FINANCIAL PERFORMANCE

Security Bank Corporation (SBC) ended the year with record revenues of PHP33.9 billion. Our
revenue growth was driven by our core retail and wholesale businesses. Our 2019 net profit
increased 17% to PHP10.1 billion. Net interest income from customer loans and deposits/peso bond
issuance grew 43% to PHP22.5 billion. This was driven by the significant growth of retail loans and
margin improvement on our low-cost deposits. Total net interest income increased 29% to PHP26.8
billion. Net interest margin in 2019 improved to 3.93%, up 66 basis points year-on-year. We
continued to focus on profitability and risk-adjusted returns.

Retail loans grew 56%, and now account for 29% of total loans from 20% in 2018. Within retail loans,
our better yielding auto loans and credit card receivables grew faster than our consumer housing
loans. Wholesale loans decreased 2% due to tempered loan demand and disciplined pricing. Total
loans grew 9% to PHP456 billion. Service charges, fees and commissions grew 40% to PHP4.1 billion
as a result of successful cross-selling initiatives by our Retail and Wholesale Banking segments.

We increased headcount by 12%, or 722 to 6,625, primarily to support the growth of the retail
banking business. We likewise increased investment to support the transformation of the Bank's
infrastructure, processes and culture. The improvement in productivity was reflected in our cost-to-
income ratio. Excluding gross receipts and documentary stamp taxes (GRT and DST), our cost-to-
income ratio improved five percentage points to 42.2% in 2019 from 47.5% in 2018 despite an 18%
increase in operating expense driven mainly by an increase in manpower cost. Including GRT and
DST, total cost-to-income ratio improved by over two percentage points to 51.1% from 53.9% in
2018, despite an increase in the GRT and DST, which caused taxes and licenses to increase by 79%.

The Bank set aside PHP4.2 billion as provision for credit losses in 2019, a significant increase from
PHP714 million in 2018. This was a consequence of enhancements made in our credit provisioning
models, rapid growth in retail loans and softness in select commercial sectors.

Our asset quality remained healthy with gross non-performing loans ratio at 1.17%, lower than the
Philippine banking system’s 2.1% as reported by the Bangko Sentral ng Pilipinas (BSP) as of
December 31, 2019.
The Stockholders and the Board of Directors Security Bank Corporation

Report on the Consolidated and Parent Company Financial Statements

Opinion

We have audited the consolidated financial statements of Security Bank Corporation and its
subsidiaries (the Group) and the parent company financial statements of Security Bank Corporation
(the Parent Company), which comprise the consolidated and parent company statements of financial
position as at December 31, 2019 and 2018, and the consolidated and parent company statements
of income, consolidated and parent company statements of comprehensive income, consolidated
and parent company statements of changes in equity and consolidated and parent company
statements of cash flows for each of the three years in the period ended December 31, 2019, and
notes to the consolidated and parent company financial statements, including a summary of
significant accounting policies.

In our opinion, the accompanying consolidated and parent company financial statements present
fairly, in all material respects, the financial position of the Group and the Parent Company as at
December 31, 2019 and 2018, and their financial performance and their cash flows for each of the
three years in the period ended December 31, 2019 in accordance with Philippine Financial
Reporting Standards (PFRS).

Basis for Opinion

We conducted our audits in accordance with Philippine Standards on Auditing (PSAs). Our
responsibilities under those standards are further described in the Auditor’s Responsibilities for the
Audit of the Consolidated and Parent Company Financial Statements section of our report. We are
independent of the Group and the Parent Company in accordance with the Code of Ethics for
Professional Accountants in the Philippines (the Code of Ethics) together with the ethical
requirements that are relevant to our audit of the consolidated and parent company financial
statements in the Philippines, and we have fulfilled our other ethical responsibilities in accordance
with these requirements and the Code of Ethics. We believe that the audit evidence we have
obtained is sufficient and appropriate to provide a basis for our opinion.

Key Audit Matters

Key audit matters are those matters that, in our professional judgment, were of most significance in
our audit of the consolidated and parent company financial statements of the current period. These
matters were addressed in the context of our audit of the consolidated and parent company
financial statements as a whole, and in forming our opinion thereon, and we do not provide a
separate opinion on these matters. For each matter below, our description of how our audit
addressed the matter is provided in that context.

