NOTES TO FINANCIAL STATEMENTS
2007 2006 Due Within
One Year
Due Beyond
One Year Total
Due Within One Year
Due Beyond
One Year Total (In Thousands)
Financial Assets
Cash and other cash items P=3,445,319 P=– P=3,445,319 P=3,823,766 P=– P=3,823,766 Due from BSP 13,222,310 – 13,222,310 12,090,540 – 12,090,540 Due from other banks 2,351,313 – 2,351,313 2,265,375 – 2,265,375 Interbank loans receivable 11,057,198 – 11,057,198 13,431,660 81,717 13,513,377 Derivative assets 332,302 – 332,302 184,771 – 184,771 Financial assets at FVPL 2,036,765 2,041,273 4,078,038 101,529 12,475,822 12,577,351 AFS investments – gross 14,005,780 6,571,714 20,577,494 1,138,154 19,235,937 20,374,091 HTM investments 2,108,432 2,511,380 4,619,812 1,185,998 1,534,679 2,720,677 Loans and receivable - gross
Loans 35,471,700 6,247,931 41,719,631 38,469,480 5,335,585 43,805,065 Unquoted debt securities 6,342,212 – 6,342,212 331,509 6,317,215 6,648,724 Sales contracts receivable 1,867,973 – 1,867,973 – 1,956,120 1,956,120 Accrued interest receivable 1,005,775 – 1,005,775 1,758,305 – 1,758,305 Accounts receivable 432,893 – 432,893 416,211 – 416,211 Other assets (Note 11):
Returned checks and other
cash items 213,715 – 213,715 224,559 – 224,559 Bond sinking fund – 50,000 50,000 – 50,000 50,000 Others 26,719 – 26,719 27,398 – 27,398 Nonfinancial Assets
Investment in subsidiaries and
associate – 3,052,796 3,052,796 – 2,935,627 2,935,627 Property and equipment - at cost – 3,614,713 3,614,713 – 3,626,987 3,626,987 Property and equipment - at appraised – 2,496,372 2,496,372 – 2,495,412 2,495,412 Investment properties – gross 6,503,996 – 6,503,996 6,157,503 – 6,157,503 Other assets – gross 305,140 539,253 844,393 144,417 388,218 532,635
P
=100,729,542 P=27,125,432 127,854,974 P=81,751,175 P=56,433,319 138,184,494 Unearned interest (Note 7) (142,572) (253,412) Prompt payment and discount (Note 7) (10,639) (6,031) Capitalized interest (Note 7) (45,298) (94,594) Accumulated depreciation
Property and equipment (Note 9) (2,167,126) (2,289,737) Investment properties (Note 10) (273,647) (331,918) Other assets (Note 11) (1,601) (7,328) Allowance for impairment losses
AFS investments (Note 6) (2,619) (2,619) Loans and receivables (Note 7) (1,571,696) (4,917,134) Property and equipment (Note 9) (4,352) (4,352) Investment properties (Note 10) (587,502) (626,554) Other assets (Note 11) (917) (386) P=123,047,005 P=129,650,429 (Forward)
Parent Company
2007 2006 Due Within
One Year
Due Beyond
One Year Total
Due Within One Year
Due Beyond
One Year Total Financial Liabilities
Deposit liabilities P=101,256,266 P=30,100 P=101,286,366 P=106,034,888 P=2,493,362 P=108,528,250 Derivative liabilities 274,587 43,255 317,842 86,474 – 86,474 Bills payable 766,777 – 766,777 167,679 1,040 168,719 Marginal deposits 97,611 – 97,611 51,383 – 51,383 Manager’s checks and demand
drafts outstanding 536,990 – 536,990 509,602 – 509,602 Accrued taxes, interest and other
expenses 1,082,300 – 1,082,300 1,100,088 – 1,100,088 Subordinated debt – 2,064,000 2,064,000 – 2,451,500 2,451,500 Other liabilities (Note 18):
Domestic bills purchased 936,310 – 936,310 790,800 – 790,800 Outstanding acceptances payable 353,746 – 353,746 255,547 – 255,547 Accounts payable 457,283 – 457,283 511,276 – 511,276 Cash letters of credit 286,945 – 286,945 178,436 – 178,436 Payment orders payable 173,446 – 173,446 187,014 – 187,014 Due to BSP 31,304 – 31,304 53,158 – 53,158 Special time deposits 2,956 – 2,956 4,779 – 4,779 Due to other banks 588 – 588 461 – 461 Nonfinancial Liabilities
Net deferred tax liability – 802,398 802,398 – 1,129,896 1,129,896 Net retirement liability – 321,568 321,568 – 445,072 445,072 Withholding tax payable 48,388 – 48,388 49,230 – 49,230 Other liabilities 369,286 118,095 487,381 385,079 760,093 1,145,172
P
=106,781,428 P=3,272,771 P=110,054,199 P=110,365,894 P=7,280,963 P=117,646,857
20. Equity
