depreciation, amortization, and impairment loss presented in the statement of income follow:

2015 2014
Property and equipment P
=73,472,106 =51,391,470
P
Intangible assets (Note 12) 340,648 1,490,612
P
=73,812,754 =52,882,082
P

Cost of fully depreciated assets still in use as at December 31, 2015 and 2014 amounted to
P142.2 million and P141.0 million, respectively.

12. Other Assets

Other assets consist of:

2015 2014
Stationeries and supplies P
=53,579,973 =40,515,769
P
Sundries 40,554,655 –
Intangible assets 34,492,180 1,049,364
Security deposits 22,189,022 13,094,110
Prepaid expenses 15,173,016 1,833,155
Others 1,491,563 6,596,414
P
=167,480,409 =63,088,812
P

Sundries pertain to inward clearing checks issued by the Bank’s depositors during the last banking
day of 2015. These are subsequently reversed on January 4, 2016.

Intangible assets include software costs under development amounting to P33.3 million, which the
Bank accrued in July 2015.

Security deposits pertain to refundable deposits on the Bank’s leased office spaces and staff house
premises.

The movements of intangible assets follow:

2015 2014
Cost
Balance at beginning of year P
=4,363,102 =3,798,976
P
Additions (Note 23) 33,783,464 981,000
Write-off – (416,874)
Balance at end of year 38,146,566 4,363,102
Accumulated Amortization
Balance at beginning of year 3,313,738 1,823,126
Amortization 340,648 1,490,612
Balance at end of year 3,654,386 3,313,738
Net Book Value P
=34,492,180 =1,049,364
P

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13. Deposit Liabilities

The Bank’s savings deposit liabilities include pledge savings amounting to P

=2.9 billion and
P
=2.3 billion as at December 31, 2015 and 2014, respectively. These represent the aggregate
compulsory savings of =P50.0 per week collected from each member in 2015 and 2014. Under an
assignment agreement, the pledge savings balances serve as security for loans granted by the Bank
to its members. The pledge savings earn annual interest of 2.0%. Pledge savings equivalent to
15.0% of the loan proceeds serves as guarantee fund of the outstanding loan receivable from
members (Note 8).

Savings deposits include regular and special savings deposit. Regular savings deposits include
“Kayang kaya”, “Tagumpay”, “Maagap”, “Matapat” and “Dollar” savings. These savings
accounts earn annual interest rate ranging from 0.3% to 6.0% in 2015 and 2014. Special savings
deposits include “Tiwala” savings. This account earns annual interest ranging from 2.0% to 4.3%
in 2015 and 2014. Interest expense on deposit liabilities amounted to =
P102.8 million and
=
P84.3 million in 2015 and 2014, respectively.

On April 3, 2014, the BSP issued Circular No. 830 which took effect on April 11, 2014. Circular
No. 830 which superseded Circular No. 7053, issued on March 29, 2012, increased the reserve
requirements from 4.0% to 5.0% for demand deposits and from 2.0% to 3.0% for savings and time
deposits.

As at December 31, 2015 and 2014, available reserves pertain to Due from BSP of =
P149.5 million
and =
P125.0 million for 2015 and 2014, respectively (Note 6).

As at December 31, 2015 and 2014, the Bank is compliant with the applicable reserve
requirements.

14. Bills Payable

This account consists of borrowings from:

2015 2014
Face Value
Balance at beginning of year P
=885,000,000 =425,000,000
P
Availments 1,320,000,000 1,185,000,000
Principal payments (935,000,000) (725,000,000)
Balance at end of year 1,270,000,000 885,000,000
Unamortized Discount
Balance at beginning of year (3,045,104) (1,567,315)
Availments (9,281,433) (5,840,068)
Amortization 4,028,347 4,362,279
Balance at end of year (8,298,190) (3,045,104)
Carrying value P
=1,261,701,810 =881,954,896
P

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 - 39 -

Local banks
Bills payable of P
=721.7 million and = P882.0 million in 2015 and 2014, respectively, pertain to
promissory notes obtained from various local banks for working capital requirements and have
tenor of 1 year and interest rates ranging from 3.4% to 4.3% and 3.9% to 6.0% in 2015 and 2014,
respectively.

International Finance Corporation (IFC)

On December 16, 2015, the Bank entered into a Loan Agreement (Agreement) with IFC for the
availment of loan amounting to P=540.0 million (the Loan). The purpose of the loan is to provide
funds to be used by the Bank for financing its lending operations to small and medium-sized
enterprises and microfinance entities. The note bears a Philippine fixed base rate of 6.5%
inclusive of 2.7% spread and has a tenor of seven (7) years.

Borrowings from IFC contain the following embedded derivatives:

a. prepayment option which allows the Bank to redeem the loan (or portion of the loan not less
than =
P45.0 million) prior to the respective maturities; and
b. cross currency swap which allows the parties to exchange interest payments and principals
denominated in different currencies (in USD and Philippine Pesos).

The Bank assessed that these embedded derivatives are clearly and closely related to the host loan
instruments, since their redemption price approximate the loans’ amortized cost on redemption
dates. Accordingly, these embedded derivatives were not accounted for separately from the host
loan instrument.