We have fulfilled the responsibilities described in the Auditor’s Responsibilities for the Audit of the
Consolidated and Parent Company Financial Statements section of our report, including in relation to
these matters. Accordingly, our audit included the performance of procedures designed to respond
to our assessment of the risks of material misstatement of the consolidated and parent company
financial statements. The results of our audit procedures, including the procedures performed to
address the matters below, provide the basis for our audit opinion on the accompanying
consolidated and parent company financial statements.

Applicable to the Audit of the Consolidated and Parent Company Financial Statements

Allowance for Credit Losses on Loans and Receivables. The Group’s and the Parent Company’s
application of the Expected Credit Loss (ECL) model in calculating the allowance for credit losses on
loans and receivables is significant to our audit as it involves the exercise of significant management
judgment. Key areas of judgment include: segmenting the Group’s and the Parent Company’s credit
risk exposures; determining the method to estimate ECL; defining default; identifying exposures with
significant deterioration in credit quality; determining assumptions to be used in the ECL model such
as the counterparty credit risk rating, the expected life of the financial asset and expected recoveries
from defaulted accounts; and incorporating forward-looking information (called overlays) in
calculating ECL.

Allowance for credit losses on loans and receivables as of December 31, 2019 for the Group and the
Parent Company amounted to ₱5.93 billion and ₱5.92 billion, respectively. Provision for credit losses
on loans and receivables of the Group and the Parent Company in 2019 amounted to ₱4.31 billion
and ₱3.51 billion, respectively.

The disclosures related to the allowance for credit losses on loans and receivables are included in
Note 14 of the financial statements.

Audit Response

We obtained an understanding of the methodologies and models used for the Group’s and the
Parent Company’s different credit exposures and assessed whether these considered the
requirements of PFRS 9 to reflect an unbiased and probability-weighted outcome, and to consider
time value of money and the best available forward-looking information.

We (a) assessed the Group’s and the Parent Company’s segmentation of its credit risk exposures
based on homogeneity of credit risk characteristics; (b) tested the definition of default and
significant increase in credit risk criteria against historical analysis of accounts and credit risk
management policies and practices in place, (c) tested the Group’s and the Parent Company’s
application of internal credit risk rating system by reviewing the ratings of sample credit exposures;
(d) assessed whether expected life is different from the contractual life by testing the maturity dates
reflected in the Group’s and the Parent Company’s records and considering management’s
assumptions regarding future collections, advances, extensions, renewals and modifications; (e)
tested loss given default by inspecting historical recoveries and related costs, write-offs and
collateral valuations; (f) tested exposure at default considering outstanding commitments and
repayment scheme; (g) checked the reasonableness of forward-looking information used for overlay
through statistical test and corroboration using publicly available information and our understanding
of the Group’s and the Parent Company’s lending portfolios and broader industry knowledge; and
(h) tested the effective interest rate used in discounting the expected loss.

Further, we checked the data used in the ECL models by reconciling data from source system reports
to the data warehouse and from the data warehouse to the loss allowance analysis/models and
financial reporting systems. To the extent that the loss allowance analysis is based on credit
exposures that have been disaggregated into subsets of debt financial assets with similar risk
characteristics, we traced or re-performed the disaggregation from source systems to the loss
allowance analysis. We also assessed the assumptions used where there are missing or insufficient
data.

Other Information

Management is responsible for the other information. The other information comprises the
information included in the SEC Form 20-IS (Definitive Information Statement), SEC Form 17-A, and
Annual Report for the year ended December 31, 2019, but does not include the consolidated and
parent company financial statements and our auditor’s report thereon. The SEC Form 20-IS
(Definitive Information Statement), SEC Form 17-A, and Annual Report for the year ended December
31, 2019 are expected to be made available to us after the date of this auditor’s report.

Our opinion on the consolidated and Parent Company financial statements does not cover the other
information and we do not express any form of assurance conclusion thereon.

In connection with our audits of the consolidated and parent company financial statements, our
responsibility is to read the other information identified above when it becomes available and, in
doing so, consider whether the other information is materially inconsistent with the consolidated
and parent company financial statements or our knowledge obtained in the audit, or otherwise
appears to be materially misstated.

Responsibilities of Management and Those Charged with Governance for the Consolidated and
Parent Company Financial Statements

Management is responsible for the preparation and fair presentation of the consolidated and parent
company financial statements in accordance with PFRSs, and for such internal control as
management determines is necessary to enable the preparation of consolidated and parent
company financial statements that are free from material misstatement, whether due to fraud or
error.

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

Those charged with governance are responsible for overseeing the Group’s and the Parent
Company’s financial reporting process.