Capital stock as of December 31, 2007 and 2006 consists of (in thousands except for par value and number of shares):
Preferred - P=1,000 par value
Authorized, issued and outstanding - 50,000 shares P=50,000
Common - P=1,000 par value Authorized - 450,000 shares
Issued and outstanding - 445,295 shares 445,295
P
=495,295 The Parent Company’s preferred shares have the following features:
a. nonvoting, cumulative and entitled to guaranteed dividends of 15.00% per annum; b. convertible into common stock in case of nonpayment of dividends for three consecutive
years. The conversion value of the preferred stock is at the rate of peso for peso of its par value to prevailing book value of the common stock at the time of conversion; and
c. redeemable in whole or in part at the option of the Parent Company, upon 30-day notice at par value plus accrued dividends at the time of redemption.
On January 29, 2003, the BOD approved the establishment of a sinking fund of P=50.00 million, equal to the outstanding preferred shares redeemable at their maturity dates. As of December 31, 2007 and 2006, the fund is shown under other assets - others in the statements of condition.
Dividend in arrears on the preferred shares amounted to P=188.22 million and P=180.72 million as of December 31, 2007 and 2006, respectively.
Capital Management
The primary objectives of the Group’s capital management are to ensure that it complies with externally imposed capital requirements and it maintains strong credit ratings and healthy capital ratios in order to support its business and to maximize shareholders’ value.
The Group manages its capital structure and makes adjustments to it in the light of changes in economic conditions and the risk characteristics of its activities. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividend payment to stockholders, return capital to stockholders, or issue capital securit ies. No changes were made in the objectives, policies and processes from the previous years.
The Group and its individual regulatory operations have complied with all externally imposed capital requirements throughout the period.
Regulatory Capital
The following table sets the regulatory capital as reported to BSP as at December 31, 2007 and 2006:
Consolidated Parent Company
2007 2006 2007 2006
(In Thousands)
Tier 1 Capital P=12,736,689 P=10,636,609 P=8,864,862 P=7,443,960
Tier 2 Capital 2,633,249 3,136,310 891,538 1,422,449
15,369,938 13,772,919 9,756,400 8,866,409 Risk weighted assets P=108,354,131 P=86,308,961 P=85,287,067 P=75,276,444
Tier 1 capital ratio 11.75% 12.32% 10.39% 9.89%
Total capital ratio 14.19% 15.96% 11.44% 11.78%
The risk-weighted assets of the Group and Parent Company as of December 31, 2007 are as follow:
Consolidated Parent Company
Credit risk-weighted assets P=91,298,351 P=68,747,782
Market risk-weighted assets 4,875,555 4,359,060
Operational risk-weighted assets 12,180,225 12,180,225
Risk-weighted assets P=108,354,131 P=85,287,067
Under existing BSP regulations, the determination of the Parent Company’s compliance with regulatory requirements and ratios is based on the amount of the Parent Company’s “unimpaired
The regulatory qualifying capital of the Parent Company consists of Tier 1 capital, which is the sum of Core Tier 1 capital and allowable amount of Hybrid Tier 1 capital. Core Tier 1 capital consists of paid-up common stock, paid-up perpetual and non-cumulative preferred stock, surplus including current year profit, surplus reserves less required deductions such as unsecured credit accommodations to DOSRI, deferred income tax, and goodwill while Hybrid Tier 1 capital includes perpetual preferred stock and perpetual unsecured subordinated debt. Certain
adjustments are made to PFRS - based results and reserves, as prescribed by the BSP. The other component of regulatory capital is Tier 2 (supplementary) capital, which includes unsecured subordinated debt and general loan loss provision.