Debt covenants
The Agreement covering the loan with IFC provide for restrictions and requirements which
includes the following negative and financial covenants, among others:

a. Negative covenants

Unless IFC otherwise agrees, the Bank shall not take action on the following, among others:

· declare or pay any dividend or make any distribution on its share capital (other than
dividends or distribution payable in shares of the Bank), unless the proposed payment or
distribution is out of net income of the current financial year, no event of default or
potential event of default has occurred and is then continuing; and after giving effect to
any such action the Bank is in compliance with the financial covenants stated in the
agreement;
· purchase, redeem or otherwise acquire any shares of the Bank or any option over them;
· incur, create, assume or permit to exist any liability that is covered or ranks prior or senior
to the Loan, except those that is in existence of the date of Agreement;
· create or permit to exist any lien on any property, revenues or other assets, present or
future, of the Bank subject to exceptions indicated in the Agreement;
· enter into any transaction except in the ordinary course of business on ordinary
commercial terms and on the basis of arm’s-length arrangements;
· enter into or establish any partnership, profit-sharing or royalty agreement or other similar
arrangement whereby the Bank’s income or profits are, or might be, shared with any other
person; or enter into any management contract or similar arrangement whereby its
business or operations are managed by any other persons;
· have any subsidiaries subject to exceptions indicated in the Agreement;

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· change its charter in any manner which would be inconsistent with the provisions of the
agreement or any other transaction document; its financial year; or the nature or scope of
its present or contemplated business or operations;
· undertake or permit any merger, spin-off, consolidation or reorganization; or sell,
transfer, lease or otherwise dispose of all or a substantial part of its assets, other than
assets acquired in the enforcement of security created in favor of the Bank in the
ordinary course of its banking business, whether in a single transaction or in a series of
transaction; and
· prepay or repurchase any long-term debt (other than the Loan) subject to conditions
indicated the agreement.

b. Financial covenants

The Bank agreed to prudently manage its financial position in accordance with sound banking
and financial practices, applicable laws and the prudential standards of the BSP. To the extent
that the banking regulation imposes financial requirements or ratios that are more stringent
than the following, the Bank shall observe and comply with those more stringent requirements
or ratios.

· risk weighted capital adequacy ratio of not less than 10.0%;

· equity to assets ratio of not less than 5.0%;
· economic group exposure ratio of not more than 15.0%;
· aggregate large exposure ratio of not more than 400.0%;
· related party exposure ratio of not more than 15.0%;
· open credit exposures ratio of not more than 25.0%;
· fixed assets plus equity participants ratio of not more than 35.0%;
· aggregate foreign exchange risk ratio of not more than 25.0%;
· single currency foreign exchange risk ratio of not more than 10.0%;
· interest rate risk ratio of not less than -10.0% and not more than 10.0%;
· aggregate interest rate risk ratio of not less than -20.0% and not more than 20.0%;
· foreign currency maturity gap ratio of not less than (i.e., more negative than) -150.0%; and
· aggregate negative maturity gap ratio of not less than (i.e., more
negative than) -300.0%.

The period of compliance with the above covenants will commence on March 31, 2016.

Receivable from borrowers amounting to P

=2.1 billion and P
=1.2 billion secure the above
borrowings as at December 31, 2015 and 2014, respectively (Note 8).

Interest expense on bills payable amounted to =

P24.4 million and P
=25.9 million in 2015 and 2014,
respectively.

The Bank has available funds from its loan facilities amounting to =
P480.0 million and
=
P215.0 million in 2015 and 2014, respectively.

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15. Other Liabilities

This account consists of the following:

2015 2014
Financial liabilities
Accrued expenses P
=138,698,404 =126,710,041
P
Accounts payable (Note 22) 52,225,866 47,315,395
Dividends payable (Note 17) 42,037,014 10,097,266
Accrued interest on deposit liabilities (Note 22) 41,145,317 25,075,135
Subscriptions payable (Notes 10 and 23) 29,600,000 –
Accrued interest on bills payable 3,863,878 3,795,049
307,570,479 212,992,886
Nonfinancial liabilities
Deposit for future stock subscription (Note 17) 68,288,110 –
Accrued vacation leaves 40,652,767 38,330,266
Accrued taxes 12,054,399 7,805,158
Withholding taxes payable 11,240,104 7,418,324
132,235,380 53,553,748
P
=439,805,859 =266,546,634
P

Accrued expenses include accrued rent, Philippine Deposit Insurance Corporation premium and
other operating expenses.

Subscriptions payable pertains to the unpaid portion of additional subscriptions amounting to

=
P40.0 million in RBI’s net assets in 2015 (Note 10).

Accounts payable include due to suppliers and contractors, due to staff, due to Social Security
System for collection remittances, Automated Teller Machine overages, statutory payables on
employee compensation, and due to related parties (see Note 22).

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16. Maturity Analysis of Assets and Liabilities

The following table shows an analysis of assets and liabilities analyzed according to whether they
are expected to be recovered or settled within one year and beyond one year from reporting dates
(in thousands):

2015 2014
Within one Beyond one Within one Beyond one
year year Total year year Total
Financial Assets
Cash and other cash items P
= 100,839 P
=– P
= 100,839 P
=65,451 =
P– P
=65,451
Due from BSP 149,539 – 149,539 124,989 – 124,989
Due from other banks 1,158,855 – 1,158,855 587,746 – 587,746
AFS investment – 136,508 136,508 – 139,524 139,524
Loans and receivables 5,519,223 30,894 5,550,117 4,467,326 19,902 4,487,228
HTM investments 63,732 174,488 238,220 55,577 203,289 258,866
Security deposits – 22,189 22,189 – 13,094 13,094
Nonfinancial Assets
Retirement asset – 126,101 126,101 – 87,600 87,600
Investment in an associate – 118,784 118,784 – 62,165 62,165
Property and equipment – 820,144 820,144 – 656,977 656,977
Deferred tax asset – 46,028 46,028 – 42,463 42,463
Intangibles – 38,147 38,147 – 4,363 4,363
Other assets 88,610 22,188 110,798 40,522 9,473 49,995
Total Assets P
= 7,080,798 P
= 1,535,471 8,616,269 P
=5,341,611 P
=1,238,850 6,580,461
Less: Allowance for credit and
impairment losses (225,734) (179,014)
Unearned interest (129) (72)
Accumulated depreciation and
amortization (303,939) (240,127)
P
= 8,086,467 P
=6,160,198

Financial liabilities
Deposit liabilities P
= 4,332,286 P
= 180,481 P
= 4,512,767 P
=3,375,762 P
=144,138 P
=3,519,900
Bills payable 730,983 540,000 1,270,983 885,000 – 885,000
Other liabilities:
Accrued expenses 150,074 18,224 168,298 96,524 30,186 126,710
Accounts payable 52,226 – 52,226 47,315 – 47,315
Accrued interest 45,009 – 45,009 9,226 19,645 28,871
Dividends payable 42,037 – 42,037 10,097 – 10,097
Nonfinancial liabilities
Income tax payable 106,110 – 106,110 61,984 – 61,984
Other liabilities:
Accrued vacation leaves 8,035 32,618 40,653 6,808 31,522 38,330
Deposit for stock
subscription – 68,288 68,288 – – –
Accrued taxes 12,054 – 12,054 7,805 – 7,805
Withholding taxes payable 11,240 – 11,240 7,419 – 7,419
Total Liabilities P
= 5,490,054 P
= 839,611 P
= 6,329,665 P
=4,507,940 P
=225,491 P
=4,733,431
Less: Unamortized discount on bills
(9,281) (3,045)
Payable
P
= 6,320,384 P
=4,730,386

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17. Equity

Capital Stock
As at December 31, 2015 and 2014, the Bank’s capital stock consists of:

2015 2014
Shares Amount Shares Amount
Preferred stock - P =200 par value,
2,500,000 authorized shares
Issued and outstanding
Issuance of shares at beginning of
year 2,481,263 P
=496,252,600 2,101,220 P
=420,244,000
Issuance of shares – – 374,727 74,945,400
Issuances of shares of stocks from
settlement of subscriptions
receivables 14,134 2,826,800 5,316 1,063,200
Application of cash dividends to
subscription receivable 594 118,800 – –
Preferred stock at the end of the year 2,495,991 499,198,200 2,481,263 496,252,600
Subscribed 4,009 801,800 4,964 992,800
Subscription receivable – (116,000) – (307,000)
2,500,000 P
=499,884,000 2,486,227 P
=496,938,400
Common stock - P =100 par value,
5,000,000 authorized shares
Issued and outstanding
Issuance of shares at beginning of
year 3,205,465 P
=320,546,500 2,013,194 P
=201,319,400
Issuances of shares of stocks from
settlement of subscriptions
receivables 48,869 4,886,900 326,027 32,602,748
Application of cash dividends to
subscription receivable 169,610 16,961,000 – –
Issuance of stock dividends – – 866,244 86,624,352
Common stock at the end of the year 3,423,944 342,394,400 3,205,465 320,546,500
Subscribed 1,576,056 157,605,600 1,794,535 179,453,500
Subscription receivable – (7,713,200) – (29,561,100)
5,000,000 P
=492,286,800 5,000,000 P
=470,438,900

Preferred shares receive annual dividend rate of 8.0% and has the following features:
(a) cumulative, (b) non-participating, and (c) non-redeemable.

In 2015, the Bank issued 5,000 preferred shares at par amounting to a total of =
P1.0 million. In
addition, the Bank’s collections from subscriptions receivable on preferred and common shares
amounted to = P4.9 million and =
P2.8 million, respectively.

On January 17, 2015, the BOD and the stockholders approved and ratified the increase in the
Bank’s capitalization from = P1.0 billion to =
P2.0 billion by increasing its authorized preferred and
common stock by = P0.5 billion each. As of December 31, 2015, the Bank has yet to obtain
approval and file its application from BSP and SEC, respectively.

Deposit for Future Stock Subscriptions

Deposit for future stock subscriptions pertains to total consideration received in excess of the
authorized capital of the Bank with the purpose of applying the same as payment for future
issuance of shares.

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As at December 31, 2015, the Bank has not yet filed its application for increase in authorized
capital with SEC. DFS of =P68.3 million was classified under liabilities as of December 31, 2015
in accordance with the requirement of SEC Financial Reporting Bulletin No. 006
(Notes 2 and 15).

Dividend Declaration
Cash and stock dividends
On April 18, 2015, the BOD declared cash dividends of 8.0% and P15.0 per share to its preferred
and common stockholders, respectively. These were approved by the BSP on June 19, 2015.
Cash dividends declared amounting to =
P114.8 million were paid starting July 14, 2015 to preferred
and common stockholders of record as at March 31, 2015.

On September 19, 2015, the BOD declared another cash dividend of 4.0% and = P10.0 per share to
its preferred and common stockholders, respectively, which were approved by the BSP on
November 24, 2015. Cash dividends declared amounting to P =70.0 million were paid starting
December 11, 2015 to preferred and common stockholders.

In 2015, cash dividends amounting to =P17.1 million were applied as payments for the outstanding
subscription receivables of which, P
=17.0 million and P
=0.1 million were recognized as additional
common and preferred stocks, respectively.

On March 15, 2014, the BOD declared 8.0% and cash dividends of = P19.0 per share to its preferred
and common stockholders, respectively, and P
=21.0 per share of stock dividends to its common
stockholders. These were approved by the BSP on May 7, 2014. Cash dividends amounting to P =
112.8 million were paid on May 8, 2014 to preferred and common stockholders of record as at
February 28, 2014. Of this amount, =
P1,852 represented cash payments to fractional shareholders.

On August 16, 2014, the BOD declared another cash dividend of 4.0% and P =12.5 per share to its
preferred and common stockholders, respectively, which were approved by the BSP on
October 28, 2014. The cash dividends amounted to =P80.5 million and were partially paid on
October 29, 2014 to preferred and common stockholders of record as at July 31, 2014.

Capital Management
The Bank’s capital management aims to ensure that it complies with regulatory capital
requirements and it maintains strong credit ratings and healthy capital ratios in order to support
and sustain its business growth towards maximizing the shareholders’ value.

The Bank manages its capital structure and appropriately effect adjustment according to the
changes in economic conditions and the risk level it recognizes at every point of time in the course
of its business operations.

In order to maintain or adjust for good capital structure, the Bank carefully measures the amount
of dividend payment to shareholders, call payment due from the capital subscribers or issue capital
securities as necessary. No changes were made in the objectives, policies and processes from the
previous years.