Specifically under existing BSP regulations, the risk-based capital adequacy ratio of a bank, expressed as a percentage of qualifying capital to risk-weighted assets, should not be less than 10.00% for both solo basis (head office and branches) and consolidated basis (Parent Company and subsidiaries engaged in financial allied undertakings but excluding insurance companies). Qualifying capital and risk-weighted assets are computed based on BSP regulations. Credit risk- weighted assets consist of total assets less cash on hand, 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 determined by the Monetary Board (MB) of the BSP. Under BSP Circular No. 360, effective July 1, 2003, the capital-to-risk assets ratio (CAR) is to be inclusive of a market risk charge. In August 2006, the BSP issued Circular No. 538 which contains the implementing guidelines for the revised risk-based capital adequacy framework to conform to Basel II recommendations. Under the revised framework, capital requirements for operational risk, credit derivatives and securitization exposures are to be included in the calculation of the Bank’s capital adequacy. The revised framework also prescribes a more granular mapping of external credit ratings to the capital requirements and recognizes more types of financial collateral and guarantees as credit risk mitigants. Changes in the credit risk weights of various assets, such as foreign currency denominated exposures to the Philippine National
Government, non-performing exposures and ROPA, were also made. Exposures shall be risk- weighted based on third party credit assessment of the individual exposure given by eligible external credit assessment institutions. Credit risk-weights range from 0% to 150% depending on the type of exposure and/or credit assessment of the obligor. The new guidelines took effect last July 1, 2007.
Under BSP Circular regulations, the capital-to-risk assets ratio (CAR) of the Group as reported to the BSP was 14.19% and 15.96% as of December 31, 2007 and 2006, respectively, while that of the Parent Company was 11.44% and 11.78%, respectively.
The Parent Company embarked on a comprehensive program to update existing products, policies and procedures manuals incorporating new bank policies, laws and regulations and BSP
requirements to further strengthen the management and operations of the Parent Company including its branches, affiliates and subsidiaries. In addition, the Parent Company has been implementing continuous enhancements in the areas of risk management, internal controls, technology and strategic planning to streamline management oversight and performance
monitoring of its head office, branches, affiliates and subsidiaries. This is in preparation for more competitive business environment and much tougher requirements of Basel II, the international banking standards adopted by BSP.
As discussed in Note 16, on January 30, 2008, the BOD of the Parent Company approved to present for stockholders’ approval on its annual stockholders meeting on March 12, 2008 the conversion of US$50.00 million worth of Upper Tier 2 subordinated debt to capital stock. The Parent Company intends to increase its authorized capital stock to P=20.00 billion from P
=500.00 million.
On July 25, 2007, the BOD of the Parent Company approved and authorized the management to conduct capital raising activity by way of issuance of Lower Tier 2 capital up to the maximum amount of P=5.00 billion through a public offering subject to the provisions of BSP Circular No. 280 and BSP Memorandum to all banks and financial institutions dated February 17, 2003. The issuance of the foregoing subordinated debt was approved by the MB in its Resolution No. 98 dated January 24, 2008.
Relative to this, on March 6, 2008, the Parent Company issued P=4.50 billion, 7.13% Subordinated Notes due on 2018, callable with step-up in 2013. Among the significant terms and conditions of the issuance of the subordinated notes are:
a).Issue price is at 100.00% of the Principal amount.
b).The Notes bear interest at 7.13% per annum, payable to the noteholder for the period from and including the issue date up to the maturity date if the call option is not exercised on the call option date. Interest shall be payable quarterly in arrears on March 6, June 6, September 6 and December 6 of each year, commencing June 6, 2008. The Subordinated Notes will mature on March 6, 2018, if not redeemed earlier.