Regulatory Qualifying Capital

Under existing BSP regulations, the determination of the Bank’s compliance with regulatory
requirements and ratios is based on the amount of the Bank’s unimpaired capital (regulatory net
worth) reported to the BSP, determined on the basis of regulatory accounting policies, which
differ from PFRS in some aspects.

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The amount of surplus funds available for dividend declaration is determined also on the basis of
regulatory net worth after considering certain adjustments. As at December 31, 2015 and 2014,
the Bank was in compliance with the risk-based capital adequacy ratio (CAR).
BSP Circular No. 688, Revised Risk-Based Capital Adequacy Framework for stand-alone thrift
banks, rural banks and cooperative banks which took effect on January 1, 2012 represents BSP's
commitment to align existing prudential regulations with international standards consistent with
the BSP's goal of promoting the soundness and stability of individual banks and of the banking
system as a whole. BSP Circular No. 688 replaced BSP Circular No. 280 which is primarily based
on Basel 1.

Under current banking regulations, the combined capital accounts of each bank should not be less
than an amount equal to ten percent (10.0%) of its risk assets. The qualifying capital of the Bank
for purposes of determining the capital-to-risk assets ratio to total equity excluding:

· unbooked valuation reserves and other capital adjustments as may be required by the BSP;
· total outstanding unsecured credit accommodations to directors, officers, stakeholders and
DOSRI;
· deferred tax asset or liability; and
· other regulatory deductions.

Risk assets consist of total assets after exclusion of cash and other cash items, due from BSP,
loans covered by hold-out on or assignment of deposits, loans or acceptances under letters of
credit to the extent covered by margin deposits, and other non-risk items as determined by the
Monetary Board of the BSP.

Under BSP Circular No. 360, effective July 1, 2003, the CAR is to be inclusive of a market risk
charge. BSP Circular No. 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 October 9, 2014, the BSP issued BSP Circular No. 854 which amends the provisions of the
Manual of Regulations for Banks on the minimum capitalization of banks and on the prerequisites
for the grant of authority to establish a branch. Based on this circular, the Bank is required to
maintain a minimum capitalization of = P400.0 million.

Regulatory capital consists of Tier 1 capital, which comprises share capital, share premium,
retained earnings including current year profit. The other component of regulatory capital is
Tier 2 capital, which includes revaluation reserves. Certain adjustments are made to PFRS-based
results and reserves, as prescribed by the BSP.

The CAR of the Bank as at December 31, 2015 and 2014, as reported to the BSP, is shown in the
table below (amounts in millions):

2015 2014
Tier 1 capital P
=1,117.0 =780.6
P
Tier 2 capital 577.1 516.7
Total qualifying capital P
=1,694.1 =1,297.3
P
Risk weighted assets P
=8,960.0 =4,865.1
P
Tier 1 capital ratio 12.5% 16.0%
Tier 2 capital ratio 6.4% 10.6%
Total CAR 18.9% 26.6%

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As at December 31, 2015 and 2014, the Bank’s CAR is in compliance with the regulatory
requirements.

The Bank maintains an actively managed capital base to cover risks inherent in the business. The
adequacy of the Bank’s capital is monitored using, among other measures, the rules and ratios
adopted by the BSP in supervising the Bank.

Financial Performance
The following basic ratios measure the financial performance of the Bank:

2015 2014
Return on average equity 32.3% 26.6%
Return on average assets 7.3% 6.0%
Net interest margin 37.5% 37.8%

Covered banks and quasi-banks are enjoined to consider the forthcoming regulatory changes in
capital planning exercises and conduct preliminary assessments of the likely impact of the
changes.

18. Miscellaneous Income and Expenses

Miscellaneous income consists of:

2015 2014
Deposit-related fees and other charges P
=8,579,888 =5,104,774
P
Recoveries of written-off account 3,655,810 4,956,559
Gain on disposal of property and equipment 1,940,537 683,562
Commission income 740,393 692,469
Others (Notes 20 and 22) 2,695,044 3,119,284
P
=17,611,672 =14,556,648
P

Others include rental income, service charges on remittances, management fees to RBI, donation
from private institutions and insurance claims for transportation equipment.

Miscellaneous expense consists of the following:

2015 2014
Scholarship allowance P
=14,288,612 =8,771,522
P
Other donations and charitable expenses (Note 22) 10,140,176 551,944
Medical and other related expenses 6,306,622 1,424,753
Representation and entertainment (Note 21) 8,219,007 6,353,192
Penalties and other service charges 3,705,538 2,433,426
Calamity assistance 4,495,535 21,750,365
Advertising and promotions 656,833 2,745,492
Others 13,775,147 830,681
P
=61,587,470 =44,861,375
P

Others include notarial and other legal expenses, foreign currency exchange loss, loss on
derecognition of asset and other small value expenses that are non-recurring.

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19. Retirement Benefits

The Bank, CARD MRI Development Institute, Inc. (CMDI), CARD Mutual Benefit Association
(MBA), Inc., CARD SME Bank, Inc., CARD MRI Insurance Agency (CAMIA), Inc., CARD
Business Development Service Foundation, Inc. (BDSFI), Inc., CARD MRI Information
Technology, Inc. (CMIT), CARD Employees Multi-Purpose Cooperative (EMPC), Responsible
Investments for Solidarity and Empowerment Financing Co. (RISE), BotiCARD Inc., CARD
Leasing and Finance Corporation (CLFC), RBI, CARD, Inc. and Mga Likha ni Inay Inc. (MLNI),
maintain a funded and formal noncontributory defined benefit retirement plan - the CARD MRI
Multi-Employer Retirement Plan (MERP) - covering all of their regular employees. MERP has a
projected unit cost format and is financed solely by the Bank and its related parties. MERP
complies with the requirement of Republic Act No. 7641 (Retirement Law). MERP provides
lump sum benefits equivalent to 120.0% of final salary for every year of credited service, a
fraction of at least six (6) months being considered as one whole year upon retirement, death, total
and permanent disability, or early retirement after completion of at least one year of service with
the participating companies.

The latest actuarial valuation report covers reporting period as at December 31, 2015.

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Changes in net retirement liability in 2015 and 2014 are as follows:

2015
Net benefit cost in statement of income* Remeasurements in other comprehensive income
Return on Actuarial
plan changes
assets Actuarial arising
(excluding changes arising from changes
amount from changes in in
January 1, Current Transfer to Benefits included in Experience demographic financial Effect of Asset Contribution December 31,
2015 service cost Net interest Subtotal the Plan paid net interest) adjustments assumptions assumptions Ceiling Subtotal by employer 2015
Present value of defined benefit
obligation =
P275,892,902 =
P30,439,958 =
P12,304,823 =
P42,744,781 =
P7,211,673 (P
= 490,045) =
P– =
P19,594,140 =
P8,227,465 (P
= 30,840,705) P
=– (P
= 3,019,100) =
P– =
P322,340,211
Fair value of plan assets (371,515,908) – (18,411,347) (18,411,347) (7,211,673) 490,045 8,596,526 – – – – 8,596,526 (75,867,516) (463,919,873)
Effect of asset ceiling 8,022,959 – 357,824 357,824 – – – – – – 7,097,960 7,097,960 – 15,478,743
Net retirement liability (asset) (P
= 87,600,047) =
P30,439,958 (P
= 5,748,700) =
P24,691,258 P
=– P
=– =
P8,596,526 =
P19,594,140 =
P8,227,465 (P
= 30,840,705) =
P7,097,960 =
P12,675,386 (P
= 75,867,516) (P
= 126,100,919)
*The net benefit cost is included in ‘Compensation and benefits’ in the statement of income.

2014
Net benefit cost in statement of income* Remeasurements in other comprehensive income
Return on Actuarial
plan changes
assets Actuarial arising
(excluding changes arising from changes
amount from changes in in
January 1, Current Transfer to Benefits included in Experience demographic financial Effect of Asset Contribution December 31,
2014 service cost Net interest Subtotal the Plan paid net interest) adjustments assumptions assumptions Ceiling Subtotal by employer 2014

Present value of defined benefit

obligation =
P495,868,369 =
P68,916,949 =
P31,636,402 =
P100,553,351 (P
=1,091,584) (P
=1,459,850) P
=– =
P732,445 (P
=70,340,254) (P
=248,369,575) =
P– (P
=317,977,384) =
P– =
P275,892,902
Fair value of plan assets (289,029,445) – (20,778,862) (20,778,862) 1,091,584 1,459,850 11,608,481 – – – – 11,608,481 (75,867,516) (371,515,908)
Effect of asset ceiling – – – – – – – – – – 8,022,959 8,022,959 – 8,022,959

Net retirement liability (asset) =

P206,838,924 =
P68,916,949 =
P10,857,540 =
P79,774,489 P
=– P
=– =
P11,608,481 =
P732,445 (P
=70,340,254) (P
=248,369,575) =
P8,022,959 (P
=298,345,944) (P
=75,867,516) (P
=87,600,047)

*The net benefit cost is included in ‘Compensation and benefits’ in the statement of income.

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The maximum economic benefit of plan assets available is a combination of expected refunds
from the plan and reduction in future contributions. The fair value of plan assets by each class as
at the end of the reporting period are as follow:

2015 2014
Cash and other cash items P
=188,861,781 = 146,080,054
P
Government securities 212,057,770 170,414,347
Loans and receivables 48,989,939 41,163,963
Mutual funds 10,391,807 3,492,250
Other assets 3,618,576 10,365,294
Fair value of plan assets P
=463,919,873 =371,515,908
P

All plan assets do not have quoted prices in an active market except for government securities.
Cash and cash equivalents are deposited in reputable financial institutions and related parties and
are deemed to be standard grade. Mutual fund, loans and other assets are unrated.

The plan assets have diverse investments and do not have any concentration risk other than those
in government securities which are of low risk.

The management performs an Asset-Liability Matching Study annually. The overall investment
policy and strategy of the Bank’s defined benefit plans is guided by the objective of achieving an
investment return which, together with contributions, ensures that there will be sufficient assets to
pay pension benefits as they fall due while also mitigating the various risk of the plans.

The cost of defined retirement plan as well as the present value of the defined benefit obligation is
determined using actuarial valuations. The actuarial valuation involves making various
assumptions. The principal assumptions used in determining pension for the defined benefit plans
are shown below:

2015 2014
Discount rates
January 1 4.5% 6.4%
December 31 4.9% 4.5%
Future salary increases 7.0% 7.0%

The sensitivity analysis below has been determined based on reasonably possible changes of each
significant assumption on the defined benefit obligation as at the end of the reporting period,
assuming if all other assumptions were held constant:

Increase (decrease) in present value of obligation

2015 2014
+100 -100 +100 -100
Discount rates (P
=83,591,100) =64,519,753 (P
P =73,397,777) =56,405,812
P
Future salary increases 77,363,714 (61,674,061) 146,180280 116,428,311

The Bank plans to contribute P

=75.9 million to the defined benefit retirement plan in 2016.

As at December 31, 2015 and 2014, the average duration of defined benefit obligations is 28.0 and
27.5 years, respectively.

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Shown below is the maturity analysis of the undiscounted benefit payments:

2015 2014
Less than 1 year P
=5,537,160 =5,026,050
P
More than 1 year to 5 years 6,490,698 6,040,832
More than 5 years to 10 years 6,738,901 5,372,871
More than 10 years to 15 years 50,752,196 21,770,477
More than 15 years to 20 years 345,596,419 125,233,966
More than 20 years to 25 years 1,542,425,475 720,760,832
More than 25 years 21,507,296,653 7,113,701,098

20. Leases

Office spaces
The Bank leases the premises occupied by some of its branches in which lease payments are
subjected to escalation clauses at 3.0% to 10.0% starting either on the second or third year of
lease. The lease contracts are for the periods ranging from one to five years and are renewable
upon mutual agreement between the Bank and the lessors.