c).The Subordinated Notes will constitute direct, unconditional, unsecured and subordinated obligations of the Parent Company. The Subordinated Notes will at all times rank pari passu and without any preference among themselves, but in priority to the rights and claims of holders of all classes of equity securities of the Bank, including holders of preferences shares. d).The Parent Company may redeem the notes in whole, but not in part, at a redemption price
equal to 100.00% of the principal amount of the Notes together with accrued and unpaid interest at first banking day after the 20th interest period from issue date subject to at least 30- day prior written notice to noteholders and prior approval of the BSP, subject to the following conditions: (i) the capital adequacy ratio of the Parent Company is at least equal to the required minimum ratio; and (ii) the Subordinated Note is simultaneously replaced with the issues of new capital which are neither smaller in size nor lower in quality than the Subordinated Notes. e).The Subordinated Note shall not be redeemable or terminable at the instance of any noteholder
21. Miscellaneous Income
This account consists of:
Consolidated Parent Company
2007 2006 2005 2007 2006 2005
(In Thousands)
Gain on foreclosures (Note 10) P=578,204 P=455,437 P=1,056 P=571,831 P=463,156 P=1,056
Premiums-net of reinsurance 525,438 – – – – –
Gain on acquisition of additional
interest in NYLIP (Note 8) 156,574 – – – – –
Rental (Notes 10 and 23) 96,958 101,550 82,452 93,166 105,888 82,452
Income from trust operations 56,102 48,676 43,115 56,102 48,676 43,115
Profit (loss) from assets sold 49,128 18,931 75,321 (10,025) 18,931 75,321
Leasing and finance 17,991 12,241 4,970 – – –
Dividends 9,335 1,614 4,692 9,335 1,612 4,692
Recovery on charged-off assets 195 63,240 138,189 195 57 138,189
Miscellaneous 470,313 297,167 237,140 439,518 211,746 162,879
P
=1,960,238 P=998,856 P=586,935 P=1,160,122 P=850,066 P=507,704 Gain on acquisition of additional interest in NYLIP represents excess of Parent Company's
additional interest in the net fair value of NYLIP's identifiable assets and liabilities over its acquisition cost
(see Note 8).
The details net premiums on insurance contracts are shown below:
Ordinary life insurance P=453,563
Unit-linked 66,043
Group life insurance 8,541
Life insurance premiums revenue 528,147
Ordinary life insurance 1,692
Group life insurance 1,017
Reinsurers’ share of life insurance contracts
premiums revenue 2,709
Total net insurance premiums P=525,438
22. Retirement Plan
The Parent Company has a funded, noncontributory defined benefit retirement plan (the Plan) covering substantially all of its employees. Qualified employees of the Parent Company which have been seconded to its subsidiaries are covered by the Parent Company’s Plan. Under this Plan, the employees receive a defined amount of pension benefit upon retirement dependent on one or more factors such as age, years of service and salary.
For maximum benefits under the Plan, the Parent Company provides an Employee Investment Program (EIP) wherein an employee may invests monthly during his employment with the Parent Company an amount not less than 1.00% of monthly salary but not more than 50.00% of his net monthly salary in the EIP. Upon retirement, employee who also availed of the EIP shall receive an additional benefit from the Plan plus a return of his investment in EIP plus related interests. A full actuarial valuation of the EIP and the Plan is carried out by a qualified independent actuary at least once every two years.
The Parent Company’s annual contribution to the retirement plan consists of a payment covering the current service cost, amortization of the unfunded actuarial accrued liability and interest on such unfunded actuarial liability.
The principal actuarial assumptions used in determining the retirement liability for the Parent Company’s retirement plan are shown below:
January 1, 2007
January 1, 2006
Discount rate 6.71% 10.53%
Expected rate of return on assets 9.00% 9.00%
Future salary increases 5.00% 5.00%
Average remaining working life 12 12
The discount rate used in computing the present value of obligation as of December 31, 2007 and 2006 is 6.71%.