Rent expense amounted to =

P60.6 million and =
P47.3 million in 2015 and 2014, respectively.

Future minimum rental lease payments on operating leases of the Bank are as follows:

2015 2014
Within one year P
=57,396,647 =44,115,136
P
Beyond one year but not beyond five years 89,368,956 61,879,374
P
=146,765,603 =105,994,510
P

Transportation and IT equipment

The Bank leases transportation and IT equipment from CLFC. The lease contracts have a term of
18 months.

Lease for transportation equipment recorded under ‘Occupancy’ in 2015 and 2014
amounted to =P11.9 million and =P5.7 million, respectively. Lease for IT equipment recorded under
‘Occupancy’ amounted to = P7.3 million and P
=3.3 million in 2015 and 2014, respectively.

Future minimum rental lease payments on the operating leases of the Bank are as follows:

2015 2014
Within one year P
=18,236,965 =13,560,700
P
Beyond one year but not beyond five years 3,056,433 2,459,400
P
=21,293,398 =16,020,100
P

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21. Income Taxes

Under Philippine tax laws, the Bank is subject to percentage and other taxes as well as income
taxes. Percentage and other taxes paid consist principally of gross receipts tax (GRT) and
documentary stamp taxes presented as ‘Taxes and licenses’ in the statement of income.

Income taxes include corporate income tax, as discussed below, and 20.0% final withholding tax
on gross interest income from government securities and other deposit substitutes.

Current tax regulations provide that RCIT rate shall be 30.0%. It further states that nondeductible
interest expense shall likewise be reduced to 33.0% of interest income subjected to final tax.
The Bank allocates common expenses in computing its taxable income based on Revenue
Regulations (RR) 4-2011, which prescribes the proper allocation of costs and expenses amongst
income earnings of banks and other financial institutions for income tax reporting purposes.

An optional standard deduction equivalent to 40.0% of gross income may be claimed as an

alternative deduction in computing for the RCIT.

Current tax regulations also provide for the ceiling on the amount of entertainment, amusement
and recreation (EAR) expense that can be claimed as a deduction against taxable income. Under
the regulation, EAR expense allowed as a deductible expense for a service company like the Bank
is limited to the actual EAR paid or incurred but not to exceed 1.0% of net revenue. As at
December 31, 2015, EAR expenses of the Bank amounted to P =8.2 million in 2015 and
P
=6.4 million in 2014. The regulations also provide for MCIT of 2.0% on modified gross income
and allow a NOLCO. The MCIT and NOLCO may be applied against the Bank’s income tax
liability and taxable income, respectively, over a three-year period from the year of inception.

Provision for income tax consists of:

2015 2014
Current:
RCIT P
=211,354,802 =148,581,476
P
Final tax 5,546,257 5,435,260
216,901,059 154,016,736
Deferred 937,243 (13,635,100)
P
=217,838,302 =140,381,636
P

As at December 31, 2015, the Bank has no unrecognized deferred tax assets. As at
December 31, 2014, deferred tax assets amounting to = P0.2 million from allowance on other risk
assets were not recognized by the Bank. The management believes that it is not probable that
these temporary differences will be realized in the future.

Components of net deferred tax assets are as follows:

2015 2014
Deferred tax asset
Allowance for credit and impairment losses P67,720,334
= P53,704,085
=
Accrued rent and vacation leave 12,678,899 11,763,867
Unamortized past service cost 3,044,568 3,583,833
Unrealized foreign exchange loss 54,967 31,350
Unrealized loss on AFS investments 359,083 −
83,857,851 69,083,135
(Forward)

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2015 2014
Deferred tax liability
Retirement asset (P
=37,830,276) (P
=26,280,014)
Unrealized gain on AFS investments – (340,289)
(37,830,276) (26,620,303)
=46,027,575
P =42,462,832
P

The income tax effect arising from retirement asset/liabilities recognized 2015 and 2014 in other
comprehensive income amounted to a benefit of = P3.8 million and provision of P =89.5 million,
respectively.

The income tax effect arising from unrealized gain (loss) on AFS investment recognized in
statement of other comprehensive income amounted to a benefit of = P0.7 million and provision of
=
P0.3 million in 2015 and 2014, respectively.

The reconciliation between the statutory income tax and effective income tax follow:

2015 2014
Statutory income tax P
=220,316,293 =138,771,351
P
Income tax effects of:
Nondeductible interest expense and other
expenses 10,616,944 7,246,176
Interest income subject to final tax (2,066,693) (1,767,277)
Nontaxable income (11,028,242) (3,936,544)
Movements in unrecognized deferred tax asset – (67,930)
Provision for income tax P
=217,838,302 =140,245,776
P

22. Related Party Transactions

Related party relationship exists when one party has the ability to control, directly, or indirectly
through one or more intermediaries, the other party or exercises significant influence over the
other party in making financial and operating decisions. Such relationship also exists between
and/or among entities which are under common control with the reporting enterprise, or between
and/or among the enterprise and its key management personnel, directors, or its shareholders. In
considering each possible related party relationship, attention is directed to the substance or the
relationship, and not merely the legal form. The Bank’s related parties include:

· key management personnel, close family members of key management personnel and entities
which are controlled, significantly influenced by or for which significant voting power is held
by key management personnel or their close family members,
· post-employment benefit plans for the benefit of the Bank’s employees, and
· other related parties within the CARD-MRI Group.

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Transactions with retirement plans

Under PFRS, certain post-employment benefit plans are considered as related parties. CARD-
MRI’s MERP is managed by the CARD EMPC. The plan assets are invested in time deposits and
special savings accounts and government bonds (see Note 19). As at December 31, 2015 and
2014, the retirement funds do not hold or trade the Bank’s shares.

Remunerations of Key Management Personnel

Key management personnel are those persons having authority and responsibility for planning,
directing and controlling the activities of the Bank, directly or indirectly. The Bank considers the
members of the senior management to constitute key management personnel for purposes of
PAS 24.

The compensation of key management personnel included under ‘Compensation and benefits’ in
the statement of income are as follows (in millions):

2015 2014
Short-term employee benefits P
=30.2 P15.4
=
Post-employment benefits 1.9 1.7
P
=32.1 =17.1
P

The Bank also provides banking services to directors and other key management personnel and
persons connected to them. These transactions are presented in the tables that follow.

Other related party transactions

Transactions between the Bank and its key management personnel meet the definition of related
party transactions. Transactions between the Bank and related parties within the CARD-MRI
Group, also qualify as related party transactions.

Loans receivables
As at December 31, 2015 and 2014, the Bank has no loan outstanding that was granted to related
parties.

Deposit liabilities, accounts receivable, accounts payable and miscellaneous income

Deposit liabilities, accounts receivable, accounts payable and miscellaneous income held by the
Bank for key management personnel, shareholder and other related parties as at
December 31, 2015 and 2014 follow:

December 31, 2015

Category Amount/Volume Outstanding Balance Nature, Terms and Conditions
Key Management Personnel
Deposit liabilities = 40,869,511
P These are demand and savings accounts with annual
Deposits P276,876,218
= interest rates ranging from 1.5% to 4.5%.
Withdrawals (257,021,781)
Accounts receivable 4,501,437 These are salary loans granted to officers under
Disburses of salary loan 710,000 fringe benefit program approved by BSP payable
Collections (918,303) in either five or ten years.
Shareholders*
Deposit liabilities = 210,493,859
P These are savings and demand maintained by
Deposits P3,162,468,809
= shareholders with the Bank with annual interest rates
Withdrawals (3,157,680,617) ranging from 1.5% to 4.3%.
Accounts receivable 1,004,915 This amount represents the shareholders’ share in
Share in expenses 10,424,969 expenses still payable to the Bank.
Collections (9,809,131)
Accounts Payable 320,110 This amount represents the Bank’s share in expenses still
Share in Expenses 17,004,934 payable to its shareholders.
Remittances (22,991,186)

(Forward)

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December 31, 2015

Category Amount/Volume Outstanding Balance Nature, Terms and Conditions
Other Related Parties**
Deposit liabilities 112,758,247 These are savings and demand with annual interest rates
Deposits 743,870,024 ranging from 1.5% to 4.3%.
Withdrawals (724,943,626)
Accounts receivable 20,545 This amount represents other related parties’ share in
Share in expenses 17,135,516 expenses still payable to the Bank.
Collections (17,763,418)
Accounts Payable 1,071,073 This amount represents the Bank’s share in expenses
Share in expenses 173,035,090 still payable to its other related parties.
Remittances (173,994,186)
Retirement Plan
Deposit liabilities 156,396,362 These are demand, savings, and special savings
Deposits 347,323,206 accounts with annual interest rates ranging from
Withdrawals (343,405,167) 1.5% to 4.3%.
*Include transactions with CARD EMPC, CARD MBA and CARD INC.
**Include transactions with BotiCARD, CMIT, CMDI, CLFC, MLNI and CAMIA

December 31, 2014

Category Amount/Volume Outstanding Balance Nature, Terms and Conditions
Key Management Personnel
Deposit liabilities P
=21,015,074 These are demand and savings accounts with annual
Deposits P
=198,207,657 interest rates ranging from 1.5% to 4.5%.
Withdrawals (191,071,798)
Accounts receivable 4,709,740 These are salary loan granted to employees under
Disburses of salary loan 5,240,000 fringe benefit program approved by BSP payable
Collections (530,260) in either five or ten years.
Shareholders*
Deposit liabilities 205,705,667 These are savings and demand maintained by
Deposits 4,113,371,485 shareholders to the Bank with annual interest rates
Withdrawals (4,203,401,156) ranging from 1.5% to 4.3%.
Accounts receivable 389,077 This amount represents the shareholders’ share in
Share in expenses 18,656,369 expenses still payable to the Bank.
Collections (18,267,292)
Accounts Payable 6,306,362 This amount represents the Bank’s share in expenses
Share in expenses 889,861,631 still payable to its shareholders.
Remittances (896,167,992)
Other Related Parties**
Deposit liabilities 93,831,849 These are demand and savings with annual interest rates
Deposits 652,888,991 ranging from 1.5% to 4.3%.
Withdrawals (609,759,856)
Accounts receivable 648,447 This amount represents other related parties’ share in
Share in expenses 2,842,909 expenses still payable to the Bank.
Collections (2,194,462)
Accounts Payable 2,030,169 This amount represents the Bank’s share in expenses
Share in expenses 14,180,618 still payable to its other related parties.
Remittances (16,116,151)
Retirement Plan
Deposit liabilities 152,478,323 Savings accounts with annual interest rates ranging
Deposits 325,810,048 from 1.5% to 6.0%.
Withdrawals (338,749,434)
*Include transactions with CARD EMPC, CARD MBA and CARD INC.
**Include transactions with BotiCARD, CMIT, CMDI, CLFC, MLNI and CAMIA