The summary of the valuation results for both the Plan and EIP follows:
2007 2006
(In Thousands)
Present value of obligation P=1,672,069 P=1,679,471
Fair value of plan assets 1,141,764 734,131
Deficit 530,305 945,340
Unrecognized actuarial gains (208,737) (500,268)
Net retirement liability P=321,568 P=445,072
The movements in the present value of obligations of the Plan and EIP follow:
2007 2006
(In Thousands)
Balance at beginning of year P=1,679,471 P=965,681
Current service costs 88,918 388,349
Interest costs 112,693 132,619
Actuarial loss – 272,866
The movements in the fair value of the assets of the Plan and EIP follow:
2007 2006
(In Thousands)
Balance at beginning of year P=734,131 P=470,629
Expected return 66,072 51,445
Contributions 286,736 282,000
Benefits paid (209,013) (80,044)
Actuarial gain 263,838 10,101
Balance at end of year P=1,141,764 P=734,131
The Parent Company expects to contribute P=482.40 million to its defined benefit plan in 2008. Actual return on plan assets amounted to P=329.91 million and P=61.55 million as at December 31, 2007 and 2006, respectively.
The major categories of plan assets of the Plan as a percentage of the fair value of total plan assets are as follows: 2007 2006 Debt instruments 64.39% 52.33% Deposits in banks 34.31% 42.70% Other assets 1.30% 4.97% 100.00% 100.00%
The overall expected rate of return on plan assets is determined based on the market prices prevailing on that date applicable to the period over which the obligation is to be settle d. The amounts included in Compensation and fringe benefits of the Parent Company in the statements of income follow:
2007 2006
(In Thousands)
Current service costs P=88,918 P=388,349
Interest costs 112,693 132,619
Expected return on plan assets (66,072) (51,445)
Actuarial loss recognized during the year 27,693 12,813
P
=163,232 P=482,336
Movements in the net retirement liability included in other liabilities are as follows:
2007 2006
(In Thousands)
Balance at beginning of year P=445,072 P=244,736
Retirement expense 163,232 482,336
Contribution (286,736) (282,000)
Movements in the accumulated unrecognized actuarial gains of the Plan and EIP follow:
2007 2006
(In Thousands)
Balance at beginning of year (P=500,268) (P=250,316)
Actuarial loss on the present value of the
defined benefit obligations – (272,866)
Actuarial gain on plan assets 263,838 10,101
Actuarial loss recognized during the year 27,693 12,813
Balance at end of year (P=208,737) (P=500,268)
Amounts for the current and previous years are as follows:
2007 2006
Present value of obligations P=1,672,069 P=1,679,471
Fair value of plan assets 1,141,764 734,131
Deficit 530,305 945,340
Change in assumptions on plan liabilities – 273,059
Experience adjustments on plan liabilities – (193)
Experience adjustments on plan assets 263,838 10,101
The amounts of long-term benefits expense representing Accumulated leave absences (included in Compensation and fringe benefits) in the statements of income are as follows:
2007 2006
Current service cost P=265,075 P=50,507
Actuarial loss – 224,357
P
=265,075 P=274,864
The movements in the present value of unfunded accumulated leave absences (included in Accrued Taxes, Interest and Other Expenses) (see Note 15) recognized in the statements of condition follow:
2007 2006
Balance, January 1 P=346,493 P=71,629
Current service cost 265,075 50,507
Actuarial loss – 224,357
Balance, December 31 P=611,568 P=346,493
The movements in the accumulated leave absences are as follow:
2007 2006
Balance at beginning of year P=346,493 P=71,629
Long-term benefits expense 265,075 274,864
23. Lease Contracts
The Parent Company leases the premises occupied by some of its branches including those of its subsidiaries for periods ranging from 2 to 20 years, renewable upon mutual agreement of the parties. Various lease contracts include escalation clauses, most of which bear an annual rent increase of 5.00% to 10.00%.
Rent expense charged against current operations (included in Occupancy and other equipment- related costs in the statement of income) amounted to P=243.96 million in December 31, 2007, P
=255.31 million in December 31, 2006 and P=247.50 million in December 31, 2005, for the Group, of which P=208.09 million in December 31, 2007, P=204.19 million in December 31, 2006 and P
=164.75 million in December 31, 2005, was incurred by the Parent Company. As of December 31, 2007 and 2006, the Group had no lease arrangements with contingent provisions.