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Others
Other related party transactions of the Bank are as follows:
2015 2014 Nature, Terms and Conditions
Statement of Financial Position
Key management personnel
Dividends paid P
= 28,893,893 =
P32,488,723 Relates to common and preference shares of the Bank
held by key management personnel
Associate
Other investments 400,000 20,000,000 Pertains to other investments of the Bank in RBI
Shareholders*
Dividends paid 64,514,335 70,132,602 Pertains to dividends on common and preference
shares of the Bank held buy its shareholders
Statement of Comprehensive Income
Key management personnel
Interest expense 546,264 280,912 Pertains to interest on demand and savings accounts
with annual rates ranging from 1.5% to 4.5%
Associate
Equity in net earnings 36,760,807 13,121,813
Share in other (9,742,074) 3,764,808 Pertains to the Bank’s share in net income and other
comprehensive loss comprehensive income of RBI.
Miscellaneous income 176,400 – Pertains to management fee income for services to
RBI regarding compliance tasks
Dividend received 10,400,000 – Pertains to income received by the Bank from RBI as
an associate
Shareholders*
Occupancy 15,117,251 9,020,420 Certain establishments and transportation and IT
equipment are being by shareholders leased to the
Bank. The lease contracts have a three-year term
with no escalation clause
Interest expense 7,479,961 Pertains to interest on savings accounts with annual
rates ranging from 1.5% to 4.3%
Other related parties**
Interest expense 2,637,848 1,835,422 Pertains to interest on savings accounts with annual
rates ranging from 1.5% to 4.3%
Seminars and training 60,870,824 29,320,790 The Bank engaged CMDI for training and
development of its members and employees
(shown as part of ‘Employee trainings’ and
‘Members training and development’ and
‘Seminars and meetings’ in the statement of
income.)
Information technology 49,788,917 962,894 Pertains to the CMIT’s rendered services in relation
to system maintenance agreement and upgrade of
the Bank’s core banking system (CBS).
Occupancy 19,272,279 – Pertains to the rental of transportation and office
equipment of the Bank to CMIT.
Miscellaneous expense 10,000,000 – Pertains to the Bank’s donation to CMDI
Retirement Plan
Contributions 75,867,516 75,867,516 Pertains to the funded and formal noncontributory
defined benefit retirement plan of the Bank that is
handled by CARD MERP (see Note 19)
Interest expense 5,255,524 5,255,524
*Include transactions with CARD EMPC, CARD MBA and CARD INC.
**Include transactions with BotiCARD, CMIT, CMDI, CLFC, MLNI and CAMIA

Transitioned branches from CARD, Inc. to the Bank were 16 and 6 in 2015 and 2014,
respectively. The BOD passed a resolution for the transition of the branches from CARD, Inc.
after receipt of approval from the BSP to establish additional microfinance-oriented branches on
May 13, 2014 with 21 branches to be opened within 3 years from date of approval.

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Regulatory Reporting
As required by BSP, the Bank discloses loan transactions with investees and with certain DOSRI.
Existing banking regulations limit the amount of individual loans to DOSRI, 70.0% of which must
be secured, to the total of their respective deposits and book value of their respective investments
in the lending company within the Bank.

In the aggregate, loans to DOSRI generally should not exceed total equity or 15.0% of total loan
portfolio, whichever is lower. As at December 31, 2015 and 2014, the Bank is in compliance with
the regulatory requirements.

BSP Circular No. 423 dated March 15, 2004 amended the definition of DOSRI accounts.
On October 8, 2010, BSP Circular No. 695 is issued to provide guidance on the definition of
Related Interest. BSP Circular No. 749, dated February 6, 2012, provides that related party
transactions are expected to cover a wider definition than DOSRI under existing regulations and a
broader spectrum of transactions (i.e., not limited to credit exposures).

As at December 31, 2015 and 2014, DOSRI accounts under the existing regulations are shown in
the table below (as reported to BSP):

2015 2014
Total outstanding DOSRI accounts P
=678,723 P
=68,450
Percent of DOSRI accounts granted prior to effectivity of BSP
Circular No. 423 to total loans 0.0% 0.0%
Percent of DOSRI accounts granted after effectivity of BSP
Circular No. 423 to total loans 0.0% 0.0%
Percent of DOSRI accounts to total loans 0.0% 0.0%
Percent of unsecured DOSRI accounts to total DOSRI accounts 0.0% 0.0%
Percent of past due DOSRI accounts to total DOSRI accounts 0.0% 0.0%
Percent of nonaccruing DOSRI accounts to total DOSRI accounts 0.0% 0.0%

23. Notes to Statements of Cash Flows

The following is the summary of noncash activities in 2015 and 2014:

2015 2014
Noncash operating activities:
Net foreign currency exchange loss P
=183,224 =104,500
P
Noncash investing activities:
Unpaid subscription to shares
of an associate (Notes 10 and 15) 29,600,000 –
Unpaid acquisition of software costs (Note 12) 19,737,232 –
Reclassification from other investment to
investment in an associate (Note 10) 19,600,000 13,000,000
Reclassification of property and
equipment items – 1,910,000
Noncash financing activities:
Application of cash dividends as
collection of subscription
receivable (Note 17) 17,079,800 –

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24. Approval for the Release of Financial Statements

The accompanying financial statements of the Bank were approved and authorized for issue by the
BOD on March 19, 2016.

25. Supplementary Information Required under Revenue Regulations 15-2010

The components of ‘Taxes and licenses’ recognized in the statement of income for the year ended
December 31, 2015, follow:

Gross receipt tax (GRT) =121,903,729

P
Business permits and licenses 6,680,303
Documentary stamp (DST) 715,094
Real property tax 905,563
Others 971,489
=131,176,178
P

GRT in 2015 consists of taxes on:

Interest income on loans =121,445,475

P
Other income 458,254
=121,903,729
P

DST in 2015 consists of taxes on special savings account.

Withholding taxes in 2015 are categorized into:

Paid:
Withholding taxes on compensation and benefits =23,750,243
P
Final withholding tax on interest expense and dividends declared 7,855,092
Expanded withholding tax 10,845,532
42,450,867
Accrued:
Withholding taxes on compensation and benefits 2,622,145
Final withholding tax on interest expense and dividends declared 1,959,412
Expanded withholding tax 6,658,547
11,240,104
=53,690,971
P

Tax Assessment and Cases

The Bank has no outstanding tax assessment and legal cases filed in courts as at
December 31, 2015.

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