Future minimum rentals payable under non-cancellable operating leases follow:
Consolidated Parent Company
2007 2006 2007 2006
(In Thousands)
Within one year P=188,869 P=55,318 P=159,496 P=8,811 Beyond one year but not more than five years 433,626 330,247 402,395 255,830 Beyond five years 43,135 493,481 36,543 270,195
P
=665,630 P=879,046 P=598,434 P=534,836
Future minimum rentals receivable under non-cancellable operating leases follow:
Consolidated Parent Company
2007 2006 2007 2006
(In Thousands)
Within one year P=40,102 P=62,421 P=40,019 P=62,421 Beyond one year but not more than five years 42,905 68,974 28,954 68,974
Beyond five years 2,085 – – –
P
24. Miscellaneous Expenses
This account consists of:
Consolidated Parent Company
2007 2006 2005 2007 2006 2005
(In Thousands)
Insurance P=276,988 P=260,557 P=259,289 P=271,705 P=257,547 P=259,032 Increase in aggregate reserve for life
Policies 204,636 – – – – – Repairs and maintenance 191,125 191,637 167,038 182,750 189,586 165,162 Fines, penalties and other charges 180,974 76,004 2,823 180,974 76,004 2,823 Litigation/assets acquired expenses 153,541 15,449 96,804 153,538 15,209 95,677 Information technology expenses 139,598 148,891 101,585 138,397 148,891 101,585 Stationery and office supplies 113,371 112,874 55,030 109,442 110,466 50,184 EAR (Note 25) 79,773 57,175 46,280 69,496 54,127 45,614 Management and professional fees 75,227 76,658 66,865 53,224 66,401 66,865 Postage, telephone, cable 66,958 46,841 45,242 57,581 44,286 45,123 Policyholder benefits and claim
Benefits 61,696 – – – – –
Commissions 49,317 – – – – –
Brokers fees and charges 44,957 46,052 40,134 40,805 40,400 40,134 Donations 35,877 26,570 69,405 35,860 26,525 69,405 Traveling expenses 31,496 36,191 100,315 26,414 32,208 100,088 PCHC processing fee 15,761 16,143 15,958 15,761 16,143 15,958 Membership fees 13,190 8,812 7,419 11,020 7,709 7,385 Advertising 10,222 4,308 6,706 5,167 3,706 6,706 Periodicals and magazines 1,950 1,785 1,910 1,840 1,697 1,910 Miscellaneous 251,250 558,043 369,608 138,648 456,946 122,348
P
=1,997,907 P=1,683,990 P=1,452,411 P=1,492,622 P=1,547,851 P=1,195,999
There are pending tax assessments on the Parent Company by the BIR relating to prior tax periods, a substantial portion of which pertains to issues affecting the banking industry. As of
December 31, 2006, the Parent Company accrued P=120.00 million as estimated settlement which was booked under fines, penalties and other charges.
Miscellaneous includes finance charges, other occupancy expenses, other equipment expenses, freight expenses, and appraisal expenses.
25. Income and Other Taxes
Under Philippine tax laws, the RBU of the Parent Company and its banking subsidiary are subject to percentage and other taxes (presented as Taxes and Licenses in the statement of income) as well as income taxes. Percentage and other taxes paid consist principally of gross receipts tax (GRT) and documentary stamp taxes.
Income taxes include the corporate income tax, discussed below, and final tax paid at the rate of 20.00%, which represents final withholding tax on gross interest income from government securities and other deposit substitutes. These income taxes, as well as the deferred tax benefits and provisions, are presented as ‘Provision for income tax’ in the statement of income.
Provision for income tax consists of:
Consolidated Parent Company
2007 2006 2005 2007 2006 2005 (In Thousands) Current P=162,691 P=155,125 P=116,669 P=35,736 41,426 P=30,962 Final 396,521 381,088 325,922 374,704 355,878 304,832 Deferred (196,146) (55,602) 32,888 (204,064) (51,535) 27,524 P =363,066 P=480,611 P=475,479 P=206,376 P=345,769 P=363,318
Republic Act (RA) No. 9337, An Act Amending National Internal Revenue Code, provides that effective July 1, 2005, the RCIT shall be 35.00% until December 31, 2008. Starting January 1, 2009 the RCIT rate shall be 30.00%. In addition, the allowable interest expense shall be reduced